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49 Tax L. Rev. 209 (1993-1994)
The Effects of Price Volatility and Strategic Trading under Realization, Expected Return and Retrospective Taxation

handle is hein.journals/taxlr49 and id is 219 raw text is: The Effects of Price Volatility and Strategic Trading Under Realization, Expected Return and Retrospective Taxation MARK P. GERGEN* I. INTRODUCTION The taxation of investments in capital assets poses some of the most difficult problems under an income tax because of the deferral of re- turns and the volatility of prices. Recent measures address the prob- lem of tax deferral when investments pay deferred returns by imputing income based on the expected return when the investment is made. The original issue discount (OID) rules have evolved in this direction' and recent regulations on notional principal contracts2 and proposed regulations on contingent interest3 include fairly sophisti- cated rules that use the expected return method. Important recent scholarship has sought to extend and to refine this method.4 Other * Professor, University of Texas School of Law. I would like to thank Tom Evans and Don Fullerton, as well as participants at a January 1994 meeting of the ABA Tax Section Committee on Tax Structure and Simplification and participants in a colloquium at the University of Texas for comments and questions. 1 IRC §§ 1272-1275. 2 Reg. § 1.446-3. 3 Prop. Reg. § 1.1275-4, 59 Fed. Reg. 64,884, 64,893 (1994). 4 See, e.g., Noal B. Cunningham & Deborah H. Schenk, Taxation without Realization: A Revolutionary Approach to Ownership, 47 Tax L Rev. 725 (1992); Reed Shuldiner, A General Approach to the Taxation of Financial Instruments, 71 Tex. L Rev. 243 (1992). Something akin to expected return taxation would occur if firms that undertook construc- tion projects were required to impute income on capital devoted to the construction based on its expected return. See Thomas L. Evans, The Taxation of Multi-Period Projects: An Analysis of Comleting Models, 69 Tex. L. Rev. 1109, 1143-44 (1991). One issue in the design of an expected return rule is whether income should be imputed in a way that accounts for the slope in the yield curve rather than on a constant yield to maturity method. See generally Joseph Bankman & William A. Klein, Accurate Taxation of Long- Term Debt: Taking Into Account the Term Structure of Interest, 44 Tax L Rev. 335 (1989) (arguing that the difficulty of determining yield curves of long-term debt ex ante means that income can be measured accurately only by ex post valuations, as under a mark-to- market rule); see also Theodore S. Sims, Long-Term Debt, the Term Structure of Interest and the Case for Accrual Taxation, 47 Tax L. Rev. 313 (1992) (arguing that although the method for accruing interest can be adjusted to account for the usual upward slope in yield curves, it is not worth the effort because the effect of not accounting for sloping yield 209 Imaged with the Permission of N.Y.U. Tax Law Review

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