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Like-Kind Exchange

  • A like-kind exchange allows two parties to exchange discrete tangible assets (i.e. PP&E and real estate) of a similar character in a tax-free transaction.
  • Discrete intangible assets, other than goodwill (e.g. licenses, patents, trademarks) are also eligible for like-kind exchange treatment.
  • The government has publicized categories which group tangible assets into "asset classes" and "product classes"; tangible assets which are in the same asset or product class are by definition of "like kind".
  • No such classes exist, however, for intangible assets, and as a result the analysis will be more qualitative with respect to intangibles; in general, an intangible which conveys the same or similar rights (e.g. patent or copyright) with respect to the same or similar asset (e.g. computer software or motion picture) as another intangible will qualify for like-kind treatment.
  • Multiple assets can be simultaneously exchanged in a like-kind exchange, however, to do so tax efficiently requires each party to transfer roughly equal amounts of tangible assets in the same asset or product classes, and equal amounts of intangible assets of the same general character; if the assets exchanged do not fall, in roughly equal proportion, into the same asset or product class, tax leakage will result to this extent.
  • Precedent transactions: Comcast/Adelphia, Comcast/AT&T Broadband, Alltel/Verizon

Transaction Structure

like-kind structure

  • While a like-kind exchange is a clean, straightforward technique for exchanging similar assets, it is generally difficult to execute an exchange of similar business on a tax-efficient basis.
    • Goodwill of one business (whether or not reflected on a company's financial statements) is never of like-kind to goodwill of another business and cannot be exchanged on a tax-free, "like-kind" basis.
    • Thus, where a meaningful portion of the value of each business is allocable to goodwill, a like-kind exchange will result in a significant level of tax leakage.
  • As outlined in a following section, a mixing bowl is an alternative structure through which two parties would be able to avoid the restrictions of a like-kind exchange and successfully exchange similar businesses.

Advantages   Disadvantages
  • Clean and straightforward structure
  • Fully tax-free (until assets received are sold)
  • Simple accounting and control: each party consolidates and controls the assets received
  • Potentially difficult to identify perfect like-kind exchange counterparty
  • Meaningful tax leakage where significant portion of value is allocable to goodwill
    • Thus, likely to only be an option for exchange of discrete assets and not full businesses
  • Neither party achieves monetization
  • Requires negotiation and agreement on values of each tangible asset class

Deferred Like-Kind Exchange

  • A deferred like-kind exchange is a variation which allows a Seller of assets to dispose of the assets to a party other than the party which owns the similar assets sought by the Seller
  • As such, a "three-way" like-kind exchange is substantially more flexible than a conventional like-kind exchange--the Seller need only seek to acquire assets of like-kind to the assets being sold, and to do so within the required time period. No specific exchange of assets between two parties, each of whom seeks to acquire the assets owned by the other, is required
  • Mechanically, the Seller would deposit the assets to be sold with a Qualified Intermediary (generally, an independent third-party who agrees in writing to serve as such) who would sell the assets for cash at the Seller's direction within 45 days of the transfer of assets to the Qualified Intermediary, the Seller would be required to identify the "like-kind" replacement property it sought to acquire, and within 180 days of the original transfer, the Qualified Intermediary would be required to close such acquisition

deferred like-kind structure

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