The taxpayer in this ruling operated a vehicle leasing business. In this business, the taxpayer purchased vehicles for leases and sold the vehicles as the lease terminated. The vehicles included the types described above. The taxpayer in this ruling implemented an LKE program pursuant to which the taxpayer exchanged vehicles through a qualified intermediary (QI) under a master exchange agreement. The taxpayer proposed to combine into single exchange groups all of its vehicles, arguing that all such vehicles are of like-kind under section 1031.
The IRS stated that the general rule for personal property requires the assets to be of like-class, either a like Product Class or within the same General Asset Class. In this case, the vehicles were in different asset classes and, therefore, were not of like class. However, the exception to this general rule holds that properties can be in different assets classes and still be like-kind for purposes of section 1031.
In this ruling, the IRS looked to the evolution of motor vehicles over the past few decades and commented that manufacturers now advertise that their light-duty trucks offer the ride, handling and amenities of cars, plus additional seating and cargo capacity to fulfill families' needs and that no special operator's license is required to drive light-duty trucks. Further, the IRS noted that "crossover" vehicles have been introduced which share some characteristics of both cars and light-duty trucks.
Based on these facts, the IRS ruled that the vehicles leased by the taxpayer, as described above, are of the same nature and character and therefore are of like-kind for purposes of section 1031.
This ruling is extremely important and valuable to vehicle leasing companies that offer multiple types vehicles for lease and reflects the realities of today's marketplace. Every vehicle leasing company should consider implementing an LKE program in order to reap the financial rewards available under section 1031.