July 20, 2020 The Tax Lawyer

Basis and Bargain Sales: Income Tax and Other Concerns

Vol. 73, No. 4 - Summer 2020

Bridget J. Crawford and Jonathan G. Blattmachr

Abstract

This Article explores the income tax consequences of the sale of property during a taxpayer’s lifetime and at death 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. From an income tax perspective, generally speaking, death-time bargain sales may be preferable to similar lifetime transactions, if the assets have a low basis pre-death, because of the step-up in income tax basis under section 1014. Depending on the tax clause of the will, a death-time bargain sale may generate more or less overall tax liability than a lifetime bargain sale would.

The Article also discusses in detail an understudied 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 those to a 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. 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. The Article concludes by noting multiple other contexts in which bargain sales might be part of an effective estate plan.

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