Inflated Tax Basis and the Quarter-Trillion-Dollar Revenue Question

Posted: 21 Jan 2005

See all articles by Joseph M. Dodge

Joseph M. Dodge

Florida State University - College of Law

Jay A. Soled

Rutgers University

Abstract

In this article, Dodge and Soled explain why inflated tax basis reporting is pervasive, estimating that this problem will cost the federal government $250 billion over the next 10 years and that the real figure could easily be much higher. And, unlike corporate tax shelters, this type of tax fraud is available to all taxpayers who engage in property transactions.

Furthermore, the underlying problem of tax basis identifications will be dramatically exacerbated if the new Congress moves quickly (as seems likely) to permanently repeal the estate tax, in which case a carryover tax basis regime of section 1022 will supplant the current basis-equals-fair-market-value-at-death rule. The authors question, however, how estate fiduciaries could possibly calculate the tax basis that decedents had in their investments, if the taxpayers themselves, while alive, did not know that basis. A carryover basis regime failed so badly in 1976 that it was retroactively repealed. In light if this failure, there is no reason to suspect that the carryover basis regime scheduled to take in effect in 2010 will fare any better, unless Congress and the IRS institute safeguards along the lines that the authors propose.

In a conversation with Mikhail Gorbachev, Ronald Reagan once said, Trust, but verify. In making that remark, Reagan made an important observation about how perhaps we should conduct diplomacy and, the authors suspect, our affairs in general. Tax basis identifications require the same vigilance on the part of Congress and the IRS.

Suggested Citation

Dodge, Joseph M. and Soled, Jay, Inflated Tax Basis and the Quarter-Trillion-Dollar Revenue Question. Available at SSRN: https://ssrn.com/abstract=651905

Joseph M. Dodge (Contact Author)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States
850-644-4590 (Phone)

Jay Soled

Rutgers University ( email )

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

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