Sunday, March 8, 2020
Bridget J. Crawford (Pace) & Jonathan G. Blattmachr (Milbank, New York), Basis and Bargain Sales: Income Tax and Other Concerns, 73 Tax Law. ___ (2020):
This article explores the income tax consequences of the sale during lifetime and at death of property for less than fair market value. The analysis focuses in particular on the tax consequences of a bargain sale by a transferor who wishes to confer some financial benefit on a family member, but leave the rest of her estate to charity. Generally speaking, death-time bargain sales may be preferable to similar transactions during lifetime, if the assets have a low basis pre-death, because of the step up in income tax basis under section 1014.
The article also explores in detail an under-studied provision of section 1015 that requires adjustments to the basis of property acquired in a lifetime bargain sale to an individual. Basis must be increased by a certain portion of the gift tax paid by the transferor. Different rules govern the allocation of the transferor’s basis in lifetime bargain sales to individuals (allocating the entire basis to the sale) on the one hand, and charity (allocating basis pro rata to the sale portion), on the other. This difference gives rise to a statutory ambiguity that the authors believe should be resolved in a way that gives the transferee the greatest increase in basis. The authors conclude their discussion by noting multiple other contexts in which bargain sales might be part of an effective estate plan. As a policy matter, a pro rata basis rule would simplify tax administration and lead to parity in treatment between bargain sales to individuals and to charities. It should be possible for the Treasury to implement such a rule by revising the regulations.