Like-kind exchanges: big money can be involved

The U.S. tax code is filled with detailed provisions whose origins are deep in the past. But the current application of such provisions is often alive and well – and the subject of tax litigation.

To take just one example, consider the tax break for asset exchanges. When this provision began, early in the 20th century, it may have been intended to benefit family farmers who were selling livestock or farm equipment and putting the proceeds into upgraded assets.

As the years have gone on, however, the practice of selling one asset and acquiring another without paying capital gains taxes has become a common practice in many different arenas, from art collection to truck rental. Overall, it’s a tax break that costs the Treasury billions of dollars each year in potential revenue that isn’t taxed.

But in the wake of last week’s deal to avert the fiscal cliff, President Obama and many members of Congress are looking for ways to simplify the federal tax code in a way that will bring in new revenue. The taxation of asset exchanges are one area they may look at.

In technical terms, a tax break like the one on asset exchanges is known as a tax expenditure. There are many other exemptions, exclusions and tax deferrals that go into this category as well. Add them all up and they come to more than $1.1 trillion a year.

In the case of asset exchanges, otherwise known as like-kind exchanges, the amount of the foregone revenue can be difficult to estimate. But clearly big money is involved, as the companies seeking to benefit from the break include big ones like General Electric and Wells Fargo.

The scope of the law on asset exchanges may be broad, but sometimes the I.R.S. steps in to challenge taxpayers for taking what the agency sees as an overly expansive interpretation. In those cases, tax litigation is often the result.

Source: “Major Companies Push the Limits of a Tax Break,” The New York Times, David Kocienziewski, 1-6-13

Our firm handles situations similar to those discussed in this post. To learn more about our practice please visit our Texas tax litigation page.