Determining an Asset's Tax Basis in the Absence of A Meaningful Transfer Tax Regime

Authors

Jay A. Soled
Richard L. Schmalbeck, Duke Law SchoolFollow

Document Type

Article

Publication Date

2018

Keywords

tax, tax basis, estate tax

Abstract

Until recently, in those circumstances where there was a valuation range with respect to a particular asset, executors faced a choice: among estates subject to the estate tax, declaring a high value would increase the estate tax liability; however, due to the Internal Revenue Code's "basis equal to fair market value" rule applicable at death, declaring a low value would expose heirs to a greater capital gains tax on subsequent asset disposition. Because the estate tax rates were higher and that tax was immediate (as opposed to deferred until a later sale by the heir), executors typically minimized asset values, with the corresponding effect of tax basis diminishment. This commonplace strategy thus negated the possibility that taxpayers might exploit the basis equal to fair market rule.

But this is often no longer the case. Through a series of exemption level increases, tax rate reductions, and other reforms, Congress has gutted the nation's transfer tax system. What remains is a teetering transfer tax system that applies only to a handful of the wealthiest taxpayers. For the rest, the transfer tax system provides no disincentive to executors from assigning the highest defensible valuations to a decedent's assets, opening the opportunity to capitalize upon the basis equal to fair market value rule. Unfortunately, the I.R.S. lacks the tools and resources to combat this practice. To preserve the integrity of the capital gains tax and the revenue that it produces, Congress must therefore intercede.

Citation

Jay A. Soled & Richard L. Schmalbeck, Determining an Asset's Tax Basis in the Absence of A Meaningful Transfer Tax Regime, 10 Columbia Journal of Tax Law 49-75 (2018)