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Like-Kind Exchanges Run Amok

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By Michael Cohn
January 7, 2013

Some of the largest corporations are relying on like-kind-exchanges to lower their tax bills, in some cases pushing the boundaries of what the Internal Revenue Service will allow under the law.

An eye-opening article in Sunday’s New York Times shed light on how major companies such as Cendant, General Electric and Wells Fargo are using like-kind exchanges to divert billions of dollars a year from the U.S. Treasury. The tax break was originally intended to help family farmers swap land, livestock and equipment without subjecting them to capital gains, taxes as long as they were simply replacing or upgrading those assets.

But like-kind exchanges have expanded to enable investors, real estate developers and art collectors to purchase all manner of assets, including vacation homes and thoroughbred race horses, without paying taxes on the transactions.

Companies are not supposed to be able to use the proceeds of a like-kind exchange for any purpose aside from purchasing a replacement for the asset that was sold. The money is supposed to be reinvested in the business, held in the meantime in an escrow account controlled by a third party.

But loopholes have developed over the years, allowing banks to give clients essentially unfettered access to the money in the escrow accounts.

With Congress and President Obama once again looking to do tax reform this year, like-kind exchanges may turn out to be one area they will be scrutinizing closely as a way to tighten the so-called “tax gap.”

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