Paul L. Caron

Thursday, January 14, 2021

Lederman: Valuation As A Challenge For Tax Administration

Leandra Lederman (Indiana), Valuation as a Challenge for Tax Administration, 96 Notre Dame L. Rev. ___ (2021):

Valuation issues have long posed challenges for the U.S. federal tax system. This is not just because of questions about what technique will most accurately value particular types of property. A key problem for tax administration is that taxpayers have an incentive to claim erroneous, self-serving valuations. This Essay analyzes tax valuation through this tax compliance lens. In so doing, it highlights the importance that third parties to the taxpayer-government relationship act at arm’s-length from the taxpayer. It also explains why penalties are insufficient to deter erroneous self-reported valuations. The Essay also draws on the tax compliance perspective to make some preliminary observations about valuation methodologies.

Valuation of non-cash assets has long been a challenge for U.S. tax administration. Where a structural system can be established that constrains valuation to figures close to fair market value, that likely is optimal. Failing that, third-party reporting of values by arm’s-length parties should be helpful, although more research is warranted in this regard.

The tax compliance lens on valuation questions also helps provide insight into valuation methodologies. Valuation approaches that rely primarily on arm’s-length transactions should face less noncompliance than ones that have important components of self-reporting, even if supported by an appraisal. Ultimately, however, techniques that solve a tax-administration issue by forcing an arm’s-length disposition by the taxpayer may not be politically viable. These concerns—and the distributional effects of tax evasion—should be considered by any tax reform proposal that would increase the need for asset valuation.

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