TaxProf Blog

Monday, May 10, 2004

Michelle Arnopol Cecil (Missouri-Columbia) has published Abandonments in Bankruptcy: Unifying Competing Tax and Bankruptcy Policies, 88 Minn. L. Rev. 723 (2004). Here is part of the Introduction:

…As the number of bankruptcy cases rises, the burden on the already overworked bankruptcy courts will continue to mount. In this situation it is imperative that the bankruptcy system operate effectively, which is impossible with so many bankruptcy issues left unanswered. This Article attempts to resolve one such issue: the tax consequences of property abandonments by the bankruptcy trustee.

….For example, if the debtor owns a factory with a fair market value of $450,000 that is encumbered by a nonrecourse mortgage of $500,000, the factory has no value to the debtor’s unsecured creditors; therefore, the trustee will abandon the factory either to the debtor or to the party holding the $500,000 mortgage on it (so long as the mortgage holder has a possessory interest in the factory at the time of the abandonment).

The issue that has perplexed the courts is whether the trustee’s abandonment of the factory should be a taxable event to the bankruptcy estate. For example, if the factory has a basis for tax purposes of $200,000, should the estate be liable for income taxes owed on the $300,000 gain triggered upon the factory’s abandonment, or should the abandonment instead be viewed as a nontaxable transfer, so that the debtor becomes liable for the income taxes due on the $300,000 gain when she later sells or disposes of the factory? This issue is governed by both the Bankruptcy Code and the Tax Code. Although each statute offers some guidance as to whether an abandonment is a taxable transfer, neither statute fully resolves this important issue. Courts have grappled with the issue with no greater success….

This Article not only resolves the issue of whether the trustee’s abandonment of property is a taxable transfer from a strict statutory construction standpoint, but it also attempts to provide a more comprehensive solution to the broader issue of who should bear the burden of the tax imposed on the gain inherent in an asset as of the commencement of a bankruptcy proceeding….

Sunday, May 9, 2004

Mitchell Kane (Virginia) has posted Strategy and Cooperation in National Responses to International Tax Arbitrage on SSRN. Here is part of the abstract:

International tax arbitrage may be loosely defined as a phenomenon in which an inconsistency in the substantive law of two or more jurisdictions yields a tax benefit that would not be available if the laws of the relevant jurisdictions were completely harmonized. Taxpayers engaging in international tax arbitrage may, for example, be able to duplicate valuable tax attributes, such as deductions or losses. Unlike instances of aggressive tax planning in which taxpayers push statutory tax provisions or judicial anti-abuse doctrines to their limits, international tax arbitrage typically involves cases in which the taxpayer is indisputably compliant with domestic law. Although the U.S. government has sought to eliminate such arbitrage opportunities in a number of instances, either through legislation or regulation, its policy reasons for attacking transactions in which taxpayers are fully compliant with the law have remained opaque. The literature on the subject has explored a number of possible justifications, ranging from the existence of implicit, though initially obscured, assumptions in domestic law to considerations of worldwide efficiency. A common strand running through this literature is the attempt to determine the problem that arbitrage transactions present. Once one has identified the problem, if any, the appropriateness of the governmental response can then be assessed. This article argues that rather than presenting a potential problem, international tax arbitrage may present governments with strategic opportunities to further their interests in the location and control of international investment….

Sunday, May 9, 2004

Yariv Brauner (Northwestern) has published A Good Old Habit, or Just an Old One? Preferential Tax Treatment for Reorganizations, 2004 B.Y.U. L. Rev. 1 (2004). A prior version is available on SSRN. Here is the abstract:

This article proposes to repeal the preferential tax treatment of certain merger and acquisition transactions known as “reorganizations,” and tax them like all other sales or exchanges. In the last 80 years this preference has been a cornerstone of our tax system. It is also one of the most stable rules in the tax code. Nevertheless, its normative justification is weak, and has never been rigorously debated in the legal literature. This article rejects the stated rationale for this rules – that such transactions trigger insufficient realization and therefore it is both unfair and impractical to currently tax them. It further demonstrates that the preferential tax treatment of reorganizations cannot be supported on efficiency grounds, applying the formerly unexploited (at least in the tax literature) wisdom available in the economic, business and corporate law literature. The latter conclusion is the primary contribution of this article.