Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, March 29, 2017

Article on a Carryover Tax Basis Regime

CarryoverRichard Schmalbeck, Jay A. Soled & Kathleen DeLaney Thomas recently published an Article entitled, Advocating a Carryover Tax Basis Regime, Notre Dame L. Rev. (Forthcoming 2017). Provided below is an abstract of the Article:

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.


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Sigh, another case of academics pontificating from their ivory towers who don’t deal with these types of transactions on a daily basis. I would ask the authors to explain “making a carryover tax basis regime eminently feasible” what is eminently feasible about finding out what an acre of rural farm land was worth in 1960s or 1970s when most central appraisal districts only have 10 or 15 years worth of data? And as we all know CAD values are not binding in any way on the IRS. Additionally the IRS has prevailed in multiple cases when a taxpayer can’t definitely prove basis in capital assets such as land, stock, partnership interests etc, then their basis is zero. So carryover basis on inherited property would effectively leave thousands of taxpayers and their heirs with no way to prove basis on long held assets and closely held assets which are hard to value stocks, limited partnership interests, real estate etc etc. This would put small taxpayers and their heirs in a severe disadvantage when it comes to inheritance. Look for the dynasty trust attorneys to be out in force if this passes. Why not put it in a dynasty trust? Your heirs get your basis anyways if you hold it until you die might as well tie these assets up for 100+ years in one of the few states that allow dynasty trusts.

Posted by: James W | Mar 29, 2017 8:29:52 PM

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