Monday, January 7, 2013
It began more than 90 years ago as a small tax break intended to help family farmers who wanted to swap horses and land. Farmers who sold property, livestock or equipment were allowed to avoid paying capital gains taxes, as long as they used the proceeds to replace or upgrade their assets.
Over the years, however, as the rules were loosened, the practice of exchanging one asset for another without incurring taxes spread to everyone from commercial real estate developers and art collectors to major corporations. It provides subsidies for rental truck fleets and investment property, vacation homes, oil wells and thoroughbred racehorses, and diverts billions of dollars in potential tax revenue from the Treasury each year.
Yet even with those generous terms, some major American companies — including Cendant, Wells Fargo and General Electric — have routinely pushed the boundaries while claiming lucrative tax savings, according to evidence recently presented at a federal trial in New York. ...
With hundreds of thousands of transactions a year, it is hard to gauge the true cost of the tax break for so-called like-kind exchanges, like those used by Cendant, General Electric and Wells Fargo. The government estimates that it diverts less than $3 billion a year from the Treasury, but industry statistics suggest the number could be far higher.
The tax break also exposes one of the greatest vulnerabilities of the United States tax system: it depends on voluntary compliance. The IRS staff is so outnumbered by tax lawyers and accounting departments at major corporations that there is often little to prevent taxpayers from taking a freewheeling approach to interpreting and administering the rules. ...
Some financial planners and economists say that the tax break even favors real estate investors unfairly by allowing them to defer capital gains taxes that those who invest in securities and other ventures have to pay. And although it was originally intended to help farmers, some economists and lawmakers in agricultural areas say it has perversely contributed to suburban sprawl and the spiraling cost of farmland. Because it allows farmers to avoid capital gains taxes on land swaps, the tax break provides an incentive to sell farmland coveted by developers and buy property in less desirable and more remote areas.
(Hat Tip: Jack Bogdanski, Mike Livingston.)