Paul L. Caron

Monday, January 13, 2014

Morse Reviews Brennan's Constructive Sales

JotwellSusan Morse (Texas), There's Math for That! Delta Value and the Constructive Sale Rules (Jotwell), reviewing Thomas J. Brennan (Northwestern), Law and Finance: The Case of Constructive Sales, 5 Ann. Rev. Fin. Econ. ___ (2013):

Tom Brennan’s recent paper ... explains that constructive sale guidance and case law fail to take account of volatility. To fix the omission, Brennan explains, use the delta value of the constructive sale transaction relative to the underlying asset to determine how close the transaction is to a sale. Reg writers, take note. ...

Brennan takes as his example the variable prepaid forward contract (VPFC) transactions held not to create constructive sales in Revenue Ruling 2003-7 and in a recent Tax Court and Tenth Circuit case, Anschutz Co. v. CommissionerOthers have contended that Section 1259 has not lived up to its potential because of the ruling’s “giveaway” to the financial industry.  Brennan’s dissection reveals a key shortcoming: the failure to consider volatility.

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