Exchanging a Trade or Business under the IRC §1031 Like-Kind Exchange Rules

Tax Officers Summit September 26, 2016 Angela Pulley, Sr. Tax Director Coca-Cola Bottling Co. Consolidated

Agenda

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About Coca-Cola Bottling Co. Consolidated (“CCBCC”)

IRC §1031 Like-Kind Exchange Basics Exchanging a Trade or Business

State Considerations

Agenda

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Coca-Cola Bottling Co. Consolidated

● Founded in 1902

● 2015 revenue of $2.3 billion

● Produces, Markets, & Distributes primarily products of The Coca-Cola Company

● Operates in 15 states (includes D.C.)

● Capital & Intangible Assets represent ~$1.6B

● 7 production and 62 distribution facilities

● ~12,000 employees

● Continued growth and expansion within the Coca-Cola system

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Beverage Portfolio

Sparkling & Energy (carbonated)

80% of Volume

Still (non-carbonated)

20% of Volume

2000 2006 Today

U.S. Non-Alcoholic Beverage Category

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IRC §1031 Like-Kind Exchange Basics

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Like-Kind Exchange Basics

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Held for investment or productive use in a trade or business, and not held for sale

Held for productive use in a trade or business can be exchanged for other property held for use in a trade or business, or can be exchanged for investment property

Similar with respect to its nature or character, and not its grade or quality

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Like-Kind in Character or Nature

Not Like-Kind in Character or Nature

Like-Kind Exchange Basics

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FMV of the transferred property (“relinquished property“) must equal the acquired property (“replacement property”)

Liabilities assumed are offset by liabilities relieved, with any net liabilities assumed allocated to relinquished property

Tax basis for replacement property is determined by the adjusted tax basis of the relinquished property with certain adjustments

Completion of Form 8824, Like-Kind Exchange

Exchanging a Trade or Business

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Exchanging a Trade or Business

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Production Rights

Distribution

Rights

Trailers

Trucks

Land/Buildings

Computers/Printers/

Furniture/Fixtures

Forklifts

Vending

Machines

Inventory &

Working Capital

Goodwill and

Going Concern

Exchanging a Trade or Business

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Territory A Operation

1. Working capital

2. Real property

3. Personal property

4. Production and

Distribution rights

5. Goodwill and going

concern

Territory B Operation

1. Working capital

2. Real property

3. Personal property

4. Production and

Distribution rights

5. Goodwill and going

concern

CCBCC exchanged Territory A operation for a 3rd party Territory B operation to realign territories for greater operating synergies

Exchanging a Trade or Business

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Qualifying Property

1. Real property

2. Personal property

Non-Qualifying Property

1. Working capital

2. Goodwill and going

concern

The following represents qualifying and non-qualifying property in accordance with the like-kind exchange rules:

A private letter ruling was requested and obtained from the IRS to determine if production and distribution rights were qualifying property

The following facts and circumstances were submitted to the IRS regarding the production and distribution rights:

Exchanging a Trade or Business

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Territory A Operation

1. Rights to manufacture

and distribute certain

beverage products

2. Rights to distribute

only certain other

beverage products

3. Rights relate to certain

geographical

territories and include

marketing and quality

control requirements

Territory B Operation

1. Rights to manufacture

and distribute certain

beverage products

2. Rights to distribute

only certain other

beverage products

3. Rights relate to certain

geographical

territories and include

marketing and quality

control requirements

EXCHANGE

IRS determined that the intangible property exchanged represented two separate like-kind exchange groups

Exchanging a Trade or Business

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“Dual activity agreements” – represents production and distribution rights

“Single activity agreements” – represents distribution only rights

Exchanging a Trade or Business

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Integrated business process with respect to production and distribution within same agreement

Close economical and unique historical connection between production/distribution

Differences between geographical territories, quality control and marketing requirements were deemed to represent grade or quality

IRS rationale in determining the “Dual Activity Agreement” exchange group was based on the following:

Exchanging a Trade or Business

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Certain beverage products shared similar processes, common design and similar distribution

Certain brands, ingredients, and packaging related to grade or quality

Nature and character of rights and underlying property are like-kind

IRS rationale in determining the “Dual Activity Agreement” exchange group was based on the following:

Exchanging a Trade or Business

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Represented a single business activity

Differences between geographical territories, quality control and marketing requirements were deemed to represent grade or quality

IRS rationale in determining the “Single Activity Agreement” exchange group was based on the following:

Exchanging a Trade or Business

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Certain beverage products shared similar processes, common design and similar distribution

Certain brands, ingredients, and packaging related to grade or quality

Nature and character of rights and underlying property are like-kind

IRS rationale in determining the “Single Activity Agreement” exchange group was based on the following:

Exchanging a Trade or Business

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Qualifying Property

1. Real property

2. Personal property

3. Dual Activity

4. Single Activity

ty

Non-Qualifying Property

1. Working capital

2. Goodwill and going

concern

A final determination of qualifying and non-qualifying property is as follows:

Multiple assets representing personal property within a trade or business is required to be sorted into separate like-kind exchange groups

Class lives determined under Rev. Proc. 87-56

Product class (same NAICS code)

Exchanging a Trade or Business

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Examples of multiple asset exchange groups: -Vending machines-Asset Class 57.0 -Over the Road Tractor units-Asset Class 00.26 -Trailers-Asset Class 00.26 -Computers/Peripheral Equipment-Asset Class 00.11

Any Surplus or Deficiency must be determined for each separate exchange group

Exchanging a Trade or Business

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Surplus = FMV of Replacement Property >

FMV of Relinquished Property

Deficiency = FMV of Replacement Property <

FMV of Relinquished Property

Any Realized and Recognized Gain must be determined for each separate exchange group

Exchanging a Trade or Business

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Realized Gain = FMV of Relinquished

Property minus Tax Basis

Recognized Gain = Lesser of Deficiency or

Realized Gain

Any losses associated with exchange groups are not recognized

Tax Basis must be determined for each separate exchange group and allocated to each individual asset

Exchanging Trade or Business

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Treasury Reg. 1.168(i)-6 provides rules and examples on depreciation for replacement and relinquished property

Tax Basis of Relinquished Property

+ Net Liabilities Assumed (allocated)

+ Recognized Gain

+ Surplus

- Deficiency

= Tax Basis of Replacement Property

Tax gain or loss must be recognized for non-qualifying property (working capital, goodwill and going concern) representing the difference between FMV and any available tax basis

Report on Form 8594-Asset Acquisition Statement

Exchanging Trade or Business

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State Implications

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State Considerations

Most states conform to the IRC§1031 Like-Kind Exchange Rules

State tax basis is generally determined consistent with the federal rules, however could be different due to bonus depreciation

Gain could be allocated or apportioned

Gain or proceeds may be included or excluded within the sales factor

State sales taxes and other transfer taxes may be applicable to assets transferred in 1031 exchanges

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Questions??

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angie.pulley@ccbcc.com