Document Type

Article

Publication Date

Fall 2002

Abstract

Almost from the beginning of the federal income tax, the law has contained two nonrecognition provisions that have undergone relatively little change: the like kind rule and the involuntary conversion rule. Commentators have questioned the policy grounds for the like kind rule in general, and for some of its particular features, such as the exchange requirement. Congress and its staffers have also noted the complexity caused by certain aspects of the rule and have enacted or proposed remedial changes in this regard. The involuntary conversion rule also contributes to the complexity of the tax system given the fact-intensive analysis that it requires. Perhaps more fundamentally, the two nonrecognition rules generally use different standards for determining eligible replacement property, an apparent inconsistency that occasionally catches the attention of both Congress and commentators.

This article seeks to improve the like kind and involuntary conversion rules, that is, make the provisions more rational and less complex, by analyzing them in light of the fundamental tax policies of efficiency, equity, and administrability. The product of this effort is a simpler, more rational and more unified approach for granting nonrecognition treatment to voluntary and involuntary dispositions of property. The article's recommendations include (i) the use of the like kind standard to determine eligible replacement property under both the like kind and involuntary conversion rules, along with narrowing the like kind standard for real property by employing a categorization approach modeled on the real property classifications used for depreciation purposes; (ii) the use of an express rollover mechanism under the like kind rule; and (iii) the use of a single, rather than bifurcated, period for replacing assets under the like kind rule.

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