[Federal Register Volume 69, Number 156 (Friday, August 13, 2004)]
[Rules and Regulations]
[Pages 50067-50069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18479]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9151]
RIN 1545-BD26


Additional Rules for Exchanges of Personal Property Under Section 
1031(a)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
replacing the use of the Standard Industrial Classification (SIC) 
system with the North American Industry Classification System (NAICS) 
for determining what properties are of a like class for purposes of 
section 1031 of the Internal Revenue Code (Code). The text of these 
temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the proposed rules section in this issue of the Federal 
Register. The final regulations consist of technical revisions to 
reflect the issuance of the temporary regulations.

DATES: Effective Date: These final and temporary regulations are 
effective August 12, 2004.
    Applicability Date: For date of applicability, see Sec.  1.1031(a)-
2T(d).

FOR FURTHER INFORMATION CONTACT: J. Peter Baumgarten, (202) 622-4920 
(not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under section 
1031(a) relating to the exchange of items of personal property that are 
within the same product class. Section 1031(a)(1) generally 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 the 
property is exchanged solely for property of like kind to be held 
either for productive use in a trade or business or for investment. 
Thus, for a transaction to qualify as an exchange under section 1031, 
the transaction must constitute an exchange, the property relinquished 
and the property received in the exchange must be held for use in a 
trade or business or for investment, and the exchanged properties must 
be of like kind.
    Section 1.1031(a)-2(a) provides that personal properties of a like 
class are to be considered of like kind for purposes of section 1031. 
Under Sec.  1.1031(a)-2(b), depreciable tangible personal property is 
of a like class to other depreciable tangible personal property if the 
exchanged properties are either within the same general asset class or 
within the same product class. The general asset classes are derived 
from Rev. Proc. 87-56 (1987-2 C.B. 674) (dealing with depreciation of 
personal property). Section 1.1031(a)-2(b)(2) adopts certain of those 
general asset classes to determine what property is of like kind for 
purposes of exchanging depreciable tangible personal property under 
section 1031, and identifies the types of personal property included in 
each general asset class listed.
    Section 1.1031(a)-2(b)(3) provides, in part, that property within a 
product class consists of depreciable tangible personal property that 
is listed in a 4-digit product class (or ``code'') within Division D 
(pertaining to the manufacturing sector of the economy) of Executive 
Office of the President, Office of Management and Budget, Standard 
Industrial Classification Manuale (1987) (SIC Manual). Section 
1.1031(a)-2(b)(4) states that the SIC Manual generally is modified 
every 5 years and that the product classes for section 1031 purposes 
will follow the modifications of product classes in the SIC Manual.
    Effective January 1, 1997, the Department of Commerce discontinued 
the SIC system set forth in the SIC Manual and adopted NAICS as set 
forth in Executive Office of the President, Office of Management and 
Budget, North American Industry Classification System, United States, 
1997 (NAICS Manual). The NAICS Manual was updated in 2002. Copies of 
the NAICS Manual may be obtained from the National Technical 
Information Service of the Department of Commerce and may be accessed, 
with a more complete listing of manufactured products and manufacturing 
industries, on the internet at http://www.census.gov/naics.

Explanation of Provisions

    As a result of the replacement of the SIC system with NAICS, these 
temporary regulations discontinue the use of SIC codes and adopt 
Sectors 31 through 33 of NAICS (pertaining to manufacturing) as the 
system for defining the product classes for purposes of like-kind 
exchanges of depreciable tangible personal property. Within NAICS, 
product classes are designated using 6-digit codes rather than the 4-
digit codes assigned to product classes under the SIC system. However, 
properties within the same product class under the 4-digit SIC

[[Page 50068]]

system generally will be of the same product class under the 6-digit 
NAICS. For example, under the SIC codes, dairy equipment and haying 
machinery are within the same product class (SIC code 3523). Under 
NAICS, milking machines and haying machines are also within the same 
product class (NAICS code 333111).
    The temporary regulations generally incorporate the provisions of 
Sec.  1.1031(a)-2(b)(3) relating to the use of product classes but 
substitute NAICS codes for SIC codes. For example, Sec.  1.1031(a)-
2(b)(3) provides that, under the 4-digit SIC system, any 4-digit 
product class ending in 9 (a miscellaneous category) is not property 
within a product class. Similarly, the temporary regulations provide 
that any NAICS 6-digit product class ending in 9 is not property within 
a product class. Accordingly, such property, and property that is not 
listed in a 6-digit product class, cannot be of a like class to other 
property based on the 6-digit NAICS Manual classification. Taxpayers, 
however, may still demonstrate that these properties are of a like 
kind.
    Comments are specifically requested regarding the continued utility 
of SIC codes and any potential problems in adopting the 6-digit NAICS 
codes in lieu of the 4-digit SIC codes, including specific examples of 
how a product class is narrowed if the 6-digit NAICS code is used and 
whether this would be a disadvantage to any class of taxpayers.
    The temporary regulations incorporate the provisions of Sec.  
1.1031(a)-2(b)(4) that permit taxpayers, in structuring like-kind 
exchanges, to rely on modifications to the product classes resulting 
from revisions to the NAICS Manual. The temporary regulations omit the 
provisions of Sec.  1.1031(a)-2(b)(4) that permit taxpayers to rely on 
modifications to the general asset classes in Rev. Proc. 87-56 for 
purposes of structuring like-kind exchanges. Under section 6253 of the 
Technical and Miscellaneous Revenue Act of 1988 (Public Law 100-647, 
102 Stat. 3342), the Commissioner may not modify the asset classes in 
Rev. Proc. 87-56 for depreciation purposes. However, the temporary 
regulations provide that the Commissioner may, through published 
guidance of general applicability, supplement, modify, clarify and 
update the rules for the classification of properties. Therefore, the 
Commissioner may determine through published guidance not to follow a 
general asset class or product class for purposes of identifying 
property of like class or may determine that other properties not 
listed within the same or in any product class or general asset class 
nevertheless are of a like class.

Effective Date

    In general, the temporary regulations apply to transfers of 
property made by taxpayers on or after August 12, 2004. However, 
taxpayers may apply the temporary regulations to transfers of property 
made by taxpayers on or after January 1, 1997, in taxable years for 
which the period of limitation has not expired. The temporary 
regulations include a transition rule permitting taxpayers to treat 
properties within the same product classes under a 4-digit SIC code as 
properties of like class for transfers of property made by taxpayers on 
or before the date these temporary regulations are published as final 
regulations in the Federal Register. Comments are specifically 
requested on whether a longer transition period should be provided 
before the use of the SIC codes is discontinued.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Please refer to 
the cross-referenced notice of proposed rulemaking published elsewhere 
in this issue of the Federal Register for applicability of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 
7805(f) of the Code, these temporary regulations will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these temporary regulations is J. Peter 
Baumgarten of the Office of the Associate Chief Counsel (Income Tax and 
Accounting). However, other personnel from the IRS and Treasury 
participated in their development.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. In Sec.  1.1031(a)-2, paragraphs (b)(3) through (b)(6) and 
paragraph (b)(7), Example 3 and Example 4 are revised and a sentence is 
added at the end of paragraph (d) to read as follows:


Sec.  1.1031(a)-2  Additional rules for exchanges of personal property.

* * * * *
    (b)(3) through (b)(6) [Reserved]. For further guidance, see Sec.  
1.1031(a)-2T(b)(3) through (b)(6).
    (b)(7) * * *

    Example 3. [Reserved]. For further guidance see Sec.  1.1031(a)-
2T(b)(7), Example 3.
    Example 4. [Reserved]. For further guidance see Sec.  1.1031(a)-
2T(b)(7), Example 4.

* * * * *
    (d) Effective date. For transfers of property made by taxpayers on 
or after January 1, 1997, see Sec.  1.1031(a)-2T(d).

0
Par. 3. Section 1.1031(a)-2T is added to read as follows:


Sec.  1.1031(a)-2T  Additional rules for exchanges of personal property 
(temporary).

    (a) through (b)(2) [Reserved]. For further guidance, see Sec.  
1.1031(a)-2(a) through (b)(2).
    (3) Product classes. Except as provided in paragraphs (b)(4) and 
(b)(5) of this section, or as provided by the Commissioner in published 
guidance of general applicability, property within a product class 
consists of depreciable tangible personal property that is described in 
a 6-digit product class within Sectors 31, 32, and 33 (pertaining to 
manufacturing industries) of the North American Industry Classification 
System (NAICS), set forth in Executive Office of the President, Office 
of Management and Budget, North American Industry Classification 
System, United States, 2002 (NAICS Manual), as periodically updated. 
Copies of the NAICS Manual may be obtained from the National Technical 
Information Service, an agency of the U.S. Department of Commerce, and 
may be accessed on the internet. Sectors 31 through 33 of the NAICS 
Manual contain listings of specialized industries for the manufacture 
of described products and equipment. For this purpose, any 6-digit 
NAICS product class with a last digit of 9 (a miscellaneous category) 
is not a product class for purposes of this section. If a property is 
listed in more than one product class, the property is treated as 
listed in any one of those product classes. A property's 6-digit 
product class is referred to as the property's NAICS code.

[[Page 50069]]

    (4) Modifications of NAICS product classes. The product classes of 
the NAICS Manual may be updated or otherwise modified from time to time 
as the manual is updated, effective on or after the date of the 
modification. The NAICS Manual generally is modified every five years, 
in years ending in a 2 or 7 (such as 2002, 2007, and 2012). The 
applicability date of the modified NAICS Manual is announced in the 
Federal Register and generally is January 1 of the year the NAICS 
Manual is modified. Taxpayers may rely on these modifications as they 
become effective in structuring exchanges under this section. Taxpayers 
may rely on the previous NAICS Manual for transfers of property made by 
a taxpayer during the one-year period following the effective date of 
the modification. For transfers of property made by a taxpayer on or 
after January 1, 1997, and on or before January 1, 2003, the NAICS 
Manual of 1997 may be used for determining product classes of the 
exchanged property.
    (5) Administrative procedures for revising general asset classes 
and product classes. The Commissioner may, through published guidance 
of general applicability, supplement, modify, clarify, or update the 
guidance relating to the classification of properties provided in this 
paragraph (b). (See Sec.  601.601(d)(2) of this chapter.) For example, 
the Commissioner may determine not to follow (in whole or in part) a 
general asset class for purposes of identifying property of like class, 
may determine not to follow (in whole or in part) any modification of 
product classes published in the NAICS Manual, or may determine that 
other properties not listed within the same or in any product class or 
general asset class nevertheless are of a like class. The Commissioner 
also may determine that two items of property that are listed in 
separate product classes or in product classes with a last digit of 9 
are of a like class, or that an item of property that has a NAICS code 
is of a like class to an item of property that does not have a NAICS 
code.
    (6) No inference outside of section 1031. The rules provided in 
this section concerning the use of general asset classes or product 
classes are limited to exchanges under section 1031. No inference is 
intended with respect to the classification of property for other 
purposes, such as depreciation.
    (7) Examples. The provisions of this paragraph (b) are illustrated 
by the following examples:

    Example 1  and Example 2 [Reserved]. For further guidance, see 
Sec.  1.1031(a)-2(b)(7), Example 1 and Example 2.
    Example 3. Taxpayer E transfers a grader to F in exchange for a 
scraper. Neither property is within any of the general asset 
classes. However, both properties are within the same product class 
(NAICS code 333120). The grader and scraper are of a like class and 
deemed to be of a like kind for purposes of section 1031.
    Example 4. Taxpayer G transfers a personal computer (asset class 
00.12), an airplane (asset class 00.21) and a sanding machine (NAICS 
code 333210), to H in exchange for a printer (asset class 00.12), a 
heavy general purpose truck (asset class 00.242) and a lathe (NAICS 
code 333210). The personal computer and the printer are of a like 
class because they are within the same general asset class; the 
sanding machine and the lathe are of a like class because they are 
within the same product class (although neither property is within 
any of the general asset classes). The airplane and the heavy 
general purpose truck are neither within the same general asset 
class nor within the same product class, and are not of a like kind.

    (8) Transition rule. Properties within the same product classes 
based on the 4-digit codes contained in Division D of the Executive 
Office of the President, Office of Management and Budget, Standard 
Industrial Classification Manual (1987), will be treated as property of 
a like class for transfers of property made by taxpayers on or before 
[the date these regulations are published as final regulations in the 
Federal Register].
    (c) [Reserved]. For further guidance, see Sec.  1.1031(a)-2(c).
    (d) Effective dates. This section applies to transfers of property 
made by taxpayers on or after August 12, 2004. However, taxpayers may 
apply this section to transfers of property made by taxpayers on or 
after January 1, 1997, in taxable years for which the period of 
limitation for filing a claim for refund or credit under section 6511 
has not expired. For all other exchanges occurring prior to August 12, 
2004, see Sec.  1.1031(a)-2(d).

Linda M. Kroening,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: July 28, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-18479 Filed 8-12-04; 8:45 am]
BILLING CODE 4830-01-P