Bank subsidiary's LKE program qualifies under Sec. 1031.
A bank subsidiary both leases vehicles to consumers and provides them loans to purchase vehicles. Its lease portfolio includes automobiles, passenger vans, sport utility vehicles (SUVs) and light-duty trucks. To meet Sec. 1031 requirements, the taxpayer entered into an exchange agreement with a QI that authorized the QI to purchase all leased vehicles on the taxpayer's behalf, including vehicles that are not replacement vehicles.
Letter Ruling 200240049 deals with sales of relinquished vehicles to lessees and dealers and through auctions. In each case, a purchaser of a relinquished vehicle is notified of the taxpayer's assignment of its rights to the QI on or before the transfer date. Lessees and dealers send completed sale documents to the taxpayer, which verifies the information and sends checks to the QI for deposit. Auction houses wire the sales funds directly to the QI. The exchange agreement expressly limits the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of money or other property held by the QI before the exchange period ends.
The taxpayer acquires replacement vehicles from dealers subject to an agreement. There are two lease programs. Under the first, the dealer has the lessee complete a credit application, and faxes it to the taxpayer. If approved, the taxpayer faxes back a credit approval, which includes proper notifications.
Under the second program, the dealer has the lessee complete a credit application, but also obtains a credit report from an external credit bureau. The dealer completes a form that includes an assignment of the taxpayer's rights to the QI. Within two to three days of executing the lease with the lessee, the dealer delivers the documents to the taxpayer for processing. On receipt, the taxpayer confirms lease approval and faxes a copy of the credit approval to the QI and the dealer. The approval includes language confirming that the taxpayer notified the QI and the dealer.
Payment for replacement vehicles can occur in two ways: the taxpayer (1) orders the QI to transfer funds via the Automated Clearing House to the dealer or (2) writes a check to the dealer. If it writes a check, the taxpayer would notify the QI of the check so that the latter can authorize payment.
Under the facts, each relinquished vehicle was an automobile that was matched with a passenger van, an SUV or a light-duty truck. The QI also purchased one nonreplacement automobile. The matching took place in the month after the purchase of the vehicles.
The sale of the automobiles and the acquisition of the passenger van and the SUV qualify for Sec. 1031 gain non-recognition. Although not specifically requested, Letter Ruling 200240049 held that a light-duty truck could be exchanged for an automobile. In the ruling, the IRS held that:
1. The procedures described meet the Regs. Sec. 1.1031(k)-1(g) deferred LKE rules.
2. The taxpayer may process checks payable to the QI without being in constructive receipt of such funds (in the ruling, however, the taxpayer has to send such checks to the QI for the QI to deposit, rather than depositing such funds on the QI'S behalf).
3. The QI can purchase both replacement and nonreplacement property.
4. The lessee can borrow funds from the taxpayer to finance the purchase of the relinquished vehicle.
5. The taxpayer may take up to two to three days after the lessee entered into the lease contract to confirm notice to the QI and selling dealer.
6. The taxpayer could write a check to the seller-dealer for replacement vehicles from the QI's account if the taxpayer subsequently obtains the QI's authorization.
7. The taxpayer may match replacement vehicles to relinquished vehicles in the month following the transaction.
8. Passenger vans and SUVs can be exchanged with an automobile.
First, Letter Ruling 200240049 expressly allows the taxpayer to match acquired vehicles with sold vehicles after the purchase date, in the month following the acquisition. The discussion of the matching process was limited, but it concluded that the exchange occurred within the prescribed time periods. It did not comment on the procedures (if any) required to prevent the taxpayer from using funds of later-sold relinquished vehicles to acquire replacement vehicles with an earlier purchase date. The delay in matching provides the taxpayer with increased flexibility for its LKE program.
Second, the ruling allows the taxpayer to (1) notify the QI two to three days after the purchase of replacement property and (2) provide a form in advance to participating selling dealers that contains an assignment of rights to the QI. The taxpayer will confirm the general form provided in advance to the dealer, with a specific notice sent to the dealer when the QI is notified. The ruling does not discuss the requirement that the QI and all parties to the agreement must be notified on or before the date of the relevant transfer. Although the notifications are still provided, this delay in giving the QI notification and the selling dealers advance notification provides the taxpayer with increased flexibility. Accordingly, the letter ruling provides one possible solution to the "drive-off" issue (i.e., when a selling dealer sells a replacement vehicle before receiving approval (and assignment notification) from the taxpayer).
Third, the ruling states that passenger vans and SUVs, but not light-duty trucks, can be exchanged for automobiles. It does not indicate if either could be a LKE for light-duty trucks. On balance, the ruling confirms the general practice in the industry, allowing for increased flexibility in the matching process.
Fourth, the ruling allows the QI to purchase all leased vehicles on the taxpayer's behalf, including those that will not be replacements for LKE purposes. The IRS previously indicated that this was an issue, but has resolved its doubts in favor of taxpayers.
Fifth, in resolving another issue in favor of the taxpayer, the ruling allows the taxpayer to receive and process checks for the purchase of relinquished vehicles without being in receipt of the sales proceeds. Under the facts, the taxpayer does not deposit the checks, but sends them to the QI for deposit. Thus, the ruling does not resolve whether a taxpayer, with appropriate contractual restrictions, can deposit checks made out to the QI directly into the QI's account, without raising constructive-receipt questions.
Overall, Letter Ruling 200240049 is quite helpful. The IRS appears to have moved from viewing LKE programs with disfavor to allowing taxpayers to operate them in an efficient manner, provided acceptable procedures for handling of funds are provided.
FROM JAY H. ZUCKERMAN, NEW YORK, NY
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|Title Annotation:||transfers of relinquished vehicles; like-kind-exchange|
|Author:||Kautter, David J.|
|Publication:||The Tax Adviser|
|Date:||Jan 1, 2003|
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