At first glance, one might be tempted to say that Section 1031 is an overly generous provision of the tax code whose time has passed. But wait: Section 1031 was first passed into law on March 8, 1921, in the waning days of the Wilson Administration, and has been reviewed and commented upon in nearly every subsequent Congress.
In fact, in 1923, just two years later, the statute was amended to prohibit securities and the like from being exchanged. It seems that owners of shares that had made money were exchanging, deferring the taxes due, while owners of shares that had lost money were selling and deducting the loss. Pretty sneaky.
But after 1923, when would you guess the next change came to Section 1031? Not until 1971, when paragraph (e) was added to provide that:
“For purposes of this Section (1031), livestock of different sexes are not property of a like-kind”.
So, 48 years passed without a change of any kind. And, 13 more years would pass before the above noted time periods of 45 and 180 days found their way into the law.
Since 1984, there have been several changes, which may be summarized as the Related Party Rules and the Foreign Property Rules, which were added in 1989. Since then: nothing except something in 2008 pertaining to ditches on farmland, a very obscure provision. So, what is the outlook going forward?
Although Section 1031 originated in 1921 as an administrative convenience to the government in attempting to collect tax on barter or swap transactions, it has remained in the Code for 90 more years for one very simple and powerful reason: JOBS. Section 1031 is widely and routinely used by business in plant expansions, relocations and restructuring transactions.
With the highest rate of corporate tax in the world (Japan was higher, and is/has taken steps to lower its rate), there is simply no reason for a company to sell its assets and pay tax, only to later replace the same assets elsewhere in the US. Fleets of automobiles come to mind, and many other examples.
Another powerful reason is that IRS can use Section 1031 to trump a taxpayer’s claim of a tax loss. Since Section 1031 is a mandatory (and not an elective) provision of the Code, a taxpayer with a loss has to take careful steps to sell an asset, banking the funds, etc., else the IRS on audit might construe the matter to be a Section 1031 Exchange; since no gain or loss is recognized on an exchange, the taxpayer’s move to claim such would be frustrated.
These and other powerful reasons dictate that Section 1031 will be with us for a long time to come.
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