Monday, November 14, 2016
Lawrence Zelenak (Duke) has made available a draft article titled The Tax-Free Basis Step-Up at Death, the Charitable Deduction for Unrealized Appreciation, and the Persistence of Error. Here are the opening paragraphs:
As every student of the federal income tax well knows, two of the system’s most glaring conceptual errors are the tax-free step-up in basis at death and the deduction for unrealized appreciation in property donated to charity. The two errors are closely related in both character and history.
As for character, both permit taxpayers to claim benefits which should be conditioned on the recognition of income, despite the absence of any recognition event. A basis step-up at death would be appropriate if gains were taxed at death, and a deduction for the fair market value of an appreciated asset donated to charity would be appropriate if the donation triggered taxation of the appreciation. The provisions are errors because the income tax does not treat either transfers at death or transfers to charity as gain recognition events.
As for history, both mistakes originated very early in the development of the modern federal income tax, and in similar ways. In each case, Congress enacted a statutory provision so vague and general that it did not address the issue, and shortly after enactment the Treasury Department promulgated a regulation introducing the conceptual error. There was no apparent intent on the part of either Congress or Treasury to subsidize bequests of appreciated property, or to subsidize charitable donations of appreciated property more heavily than cash donations; the overly-generous rules resulted from the failure of Congress to consider the issues, and from errors of tax logic made by Treasury when it addressed the issues left open by Congress.
Hat Tip: TaxProf Blog.