Vanderbilt Law Review


Joseph M. Dodge

First Page



Professor Lawrence Zelenak has put forth a detailed proposal' for repealing present Section 1014 of the Internal Revenue Code, which gives a decedent's successor a basis equal to the estate tax value of property at death. This rule, commonly known as the stepped-up basis (at death) rule, has been roundly criticized as producing an unwarranted (inequitable, nonneutral) income tax loophole, because the step up in basis without realization of gain removes the gain from the tax system entirely. Its repeal, therefore, offers a potential source of significant revenue. Moreover, Section 1014 aggravates the "lock-in effect"; that is, it inhibits rational deployment of investment funds by inducing taxpayers to retain gain property until death. Repeal of Section 1014 alone, however, does not solve the problem, because it must then be decided whether the decedent's basis should carry over to her successors, as presently occurs under Section 1015 with respect to inter vivos gifts, or whether a gratuitous transfer should be treated as a realization event, with the amount realized deemed to be the fair market value of the property at death. Professor Zelenak favors the deemed-realization approach. I concur in this view, wholly apart from the fact that the carryover basis approach was tried and repealed.

This Article attempts to avoid unnecessary redundancy with Professor Zelenak's article. Unlike Professor Zelenak, who concentrates on the practical reasons for favoring repeal of Section 1014 and preferring the deemed-realization approach over the carryover basis approach, I emphasize the theory and policy reasons justifying these outcomes. In the section of this Article that addresses the technical details of the proposal, I point out areas of disagreement with Professor Zelenak, plus Professor Zelenak's areas of omission or light coverage. Ultimately, my preferred version of the taxing gains at death proposal would have fewer gaps than Professor Zelenak's proposal but would be more generous to taxpayers in certain instances.