Leandra Lederman (Indiana; Google Scholar), Valuation as a Challenge for Tax Administration, 96 Notre Dame L. Rev. 1495 (2021) (reviewed by Michelle Layser (Illinois) here):
Valuation points have lengthy posed challenges for the U.S. federal tax system. This isn’t simply due to questions on what approach will most precisely worth explicit forms of property. A key downside for tax administration is that taxpayers have an incentive to say faulty, self-serving valuations. This Essay analyzes tax valuation via this tax compliance lens. In so doing, it highlights the significance that third events to the taxpayer-government relationship act at arm’s-length from the taxpayer. It additionally explains why penalties are inadequate to discourage faulty self-reported valuations. The Essay additionally attracts on the tax compliance perspective to make some preliminary observations about valuation methodologies.
Valuation of non-cash property has lengthy been a problem for U.S. tax administration. The place a structural system might be established that constrains valuation to figures near truthful market worth, that seemingly is perfect. Failing that, third-party reporting of values by arm’s-length events needs to be useful, though extra analysis is warranted on this regard.
The tax compliance lens on valuation questions additionally helps present perception into valuation methodologies. Valuation approaches that rely totally on arm’s-length transactions ought to face much less noncompliance than ones which have essential parts of self-reporting, even when supported by an appraisal. In the end, nevertheless, methods that remedy a tax-administration problem by forcing an arm’s-length disposition by the taxpayer will not be politically viable. These considerations—and the distributional results of tax evasion—needs to be thought of by any tax reform proposal that might improve the necessity for asset valuation.