14 January 2016 Like-kind exchange of aircraft not doomed by entity structure In CCA 201601011, the Office of the Chief Counsel ruled that the entity structure of a group of companies does not cause property to fail to be held for productive use in a trade or business. The determination was made in connection with the like-kind exchange of aircraft. Two individuals A and B, own and are senior executives at Partnership O and wholly own Partnership P, which is in the O group of entities. For business and legal reasons, P holds an aircraft that is leased by O for business travel and as an employment perk for its senior executives. To the extent A and B use the plane for personal purposes, they include the required amount in income as compensation. In Year 1, P exchanged the relinquished aircraft for the replacement aircraft. Both aircrafts were leased under a so-called "dry" lease, under which the lessee provides flight crew and other services pertaining to the aircraft. The lease payments for the relinquished aircraft approximated the fair market rental value of the aircraft whereas the lease payments for the replacement aircraft were below market. In both cases, the lease payments were designed to cover the aircraft's carrying costs and were not designed to generate meaningful economic profit. The IRS field office (Field Office) determined that P did not hold either the relinquished or replacement aircraft for productive use in a trade or business as required by Section 1031 because P had no profit motive. The Field Office based this determination on the case law concerning Section 183. The Field Office noted that entities should be examined solely on an entity-by-entity basis, and the profit motive of one entity should not be attributed to another entity, even if the two entities are closely related. The CCA noted that many businesses hold and use properties that do not and could not generate profit, if the use of the property were viewed as an activity. Nevertheless, the property itself is held for productive use in that business. Thus, P's lack of intent to make an economic profit on the aircraft rental does not establish that the aircraft fails the productive-use-in-a-trade-or-business standard of Section 1031. The CCA further noted that, for many reasons, taxpayers opt to hold property, especially aircraft, in a separate entity. O operates a legitimate business enterprise that requires private aircraft to be available to its senior executives. If O owned the aircraft, or was the 100% owner of P, the CCA expressed doubt that the field would have raised the issue of whether the aircraft were held for productive use in a trade or business. Accordingly, the CCA ruled that the aircraft are held for productive use in a trade or business, determining that entity structure in the present case should not be used as grounds to disqualify them. The CCA agreed with the Field Office that A's and B's use of the property for personal purposes is not relevant in determining whether P holds the aircraft for productive use in a trade or business. The CCA did not rule on whether the exchange met the other requirements under Section 1031 to qualify as a like-kind exchange. The CCA remarked that there may be additional tax consequences under Sections 280F or 482 due to P charging below-market rent for the replacement aircraft and A and B, rather than O, owning P. The CCA is a taxpayer-favorable result allowing the taxpayer to structure its business when an entity (P) does not need a profit motive to meet the Section 1031 held for use in a trade or business requirement. The CCA did not address whether the transaction satisfied the Section 7701(o) business purpose and economic substance requirement. Taxpayers should, however, remain cautious about structuring related-party transaction without market terms and conditions when one party does not anticipate making a profit because the IRS reserved the right to assign greater income/deductions between the parties.
Document ID: 2016-0092 | |||||||||||||
