Monday, September 24, 2012
We examine the tax rules for ownership of fungible securities in light of three recent cases addressing this issue, Samueli, Calloway, and Anschutz. We argue that ownership has no economic basis under an income tax because under a pure income tax ownership would not be needed to measure income. Rather than acting as a bedrock principle based in economics, ownership in a realization based income tax acts as a default rule for assigning tax characteristics to positions. For example, ownership determine characteristics such as holding periods, eligibility for special tax benefits such as the dividends received deduction, counting toward control or as qualifying consideration for various purposes, and so forth. Each of these characteristics, which we label tax attributes, is motivated by different policy considerations. Given the wide variety of policies behind the various tax attributes, no single concept of ownership can be expected to be appropriate in all cases. Therefore, tax rules for each characteristic start with the default rule of ownership but modify the assignment of the attribute based on the relevant policy considerations. Viewing ownership, as a mere default for assigning tax attributes, we propose a simple and clear rule for ownership of fungible securities which produces results similar to those of current law and yet which avoid the problems created by the recent court decisions on ownership of fungible securities.