101 Colum. L. Rev. 1312 (2001)
Frictions as a Constraint on Tax Planning

handle is hein.journals/clr101 and id is 1356 raw text is: FRICTIONS AS A CONSTRAINT ON TAX PLANNING
David M. Schizer*
The government often uses narrow tax reforms to target specific plan-
ning strategies. Sometimes the targeted transaction is stopped. But in other
cases, taxpayers press on, tweaking the deal just enough to sidestep the re-
form. The difference often lies in transaction costs, financial accounting,
and other 'frictions,  which are constraints on tax planning external to the
tax law.
This Article contributes a methodology for determining whether frictions
will block end runs, and illustrates the effect of frictions by comparing the
constructive sale rule of section 1259 with the constructive ownership rule of
section 1260. These reforms use the same statutory language to target tax
motivated derivatives transactions, but taxpayers have responded differently.
Theoretically, taxpayers can avoid either rule through relatively modest
changes in economic return. Although the strategy is common for section
1259, however, it is rarely used for section 1260 because securities dealers
cannot supply the necessary derivative. Thus, if a friction blocks a transac-
tion, the tax law does not have to block it, too. More attention to frictions is
warranted, and legal academics should offer greater assistance. Without a
grounding in frictions, narrow reforms are unlikely to play a constructive
role.
TABLE OF CONTENTS
INTRODUCTION    . ..................................................   1314
I. BACKSTOPPING NARROW RULES WITH FRICTIONS ............ 1319
A. Policy Goals in Targeting Tax Planning .............. 1319
B. Impediments to Use of Broad Legal Response ........ 1321
C. In Search of Effective Frictions ....................... 1323
1.  General Guidance .....................     ..........  1323
2. Some Usual Suspects ............................. 1326
a. Taxpayer Preferences Regarding Business
A ctivity  .......................................  1326
b. The State of Technology and Markets ........ 1327
* Associate Professor, Columbia Law School. Special thanks are due to Marvin
Chirelstein for commenting insightfully on multiple drafts. Helpful comments were
received from William Andrews, Joseph Bankman, Dale Collinson, Melvin Eisenberg,
William Gentry, Michael Graetz, David Hariton, RobertJacobs, Louis Kaplow, Bruce Kayle,
Edward Kleinbard, David Leebron, Michael Novey, Ronald Pearlman, Diane Ring,
Meredith Wolf Schizer, Daniel Shaviro, Robin Shifrin, Reed Shuldiner, Jeffrey Strnad,
Alvin Warren, David Weisbach, Bernard Wolfman, Lawrence Zelenak, and Eric Zolt, as well
as from participants at the Harvard Seminar for Current Research in Taxation, the N.Y.U.
Colloquium on Tax Policy and Public Finance, the Tax Club, a Columbia Law School
Faculty Workshop, the annual meeting of the National Tax Association, and the lB
Research Forum on Global Risk Management at Temple University. Craig Lee provided
outstanding research assistance. The author may be contacted at (212) 854-2599 or at
dschiz@law.columbia.edu.

1312

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