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

Abstract

In yesteryear, at death, taxpayers confronted a Janus-faced tax system: on the one hand, they had to endure a harsh transfer tax regime that could significantly deplete the size of their estates; on the other hand, they could take solace in the fact that the income tax system erased their taxable gains vis-à-vis a rule that the tax basis of their assets would equal fair market value. For close to a century, as taxpayers sought to diminish their transfer tax burden, for estate tax reporting purposes, they minimized their asset values; this strategy negated the possibility that the basis equal to fair market rule might be exploited.

But this is no longer the case. For all intents and purposes, through the introduction of significant exemptions and lower tax rates, Congress has emasculated the nation’s transfer tax system. What remains is a transfer tax system teetering on oblivion and unable to keep the basis equal to fair market value rule in check. This has opened the door for taxpayers and their executors and administrators to take measures which result in asset basis maximization, and the IRS lacks the tools and resources to stop them. Congress must therefore institute reforms or risk a severe narrowing of the tax base.

Keywords: Tax, Tax Basis, Estate Tax

JEL Classification: K34