Charlene Luke (Florida; Google Scholar), The Taxing Power of Co-Obligated Debt (JOTWELL) (reviewing Luís Calderón Gómez (Cardozo; Google Scholar), Whose Debt Is It Anyway?, 76 Tax L. Rev. 159 (2022):

Luís Calderón Gómez asks the question, “Whose Debt Is It Anyway?,” to frame his analysis of a situation that, while common, remains understudied and undertheorized: the tax treatment of debt co-obligors.

Calderón Gómez’s initial contribution is to demonstrate that there is, in fact, a problem. Co-obligated debt offered by corporate issuers alone is “in the hundreds of billions” of dollars under a “conservative estimate” based on SEC documentation. Yet, tax law generally assumes a conceptual paradigm “where one creditor lends money to one borrower.” Calderón Gómez begins the article by illustrating the inconsistent and incoherent tax treatment that results when a loan arrangement departs from this paradigm.

In the course of highlighting the uncertainties of the tax treatment of co-obligated debt, Calderón Gómez uses case law and administrative authorities to construct a descriptive framework “categorizing the problems the law faces and the different rules available to legal authorities to resolving such problems.” He focuses on three contexts—debt modification, interest deductions, and cancellation of indebtedness income—and identifies three recurring and interrelated problems that arise in these contexts. …

In the concluding sections of his article, Calderón Gómez shows how his proposals operate both by providing a stylized example and by examining their potential application in resolving three real-world situations. Such situations include using the proposals to bring greater coherence to the determination of the source of interest income. Calderón Gómez quotes language from a prospectus to highlight the uncertainty in sourcing interest income and argues convincingly that his approach would be less manipulable than one focused solely on the payor of the interest. He also demonstrates how his proposals may also help resolve difficult questions regarding whether a disregarded entity should be an obligor.

Calderón Gómez acknowledges that his proposals may at times result in only a “partial victory” if one focuses on revenue raising but argues convincingly that they “would still be a significant improvement from the status quo.” Calderón Gómez is highly persuasive in demonstrating the need for additional attention to this area, and his framework and proposals will serve as a strong foundation for future scholarship.