Private Letter Ruling

Ruling Number:P-2004-031
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Sale of depreciable property under Section 1031 of the Internal Revenue Code.
Approval Date:06/28/2004

Office of Policy & Research

June 28, 2004


Dear XXXX:
Thank your for your recent letter. Your company operates as a retailer in several mid-western states. It sells construction equipment, including concrete paving equipment, trailers, hydraulic tools, skid steer loaders, compaction equipment, telescoping forklifts, couplers and attachments, utility equipment, asphalt recycling and stabilization equipment, asphalt paving equipment, construction tractors, construction scrapers, and similar equipment. Recently, the company created a wholly-owned subsidiary corporation (XXXXX) to provide exchange intermediary services for the sale of depreciable property under Section 1031 of the Internal Revenue Code.

Section 1031 provides for like kind exchanges. A qualifying like kind exchange allows a taxpayer to dispose of tangible personal property or real property, but defer the recognition of gain or loss on the disposition by exchanging the property for other property that is considered to be of "like kind" to the property being disposed of. Section 1031 and its supporting regulations set forth basic requirements for like kind exchanges.

XXXXX appears to be utilizing the IRS issued Revenue Procedure 2000-37, 2000-2 C.B. 308, which provides a safe harbor for completing what is termed a "reverse exchange." The Revenue Procedure states that property will not fail to be treated as relinquished property or replacement property for purposes of Section 1031 if the property is initially transferred to an "exchange accommodation titleholder" pursuant to a "qualified exchange accommodation arrangement."

In order to be a qualified exchange accommodation arrangement the following requirements must be met:

Under the agreement that you discuss, the seller/customer assigns its right to the proceeds from the sale of its relinquished property to XXXX under a "Deferred Exchange Agreement." The relinquished property is then sold to a buyer, that is informed of the assignment to XXXXX, and XXXXX. receives all of the proceeds from the sale. Within 45 days of the date that the relinquished property is transferred to the buyer, the seller/customer must identify replacement property and notify XXXXX in writing. The seller/customer must enter into a purchase contract of the replacement property within 180 days of the date that the relinquished property was transferred to its buyer. Prior to the closing on the purchase of the replacement property, the seller/customer assigns its right to buy the replacement property to XXXXX The following is the example that is contained in your letter:
You ask if money that XXXX receives can qualify as a trade-in under the Kansas sales tax act for purposes of reducing the tax base of the sale of the replacement property. The answer is no. The moneys received from the sale cannot be used to reduce the tax base of the retail sale and should be included in the tax base which is subject to tax.

K.S.A. 79-3602(ll) provides the credit for trade-ins:
In the scenario you set forth, there is no "allowance given for the trade-in of property" by the retailer. What is occurring is that two separate sales transactions are arranged under the "qualified exchange accommodation arrangement." This is made clear in your example. The first sale involves the sale of the relinquished property to a third-party by XXXX.: the second the purchase of the replacement property from your employer. The example you give confirms this.

Under the arrangement that you describe, there is no "allowance given for a trade-in" by the retailer but two separate sales with the proceeds from one sale being used as consideration in other sale. Please note that this conclusion would be the same even if XXXX had registered as a retailer for sales tax purposes. See Hutton v. Johnson, 956 SW2d 484(Tenn. Supreme Court 1997).

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. Please let me know if you have additional questions.

Date Composed: 06/30/2004 Date Modified: 06/30/2004