January 25, 2005
Dodge & Soled on Inflated Tax Basis
Joseph M. Dodge (Florida State) & Jay A. Soled (Rutgers, Business School) have published Inflated Tax Basis and the Quarter-Trillion-Dollar Revenue Question, 106 Tax Notes 453 (2005) (also available on the Tax Analysts web site as Doc 2005-356, 2005 TNT 15-23). Here is the abstract:
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, they assert, 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 A carryover basis regime failed so badly in 1976 that it was retroactively repealed, according to Dodge and Soled. In light of this failure, there is no reason to suspect that the carryover basis regime scheduled to take 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. They think that tax basis identifications require the same vigilance on the part of Congress and the IRS.
David Cay Johnston published an extensive discussion of the article on the front page of the business section in yesterday's New York Times (Overstating of Assets Is Seen to Cost U.S. Billions in Taxes):
Investors, entrepreneurs and landlords annually avoid paying at least $29 billion in taxes by overstating the price of stocks, businesses and real estate, two professors say in an article being published today in Tax Notes, an influential tax policy journal..."An unpublicized problem of crisis proportions is plaguing" the tax system, one that will cost the government at least $250 billion in the coming decade," the professors wrote...The authors are two widely recognized authorities on little known ways of cheating by exploiting weaknesses in tax administration.
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I can imagine what will happen if the Estate Tax is repealed and carryover bases will apply. Perhaps the best advice a tax adviser could give to a taxpayer who has inherited assets is to go to a tax preparer and state what his basis (inflated?) is so that the preparer will be secure. Query whether this tax adviser would have a problem under the circumstances for explaining the thrust of this article?
Posted by: Shag from Brookline | Jan 25, 2005 3:43:36 PM