Apportioning Basis: Partial Sales, Bargain Sales and the Realization Principle

The International Revenue Code generally taxes appreciation in the value of property only on realization, defined to mean when property is sold or exchanged. In measuring gain on a sale or exchange, an allowance must be made for the return of capital, referred to as basis. In partial sales, it is the general rule that the basis is apportioned, in a fraction equal to the property that has been sold. This same rule applies to “bargain” sales—those where property is intentionally sold at less than its fair market value. This article makes logical, legal, and equitable arguments to support the proposition that basis should be “frontloaded” in bargain sales. That is, the entire basis should be allowed to offset the amount realized. The author makes an exception for charitable gifts