Accounting 6330 Background For decades, sophisticated investors have utilized IRC 91031 (which is entitled Exchanges Of Property Held For Productive Use Or Investment") as a tool for deferring the recognition of gain on the sale or exchange of properties held for productive use (for example, prior to 2018, a large CNC-controlled lathe used in a manufacturing business) or for investment (for example, an office building held for a long term investment). In short, if the taxpayer properly complies with the provisions of $1031, there is no recognition of gain or loss on the sale or exchange but, instead, that recognition is deferred into the future. [There is an old tax planner adage that a tax deferred is a tax that may never have to be paid at all. Or, as all of us know, the present value of tax paid many years in the future is far less than the present value of that same amount of tax paid today). If, in a like-kind exchange, the seller receives something that is not like-kind (for example, cash or something else that not the same as the item being exchanged (all this is called "boot"), then the taxpayer has to recognize gain or loss in an amount equal to the boot. For example, if Adam exchanges Blackacre (which is investment real property) to Eve for Greenacre (which is also investment real proprety) plus $10,000.00 in cash and a truck worth $10,000, both the cash and the truck are considered boot" (since neither are real property and hence not like-kind property) and so Adam is thus required to recognize gain or loss of up to the $20,000.00. At the end of 2017Job Act" made a substantial change to this law. Prior to January 1, 2018, $1031(a)(1) read as follows: "(1) In General-No gain or lass shall be recognized on the exchange of property held for productive use in a trade or business or as an investment if such property is exchanged solely for property of like kind which is held for either productive use in a trade or business or for investment." However, effective as of January 1, 2018, that section was amended to read as follows: "(1) In General-No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. The inclusion of the word real here makes a huge difference since the provision now excludes any like-kind exchanges of personal property. Note: Real property is real estate (land and improvements on the land). If it's not real property, then it's personal property. So, my example above of a large CNC-controlled lathe no longer qualifies for this treatment since it is personal property rather than real property. Obviously, except for the land itself, everything used to construct a building begins life as personal property but much if it is so incorporated into the building (the concrete and steel used for the frame of the building, the carpeting, the paint, etc.) that they convert into the real property itself. Other personal property, however, is somewhat less clear. All this leads us to the next three research projects. These are NOT assignments in which you are required to write either a client letter or a file memo. Rather, I simply want to you find the applicable administrative ruling (i.e., Treasury Regulations, IRS Revenue Ruling or Revenue Procedure) that answers the question. Research Problem No. 3 So here are the facts. Adam built a large Class A"office building (read that to mean fancy and really upscale). As part of the design and construction, Adam hired a famous artist to design and build a 20 foot tall sculpture to be included in the atrium of the building. Artwork, such as this sculpture, is personal property in nature. The sculpture has a fair market value of $100,000.00. The architect designing the building knew about this sculpture and designed the atrium specifically to showcase it. After it was installed, the exterior glass and brick walls were installed to close in the atrium. If the sculpture were to ever be removed, it would require demolition of that part of the exterior of the building. Now Adam wants to exchange this building for a different office building owned by Eve. Eve's building is a plain-Jane building with no fancy artwork to be concerned over. In order to defer the recognition of any of this built-in gain, Eve has substantial "built-in gain" on her building. Eve wants to have the exchange treated as a g1031 like-kind exchange. Eve is worried that the exchange of her building to Adam in exchange for Adam's building, including this large sculpture, will cause the sculpture to be treated as "boot" since it is not really real property and could (with some considerable amount of work and cost) be removed from the building. So she asks you to research all this and determine if there are any administrative rulings out there that might address her concern. Assignment: Using Checkpoint Edge, look for any kind of administrative guidance that might address this question. All you need to do is find the specific citation and give it to me. Hint: Since this big change in the law occurred after 2017, anything addressing this subject is going to have to be pretty new. Accounting 6330 Background For decades, sophisticated investors have utilized IRC 91031 (which is entitled Exchanges Of Property Held For Productive Use Or Investment") as a tool for deferring the recognition of gain on the sale or exchange of properties held for productive use (for example, prior to 2018, a large CNC-controlled lathe used in a manufacturing business) or for investment (for example, an office building held for a long term investment). In short, if the taxpayer properly complies with the provisions of $1031, there is no recognition of gain or loss on the sale or exchange but, instead, that recognition is deferred into the future. [There is an old tax planner adage that a tax deferred is a tax that may never have to be paid at all. Or, as all of us know, the present value of tax paid many years in the future is far less than the present value of that same amount of tax paid today). If, in a like-kind exchange, the seller receives something that is not like-kind (for example, cash or something else that not the same as the item being exchanged (all this is called "boot"), then the taxpayer has to recognize gain or loss in an amount equal to the boot. For example, if Adam exchanges Blackacre (which is investment real property) to Eve for Greenacre (which is also investment real proprety) plus $10,000.00 in cash and a truck worth $10,000, both the cash and the truck are considered boot" (since neither are real property and hence not like-kind property) and so Adam is thus required to recognize gain or loss of up to the $20,000.00. At the end of 2017Job Act" made a substantial change to this law. Prior to January 1, 2018, $1031(a)(1) read as follows: "(1) In General-No gain or lass shall be recognized on the exchange of property held for productive use in a trade or business or as an investment if such property is exchanged solely for property of like kind which is held for either productive use in a trade or business or for investment." However, effective as of January 1, 2018, that section was amended to read as follows: "(1) In General-No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. The inclusion of the word real here makes a huge difference since the provision now excludes any like-kind exchanges of personal property. Note: Real property is real estate (land and improvements on the land). If it's not real property, then it's personal property. So, my example above of a large CNC-controlled lathe no longer qualifies for this treatment since it is personal property rather than real property. Obviously, except for the land itself, everything used to construct a building begins life as personal property but much if it is so incorporated into the building (the concrete and steel used for the frame of the building, the carpeting, the paint, etc.) that they convert into the real property itself. Other personal property, however, is somewhat less clear. All this leads us to the next three research projects. These are NOT assignments in which you are required to write either a client letter or a file memo. Rather, I simply want to you find the applicable administrative ruling (i.e., Treasury Regulations, IRS Revenue Ruling or Revenue Procedure) that answers the question. Research Problem No. 3 So here are the facts. Adam built a large Class A"office building (read that to mean fancy and really upscale). As part of the design and construction, Adam hired a famous artist to design and build a 20 foot tall sculpture to be included in the atrium of the building. Artwork, such as this sculpture, is personal property in nature. The sculpture has a fair market value of $100,000.00. The architect designing the building knew about this sculpture and designed the atrium specifically to showcase it. After it was installed, the exterior glass and brick walls were installed to close in the atrium. If the sculpture were to ever be removed, it would require demolition of that part of the exterior of the building. Now Adam wants to exchange this building for a different office building owned by Eve. Eve's building is a plain-Jane building with no fancy artwork to be concerned over. In order to defer the recognition of any of this built-in gain, Eve has substantial "built-in gain" on her building. Eve wants to have the exchange treated as a g1031 like-kind exchange. Eve is worried that the exchange of her building to Adam in exchange for Adam's building, including this large sculpture, will cause the sculpture to be treated as "boot" since it is not really real property and could (with some considerable amount of work and cost) be removed from the building. So she asks you to research all this and determine if there are any administrative rulings out there that might address her concern. Assignment: Using Checkpoint Edge, look for any kind of administrative guidance that might address this question. All you need to do is find the specific citation and give it to me. Hint: Since this big change in the law occurred after 2017, anything addressing this subject is going to have to be pretty new