AgDM newsletter article, March 2003
By Neil Harl, Charles F. Curtiss Distinguished Professor of Agriculture, professor of economics, 515-294-6354, email@example.com
Although less common than like-kind exchanges of real estate or machinery, exchanges of livestock appear to be occurring more frequently in recent years. Except for the statutory bar for exchanges of livestock of different sexes, the rules governing livestock exchanges are less well known. The regulations adopted in 1991 have provided more definitive guidelines for like-kind exchanges of livestock (and other assets) than were available previously.
The regulations specify that depreciable tangible personal property can satisfy the like-kind requirement in two ways - (1) by showing that the property in question is exchanged for property that is of a like class or (2) by showing that the property in question is exchanged for property of a like-kind.
As for product classes, the regulations specify that a single property cannot be classified within more than one product class and that the property’s product class is determined as of the date of the exchange. A product class consists of depreciable personal property that is listed in a product class in the Standard Industrial Classification System Manual (SIC) (1987), prepared by the Office of Management and Budget. Under the SIC system, dairy cattle are listed with a classification of 0241; beef cattle are given a classification of 0212. Therefore, an exchange of beef cows for dairy cows is not a like-kind exchange.
The SIC system has been replaced with the North American Industrial Classification System (NAICS); however, the Internal Revenue Service has not issued guidance on using the NAICS for federal income tax purposes and has advised that taxpayers should continue to use the four digit SIC system until guidance is published.
Other classifications under the four-digit SIC system include
|Sheep and goats||
|Rabbits, fur-bearing animals||
Cases predating the regulations
In the 1967 case of Woodbury v. Commissioner, the parties entered into a multi-party, multi-step transaction whereby 225 cows and calves and 425 mixed yearlings were exchanged. The tax court agreed that the 225 cows with calves by side were held for breeding purposes rather than for sale but only 103 of the mixed yearlings received were held for breeding purposes; the rest of the mixed yearlings were held primarily for sale.
In the 1968 case of Wylie v. United States, the taxpayer traded 49 head of steer calves ranging in age from 7 to 11 months of age (which were not held for sale in the ordinary course of business) for registered Aberdeen-Angus cattle. The court held that income was not realized (or recognized) on the exchange.
In a case decided in 1978, half-blood heifers and three-quarter blood heifers were held to qualify as like-kind. In that case, the taxpayer agreed to deliver 12 three-quarter blood heifers in exchange for 12 one-half blood heifers. The three-quarter blood heifers were the offspring of artificial insemination of the 12 half-blood heifers which had been received earlier. Since the taxpayer had deducted the costs of raising the three-quarter blood heifers, giving the animals a zero basis, the half blood heifers received in exchange were ineligible for investment tax credit, despite the higher value placed on the three-quarter blood heifers. The court said the fair market value of the three-quarter blood heifers was without significance.
For livestock, the major concern at present is in accessing the classification reference, the Standard Industrial Classification System Manual (1987). After guidance is issued by IRS, the problem will be in accessing the North American Industrial Classification System (2002).
* Reprinted with permission from the December 13, 2002 issue of Agricultural Law Digest, Agricultural Law Press publications, Eugene, Oregon. Footnotes not included.