Document Type

Article

Publication Title

Brooklyn Law Review

Publication Date

1981

Abstract

Why would a prudent taxpayer make an acquisition at a price in excess of fair market value? This inquiry is critical to the determination of the taxpayer's basis in the asset acquired.

Burdensome tax brackets, coupled with the time-value of money, particularly crucial during periods of high interest rates, have induced taxpayers to seek "tax shelters" that provide deferral of their tax obligations. One type of scheme that offers benefits similar to those inherent in deferral is the acquisition of assets at inflated prices. The tax savings attributable to the overpayment - resulting from depreciation deductions and, where applicable, the investment tax credit - together with the income generated by the investment of the tax savings, can exceed the amount of the overpayment. It will be argued that where a taxpayer intentionally structures an overpayment for the sole purpose of securing tax savings and the related investment income, the overpayment should be treated as a sham and denied tax effect.

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