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Wednesday, September 18, 2013

Brennan: Law and Finance: The Case of Constructive Sales

Thomas J. Brennan (Northwestern), Law and Finance: The Case of Constructive Sales:

This essay illustrates the interaction between law and finance in the particular case of the taxation of constructive sales. The focus is on the treatment of variable prepaid forward contracts, and the rules regarding these instruments articulated by Revenue Ruling 2003-7 and the recent case involving Philip Anschutz. Simple models are used to show how the tests established by the law fail to reflect important financial considerations, such as the volatility of asset returns and the riskiness of dividend payments. These models provide examples that form the basis for a critique of the current rules and also indicate a possible path for future reform and improvement of the law, namely the addition of a delta-based test to the existing rules. It is hoped that the analysis presented here will encourage future work that applies financial theory to critique and improve legal rules in a wide range of other situations.

http://taxprof.typepad.com/taxprof_blog/2013/09/brennan-1.html

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