Mixed-use aircraft is one property for like-kind exchange analysis

Plain-English summary

An individual exchanged an aircraft used for both business or investment travel and personal flights in a transaction intended to qualify under section 1031. Chief Counsel advised that the aircraft must be treated as one property, not divided into separate business and personal assets. The entire aircraft either satisfies or fails the requirement that exchange property be held for productive use in a trade or business or for investment. A low percentage of business or investment flights suggested that the aircraft did not meet that requirement, but no mechanical percentage test controlled. The examiner also needed to consider flight hours, use in the prior year, repositioning flights, and the taxpayer's overall intent. More than 50 percent personal use would support disqualification, but less than 50 percent personal use would not automatically establish qualification.

Ruling snapshot

• Question: Is a mixed-use aircraft treated as one or two properties under section 1031, and does a low percentage of business or investment flights establish that it was not held for a qualifying purpose?
• Outcome: Advice given that the aircraft is one property and that the low business-use percentage is probative but not conclusive without considering all facts and circumstances.
• Key authorities: IRC § 1031; Rev. Proc. 2008-16; Wagensen v. Commissioner, 74 T.C. 653 (1980); Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985)

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           memorandum
           Number: 201605017
           Release Date: 1/29/2016
           CC:ITA:B04:SJToomey
           POSTF-141095-14

UILC:      1031.01-00

  date:    October 19, 2015

     to:   Shelia D. Harvey
           Senior Counsel
           (LB&I - Houston Gr2)

  from:    Stephen J. Toomey
           Senior Counsel
           Office of Associate Chief Counsel
           (Income Tax & Accounting)


subject:   1031 Aircraft Exchange

           This Chief Counsel Advice responds to your request for assistance. This advice may
           not be used or cited as precedent.



           LEGEND

            A                        = -----------------
            Year 1                   = --------------------------------------------------
            X                        = -------------------------------------------------------------------------------
            Y                        = -------------------------------------------------------------------------------
            Relinquished Aircraft    = -------------------------------------------------------------------------------
            Replacement Aircraft     = ----------------------------------


           ISSUES

           1. Is an aircraft owned by an individual that is exchanged for another aircraft in a
           transaction intended to qualify as a like-kind exchange under § 1031 of the Internal
           Revenue Code, considered to be two assets, one held for productive use in a trade or
           business or investment and one held for personal use, if the individual used the
POSTF-141095-14                               2

exchanged airplane for both personal purposes and for productive use in a trade or
business or investment?

2. If the airplane is treated as one property for § 1031 purposes and, in the taxable year
the relinquished aircraft was exchanged, only X percent of the aircraft’s flights were
business or investment related, is the relinquished aircraft property that is held for
productive use in a trade or business or for investment?

CONCLUSIONS

1. For purposes of whether § 1031 applies to an airplane exchange, the exchanged
airplane is considered one property that is either held for productive use in a trade or
business of for investment, or that is held for personal use.

2. The low (X) percentage of flights in the taxable year the relinquished aircraft was
exchanged that are business or investment related suggests that the aircraft was not
held for productive use in a trade or business or investment within the meaning of
§ 1031. However, other facts should be considered before a determination is made.

FACTS

A, an individual, owns aircraft through a disregarded single-member LLC. The LLC
provides management, accounting, financial, administrative and other business services
to A’s businesses and investments. These businesses and investments are dispersed
throughout the United States so that A and A’s LLC have some business and
investment need for the aircraft.

In Year 1, A’s LLC exchanged the aircraft (relinquished aircraft) for replacement aircraft.
The field asserts that, in Year 1, Y percent of the flights of the relinquished aircraft were
unrelated to A’s business or A’s investments (personal use). The remaining X percent
of the aircraft’s flights were for productive use in A’s businesses or in connection with
A’s investments.

The field asserts that because only X percent of the flights in the year of the exchange
were business or investment related, the aircraft was not “held for productive use in a
trade or business or investment” within the meaning of § 1031 and the exchange does
not qualify for non-recognition treatment under § 1031. The taxpayer disputes the
field’s percentages and the field’s treatment of the aircraft as not held for productive use
in a trade or business or investment.

LAW AND ANALYSIS

Section 1031(a)(1) provides that: “No gain or loss shall be recognized on the exchange
of property held for productive use in a trade or business or for investment if such
property is exchanged solely for property of like kind which is to be held either for
productive use in a trade or business or for investment.”
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Whether the property exchanged is held for productive use in a trade or business or for
investment is a question of fact. The manner in which the relinquished property is held
at the time of the exchange controls, not the manner in which it was held when
acquired. Wagensen v. Commissioner, 74 T.C. 653 (1980).

Treatment of relinquished aircraft as one property or two

Neither the Code nor the Income Tax Regulations under § 1031 provide further
guidance concerning the phrase “held for productive use in a trade or business or for
investment” (the “held for” requirement). Moreover, we have not come across any case
law dealing with whether property used both personally and in connection with a
business or investments is to be treated as two properties or one for purposes of
meeting the “held for” requirement of § 1031.

The plain language of § 1031 suggests that property either meets the “held for”
requirement or it does not. Under § 1031(a), “[n]o gain or loss shall be recognized on
the exchange of property held for productive use in a trade or business or for
investment” if the requirements of that section are met. If property used for business
and personal purposes was to be treated as two properties, then gain or loss would be
recognized on an exchange of that property contrary to the language in § 1031(a).
Section 1031(b) deals with situations in which other, non-like kind property is received in
an exchange but provides no support for the position that one relinquished property is
treated as two properties for purposes of § 1031(a) if the property is both used in a
trade or business and also used for personal purposes.

In addition, the Service had an opportunity in Rev. Proc. 2008-16, 2008-10 I.R.B. 547,
to treat one property as two for purposes of determining whether § 1031 applies when
that property is exchanged and did not do so. Rev. Proc. 2008-16 provides
circumstances under which the Internal Revenue Service (the “Service”) will not
challenge whether a dwelling unit qualifies as property that meets the “held for”
requirement even though the property is occasionally used for personal purposes. If the
safe harbor provisions of the Rev. Proc. are met, the entire property meets the “held for”
requirement for purposes of § 1031. The Rev. Proc. provides the following:

       The Service recognizes that many taxpayers hold dwelling units primarily
       for the production of current rental income, but also use the properties
       occasionally for personal purposes. In the interest of sound tax
       administration, this revenue procedure provides taxpayers with a safe
       harbor under which a dwelling unit will qualify as property held for
       productive use in a trade or business or for investment under § 1031 even
       though a taxpayer occasionally uses the dwelling unit for personal
       purposes.
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If property used for business/investment and personal purposes is treated as two
properties for purposes of § 1031, there would have been no need to publish Rev. Proc.
2008-16. Rather, the Service would require a deferral of the gain or loss allocable to
the portion of the property that meets the “held for” requirement of § 1031 and require
recognition of the gain allocable to the portion of the property used for personal
purposes. Instead, the Service treats the entire property as held for productive use in a
trade or business or for investment if the provisions of the revenue procedure are met.

In summary, there is no legal support for treating the relinquished aircraft as two
properties for purposes of § 1031. In addition, the position that property either meets or
fails to meet the “held for” requirement of § 1031(a)(1) and should not be treated as two
properties is consistent with the safe harbor published in Rev. Proc. 2008-16.
Consequently, the relinquished aircraft should be treated as one property that either
meets “the held” for requirement of § 1031(a)(1) or fails to meet the requirement.

Whether the relinquished aircraft meets the “held for” requirement

Because § 1031 applies only if property is “held for” productive use in a trade or
business or investment, the taxpayer’s intentions regarding the property are critical.
See Bolker v. CIR, 760 F. 2d 1039 (9th Cir. 1985) (“… if a taxpayer owns property which
he does not intend to liquidate or to use for personal pursuits, he is ‘holding’ that
property ‘for productive use in a trade or business or for investment’ within the meaning
of section 1031(a)”). Thus, the inquiry into whether property is “held for productive use
in a trade or business or for investment” is intensely factual—doubly so when the
property may naturally be used for both business and personal purposes.
Unfortunately, § 1031 does not provide for a simple quantitative use formula. In other
words, there are no authorized absolute mechanical or quantitative tests for measuring
intent and no safe harbor rules have been promulgated for these circumstances.
Rather, intent must be determined by the unique facts and circumstances extant in each
given transaction.
While we agree that the X percent figure cited by the field suggests that the property is
not held for productive use in a trade or business or for investment, additional facts
should be considered in determining whether the “held for” requirement of § 1031(a) is
met. For example, we suggest that the examiner consider: (1) measurement of
business/investment use versus personal use based on flight hours, not just flights; (2)
percentages of business/investment use versus personal for flights and flight hours for
the year before the year of the exchange; and (3) which flights and flight hours were
determined to be repositioning flights and the nature of the flight following the
repositioning flight. Assuming you determine that over 50 percent of the use of the
aircraft was for personal purposes, we agree with your position that the aircraft was not
held for productive use in a trade or business of for investment. i
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Please call Peter Baumgarten or Steve Toomey at (202) 317-4718 if you have any
further questions.
i
 This sentence should not be read to imply that a taxpayer whose personal use of property is less than 50
percent has met the “held for” requirement in § 1031(a) for that property. Instead, close scrutiny should
be used for any property the taxpayer uses for personal purposes. Consider that Rev. Proc. 2008-16
permits investment property to qualify as exchange property under § 1031(a) notwithstanding some
personal use, but establishes a personal use safe harbor that is significantly less than 50 percent.