Surrogate Taxation and the Second-Best Answer to the In-Kind Benefit Valuation Riddle

39 Pages Posted: 23 May 2019

Date Written: November 1, 2012


For well over a century, theorists have debated how the receipt of in-kind benefits, such as meals and lodging furnished for the convenience of an employer and business entertainment opportunities, should be taxed. While debate participants have generally agreed that the receipt of such in-kind benefits constitutes income, the question has remained about whether to value such benefits at fair market value or at the recipient’s subjective value or to use some other metric. Because of administrative considerations in determining the tax base, the Internal Revenue Code (Code) historically used a binary approach: either include the in-kind benefit at its fair market value or exclude it in its entirety.

This analysis explores an intermediate approach known as surrogate taxation, a process by which one taxpayer bears another taxpayer’s tax burden. Over the past several decades, surrogate taxation has evolved and grown in prominence. It is now commonly used to tax the receipt of in-kind benefits (and other forms of income) in ways that produce outcomes that are more administrable, equitable, and efficient than the Code’s binary approach. While this analysis concludes that direct taxation is preferable to surrogate taxation, administrative concerns sometime dictate that the latter is often a necessary substitute.

Keywords: Tax

JEL Classification: K34

Suggested Citation

Soled, Jay, Surrogate Taxation and the Second-Best Answer to the In-Kind Benefit Valuation Riddle (November 1, 2012). Brigham Young University Law Review, 153, 2012, Available at SSRN:

Jay Soled (Contact Author)

Rutgers University ( email )

1 Washington Park
Newark, NJ 07901-1825
United States
(973) 353-1727 (Phone)

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