Exchange of Emission Credits Deemed Like-Kind

PLR 201024036 concludes that the underlying nature and character of the rights conferred by emissions credits for nitrogen oxide emissions (NOE) are like-kind to the rights conferred by emissions credits for volatile organic compounds (VOC).

Interestingly, the ruling also concludes the Parent Corporation (Parent) is deemed to have held the emission credits for investment or for use in its trade or business, despite the fact that the credits had only recently been contributed to Parent
by its wholly-owned Subsidiary (Sub).

In the conduct of their business, Parent and Sub emit nitrogen oxide that is a by-product of natural gas combustion.

Parent and Sub also generate volatile organic compounds, which are chemical compounds that evaporate under specific conditions.

Sub owns NOE credits that it obtained after installing emission reducing equipment in its facility.

The credits are government issued licenses that permit Sub to emit certain levels of pollutants without penalty. The credits are intangible personal property for federal income tax purposes that Sub holds for investment or for use in its trade or business.

Parent anticipates needing additional VOC credits in the conduct of its business and desires to exchange some of Sub's NOE credits for additional VOC credits from an unrelated third party.

To achieve their objective, Sub contributes NOE credits to Parent who immediately exchanges them for VOC credits.

The IRS concluded that the underlying nature and character of the emission credits were like-kind and therefore eligible for non-recognition of gain under IRC Section 1031.

Additionally the Parent is considered to have held the NOE credits for investment, or for use in its trade or business. There is no rationale cited for this statement.