In a Chief Counsel Advice (CCA) memorandum, the IRS Office of Chief Counsel concluded that for purposes of Sec. 1031, (1) an exchanged aircraft used for both business and personal purposes is considered one property that is either held for productive use in a trade or business or held for personal use; and (2) a low percentage of business- or investment-related flights in the year of exchange may suggest that an aircraft was not held for productive use in a trade or business, but other facts need to be considered before making a final determination.
This CCA is the second recently to address issues of productive use in a trade or business for purposes of like-kind exchanges of aircraft. CCA 201601011 concluded that Sec. 183 standards should not be applied when determining whether property is held for productive use in a trade or business for purposes of Sec. 1031 (see "Tax Matters: IRS Provides Guidance on Like-Kind Exchanges of Aircraft," JofA, April 2016, page 80).
The facts of the second CCA indicate that an individual, A, owned an aircraft through a disregarded, single-member LLC. The LLC provided various accounting and administrative services to A's other businesses and investments. The aircraft was needed because A's business and investment interests were scattered throughout the United States.
The CCA details that in the year of the exchange, A used the aircraft X% for business or investment purposes and Y% for personal use. The IRS field office took the position that because only X% of the flights in the year of exchange were business- or investment-related, the aircraft was not held for productive use in a trade or business as required by Sec. 1031.
The first question raised in the field was whether, for purposes of a Sec. 1031 analysis, the aircraft could be considered two assets—one held for productive use in a trade or business and one held for personal use.
To address this question, the CCA first reviews the language of Sec. 1031 and determines that the appropriate standard is an all-or-nothing test. The memorandum concludes that the "plain language of §1031 suggests that the property either meets the 'held for' requirement or it does not." In further support of this all-or-nothing standard, the CCA cites Rev. Proc. 2008-16, an IRS safe-harbor ruling on like-kind exchanges of vacation homes used for both rental and personal purposes. In Rev. Proc. 2008-16, the IRS concluded that if certain safe-harbor provisions are met, the entire property meets the "held for" requirements of Sec. 1031. The CCA reasons that if "property used for business/investment and personal purposes is treated as two properties for purposes of §1031, there would have been no need to publish Rev. Proc. 2008-16."
The CCA next turns to the "held for" requirement. Avoiding a bright-line standard, the CCA determines that "§1031 does not provide for a simple quantitative use formula." Instead, the CCA reasons that when determining if the "held for" test is met, "the taxpayer's intentions regarding the property are critical." This means that "the inquiry into whether property is 'held for productive use in a trade or business or for investment' is intensely factual—doubly so when the property may naturally be used for both business and personal purposes."
The X% figure cited for business use by the field "suggests that the property is not held for productive use in a trade or business," the CCA states. The CCA advises, however, that "additional facts should be considered" including: "(1) measurement of business/investment use versus personal use based on flight hours, not just flights; (2) percentages of business/investment use versus personal for flights and flight hours for the year before the year of the exchange; and (3) which flights and flight hours were determined to be repositioning flights and the nature of the flight following the repositioning flight." The CCA advises the field that if the determination shows that over 50% of the use of the aircraft was for personal purposes, the aircraft was not held for productive use in a trade or business or for investment. But it adds in a footnote that "[t]his sentence should not be read to imply that a taxpayer whose personal use of property is less than 50 percent has met the 'held for' requirement in §1031. ... Instead, close scrutiny should be used for any property the taxpayer uses for personal purposes." The footnote refers to Rev. Proc. 2008-16, which "establishes a personal use safe harbor that is significantly less than 50 percent."
- CCA 201605017
—By Raymond C. Speciale, Esq., CPA, associate professor of accounting and law, Mount St. Mary’s University, Emmitsburg, Md., and Ronald D. Golden, Esq., deputy general counsel to the Aircraft Owners and Pilots Association.