What's Wrong with Carryover Basis Under H.R. 8

Posted: 3 May 2001

See all articles by Joseph M. Dodge

Joseph M. Dodge

Florida State University - College of Law

Abstract

This article examines the carrryover basis provisions of H.R. 8, the Death Tax Elimination Act of 2001. If the estate tax is repealed, the income taxation of gratuitous transfers needs to be examined. Under current law, the combination of sections 102 (excluding gratuitous receipts) and 1014 (giving stepped-up basis to bequests) causes unrealized gains at death to permanently avoid income tax. H.R. 8 purports to repeal stepped-up basis and replace it with a carryover basis rule for bequests. However, H.R. 8 would allow additional basis of up to $1.3 million per estate (augmented by unrealized business and investment losses and unused loss carryovers), plus up to $3 million for qualified marital transfers, to be added to carryover basis. These additional basis rules would permanently wash most unrealized gain of descendants out of the income tax. Additional free basis is not justified in income tax theory or policy. Estate tax features should not be carried over to the income tax. Moreover, a permanent exemption for marital transfers goes far beyond the deferral scheme of the estate tax, but would (in QTIP trusts) mostly benefit the remaindermen. The additional free basis rules would operate in a regressive manner. H.R. 8, says Dodge, is flawed in various other ways, including the fact that it discriminates in favor of life insurance and against pension and annuity rights. Finally, carryover basis is the wrong solution to the section 1014 problem, because (inter alia): (1) it cannot benefit charitable bequests, (2) it would tax gains and losses to the wrong person, (3) it would creates inequities among legatees (and would raise problems for fiduciaries), and (4) (especially the H.R. 8 version) would aggravate the lock-in effect. A better solution, he concludes, would be to treat gains and losses (including loss carryovers) as being realized by the decedent at death.

Suggested Citation

Dodge, Joseph M., What's Wrong with Carryover Basis Under H.R. 8. Available at SSRN: https://ssrn.com/abstract=268896

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)

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