Over the years, however, as the rules were loosened, the practice of exchanging one asset for another without incurring taxes spread to everyone from commercial real estate developers and art collectors to major corporations. It provides subsidies for rental truck fleets and investment property, vacation homes, oil wells and thoroughbred racehorses, and diverts billions of dollars in potential tax revenue from the Treasury each year.
“Tax expenditures are very similar to an entitlement program, so they’re easy to start,” said George K. Yin, former chief of staff of the Congressional Joint Committee on Taxation, and now a professor at the University of Virginia School of Law.
Yet even with those generous terms, some major American companies — including Cendant, Wells Fargo and General Electric — have routinely pushed the boundaries while claiming lucrative tax savings, according to evidence recently presented at a federal trial in New York.
President Obama and Congressional leaders agreed New Year’s Day to a limited agreement to raise taxes on the wealthy, and the president said over the weekend that he would press this year for broader reform in the tax code. The expansion of the tax break once intended to help farmers illustrates the challenges ahead and how special interests have learned to use the tax code to maximum effect.
“Once a tax break gets started, people think they’re entitled to it, so they are very difficult to end.”
The federal government now allows more than $1.1 trillion a year in this and other tax expenditures. Each of those incentives — which include hundreds of exemptions, exclusions, deferrals and preferential rates — either adds to the budget deficit or shifts the cost of government to other taxpayers.
What’s more, the tax break is one of so many that it tends to escape attention. The independent Simpson-Bowles deficit commission appointed by President Obama in 2010 raised the possibility of eliminating it and other tax expenditures, however, and some budget experts argue that the program should be severely limited or repealed.
“G.E. has always executed its like-kind exchange programs in a fully compliant manner, without exception,” Mr. Wilkerson said.
The tax break also exposes one of the greatest vulnerabilities of the United States tax system: it depends on voluntary compliance. The I.R.S. staff is so outnumbered by tax lawyers and accounting departments at major corporations that there is often little to prevent taxpayers from taking a freewheeling approach to interpreting and administering the rules.
Many tax breaks began with narrow targets and expanded into vast, expensive subsidies far beyond their original intent or the Internal Revenue Service’s ability to monitor them. Most have developed constituencies of taxpayers, lobbyists and elected officials who fiercely defend them, making it politically treacherous to limit or eliminate them.