California Code of Regulations Proposal Unfeasible for Like-Kind Exchanges

Comments on California proposal Title 18, secs.17951-7 and 25137(e) on the historical apportionment of gains/losses from 1031 exchanges of property.

A recent California Code of Regulations proposal considers requiring corporate taxpayers to use an historical apportionment formula to trace assets through numerous layers of like-kind exchanges to determine how to apportion gains from the eventual sale of a replacement asset that might be a decade (or more) removed from the original sale of a relinquished asset.  The attached letter from the leaders of the American Financial Services Association, the Equipment Leasing and Finance Association, and the Association of Commercial Vehicle Lessors was written to the California Franchise Tax Board to provide insight into the burden that such a requirement would place upon the taxpayers.

As a qualified intermediary who monitors and facilitates thousands of sales and purchases of assets that qualify for like-kind exchange treatment nationwide, we echo the sentiments put forth in the attached letter and would encourage the Franchise Tax Board to build a process that encourages the reinvestment inherent in like-kind exchanges rather than penalizing businesses who engage in this process to expand their operations. Replacement assets are routinely disbursed throughout the U.S. with new tax bases derived from multiple sales from multiple states. Asking third parties to track and report on fractional taxing amounts through every asset's lifespan would be overburdensome.

In short, requiring the application of historical apportionment, which requires tracing of the gain or loss through multiple exchanges spanning decades of time, is simply not administratively feasible for corporate taxpayers with like-kind exchange programs.