SPE 1031

YOUR INTELLIGENCE IS THE SOURCE OF YOUR PROSPERITY

Substantial and Tangible Knowledge and Guidance. Information can now travel 15,000 miles in an instant. However, the most important part of the journey comes at the last instant when the information reaches the brain of the recipient and the recipient responds to the information. Does this individual have the training and experience to understand the information? This is the question posed by David Brooks in “The Cognitive Age.” Your prosperity is based on your ability to assimilate, absorb, process, and analyze information.

This essential truth involves Section 1031 Exchanges everyday. Every day billions of dollars in assets are bought and sold during millions of transactions, each of which is capable of being treated as a tax-deferred Section 1031 Exchange. Some will be, but most will not. That choice is made many times in the absence of information or capacity to understand the choices that can be made.

An estimated 70% of the value of Corporate America is made up of Intangible Assets, much of which may be exchanged for other Intangible Assets on a tax-deferred basis.

As long as similar assets are acquired, no income taxes are due. This applies whether the sale or the purchase occurs first. Income tax reduction improves cash flow, reduces debt, and increases overall profitability. The comparison of a client's current internal rate of return compared with a proposed computation with taxes removed on exchanged assets, can result in a remarkable multiplying effect, e.g. doubling, tripling, quadrupling of the internal rate of returns.

We see what we expect to see. However, when we open up our horizons, we can see many more Section 1031 Exchanges everywhere. The battlefield for economic supremacy is not being fought by nations or corporations. It is being fought by individuals, whose skills are brought to the economic battlefield everyday.

In order to exchange these assets, several key concepts must be satisfied:

1. The assets must be separately identified up front in the contracts.
2. They can not be identified generically as goodwill or going concern value.
3. Their value must be measured.

The main deficiency in the current tax rulings requested in tax audits with respect to exchanging Intangible Assets is the failure to properly identify the specific assets or the failure to properly value these assets.