The article begins with a discussion in Part I of the four ways (other than the Basis Reduction Tax Trap) in which the section 1016(a)(2) basis reduction effectively protects the integrity of the depreciation deduction; and, thus, to which no change to the basis rule should be made.
Subpart A analyzes Beulah's novel reporting of the transaction as the sale of a zero-basis, nondepreciable equity interest in the apartment building, devoid of any depreciation deductions and basis reductions.
In the course of this discussion, it demonstrates how the mandatory section 1016(a)(2) basis reduction that appropriately prevents taxpayer abuse of the depreciation deduction goes too far when it causes the transformation of useless depreciation deductions into phantom taxable gain for the unwitting taxpayer.
Part V recommends that a tax benefit principle approach be implemented in the Code amendments to eliminate the Basis Reduction Tax Trap without compromising the integrity of the depreciation deduction.
THE FOUR WAYS THE SECTION 1016(a)(2) BASIS REDUCTION PRESERVES THE INTEGRITY OF THE DEPRECIATION DEDUCTION
Whereas the article advocates an amendment to the Code in order to eliminate the Basis Reduction Tax Trap, it also recognizes the important functions the codependency of depreciation deductions and the section 1016(a)(2) basis reduction serve in preserving the integrity of the depreciation deduction.
Tracking the Declining Balance of Depreciation Deductions over the Remaining Tax Years of the Recovery Period
Section 167(a) (authorizing the depreciation deduction) and section 1016(a)(2) (requiring a basis reduction for depreciation deductions) are codependent Code sections.
Depreciation is an accounting device which recognizes that the physical consumption of a capital asset is a true cost, since the asset is being depleted.
Precluding a Second Opportunity to Receive the Tax Benefit of a Depreciation Deduction that Did Not Produce a Tax Benefit in Prior Tax Years