North Carolina Department of Justice
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March 22, 1978 Taxation; Income Tax; Gross Income; Gain From Sale of Property; Nonrecognition of Gain; Exchange of "Like Property"; G.S. 105-145(a)

Subject:

 

Requested By: Mr. B. W. Brown, Director Individual Income Tax Division North Carolina Department of Revenue

 

Question: Where a farmer exchanges land for land and a tobacco allotment, is the tobacco allotment "like property" such that no gain is recognized in the exchange pursuant to G.S. 105-145(a)?

 

Conclusion: No; the exchange results in a recognizable gain.

 

The following facts are assumed, but do not conform precisely to any pending case: A farmer bought a 100 acre farm for $200,000. He subsequently sold it to a mining company for $1,000,000. Ra her than receiving cash, he chose to receive the purchase price in the form of a tobacco allotment of 50,000 pounds, and one thousand acres of land. What taxable gain, if any has he realized?

G.S. 105-145(a) provides in part that "when property is exchanged for other property of like kind, the property received in exchange shall be considered as a conversion of assets from one form to another, from which no gain or loss shall be deemed to arise."

Federal law is similar: "no gain or loss shall be recognized if property held for productive use in trade or business . . . is exchanged solely for property of a like kind to be held . . . for productive use in trade or business . . ." I.R.C. G.S. 1031.

An inquiry into whether in the given case there was an exchange of "like property" is particularly important because if there was, the gain between $200,000 and $1,000,000 is not recognized. If all or part of the property received by the farmer was not "like property", then some or all of the gain will be taxed as income.

There appears to be no North Carolina case dealing with the question of "like property", so that reference to federal practice is appropriate. G.S. 105-142; G.S. 105-145(e); In re Virginia-Carolina Chemical Corp., 242 NC 531, 103 SE 2d 823 (1958).

For federal purposes, "the words "like kind" have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class . . ." Reg. § 1.1031(a)-(1(b).

For example, "the nonrecognition provision distinguishes realty from personalty, rather than between realty which is dissimilar in location, attributes and capacities for profitable use." Commissioner v. Crichton (5 Cir. 1941), 122 F. 2d 181, 27 A.F.T.R. 824.

Thus, for federal purposes, we would expect the one thousand acres received by the farmer to be treated as "like property", and are of the further opinion that the same result obtains for State purposes. However, the status of the tobacco allotment as real property is not so clear.

Tobacco "marketing quotas" or "allotments" are solely creatures of federal law, to be increased, decreased, or done away with altogether as the Congress wills. 7 USC § 1311 et seq. They "may be transferred only in such manner and subject to such conditions as the Secretary of Agriculture may prescribe by regulation" 7 USC § 1313(d).

Whether, and the means by which, allotments may be leased or sold, and transferred to other farms, even to farms in other counties, are likewise matters of federal law. 7 USC § 1341.

On the other hand, land law, including laws dealing with the creation, transfer and registration of interests in real property, are matters of State law. None of the foregoing suggest that allotments have the attributes of real property.

It is possible that a tobacco allotment is a "chattel real", which is a property interest arising out of or dependent upon real estate. First National Bank of Kansas City v. Nee, (D.C. Mo.) 92 F. Supp.

328. If so, however, it is intagible personal property. Bragg Investment Company, Inc. v. Cumberland County, 245 NC 492, 96 SE 2d 341 (1957).

It is also possible that a quota might be an "incorporeal hereditament" appurenant to the land. This seems even less likely since an allotment is not so fixed that it cannot be moved to other land, or even to another county. Even if it were such, being "incorporeal", it too would be an intangible.

Finally, it might simply be a "license", and this seems to be the most plausible possibility. It appears to be a license granted by the Secretary of Agriculture to a farmer owning a sufficient amount of cleared land in a particular place permitting him to grow no more than a specified quantity of tobacco. As a license, it is subject to federal control as to creation, transfer and termination, attributes not consistent with interests in real property. However, none of these interests (chattel real, incorporeal hereditament, license) constitute real property and hence, do not constitute "like property", when compared with the land which the farmer conveyed.

Therefore, it is our opinion that the exchange of a tobacco allotment for land does not qualify it for nonrecognition of the gain. The gain appears to us to be both recognizable and taxable with respect to the year in which it was realized.

Rufus L. Edmisten Attorney General

Myron C. Banks Special Deputy Attorney General