Ari Joshua Brandes (Georgetown) has posted Toward a New Framework and a Better Understanding of Credit Default Swaps on SSRN.  Here is the abstract:

Derivative contracts with contingent payments have been the subject of a great deal of financial commentary and news during the recent credit crunch. The taxation of one seemingly ubiquitous type of derivative contract with contingent payments – the credit default swap (CDS) – remains uncertain and is, indeed, a question without a simple answer, especially for investors and speculators using CDSs. The wide use of CDSs, as illustrated by the approximately $43 trillion of notional amount of CDSs outstanding in the middle of 2007, coupled with the broader question of how a certain broader class of derivative contracts with contingent payments, as described below, should be taxed, warrants continuing analysis and discourse in this area.

After introducing the topic in Part I, Part II of this paper will define credit default swaps in a manner substantively the same as the common definition of the most prevalent type of CDS, but in a fashion that removes the often distorting framing of the CDS parties as buyers and sellers of protection. Part III will analyze some of the most salient viewpoints expressed by commentators on CDSs vis-a-vis guarantees, insurance, and notional principal contracts (NPCs). Part IV will discuss how, in the view of this paper, the financial characteristics of CDSs reveal that they are best characterized, from a legal perspective, as options. That is, Parts III and IV discuss the positive classification of CDSs. In addition, Part IV will introduce a viewpoint on options not articulated in past literature by removing the common framing of options in terms of the rights of the parties. Part V will discuss (using CDSs as an example) how the financial characteristics of annuity-paid deep out-of-the-money derivative contracts fit much better, from financial and temporal perspectives, into the current tax paradigm (open transaction treatment) for options rather than the regimes for NPCs, insurance, and guarantees. Part V, thus, will discuss the normative classification of APDOs based on the proper timing of taxing APDOs. Part VI will discuss additional issues regarding the normative tax treatment of CDSs in particular. Part VII will conclude.