IRS Says that Trademarks and Trade Names Can Qualify As Like-Kind Property

March 24, 2009

In 2006, IRS announced its position that trademarks and trade names are not eligible to be exchanged on a tax-deferred basis under I.R.C. §1031. IRS, in reaching its conclusion, reasoned that trademarks and trade names were too similar to goodwill and going concern value (which are not eligible for like-kind exchange treatment) and, therefore, were not eligible for like-kind exchange treatment. But, now IRS has changed its mind.

Perhaps the IRS’ change of mind is a result of the U.S. Supreme Court’s opinion in Newark Morning Ledger Co v. United States, 507 U.S. 546 (1993). In that case, the Court rejected the IRS litigating position that subscription lists, customer lists, and other customer-based intangibles acquired as part of the acquisition of an ongoing business constitute non-depreciable goodwill as a matter of law. Instead, the Court held that the IRS could not treat the "paid subscribers" asset as non-depreciable, because the taxpayer proved that the assets constituted an intangible asset with an ascertainable value and a limited useful life. Thus, the assets satisfied the necessary conditions to be depreciable. So, such intangible assets are not always part of goodwill and can be treated as separate assets if they can be separately described and valued apart from goodwill. Now, IRS says that this separation from goodwill as applied to trademarks and trade names can be recognized for purposes of the like-kind exchange rules.

To be clear, IRS is not saying that all trademarks and trade names are “like-kind” with other trademarks and trade names. Rather, IRS is saying that the “nature” and “character” rules under Treas. Reg. §1.1031(a)-2(c)(1) still must be satisfied. How that will play out in practice remains to be seen, and IRS may have to provide more definite parameters in the future. Maybe IRS will limit the application of the like-kind exchange rules to exchanges of trademarks or trade names in situations where the property to which the trademark or trade name relates is itself like-kind with the property to which the trademark or trade name relates that is received in the exchange. Tech. Adv. Memo. 200911006 (Feb. 12, 2009).