IRS Revenue Ruling 1985-135 (Rev. Rul. 85-135)
Internal Revenue Service (I.R.S.)
Revenue Ruling
Published: September 3, 1985
Section 1.1031 — Property Held for Productive Use In Trade or Business or for Investment
26 CFR 1.1031(a)-1
SALES OR EXCHANGES; LIKE-KIND; BROADCAST ASSETS
Sales or exchanges; like-kind; broadcast assets. The exchange of assets of two television stations for the assets in another television station qualifies for nonrecognition of gain or loss treatment as an exchange of like-kind property under section 1031(a) of the Code.
ISSUE
Under the circumstances described below, will the corporate taxpayers' transfer and receipt of property constitute an exchange of property held for productive use in trade or business solely for property of a like kind to be held for productive use in trade or business pursuant to section 1031(a) of the Internal Revenue Code? Also, may Y treat the exchange of broadcast assets as an involuntary conversion under sections 1071 and 1033 or, alternatively, under section 1031?
FACTS
X corporation is engaged in the business of broadcasting, cablevision, and newspaper publishing. X's television include K and L, both of which have been owned and operated by X for more than five years. X is in compliance with the Federal Communications Commission's (F.C.C.) policies concerning the cross-ownership of television stations and newspapers in the same community.
Y corporation, unrelated to X, owns and operates television station H and also owns J, a newspaper serving the same community as H. H and J are properties held for productive use in trade or business or for investment. Y has owned J for more than five years. The F.C.C. issued to Y the Tax Certificate described in section 1071 of the Code certifying that Y's transfer of the assets of H is a sale or exchange necessary to effectuate the F.C.C.'s policies concerning the cross-ownership of television stations and newspapers whose areas of operation are wholly or partially overlapping.
In order to diversify their media markets, and consistent with the F.C.C.'s cross-ownership policies, X exchanged the assets of K and L in return for Y's transfer of the assets of H. The property exchanged did not include stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest or other securities or evidences of indebtedness or interest. The exchange was contingent upon the F.C.C.'s grant of its consent to the assignment of the broadcast licenses of K, L, and H.
LAW AND ANALYSIS
Section 1031(a) of the Code provides that no gain or loss shall be recognized if property held for productive use in trade or business for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.
Section 1071 of the Code provides, in part, that the sale or exchange of property is certified by the F.C.C. to be necessary or appropriate to effectuate a change in the policy of, or the adoption of a new policy by, the F.C.C. with respect to the ownership and control of radio broadcasting stations, such sale or exchange shall, if the taxpayer so elects, be treated as an involuntary conversation of such property within the meaning of section 1033.
Section 1033(a)(1) of the Code provides that if property is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, no gain shall be recognized.
Sections 1245(b)(4) and 1250(d)(4) of the Code provided that if section 1245 or 1250 property is disposed of and gain (determined without regard to these sections) is not recognized in whole or part under section 1031, then the amount of gain taken into account by the transferor under sections 1245 or 1250 shall not exceed the amount of gain recognized on such disposition (determined without regard to these sections).
X has entered into an exchange with Y whereby X exchanged the assets of K and L in return for Y's transfer of the assets of H. X and Y received property of a like kind to that transferred, assumed no liabilities in connection with the exchange, and will use the assets of K, L, and H in the continuing business of broadcasting after the exchange. X will not recognize gain or loss on the exchange pursuant to section 1031(a) of the Code.
Sections 1071 and 1033 of the Code will apply to the transaction to allow Y, if it so elects, to treat the exchange of broadcast assets as an involuntary conversion. If Y does not elect to use sections 1071 and 1033 or if it was not eligible to receive the tax certificate under section 1071, it would be allowed to defer recognition of gain or loss under section 1031. Since X is in compliance with the F.C.C.'s cross-ownership policies, X is not eligible to receive a certification under section 1071 similar to that received by Y. Section 1031 will apply, however, to allow X to defer the recognition of gain or loss.
HOLDING
X's transfer and receipt of property constitutes an exchange of property held for productive use in trade or business solely for purposes of a like kind to be held for productive use in trade or business, with the result that no gain or loss will be recognized by X on the transaction pursuant to section 1031(a).
Y, if it so elects, may treat the exchange of broadcast assets as an involuntary conversion under sections 1071 and 1033 of the Code. If, however, Y does not elect to use sections 1071 and 1033 of the Code, X's and Y's transfer and receipt of property constitutes an exchange of property held for productive use in trade or business solely for property of a like kind to be held for productive use in trade or business, which the result that no gain or loss will be recognized by X or Y on the transaction pursuant to section 1031(a).
END OF DOCUMENT
