Exchanging a Trade or Business under the IRC §1031 Like-Kind Exchange Rules
Tax Officers Summit September 26, 2016 Angela Pulley, Sr. Tax Director Coca-Cola Bottling Co. Consolidated
Agenda
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About Coca-Cola Bottling Co. Consolidated (“CCBCC”)
IRC §1031 Like-Kind Exchange Basics Exchanging a Trade or Business
State Considerations
Agenda
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Coca-Cola Bottling Co. Consolidated
● Founded in 1902
● 2015 revenue of $2.3 billion
● Produces, Markets, & Distributes primarily products of The Coca-Cola Company
● Operates in 15 states (includes D.C.)
● Capital & Intangible Assets represent ~$1.6B
● 7 production and 62 distribution facilities
● ~12,000 employees
● Continued growth and expansion within the Coca-Cola system
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Beverage Portfolio
Sparkling & Energy (carbonated)
80% of Volume
Still (non-carbonated)
20% of Volume
2000 2006 Today
U.S. Non-Alcoholic Beverage Category
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IRC §1031 Like-Kind Exchange Basics
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Like-Kind Exchange Basics
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Held for investment or productive use in a trade or business, and not held for sale
Held for productive use in a trade or business can be exchanged for other property held for use in a trade or business, or can be exchanged for investment property
Similar with respect to its nature or character, and not its grade or quality
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Like-Kind in Character or Nature
Not Like-Kind in Character or Nature
Like-Kind Exchange Basics
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FMV of the transferred property (“relinquished property“) must equal the acquired property (“replacement property”)
Liabilities assumed are offset by liabilities relieved, with any net liabilities assumed allocated to relinquished property
Tax basis for replacement property is determined by the adjusted tax basis of the relinquished property with certain adjustments
Completion of Form 8824, Like-Kind Exchange
Exchanging a Trade or Business
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Exchanging a Trade or Business
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Production Rights
Distribution
Rights
Trailers
Trucks
Land/Buildings
Computers/Printers/
Furniture/Fixtures
Forklifts
Vending
Machines
Inventory &
Working Capital
Goodwill and
Going Concern
Exchanging a Trade or Business
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Territory A Operation
1. Working capital
2. Real property
3. Personal property
4. Production and
Distribution rights
5. Goodwill and going
concern
Territory B Operation
1. Working capital
2. Real property
3. Personal property
4. Production and
Distribution rights
5. Goodwill and going
concern
CCBCC exchanged Territory A operation for a 3rd party Territory B operation to realign territories for greater operating synergies
Exchanging a Trade or Business
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Qualifying Property
1. Real property
2. Personal property
Non-Qualifying Property
1. Working capital
2. Goodwill and going
concern
The following represents qualifying and non-qualifying property in accordance with the like-kind exchange rules:
A private letter ruling was requested and obtained from the IRS to determine if production and distribution rights were qualifying property
The following facts and circumstances were submitted to the IRS regarding the production and distribution rights:
Exchanging a Trade or Business
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Territory A Operation
1. Rights to manufacture
and distribute certain
beverage products
2. Rights to distribute
only certain other
beverage products
3. Rights relate to certain
geographical
territories and include
marketing and quality
control requirements
Territory B Operation
1. Rights to manufacture
and distribute certain
beverage products
2. Rights to distribute
only certain other
beverage products
3. Rights relate to certain
geographical
territories and include
marketing and quality
control requirements
EXCHANGE
IRS determined that the intangible property exchanged represented two separate like-kind exchange groups
Exchanging a Trade or Business
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“Dual activity agreements” – represents production and distribution rights
“Single activity agreements” – represents distribution only rights
Exchanging a Trade or Business
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Integrated business process with respect to production and distribution within same agreement
Close economical and unique historical connection between production/distribution
Differences between geographical territories, quality control and marketing requirements were deemed to represent grade or quality
IRS rationale in determining the “Dual Activity Agreement” exchange group was based on the following:
Exchanging a Trade or Business
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Certain beverage products shared similar processes, common design and similar distribution
Certain brands, ingredients, and packaging related to grade or quality
Nature and character of rights and underlying property are like-kind
IRS rationale in determining the “Dual Activity Agreement” exchange group was based on the following:
Exchanging a Trade or Business
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Represented a single business activity
Differences between geographical territories, quality control and marketing requirements were deemed to represent grade or quality
IRS rationale in determining the “Single Activity Agreement” exchange group was based on the following:
Exchanging a Trade or Business
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Certain beverage products shared similar processes, common design and similar distribution
Certain brands, ingredients, and packaging related to grade or quality
Nature and character of rights and underlying property are like-kind
IRS rationale in determining the “Single Activity Agreement” exchange group was based on the following:
Exchanging a Trade or Business
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Qualifying Property
1. Real property
2. Personal property
3. Dual Activity
4. Single Activity
ty
Non-Qualifying Property
1. Working capital
2. Goodwill and going
concern
A final determination of qualifying and non-qualifying property is as follows:
Multiple assets representing personal property within a trade or business is required to be sorted into separate like-kind exchange groups
Class lives determined under Rev. Proc. 87-56
Product class (same NAICS code)
Exchanging a Trade or Business
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Examples of multiple asset exchange groups: -Vending machines-Asset Class 57.0 -Over the Road Tractor units-Asset Class 00.26 -Trailers-Asset Class 00.26 -Computers/Peripheral Equipment-Asset Class 00.11
Any Surplus or Deficiency must be determined for each separate exchange group
Exchanging a Trade or Business
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Surplus = FMV of Replacement Property >
FMV of Relinquished Property
Deficiency = FMV of Replacement Property <
FMV of Relinquished Property
Any Realized and Recognized Gain must be determined for each separate exchange group
Exchanging a Trade or Business
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Realized Gain = FMV of Relinquished
Property minus Tax Basis
Recognized Gain = Lesser of Deficiency or
Realized Gain
Any losses associated with exchange groups are not recognized
Tax Basis must be determined for each separate exchange group and allocated to each individual asset
Exchanging Trade or Business
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Treasury Reg. 1.168(i)-6 provides rules and examples on depreciation for replacement and relinquished property
Tax Basis of Relinquished Property
+ Net Liabilities Assumed (allocated)
+ Recognized Gain
+ Surplus
- Deficiency
= Tax Basis of Replacement Property
Tax gain or loss must be recognized for non-qualifying property (working capital, goodwill and going concern) representing the difference between FMV and any available tax basis
Report on Form 8594-Asset Acquisition Statement
Exchanging Trade or Business
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State Implications
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State Considerations
Most states conform to the IRC§1031 Like-Kind Exchange Rules
State tax basis is generally determined consistent with the federal rules, however could be different due to bonus depreciation
Gain could be allocated or apportioned
Gain or proceeds may be included or excluded within the sales factor
State sales taxes and other transfer taxes may be applicable to assets transferred in 1031 exchanges
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