Legal Theory Blog

Mehrotra on Historical Materialism & Taxation of Corporate Reorganizations

Ajay K. Mehrotra (Indiana University School of Law-Bloomington) has posted Mergers, Taxes, and Historical Materialism (Indiana Law Journal, Vol. 83, p. 881, 2008) on SSRN. Here is the abstract:

In the last few years, corporate mergers and acquisitions witnessed explosive growth. Although more recent market conditions have halted the latest merger movement, scholars and commentators have used the earlier rise in merger activity to reevaluate the preferential tax treatment granted to those mergers and acquisitions that fall under the U.S. tax law's definition of a corporate "reorganization." Under the current Internal Revenue Code, neither shareholders nor corporations recognize gain or loss on the exchange of stock or securities in transactions that qualify as a "corporate reorganization." The significance of this tax rule raises a central question: why does this tax preference exist? Since its statutory inception in 1919, numerous scholars have debated the theoretical justifications for this tax law. Few, however, have sought to move beyond intellectual and conceptual origins to address the more pertinent question of institutional development: how and why has this tax benefit become a deeply entrenched part of American corporate tax law?

This Article mainly addresses this second question. It contends that historically constituted political and economic interests have gradually transformed this law from its beginnings as a limited statutory exception into a modern version of voluntary corporate welfare. This transformation can be explained less by resort to timeless economic logic or legal doctrine than by reference to the institutional dynamics and the unfolding of concrete economic, political, and social processes.

In chronicling the early phases of this gradual transformation, this Article has two interrelated objectives. First, it seeks to historicize the prehistory, the statutory origins, and the early liberalization of this corporate tax law. Second, this Article highlights the chronological and contingent development of the reorganization provisions. In examining the historical processes and conditions that led to the early expansion and entrenchment of this tax law, this Article illustrates the contested and provisional nature of the creation, expansion, and maintenance of this corporate tax benefit. This Article mainly investigates two pivotal periods - the 1920s when this rule was gradually liberalized, and the early 1930s when this tax law faced near elimination - to underscore how material context and historical sequence determined the possibilities of legal change.

This historical story about the reorganization tax preference, in the end, is not simply a tale about the evolution of an important and enduring corporate tax law. This narrative is also a case study of the broader legislative process. It shows how a typical legal regime is molded by the interactions of democratic institutions; how the lawmaking process is shaped by the negotiations among citizens, Congress, the courts, and executive agencies. Accordingly, this historical story illustrates the continuing dynamic that exists between law and society, revealing how the legal process of fortifying and routinizing laws can unwittingly create special interests - interests that often reshape and help maintain the laws that have created them.

McCouch on Estate Tax Repeal

Grayson M.P. McCouch (University of San Diego School of Law) has posted The Empty Promise of Estate Tax Repeal on SSRN. Here is the abstract:

The terms of the debate over the estate tax have been framed largely by abolitionists who have propounded an antitax message that portrays the estate tax as unambiguously harmful and threatening to ordinary families and small businesses. The attack on the estate tax is linked to a larger agenda of eliminating taxes on capital and capital income and dismantling the progressive elements of the federal tax system. The slogan of estate tax repeal, while effective in mobilizing antitax sentiment, makes no sense as a matter of tax policy because it downplays revenue costs, distributional effects, administrative concerns, and consequences for the rest of the tax system. The 2001 Act illustrates the gap between the abolitionists' simplistic antitax agenda and the complex reality of tradeoffs among competing tax and spending priorities. The estate tax cuts enacted in 2001 imply large revenue losses as well as a shift in tax burdens from the very rich to the middle class and from current taxpayers to future taxpayers. This appears to be a step in precisely the wrong direction, given growing inequalities of income and wealth and a looming fiscal gap.

Cain on Fair Taxation of Families

Patricia A. Cain (Santa Clara University - School of Law) has posted Taxing Families Fairly (Santa Clara Law Review, Vol. 48, No. 805, 2008) on SSRN. Here is the abstract:

This article focuses on the historical role of state marital property law in shaping the current federal tax rules regarding taxation of the family. Now that a number of states have granted status recognition to same-sex couples and granted them marital property rights, the tension between state property law and federal tax law has produced new problems. This article identifies those problems and proposes a solution that would restore uniformity and tax all families fairly.

Moin on Business Activities by Charities

Andrew Moin (Harvard Law School) has posted Red Herrings and Misguided Approaches: Taxation and Regulation of Business Activities by Charities in the United States and Canada (International Journal of Civil Society Law, Vol. 6, Iss. 2, April 2008) on SSRN. Here is the abstract:

Most countries place various limitations on the ability of charities to conduct business activities in areas unrelated to their charitable purpose. In this paper, I examine this narrow aspect of the legal framework for charities in the United States and Canada. First, I will briefly provide some background on charities' conduct of such activities. Next, I will broadly outline the current law in each country, highlighting key similarities and differences. Then, drawing on historical evidence, I will try to explain why the relevant law in each country developed as it did. Finally, I will evaluate each country's response, focusing not only on the results of each but also on whether the concerns that led to each were well-founded. Through doing so, I will attempt to draw conclusions as to whether there is a clear winner between the two statutory schemes, and if the experiences of each country can provide guidance for future attempts at reform.

Mirkay on Discrimination by Charities

Nicholas A Mirkay III (Widener University - School of Law) has posted Is it 'Charitable' to Discriminate?: The Necessary Transformation of Section 501(C)(3) into the Gold Standard for Charities (Wisconsin Law Review, Vol. 2007, No. 1) on SSRN. Here is the abstract:

With federal subsidies to charitable organizations exceeding $232 billion for fiscal years 2007 to 2011, the public benefit conferred by such organizations is an increasingly hot topic for Congress, the Internal Revenue Service and the entire nonprofit sector. Despite the national debate over nonprofit versus for-profit hospitals and excessive executive compensation, and the call for stricter governance and regulation, one recurring activity of charities appears to fly under the radar of reformers - discrimination. As illustrated in real-life occurrences contained in pages 3 and 4 of the article, seemingly widespread discrimination by charities exists not only with respect to employment, but more importantly in providing services or engaging in activities for which the organization was originally granted tax-exempt status (e.g., education). The primary bases for such discrimination are currently sexual orientation and marital status.

This article contends that these instances of discrimination are intrinsically incompatible with such organizations‘ "charitable" purpose and mission, and with society‘s notion of what constitutes a charity. This article contends that such organizations should not continue to enjoy the benefits of tax-exempt status if they engage in discriminatory practices or maintain discriminatory policies. To combat such discrimination, this article proposes the inclusion of an expansive nondiscrimination requirement within Section 501(c)(3). Such a requirement ensures that the stream of tax-deductible dollars (generated by the charitable contributions deduction) received by charities is not used to discriminate against any member or segment of society. The proposal transforms Section 501(c)(3) into the "gold standard" for all tax-exempt organizations, ensuring that their beneficiaries are as diverse and all encompassing as the taxpaying public from whom such organizations draw their support.

And by the same author, Losing Our Religion: Reevaluating the 501(C)(3) Exemption of Religious Organizations that Discriminate.

Prebble on Autopoiesis & Tax

John Prebble (Victoria University of Wellington - Faculty of Law) has posted Justice Hill and the Autopoiesis of Income Tax Law on SSRN. Here is the abstract:

The theory that law may best be understood as an autopoietic system has gained considerable ground since Luhmann advanced it in 1981.

Nevertheless, there have been few endeavours to apply the theory in any practical way or to employ it to analyze particular areas of law. In a recent paper, Geraldine Hikaka and the present author proposed the thesis that Luhmann's theories usefully illuminate the field of income tax law. The present paper illustrates this thesis by analyzing a leading case from each of the Privy Council and the High Court of Australia, namely Europa Oil (NZ) Ltd v Commissioner of Inland Revenue and Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd. The paper will argue that the autopoietic nature of income tax law presents challenges to the judicial process that, as these cases illustrate, lead to income tax law becoming detached from the business profits that are an important part of its subject matter.

The paper will then turn to Macquarie Finance Ltd v Federal Commissioner of Taxation, one of the last tax judgments of the late Justice Graham Hill. It will be argued that in Macquarie Finance Ltd Justice Hill demonstrated a rare, almost unique, ability among judges: to reconcile the formalistic, autopoietic nature of tax law with the business substance that was the subject matter of the case. The paper turns first, however, to the question of what is meant by the autopoietic theory of law.

Fleischer on Taxing Sovereign Wealth Funds

Vic Fleischer has a very interesting post entitled Taxing Sovereign Wealth Funds.  Here's a tiny taste:

The big worry is that these sovereign wealth funds are Trojan horses which will allow foreign governments to shape and influence American enterprise in a manner inconsistent with our economic and national security interests.  Even if funds are currently acting in a manner consistent with other, non-governmental institutional investors--and by most accounts they are--there's no guarantee that they will continue to do so in the future in circumstances where the financial interests of the fund and the political interests of the government that controls the fund diverge.  Giving foreign governments partial ownership of companies like Citigroup and Merrill Lynch gives those countries new leverage in foreign policy discussions; sudden withdrawal of foreign state-owned investment could harm the financial services sector of the U.S. economy.  Of course, one can also view these investments in a more positive light; China's investment in Blackstone might help it learn to modernize its own financial infrastructure, a development which would benefit the U.S. and China alike.

A very interesting post & also a model for the use of blogging for early development of scholarship.  Check it out!