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Advocating A Carryover Tax Basis Regime

46 Pages Posted: 20 Mar 2017 Last revised: 1 Dec 2017

Richard Schmalbeck

Duke University School of Law

Jay A. Soled

Rutgers University

Kathleen DeLaney Thomas

University of North Carolina School of Law

Date Written: March 17, 2017

Abstract

For close to a century, an important (but unfortunate) feature of the Internal Revenue Code has been a rule that the tax basis of any asset is made equal to its fair market value at death. Notwithstanding the substantial revenue losses associated with this rule, Congress has retained it for reasons of administrative convenience.

But from three different vantage points, pressure has been mounting to change what is commonly referred to as the “step-up in basis rule.” First, politicians and commentators have historically tied the step-up in basis rule to the estate tax on the theory that income be taxed only once, rather than twice. However, with the recent emasculation of the transfer tax regime, no estate tax is levied in most cases, while taxpayers routinely capitalize on the step-up in basis rule. On another front, technological advances have greatly simplified tax basis identification and record keeping, making a carryover tax basis regime eminently feasible, which it previously was not. Finally, in an era of growing income inequality, retention of a rule that primarily benefits the wealthy seems wholly unjustified, necessitating reform.

Congress essentially has two different reform options to consider, namely, a deemed realization rule or a carryover tax basis rule. While a deemed realization rule has many advantages, it appears to be politically unachievable, at least for the time being, due to liquidity and administrative concerns. On the other hand, in light of the fact that a carryover tax basis rule is widely utilized, vetted, and accepted in the related context of inter vivos gift giving, extending its application to transfers at death appears entirely feasible. Its institution would have many virtues, including improved administrability, equity, and revenue generation.

Keywords: Taxation, estate tax, tax policy, step-up in basis, section 1014

JEL Classification: K34, H20, H21, H22, H24, H29

Suggested Citation

Schmalbeck, Richard and Soled, Jay A. and Thomas, Kathleen DeLaney, Advocating A Carryover Tax Basis Regime (March 17, 2017). 93 Notre Dame Law Review 109 (2017); UNC Legal Studies Research Paper; Duke Law School Public Law & Legal Theory Series No. 2017-27. Available at SSRN: https://ssrn.com/abstract=2935317

Richard Schmalbeck

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7078 (Phone)
919-613-7231 (Fax)

Jay Soled (Contact Author)

Rutgers University ( email )

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

Kathleen Thomas

University of North Carolina School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States
919-843-7630 (Phone)

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