Strategy: Swap your intellectual property assets—such as patents or trademarks— for other like-kind property. Such tax-free exchanges of like-kind property aren’t limited to just real estate. This concept also works for other assets held for business or investment use.
Be aware, however, that the IRS has adopted a super-strict approach to swaps involving intangible assets. It requires an analysis on an item-by-item basis.
New IRS ruling: A company divided its patents among four categories: process, machine, manufacturing and matter. It wants to swap a process patent for another process patent, a machine patent for a machine patent and so on.
The IRS generally permits tax-free swaps of tangible assets that are like-kind if they’re included in the same class. But the IRS wants to use a stricter two-part test for intangible assets. First, it determines the nature or character of the rights involved. Second, it assesses the nature or character of the underlying assets.
Generally, the nature or character of rights under one patent is the same as the nature or character of rights under a different patent, even though the underlying properties differ. The company in the new ruling passed the first part of the tax test, but it flunked the second part.
The tax deferral for like-kind exchanges requires specificity and analysis on an item-by-item basis, rather than on a global basis. So, the patents couldn’t be exchanged tax-free.
Tip: This area of the tax law is fraught with tax traps. Consult a tax pro.