IRS determines exchange of property was like-kind exchange under Code Sec. 1031
The IRS has concluded that an exchange of aircraft was tax-free under Code Sec. 1031 because the aircraft were held for productive use in a trade or business, as required for a like-kind exchange under Code Sec. 1031. Although the business that owned the aircraft did not operate at a profit, that business leased the aircraft to a related company that used them in a profitable trade or business.
The partnership that owned the aircraft leased them to another partnership, whose senior executives used the aircraft for business and personal purposes. The executives held all of the interests in the partnership that owned the aircraft. The lease payments for the relinquished aircraft approximated the plane’s fair rental value while the lease payments for the replacement aircraft were below market but covered the aircrafts’ carrying costs.
The IRS noted that many businesses hold property, especially aircraft, in a separate entity. Even though the aircraft may not generate a profit, the property is still held for productive use in that business. The partnership’s lack of intent to make an economic profit on the aircraft rental did not establish that the aircraft failed the requirements of Code Sec. 1031. For business and legal reasons, the successful partnership has structured its affairs so that the aircraft are separately owned, and then leased. It could be risky for the successful partnership to own the aircraft. The IRS indicated that it did not want to interfere with a convenient business structure.