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Sources
of Complexity
Present
law allows taxpayers with an appreciated business or investment
asset to dispose of the asset and acquire another like-kind business
or investment asset without incurring a tax if the taxpayer complies
with a series of complicated rules treating the entire transaction
as an exchange. These rules elevate the form of the transaction
over its substance. Taxpayers incur additional costs complying
with these rules with no resulting non-tax benefit (other than
the fees received by the facilitators of the transaction).
Recommendation
for Simplification
The Joint Committee
staff recommends that a taxpayer should be permitted to elect
to "roll over" gain from the disposition of appreciated business
or investment property described in section 1031, if like-kind
property is acquired by the taxpayer within 180 days before
or after the date of disposition (but not later than the due
date of the taxpayer's income tax return). The determination
of whether properties are considered to be of a like kind would
be the same as under present law.
The
recommendation would reduce complexity by allowing taxpayers wishing
to reinvest the proceeds from the sale of business or investment
property into other like-kind property to do so directly without
engaging in complicated "exchanges" designed to meet the statutory
and regulatory rules regarding deferred exchanges.
Although
this recommendation would permit a taxpayer to receive the funds
for the period of time between the sale of the property and the
purchase of the replacement property or to acquire the replacement
property prior to the disposition of the relinquished property,
the substance is not significantly different than using a "qualified
intermediary" or "qualified exchange accommodation arrangement"
in accordance with the rules under the regulations or revenue
procedure. Eliminating these intermediary arrangements will permit
taxpayers to simplify these transactions and to reduce transaction
costs.
Under
the recommendation, gain would be recognized to the extent any
proceeds are not reinvested in eligible replacement property.
For example, assume a calendar year taxpayer on December 1, 2001,
sells for $100,000 investment land A with a basis of $40,000,
and purchases investment land B for $90,000 on February 1, 2002.
The taxpayer would be required to recognize $10,000 of gain on
December 1, 2001. The remaining $50,000 of gain would be deferred
until the taxpayer disposes of land B in a taxable sale or exchange.
Although
present-law section 1031 does not permit the taxpayer to receive
sales proceeds without the recognition of taxable gain, other
provisions do permit such receipt, while deferring gain recognition,
if qualified replacement property is acquired during the required
time frame. For example, both section 1033, regarding involuntary
conversions, and section 1034 (prior to its repeal), regarding
rollover gain on sale of a principal residence, permitted the
deferral of gain recognition upon the receipt of sales proceeds,
without the complexity of "intermediaries." In addition, recently-enacted
sections 1044 and 1045, regarding rollover of publicly traded
securities gain into specialized small business investment companies,
and rollover of gain from
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