MEMORANDUM.Rico Corporation currently owns two parcels of land (parcel A and parcel B). It owns a warehouse facility on parcel A. Rico needs to acquire a new and larger manufacturing facility.
QUESTION
ANSWER
MEMORANDUM
Date: [Date]
To: [Recipient]
From: [Your Name]
Subject: Qualification of Exchange as Like-Kind Exchange
Issue
Does the exchange of the new building for the old building and parcel A qualify as a like-kind exchange?
Conclusion
Based on the analysis of relevant tax law and authorities, it can be concluded that the exchange between Rico Corporation and Build It Up Buttercup Construction qualifies as a like-kind exchange.
Facts
Rico Corporation currently owns two parcels of land (parcel A and parcel B), with a warehouse facility on parcel A.
Build It Up Buttercup Construction offered to construct a new manufacturing facility on parcel B to Rico’s specification within four months.
Rico and Build It Up Buttercup agreed on the exchange of the existing warehouse on parcel A for the new manufacturing facility on parcel B.
Analysis
Definition of Like-Kind Exchange
According to the Internal Revenue Code (IRC) Section 1031(a)(1), no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment.
Identification and Timing
To qualify as a like-kind exchange, the exchanged properties must be identified within 45 days of the transfer of the relinquished property, and the exchange must be completed within 180 days or by the due date of the taxpayer’s tax return, including extensions (IRC Section 1031(a)(3)).
DeCleene v. Commissioner
In the case of DeCleene v. Commissioner, 115 TC 457, the Tax Court held that an exchange of improved real property for unimproved real property qualifies as a like-kind exchange, as long as the properties are of like kind and held for productive use in a trade or business or for investment. The court emphasized that the determination of like-kindness should be based on the nature or character of the properties, rather than their grade or quality.
Application
In the present case, Rico Corporation and Build It Up Buttercup Construction entered into an agreement for the exchange of Rico’s existing warehouse on parcel A for the new manufacturing facility on parcel B. The exchanged properties, although different in nature (warehouse facility versus manufacturing facility), can be considered of like kind as they are both real properties held for productive use in a trade or business.
Furthermore, Rico and Build It Up Buttercup identified the properties immediately, and the construction of the new manufacturing facility was completed within 180 days, satisfying the identification and timing requirements for a like-kind exchange.
Based on the principles established in DeCleene v. Commissioner, the exchange between Rico Corporation and Build It Up Buttercup Construction qualifies as a like-kind exchange.
Conclusion
In conclusion, the exchange of the new building for the old building and parcel A between Rico Corporation and Build It Up Buttercup Construction meets the requirements for a like-kind exchange. The properties involved are of like kind and held for productive use in a trade or business. The timely identification and completion of the exchange further support its qualification as a like-kind exchange.
[Your Name]
[Your Title]
[Company/Organization Name]
