[Federal Register Volume 70, Number 96 (Thursday, May 19, 2005)]
[Rules and Regulations]
[Pages 28818-28820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-9960]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9202]
RIN 1545-BD25


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that replace 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 regulations affect taxpayers that 
engage in like-kind exchanges of depreciable tangible personal 
property.

DATES: Effective Date: These regulations are effective May 19, 2005.
    Applicability Dates: For dates of applicability, see Sec.  
1.1031(a)-2(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. On August 13, 
2004, the IRS and Treasury Department published in the Federal Register 
a notice of proposed rulemaking (REG-116265-04; 69 FR 50108) by cross 
reference to temporary regulations (TD 9151; 69 FR 50067) under section 
1031(a). These amendments relate to the transition from the use of the 
four-digit codes under the SIC system to the six-digit NAICS for 
determining product classes of depreciable tangible personal property 
exchanged under section 1031. No written or electronic comments in 
response to the proposed regulations or requests to speak at a public 
hearing were received, and no hearing was held. The proposed 
regulations under section 1031 are adopted by this Treasury decision, 
and the temporary regulations are removed.

[[Page 28819]]

Effective Date

    These final regulations apply to transfers of property made by 
taxpayers on or after August 12, 2004. However, taxpayers may apply the 
regulations 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. Additionally, taxpayers may 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 May 19, 2005.

Special Analysis

    It has been determined that these final regulations are 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, and, because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking that preceded these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these final 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 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of 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. Section 1.1031(a)-2 is amended by:
0
1. Revising paragraphs (b)(3) through (b)(6), Example 3 and Example 4 
of paragraph (b)(7), and paragraph (d).
0
2. Adding paragraph (b)(8).
    The revisions and addition read as follows.


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

* * * * *
    (b) * * *
    (3) Product classes. Except as provided in paragraphs (b)(4) and 
(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.
    (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. * * *
* * * * *
    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

[[Page 28820]]

Manual (1987), will be treated as property of a like class for 
transfers of property made by taxpayers on or before May 19, 2005.
* * * * *
    (d) Effective date. Except as otherwise provided in this paragraph 
(d), this section applies to exchanges occurring on or after April 11, 
1991. Paragraphs (b)(3) through (b)(6), Example 3 and Example 4 of 
paragraph (b)(7), and paragraph (b)(8) of this section apply to 
transfers of property made by taxpayers on or after August 12, 2004. 
However, taxpayers may apply paragraphs (b)(3) through (b)(6), and 
Example 3 and Example 4 of paragraph (b)(7) of 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.


Sec.  1.1031(a)-2T  [Removed]

0
Par. 3. Section 1.1031(a)-2T is removed.


Sec.  1.1031(j)-1  [Amended]

0
Par. 4. Section 1.1031(j)-1(d) is amended by removing the language 
``(SIC Code 3531)'' in Example 3(ii)(C) and Example 5(i) and adding 
``(NAICS code 333120)'' in its place.

    Approved: May 12, 2005.
Cono R. Namorato,
Acting Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-9960 Filed 5-18-05; 8:45 am]
BILLING CODE 4830-01-P