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The IRS began its "Dirty Dozen" list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The tax scams in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance and monetized installment sales. These are the first four entries in this year’s Dirty Dozen series.

Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, including filing an amended return and seeking independent advice. Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list and may assert accuracy-related penalties. Further, the IRS informed that to combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Promoter Investigations (OPI). The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials.

Further, the IRS reminded taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves. Additionally, the IRS informed that taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits.

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The IRS announced that is completing the processing on a key group of individual tax returns filed during 2021. Business paper returns filed in 2021 will follow shortly after. The Service began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021 due to the pandemic. The IRS will continue to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed over 4.5 million individual paper tax returns received in 2021.

To date, more than twice as many returns await processing compared to a typical year at this point in the calendar year. A greater percentage of this year’s inventory awaiting processing is comprised of original returns that, generally, take less time to process than amended returns. To address the unprocessed inventory by the end of this year, the IRS has taken aggressive steps including significant, ongoing overtime for staff throughout 2022, creating special teams of employees focused solely on processing aged inventory and expediting hiring of thousands of new workers and contractors. Additionally, the IRS has improved the process for taxpayers whose paper and electronically filed returns were suspended during processing for manual review and correction.

The IRS reminded taxpayers who have not yet filed their 2021 tax returns this year, including those who requested an extension until October 17, to make sure they file their returns electronically with direct deposit to avoid delays. The IRS urged taxpayers to file as soon as they are ready and to not wait until the last minute before the October 17 extension deadline. Filing sooner avoids potential delays for taxpayers and assists the larger ongoing IRS efforts to complete processing tax returns this year.

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Internal Revenue Service Commissioner Charles Rettig is pushing back on assertions that the agency is spending less time targeting wealthy taxpayers for audit in favor of lower income taxpayers.

"This is damaging to tax administration in this country when people say IRS audits more lower income people than higher income people," Rettig told attendees June 23, 2022, at the NYU Tax Controversy Forum.

He asserted that audit rate figures can be skewed depending on when the calculation is taking place. For example, he noted that if data is published on rates of audit for the 2021 tax year in 2022, the numbers will be considerably off.

"[W]hen you see these audit rates, don't jump on that train and say IRS is only auditing .0000 something," he said. "I go, Wow. Who are these folks we picked up? Right? The average audit gets picked up, particularly for high wealth taxpayer at least 16 months after that return has been filed. Why would we audit in the same calendar year that it's filed?"

Rettig noted that wealthy people may be filing later toward the extended filing deadline and filing more returns covering multiple years simultaneously, which would push back when audits take place. The would give the appearance that audits for more wealthy taxpayers may not be happening as much as for lower income taxpayers when examining a single-year audit rate.

But in reality, he said that audit rates for those who make more than $10 million "runs right around seven or eight percent. And as of this year, it’s at 8.7 percent. You will see that the $5 to $10 million group runs about 4.2%. You will see the $1 to $5 million group runs about 2.2%. Most of you have done the math and you understand exactly what I'm telling you, you go for the higher income folks."

After that, the numbers drop off "considerably," he said.

"The $1 million-and-under person is really the executive who has W-2 and 1099 income and we have that information," Rettig said. "The over $1 million person is the entrepreneur who has a lot of pass-through entities and whatnot, we don't have that information," and they get audited more because of it.

Rettig also used the forum to continue advocacy for more funding and guaranteed funding over multiple years to help improve not only enforcement, but to help improve the services that the agency provides to taxpayers, including hiring for call centers and providing better outreach.

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Republican members of the Senate Finance Committee are the latest group to call on the Internal Revenue Service to implement 2-D barcoding technology on individual tax forms.

"We are writing to strongly encourage the Internal Revenue Service (IRS) to work with tax return software companies to implement 2-D barcoding technology for use during the 2023 tax filing season for the 1040 family of paper returns," the GOP senators, led by Ranking Member Mike Crapo (R-Idaho), said in a May 24, 2022, letter to IRS Commissioner Charles Rettig.

Similar calls have been made by other stakeholders, including the National Taxpayer Advocate, who sent a directive to the IRS in March to implement 2-D barcoding in time for use with the 2023 tax season.

The GOP senators noted that the IRS is financially capable of doing this now. In the letter, the senators referenced the 2017 budget request of $8.4 million for implementation of 2-D barcoding and the $1 billion earmarked in the American Rescue Plan of 2021 for IT modernization, of which they state only $98.5 million so far has been spent.

The group also called on the agency to "stop chasing technological perfection" in the letter.

"If we were to wait for the promise of better technology, nothing would ever get implemented," the letter states. "To the contrary, the fact that 2-D technology is a bit older probably means it has been tested and is less expensive. Many states currently use 2-D barcoding for tax returns, so we have proof it works."

2-D barcoding came back into the forefront of needed IT upgrades for the IRS during the pandemic that caused a significant backlog of unprocessed paper returns. As of April 29, the agency still had more than 18 million unprocessed paper returns, though Commissioner Rettig has stated in numerous congressional hearings that the backlog will be back to its "normal" levels by the end of 2022.

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The IRS Whistleblower Office has released the fiscal year (FY) 2021 annual report to Congress. In FY 2021, the Whistleblower Office made 179 award payments to whistleblowers totaling $36,144,926, including 20 awards paid under Code Sec. 7623(b). Whistleblower claim numbers assigned in FY 2021 grew by 55 percent year over year and claim closures increased by 13 percent. Additionally, this year’s report introduces the Code Sec. 7623 Payment and Claim Processing Analysis. The analysis shows Code Sec. 7623(b) awards were paid on average in 17 days.

Code Sec. 7623 Payment and Claim Processing Analysis

The average claim processing time for Code Sec. 7623(b) award payments made during FY 2021 increased by 2.9 percent from the prior year and average claim processing time for Code Sec. 7623(a) award payments increased by 10.4 percent. The report stated that it is likely average claim processing times will continue to increase as claim inventory continues to age while the Whistleblower Office awaits audits, exams, investigations, appeals, tech services, collection, statutes to expire, and whistleblower litigation.

Ten Most Common Allegations Submitted In FY 2021

The ten most common allegations submitted on Form 211, Application for Award for Original Information, for FY 2021 were:

unreported income;
general allegations of fraud, tax fraud, wire fraud, insurance fraud, and related allegations;
false dependent exemptions;
employee vs. subcontractor;
failure to file;
wage under reporter;
capital gains tax;
wages being paid in cash or under the table;
rental income; and
false deductions or expenses.

The report also provided other information including disclosures made under Taxpayer First Act, additional information on submissions received in FY 2021, information on claim numbers issued, claims remaining open and claims that were closed in each FY from 2019 to 2021, geographic location of all whistleblowers by region, open Code Sec. 7623(b) claims as of FY 2021, and reasons for closures that occurred during FY 2021.

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Department of the Treasury Secretary Janet Yellen is continuing to promote the agreement on international taxes reached by most members of the Organisation for Economic Co-operation and Development on a global corporate minimum tax, but acknowledged that its overall impact will be determined by the final details.

Testifying before the Senate Finance Committee at a June 7, 2022, hearing about the White House’s fiscal 2023 budget request, Secretary Yellen noted in her opening remarks that she is "keenly focused on moving forward on the global agreement on international tax reform, including a global minimum tax that will level the playing field and raise crucial revenues to benefit people around the world."

However, she noted that because the specific details of how the international tax reforms will be defined and implemented, the impact on American businesses cannot be determined.

In response to a question as to whether the agency will provide Congress with the analysis of data currently available on whether the pillar one agreements will have a positive or negative impact, she said "that it could go either way, depending on the details which have not yet been decided. In the pillar one negotiations, the impact on fiscal revenues will be small."

Yellen continued: "Pillar two has a big impact. Pillar one will have a small impact. We're a very large market economy. We will gain revenue from our ability to tax foreign corporations that are doing business in the United States where we consume those services, we will lose some from revenue. Yet, it could be positive or negative, depending on details that have not yet been worked out. And that's why we've not provided data. We will when those details are clear."

That being said, Yellen also highlighted that countries will not be able to skirt the requirements of the treaty, responding to a question on whether China, a signee of the agreement, can be expected to comply with it when the nation has a questionable record complying with other international agreements.

Secretary Yellen testified that she expects China to comply with the terms of the agreement, but if it fails to do so, "this agreement contains an enforcement mechanism that will allow the United States or any other country that has adopted the global minimum tax to impose taxes on China's companies that would be the same as if China had complied. So there is a tough enforcement mechanism in this deal."

She also testified that Treasury will be negotiating on the details to ensure that business tax credits and subsidies will not negatively impact corporations once the international tax reforms are implemented.

Defending the Budget

During the hearing, she also addressed a number of issues that have become common themes among Biden Administration officials in recent months, including a recent focus on the tax gap and the disparities in auditing following a Government Accountability Office report that highlighted those concerns.

"Tackling that $600 billion annual tax gap is absolutely important in ensuring fiscal responsibility," Yellen told members of the Senate Finance Committee in response to a comment that the White House is requesting $80 billion over 10 years to address this. "It would generate substantial revenue in a manner that's efficient and fair. It would enable deficit reduction and help these price pressures by providing the funding a part of the funding we need for the urgent fiscal priorities."

She reinforced a common call to better fund the Internal Revenue Service to make sure it has the proper personnel in place to do things such as conducting more complicated audits to ensure the top earners are paying their fair share of taxes, in addition to helping the IRS serve the overall population and update its information technology infrastructure.

"We absolutely have to invest in the IRS to close that tax gap, which reflects opaque sources of income, mainly by high income earners that are not taxed," she said. "And they need the resources to serve taxpayers to be able to answer their phones to be able to ensure that they receive the payments that they are due, and they need to modernize their technology which is really the oldest dating back to the [19]60s in the federal government."

Yellen also took the opportunity to encourage Congress to extend the child tax credit, noting that while it may have played a minor role in contributing to the inflation issues the nation is tackling, it has had a significant effect on helping to reduce childhood hunger.

"It enabled families to get a little bit of breathing room and to help their kids afford nutritious food and clothing and back to school supplies." Yellen said.

She also mentioned during the Senate Finance Committee hearing that the Treasury Department is looking forward to working with Congress to get a tax deduction for union dues reinstated after it was cut in 2017.

A day later, on June 8, 2022, Secretary Yellen appeared before the House Ways and Means Committee in a hearing also advertised as a review of the White House budget but one that focused heavily on inflation, current energy policy, and international tax reform.

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The American Institute of CPAs is calling on Congress to fund the Internal Revenue Service at the level requested by the White House in its fiscal year 2023 budget request. Separately, the group offered its suggestions on the IRS Guidance Priority List. "In advance of the Fiscal Year 2023 appropriations cycle, we request that you fund the Internal Revenue Service (IRS) at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisers in a timely and professional manner," AICPA said in a May 25, 2022, letter to Democratic and Republican leadership in both the House and Senate Appropriations Committees.

AICPA expressed concern that "service challenges will persist long after the pandemic has ended unless sufficient, targeted funding for technology improvements, human talent and training, and taxpayer services are appropriated."

The organization also noted that there needs to be more than money thrown at the agency to help its functioning. "It should be clear that funding alone will not solve the IRS’s problems,” AICPA wrote. “Structural reforms and organizational alignment from Congress, the President, the Secretary, and the Commissioner are necessary to delivering the promised goals. We look forward to working with all parties involved to this end and create an IRS that taxpayers deserve."

Priority Guidance Recommendations

In a separate letter sent to the IRS May 24, 2022, AICPA outlined its suggestions for the guidance that the agency should be prioritizing. The guidance recommendations cut across a range of programs and legislation, such as the Tax Cuts and Jobs Act, the SECURE Act, and the CARES Act and covering a number of areas such as corporation and shareholder taxation, employee benefits taxation, individual taxation, and international taxation.

R&E Recommendations

AICPA is also recommending the Internal Revenue Service issue specific regulations related to the treatment of research and experimental (R&E) expenditures under Sec. 174.

In a May 26, 2022, letter to the IRS, AICPA said that the Department of the Treasury and the IRS should "issue regulations providing that section 174(a) expenditures include direct costs, including employee compensation, contract labor, and materials, and at the taxpayer’s election, allocable indirect and overhead costs."

AICPA also said that Treasury and the IRS "should issue regulations that illustrate, using detailed examples, which costs are ‘incident to’ the development or improvement of a product as per Reg. §1.174-2."

If the agency doesn’t issue new regulations, AICPA recommended guidance to cover these requests.

Additionally, AICPA identified issues that have arisen with Rev. Proc. 2000-50, which covers the treatment of costs paid or incurred to develop, purchase, or lease computer software.

"IRS should modify the scope limitation under section 4 of Rev. Proc. 2000-50 to clarify that the limitation on costs that a taxpayer has treated as R&E expenditures under section 174 only applies to costs previously subject to an irrevocable election under section 174, including 174(b) or charging the expenses to capital account."

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The Department of the Treasury is continuing its push to get funding for much needed information technology infrastructure upgrades from Congress.

During a June 14, 2022, hearing before the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government, Treasury Deputy Secretary Wally Adeyemo testified as to why the funds were needed.

The "IRS’ technology is decades out of date, written in a programming language no longer taught, and incredibly expensive to maintain the master file that under grids," Adeyemo told the committee in his opening statement. "The tax system dates back to the 1960s when there was no internet, no cell phones, and no spreadsheets or automatic payments."

The White House is requesting a 12 percent budget increase in fiscal year 2023 compared to 2022 enacted levels "to begin to remedy this mismatch between the IRS’ responsibilities and its resources."

Treasury’s request for increasing funds to help address IT infrastructure upgrades for the IRS did not come up during the hearing’s question-and-answer period, as the committee focused its attention on Russian sanctions, the role of using cryptocurrency to evade sanctions, energy policy and independence, and other criminal-focused activities.

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The U.S. Supreme Court has granted a petition for certiorari in the case of A. Bittner, CA-5, 2021-2 USTC ¶50,242 . In Bittner, the U.S. Court of Appeals for the Fifth Circuit held that each failure to report a qualifying foreign account on the annual Report of Foreign Bank and Financial Accounts (FBAR) constituted a separate reporting violation subject to penalty. This means that the penalty applies on a per-account basis, not a per-form basis. The Fifth Circuit disagreed with a Ninth Circuit panel that adopted a per-form interpretation ( J. Boyd, CA-9, 2021-1 USTC ¶50,112).

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Background

U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency ( 31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. §§1010.350, 1010.306).

If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for non-willful violations, unless the violation was due to reasonable cause. For a willful violation, the maximum penalty is the greater of $100,000 or 50 percent of (1) the amount of the transaction when a violation involves a transaction, or (2) the balance in the account at the time of the violation when a violation involves a failure to report the existence of an account. There is no reasonable cause exception for willful violations ( 31 USC 5321).

Fifth Circuit: FBAR Penalty Per Account

In A. Bittner, the Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the "violation" of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-form basis.

The Fifth Circuit agreed with the government that the district court had erred in determining what constituted a "violation" under 31 USC 5314 by focusing on the regulations under section 5314 to the exclusion of section 5314 itself. Section 5314 does not create the obligation to file a single report, stated the Fifth Circuit, but instead gives the Treasury Secretary discretion to prescribe how to fulfill the statute’s requirement of reporting qualifying accounts.

The Fifth Circuit observed that by authorizing a penalty for any "violation of ... any provision of section 5314," as opposed to the regulations under section 5314, section 5314 "naturally reads" as referring to the statutory requirement to report each account, not the regulatory requirement to file FBARs in a particular manner. Further, the circuit court stated that the reasonable cause exception for non-willful violations was framed in terms of "the transaction" and "the account," and thus it also "naturally reads" as excusing the failure to report a transaction or account, not the failure to file an FBAR.

Ninth Circuit: FBAR Penalty Per Form

In J. Boyd, the Ninth Circuit ruled that the IRS can impose only one non-willful penalty when an untimely but accurate FBAR is filed, regardless of the number of foreign financial accounts. The Ninth Circuit determined that the statutory and regulatory scheme under 31 USC 5314 authorizes a single non-willful penalty for the failure to file a timely FBAR, and that the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.

The Ninth Circuit was not persuaded by the government's argument that, based on the statutory scheme as a whole and legislative intent, the penalty amount could be assessed on a per-account basis. The Ninth Circuit found nothing in the statute or regulations to suggest that the penalty could be calculated that way for a single failure to file a timely FBAR that is otherwise accurate. The Ninth Circuit presumed that Congress had purposely excluded the per-account language from the non-willful penalty provision because it had included such language in the previously-enacted willful penalty provision. Further, the inclusion of per-account language in the reasonable cause exception supported the view that Congress had intentionally omitted per-account language from the non-willful penalty provision.

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Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

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If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:
Like property:
An apartment house for a store building
A panel truck for a pickup truck
Not like property:
A piece of machinery for a store building
Real estate in the U.S. for real estate outside the U.S.

The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
The property being received must be received by a specified date.The property to be received must be received by the earlier of:
1. The 180th day after the date on which you transfer the property given up in trade, or
2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

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