![handle is hein.journals/colujoutl15 and id is 1 raw text is: TRANSACTION-SPECIFIC TAX REFORM IN THREE STEPS:
THE CASE OF CONSTRUCTIVE OWNERSHIP
Thomas J. Brennan* and David M. Schizer**
Abstract
Similar investments are often taxed differently, rendering our system less
efficient and fair. In principle, fundamental reforms could solve this problem, but
they face familiar obstacles. So instead of major surgery, Congress usually
responds with a Band-Aid, denying favorable treatment to some transactions, while
preserving it for others. These loophole-plugging rules have become a staple of tax
reform in recent years. But unfortunately, they often are ineffective or even
counterproductive. How can Congress do better? As a case study, we analyze
Section 1260, which targets a tax-advantaged way to invest in hedge funds. This
analysis is especially timely because a multi-billion dollar litigation is pending
about this rule.
This Article proposes a three-step approach. First, when faced with a new
type of tax planning, policymakers should decide whether a response is really
necessary. How harmful is the transaction? How feasible is it to target this
transaction without also burdening good transactions, which don't involve the
same abuse? Thisfirstphase determines whatwe call the normative presumption
about the transaction.
Second, Congress should define which transactions are potentially
problematic. An initial filter should exempt transactions that clearly don't pose
the relevant concern.
Third, once a transaction is deemed to be potentially problematic, a
sophisticated test is needed to check whether it actually is. Admittedly, a
sophisticated test is costly to administer. This is why initial filters are needed to
limit how often it is used.
Along with proposing this three-part framework, this Article offers a novel
critique of a sophisticated test the government has begun using: a delta test,
which measures how closely investments track each other. Although delta is often
considered the gold standard, we show how easy it is to manipulate. The trick is
to add contingencies (e.g., so the investment terminates when the price reaches a
specified level). To head off this gaming, we recommend an alternative test that
focuses on value instead of on changes in value-and, more generally, on enduring
features instead of temporary quirks.
* Stanley S. Surrey Professor of Law at Harvard Law School.
** Dean Emeritus & Harvey R. Miller Professor of Law & Economics at Columbia Law School. We
appreciate thoughtful comments from Jake Brooks, Victor Fleischer, Louis Kaplow, Michael Love,
Bob McDonald, Alex Raskolnikov, Michael Schler, Andrew Walker, David Weisbach, and
participants at workshops at the Tax Club, the American Law & Economics Association, the
National Tax Association, and Columbia Law School, as well as support from The Henry and Lucy
Moses Faculty Research Fund at Columbia Law School and the Harvard Law School Fund for Tax
and Fiscal Policy Research.
*** R Code of the authors' calculations can be found at https://github.com/tbrenn314/Transaction
SpecificTaxReform [perma.cc/2G3S-C66C].](ViewImageLocal?handle=hein.journals/colujoutl15&div=1&collection=&method=preview&ext=.png&size=3)
What Is HeinOnline?
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most