<p>In March, the Like-Kind Exchange Coalition, comprised of representatives from real estate, equipment rental, car rental, energy and QI organizations met in Washington D.C. with two purposes. The first was to announce the results of the comprehensive E&amp;Y <a href="/blog/1031-like-kind-exchange-impact-study-results-released">study examining the impact a repeal of 1031 like-kind exchanges would have on the economy</a>. The second was to schedule as many meetings possible with members of the Senate Finance and House Ways &amp; Means committees during the three days that we were in D.C. The number of meetings turned out to be 60 and included meetings the Chief of Staff of the <a href="https://www.jct.gov&quot; target="_blank">Joint Committee on Taxation</a>, senior staff of the Chairman of the Senate Finance Committee, and the senior tax policy writers for the House Ways &amp; Means Committee.</p>

<h2>How the Congressional Committees Work</h2>

<p>The <a href="https://www.govtrack.us/congress/committees/SSFI&quot; target="_blank">Senate Finance Committee</a>, chaired by Senator Orin Hatch, and the <a href="https://www.govtrack.us/congress/committees/HSWM&quot; target="_blank">House Ways &amp; Means Committee</a>, chaired by Representative Paul Ryan, are the two primary congressional commmittees involved in legislating tax policy. The retention or repeal of 1031 exchanges resides squarely on the shoulders of these committees. Members of these committees propose draft bills or draft committee notes with which to engage other members in an effort to support a final bill to be sent to both the House and the Senate for approval before being sent to the president.</p>

<h2><img alt="Meetings with senior House Ways &amp; Means Committee staff" src="/sites/default/files/files/house-ways-means-031715_0_0_0.jpg" style="width:300px; height:225px; margin-left:5px; margin-right:5px; float:right" /></h2>

<p>It's an arduous process, and the chances of moving tax reform forward by the end of the summer is slim, but possible. Our goal during our 60 meetings with these members was to speak to the economic value that 1031 exchanges represent to businesses in various sectors and to the nation's economy as a whole. It was also our goal to discourage members of the House and Senate from even considering 1031 repeal, which, in every modeled scenario in the <a href="http://www.1031taxreform.com/1031economics/&quot; target="_blank">E&amp;Y study</a>, shrinks GDP by $8 billion to $13 billion per year.</p>

<p>The <a href="http://1031.org/&quot; target="_blank">Federation of Exchange Accommodators</a> (FEA), with significant underwriting by Accruit, is now working "in-district," meeting with legislators in their own states, with key members of the Senate Finance and House Ways &amp; Means committees to ensure that they understand the impact that 1031 repeal would have in their districts.</p>

<h2>How You Can Help Preserve 1031 Exchanges</h2>

<p>Our meetings, funded studies and continual grassroots efforts are making a difference. The tax committees have received over 33,000 letters from businesses who use 1031 exchanges. If you have not already sent a letter to your congressmen or women, I encourage you to do so by visiting <a href="https://www.1031taxreform.com/join-campaign/&quot; target="_blank">1031taxreform.com/join-campaign</a>. The impact realized from this three-minute effort is exponential.</p>

<h2>Involve Your Industry Associations</h2>

<p>I also encourage you to contact your industry-specific associations and ask them what they are doing to help ensure that like-kind exchanges are retained. We're surprised to find several national associations downplaying or altogether ignoring the impact that 1031 repeal would have on their members, a stance that stems from corporate willingness to sacrifice anything, like-kind exchanges included, for a decrease in the corporate tax rate. What's missing from this notion however, is the understanding that 93% of American businesses are sole proprietorships that file at an individual tax rate and won't benefit from a corporate-only tax reform strategy that dismisses 1031s.</p>

<p>If 1031s are important to your business, and you believe your association should be involved in their preservation, let them know.</p>

<p><em>This interview is one in a series in which we've asked an industry leader questions on the topic of tax reform and the issues faced by Congress in addressing the tax code.</em></p>

<p>Michael Tuchman is a partner in <a href="http://www.lplegal.com/&quot; target="_blank">Levenfeld Pearlstein’s</a> Corporate &amp; Securities and Tax Planning &amp; Litigation groups. He structures and closes complex and tax sensitive transactions and builds organizational structures for U.S. and international operating, investment and real estate companies. Tuchman began his career in 1984 as a tax lawyer and is now a trusted advisor to numerous businesses and investors. He is an experienced and pragmatic negotiator.</p>

<h2>What are your thoughts on Congress allocating significant time and resources to tax reform in 2015?</h2>

<p>The goal is admirable but unlikely to be realized in this partisan environment. While there is some bipartisan support for a number of changes, nothing that is being contemplated rises to the level of what I would call reform. It is the usual tinkering with revenues, benefits and interests. Recall the president’s commission on tax reform in 2012? Few do.The president was as anxious to bury it as were his political opponents.</p>

<h2>How can Washington simplify the tax code?</h2>

<p>I reject the question “How?” as it is based on the premise that the president and Congress are capable of any serious-minded efforts at tax reform. My cynicism overwhelms my fear of being proved wrong on this one.</p>

<h2>Are there certain parts of the tax code today that would dramatically change your business should they be repealed?</h2>

<p>Many of my clients are real estate investment firms whose ability to conduct tax deferred exchanges under Tax Code Section 1031 is under threat. Some politicians see repeal of Section 1031 merely as taking away a tax benefit that is not afforded corporate equity investors. They do not appreciate the extent to which 1031 repeal would sap important liquidity from the real estate markets at precisely the wrong time in a slow recovery.</p>

<h2>The upper end of the tax rate for U.S. corporations is 35% and the individual rate is pushing 40% for just federal and state taxes. Should these rates be cut, and if so what tax incentives would you be willing to give up in order to facilitate that?</h2>

<p>The phrase “tax incentives” is a euphemism that obscures underlying problems with our taxing system. If such incentives were eliminated, even meaningfully lower rates would satisfy reasonable governmental needs. On the corporate side, our high tax rates (coupled with our antiquated view of multinational companies) makes us decidedly uncompetitive. Yet our administration would rather castigate businesses for being disloyal rather than address the perverse incentives that have diverted potential tax revenues abroad. And our Congress sees no need to reign in its own proclivity to make concessions to special interests</p>

<h2>Should Congress address corporate-only or comprehensive tax reform, and why?&nbsp;</h2>

<p>Putting my skepticism aside for the moment, corporate reform would be a good place to start because it is fairly self-contained. If Washington would adopt a commercial rather than a redistributionist’s view of corporate tax, it could find its way to a system of simplicity, lower rates and increased revenues. If washington accepts that we are competing globally for taxable revenues and are not merely entitled to them, very different drivers will be at play in the tax system’s design.</p>

<p>On Tuesday, March 17, the Section 1031 Like-Kind Exchange Coalition released the <a href="http://www.1031taxreform.com/1031economics/">results of a study that examines the impact of the repeal of 1031 like-kind exchanges (LKEs)</a>. The study, which was conducted by Ernst &amp; Young, concluded that the impact of 1031 repeal would be a slowing of economic growth and a reduction in GDP.</p>

<p>In an event that took place at the House of Representatives' Longworth House Office Building, eight speakers from diverse industries spoke about their experiences with like-kind exchanges. <a href="http://www.1031taxreform.com/1031bios/#TThompson">Tracy Thompson</a>, CFO of Yellowhouse Machinery Company discussed the economic benefits of like-kind exchanges and the detrimental impact their repeal would have on family-owned businesses. Jesco's <a href="http://www.1031taxreform.com/1031bios/#GBlaszka">Greg Blaszka</a> similarly spoke about growth attributable to like-kind exchanges. Other speakers included <a href="http://www.1031taxreform.com/1031bios/#DWagner">Dan Wagner</a>, Senior Vice President of Government Relations at the Inland Real Estate Group, and <a href="http://www.1031taxreform.com/1031bios/#CRoider">Carrie Roider</a>, CEO of Erb Equipment Company.</p>

<p><img alt="Bob Carroll- National Director of Ernst and Young's Quantitative Economics and Statistics " src="/sites/default/files/files/bob-carroll_0.jpg" style="margin:5px; width:180px; height:240px; float:right" />Robert Carroll, National Director of Ernst and Young's Quantitative Economics and Statistics (QUEST) practice and former Deputy Assistant Secretary of the Treasury for Tax Analysis, detailed the macroeconomic analysis the impacts a potential LKE repeal would have on GDP, including an increase to the cost of capital, labor productivity drop-off, and an increase in holding periods of business assets by roughly 40%.</p>

<p>"The key source of these estimated impacts is the finding that the repeal of the like-kind exchange provisions, even when paired with a revenue neutral reduction in the corporate income tax rate, increases the cost of capital for business investment," the study states. "The higher cost of capital not only discourages investment, but also reduces the velocity of investment through longer holding periods, whereby business investment is locked into specific investment for a longer period of time, and greater reliance on debt financing."</p>

<p>Also in attendance were David Fowler, who Leads PwC’s LKE Practice, Accruit CEO, Brent Abrahm, and President of the Federation of Exchange Accommodators, Mary Cunningham, as well as Brian McGuire, President of the Associated Equipment Distributors (AED), Bob Henderson, the AED's EVP and COO, and Christian Klein, Vice President of Government Affairs of the AED.</p>

<p>"Like-kind exchanges allow domestic businesses to efficiently expand and prosper, timulating economic growth. Most importantly, it is used by a wide array of businesses including farmers, commercial real estate investors, construction companies, trucking and transporation companies as well as small family owned businesses that invest in real estate and vehicles," said Ms. Cunningham.</p>

<p>The <a href="http://www.1031taxreform.com/1031economics/">findings of the Ernst &amp; Young Section 1031 Economic Study</a> and the <a href="http://www.1031taxreform.com/1031press-release/">press release</a> are both available at <a href="http://www.1031taxreform.com/1031economics/">1031taxreform.com/1031econ…;

<p><img alt="Like Kind Exchange Coalition members" src="/sites/default/files/files/1031-lke-repeal-impact-study-2.jpg" style="margin-top: 5px; margin-bottom: 5px;" /></p>

<p>^{From Left to Right: Brent Abrahm, Tracy Thompson, Christian Klein, David Fowler, Greg Blaszka, Carrie Roider}</p>

<p><em>This interview is one in a series in which we've asked an industry leader questions on the topic of tax reform and the issues faced by Congress in addressing the tax code.</em></p>

<p><img alt="Scott Goodman - Sterling Bay" src="/sites/default/files/files/scott-goodman.jpg" style="width:200px; height:200px; margin:5px; float:right" />Scott Goodman is the Founding Principal of <a href="http://www.sterlingbay.com/&quot; target="_blank">Sterling Bay</a>, a commercial real estate investment and development firm he established in 1986. Today, Scott focuses on investor relations, procurement of financing and equity, and transaction structuring. Scott earned a BS in Economics from the University of Michigan and an MBA from Northwestern’s Kellogg School of Business. Scott is the former Board Chair and current Board member of both the <a href="http://www.pkdcure.org/&quot; target="_blank">PKD Foundation</a> and <a href="http://www.heartlandalliance.org/&quot; target="_blank">Heartland Alliance</a>. He is also a member of the <a href="https://www.econclubchi.org/&quot; target="_blank">Chicago Economics Club</a>.</p>

<h2>What are your thoughts on Congress allocating significant time and resources to tax reform in 2015?</h2>

<p>Congress’s attention to tax reform is long overdue.&nbsp; The tax code is just a series of layers on top of layers of&nbsp; either revenue generators or incentives which have relevance at the time they are enacted, but are not adequately reviewed over time.&nbsp;&nbsp;&nbsp; The fact that a majority of Americans are not capable of preparing their own tax returns is testament to the fact that the tax code is too complicated. This seems almost unconstitutional.</p>

<h2>Do you think Congress should address corporate-only or comprehensive tax reform, and why?</h2>

<p>Congress should undertake comprehensive tax reform.&nbsp; The U.S. is falling way behind in the condition of our infrastructure, whether it be the existing conditions of our roads, bridges, and electrical grid, or the need to build new wireless networks or fiber lines.&nbsp; Obviously our national debt needs to be addressed as well.&nbsp; Comprehensive tax reform can at once simplify our tax code and raise needed revenues for public projects.</p>

<h2>The upper end of the tax rate for U.S. corporations is 35% and the individual rate is pushing 40% for federal and state taxes alone. Should that be cut and do you think individuals and/or corporations would be willing to give up popular tax incentives to do so?</h2>

<p>I do not think the tax rates for corporations or individuals should be cut. In fact, greater distribution of wealth is exactly what is needed to give our economy a chance of fortifying the middle class.&nbsp; Current policies have created a clear ”have/have not” society in America, and this is dangerous.&nbsp; Corporate incentives should be scrutinized.</p>

<p>Many industries receive tax credits that are excessive and probably unnecessary. As for eliminating some of the popular incentives, again, they should be scrutinized.&nbsp; Because they are intended to affect behavior, we should analyze the tax incentives to be sure that the type of behavior they were intended to affect is still (a) effective (b) relevant, and (c) worth the cost of revenue loss.</p>

<h2>What part of your business would be impacted most by a repeal of 1031 exchanges and why?</h2>

<p>In the past, we used 1031 exchanges often.&nbsp; Today, we utilize them less frequently because the ownership structure of our deals has become more complex.&nbsp; Repeal of 1031 exchanges would, in certain instances, affect our ability to purchase certain properties because oftentimes property owners will only sell if they can trade into new properties and defer taxes.</p>

<h2>How can Washington simplify the tax code?</h2>

<p>Obviously a flat tax or a tax code devoid of deductions, special treatments and credits would be simpler; I'm just not sure it would be better.&nbsp; The tax code is too voluminous.&nbsp; Layers and layers of new taxes and provisions have been added over time, many cowing to special interests, many which have added to the complexity without fixing or amending the problems they were meant to address.</p>

<p>Time to start over. The tax code should be made fair and balanced, readable and understandable, easily compliable and accessible.</p>

<h2>Are there certain parts of the tax code today that would dramatically change your business should they be repealed?</h2>

<p>I am sure there are, but I am not familiar or knowledgeable&nbsp; enough to comment.</p>

<h2>Are you concerned by the recent spike in inversions undergone by U.S. corporations?</h2>

<p>No, not concerned, but this loophole should be closed.</p>

<h2>States Follow Federal Laws on Section 1031 Tax Deferral</h2>

<p>While Internal Revenue Code (IRC) Section 1031 pertains to the deferral of tax on the federal level, the various states in the country generally follow the Fed's lead in this regard.&nbsp; So, if a transaction meets the requirements of IRC Section 1031, the state in which the relinquished property is located will similarly recognize the tax deferral.&nbsp; However, a few states take this matter of deferral a bit further and will only allow taxpayers who trade into replacement property in the state to avoid ongoing reporting.&nbsp; For those states, should a taxpayer acquire out-of-state replacement property, there is a requirement to pay to the state the original amount deferred when the out-of-state replacement property is sold.&nbsp; These state provisions allow the states to reach out into a future transaction and require the tax be paid upon the original transaction.&nbsp; Due to this ability to reach out and pull back the tax deferral, these state requirements are sometimes known as "clawback" provisions.&nbsp; States with clawback provisions include:</p>

<ul>
<li>Oregon</li>
<li>Montana</li>
<li>Massachusetts</li>
<li>California</li>
</ul>

<h2>The State of California and the Proposed Form FTB 3840</h2>

<p><a href="http://www.ftb.ca.gov/forms/drafts/14_3840draft.pdf&quot; target="_blank"><img alt="California Like Kind Exchange Draft Form 3840" src="/sites/default/files/files/california-lke-draft-form-3840.jpg" style="width:320px; height:399px; margin:5px; float:right" /></a>The State of California's Franchise Tax Board (FTB) has recently released a draft of its proposed form FTB 3840, California Like-Kind Exchanges, which would require taxpayers who sell relinquished real property in the State of California and who buy replacement real property out of that state to report annually the subsequent status of the replacement property :</p>

<blockquote>
<p>Form FTB 3840 must be filed for the year in which the exchange is completed and for each subsequent year until the California source deferred gain is recognized.</p>
</blockquote>

<p>This form must also be submitted in the case of a multiple asset exchange that contains both real and personal property located in California for like-kind property located outside of California as described in the form instructions:</p>

<blockquote>
<p>If personal property located in California was exchanged for personal property located outside of California as part of a single exchange that included California real property exchanged for non-California real property, combine each type of like-kind personal property given-up and report such personal property given-up as a separate property.</p>
</blockquote>

<p>So if the status is that the property was sold in a subsequent year, the California tax will be recognized and paid at that time.&nbsp; In the case of a California resident who acquires replacement property out of state, the FTB 3840 is to be attached to the taxpayer's state tax return.&nbsp; For non-resident California state taxpayers, the requirement is for the taxpayer to file the form FTB 3840 as an informational return.&nbsp;</p>

<h2>Sections of the FTB 3840 Form</h2>

<p>Much of the form follows IRS form 8824, which is used to report like-kind exchanges on the federal tax return.&nbsp; The first section of the form seeks information on the like-kind exchange.&nbsp; The second section pertains to reporting recognized gain or (loss) and basis of like-kind property received.&nbsp; There is also some specific reporting required on a schedule to the FTB 3840:</p>

<ul>
<li>Part I - Information of Properties Given Up</li>
<li>Part II – Information on Properties Received</li>
<li>Part III – Information on Allocation of California Source Deferred Gain</li>
</ul>

<h2>Summary</h2>

<p>Although the California form FTB 3840 is only in draft form currently and the State is requesting comments on the form, the state does intend to make it applicable for California like-kind exchanges taking place in 2014.&nbsp; This new filing requirement applies to all taxpayers, regardless of residence status or commercial domicile, who exchange real property located in California for like-kind property located outside of California.&nbsp; Non-California resident taxpayers who find themselves selling relinquished real property located in the State of California while acquiring replacement property outside of the state must keep in mind, and comply with this new reporting requirement.</p>

<p>Accruit CEO Brent Abrahm has completed the 2014 Preferred Gran Fondo. The 2-day event is a cycling tour of Illinois, Indiana and Michigan to raise money for the <a href="https://www.nfte.com/">Network for Teaching Entrepreneurship (NFTE)</a>. This year's event raised over $20,000, which directly supports&nbsp;NFTE participants in Chicago-area schools.</p>

<p>NFTE inspires young people from low-income communities to find their paths to success. NFTE works closely with educators in high-need schools to re-engage students in learning, introduce them to business concepts, and open up their possibilities for the future.</p>

<p>Since its inception in 1987, NFTE has worked with more than 500,000 young people from low-income communities in programs across the U.S. and around the world.</p>

<p>Brent is an avid road cyclist and strong believer in the importance of education on business. In addition to his support of NFTE, he serves on the Board of Directors for <a href="http://coloradosucceeds.org/">Colorado Succeeds</a>, a non-profit, non-partisan coalition of business leaders committed to improving the state's education system.</p>

<p><img alt="brent-cycling-team" src="/sites/default/files/brent-cycling-team.jpg" /></p>

<p><em>Brent Abrahm (back row, third from left</em>)</p>