QUESTION
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. Rico was approached by Build It Up Buttercup Construction (who specializes in prefabricated warehouses) about acquiring Rico’s existing warehouse on parcel A. Rico indicated that it prefers to exchange its existing facility for a new and larger facility in a qualifying like-kind exchange. Build It Up Buttercup indicated that it could
construct a new manufacturing facility on parcel B to Rico’s specification within four months. Rico and Build It Up Buttercup agreed to the following arrangement. First, Build It Up Buttercup would construct the new warehouse on parcel B and then relinquish the property to Rico within three months. Rico would then transfer the warehouse facility and land parcel A to Build It Up Buttercup. All of the property exchanged in the deal was identified immediately and the construction was completed within 180 days. Does the exchange of the new building for the old building and parcel A qualify as a like-kind exchange (see DeCleene v. Commissioner, 115 TC 457)?. Your responsibility:
Prepare a tax research memo addressing the question that has been raised. You will
need to support your conclusion using primary sources of tax law. Your textbook is NOT primary authority nor are IRS Publications. You must use proper citation form in your memo (see Chapter 2 for help with citation form). The form for this communication should be professional and in the form of a tax research memo (examples posted on Blackboard and a similar example in your textbook). Do yourself a favor and look at the grading rubric before you submit. This memo should be whatever length you feel is appropriate to resolve the issues. We do NOT use a bibliography or list of references in a tax research memo. You will see that citations are within the text of the document in the example. Once a court case has been cited in full, it can be referred to using simply the name in italics.
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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?
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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.
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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.
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