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OUR FAMILY OF
STRATEGIC TAX SERVICES


State of the Current Law

1031 Exchange Services - Precious Metals Exchange

State of the Current Law

Statute: Section 1031 of the US Tax Code provides that when a property is sold and the proceeds are used to purchase a property that is like-kind, the investor can defer the taxable gain by following the requirements of Section 1031.

Tax Regulations. The 1991 Tax Regulation Section 1.1031(a)-1(b) states the words 'like kind' have reference to the nature or character of the property and not to its grade or quality.

The fact that any asset involved is improved or unimproved is immaterial, for the fact relates only to the grade or quality of the property and not to its kind or class.

For exchanges occurring on or after April 11, 1991, Treasury Regulation 1.1031(a)-2(c)(1) provides the general rule that an exchange of non-depreciable personal property qualifies for non-recognition of gain or loss under Section 1031 only if the exchanged properties are of a like-kind.

The Tax Regulations do not provide any examples for an exchange of non-depreciable personal property, such as precious metals.

Court Cases. 9th Circuit California Life Insurance Co. v. Commissioner, 680 F.2d 85, (9th Cir.1982) – Gold coins and Swiss francs were not of like kind. The coins are exchanged in the marketplace only by collectors and are valued primarily for their rarity, as collector items. The Swiss francs, (in 1982 ) are currently circulating currency, and to their investors they represent investments in the Swiss national economy. (Editor's note: the gold Swiss franc was discontinued as currency in 2000.)

Administrative Tax Rulings. Since the initial promulgation of the Section 1031 regulations since 1960 there have been 4 rulings on precious metals. As noted elsewhere these are not legally binding on Courts. Since the issuance of the treasury regulations on exchanges of personal property (such as precious metals) in 1991, there have been no administrative rulings issued on precious metals as well as no Court opinions.

Revenue Ruling 76-214 provides that the exchange of a collection of Mexican 50-peso gold bullion coins for Austrian 100-corona gold coins qualified as a like kind exchange under section 1031(a) of the Code. The ruling observed that their value was determined based on their gold content and not their status as a formerly circulated coin of their respective nations. Thus their nature and character as gold bullion coins was considered identical.

Rev. Rul. 79-143 states that the exchange of U.S. $20 gold coins (numismatic-type coins) for South African Krugerrand gold coins (bullion-type coins) did not qualify as an exchange under section 1031 of the Code. The ruling stated that underlying value of a U.S. $ 20 gold coin is determined based on its age, number minted, history, age, condition, and metal content. The ruling incorporates, as a matter of law, a factual conclusion that $20 gold coins can never be traded based on their gold content only, rather there is an implicit premium always to be gained by trading in $20 Libertys and St. Gaudens (commonly called Double Eagles).

In Rev. Rul. 82-96 the exchange of gold bullion for Canadian Maple Leaf gold coins qualified as an exchange under section 1031(a) of the Code based on the fact that gold bullion and gold bullion coins, such as the Canadian Maple Leaf, are bought and sold based on their precious metal content rather than for aesthetic reasons.

This rationale can be extended to all precious metal bullion coins and bullion bars where the price is set based on their underlying store of wealth value versus aesthetic values, such as ancient or generally unavailable collectible items.

Furthermore in exchanging collectibles, the criteria for exchanging artwork is not that it be priced or valued in similar fashion, but that it be a similar artistic medium, such as paintings for paintings.

Revenue Ruling 82-166 is the most troubling of all. The exchange of gold bullion for silver bullion did not, in the opinion of a government lawyer, qualify as an exchange of like kind property. Though he agreed the value of silver bullion and gold bullion are determined solely on the basis of their metal content, (the legal basis of other rulings) the author stated that silver and gold were intrinsically different metals and primarily are used in different ways. Silver is essentially an industrial commodity. Gold is primarily utilized as an investment in itself.

First, the ruling erroneously incorporates, as a matter of law, a factual conclusion that silver and gold are intrinsically different metals, primarily used in different ways. Silver is an industrial commodity and Gold is primarily utilized as an investment. Second, the ruling does not incorporate the central test of Section 1031, that the character and nature of the properties must be compared to determine if they are like kind. Third, where it can be demonstrated that gold and silver are essentially similar metals, both physically and chemically, and/or they are used primarily in the same ways, they should succeed in being exchanged.

 
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