TRANSACTION-SPECIFIC TAX REFORM IN THREE STEPS: THE CASE OF CONSTRUCTIVE OWNERSHIP

2024-01-17T13:25:33+00:00

Similar investments are often taxed differently, rendering our system less efficient and fair. In principle, fundamental reforms could solve this problem, but they face familiar obstacles. So instead of major surgery, Congress usually responds with a Band-Aid, denying favorable treatment to some transactions, while preserving it for others. These loophole-plugging rules have become a staple of tax reform in recent years. But unfortunately, they often are ineffective or even counterproductive. How can Congress do better? As a case study, we analyze Section 1260, which targets a tax-advantaged way to invest in hedge funds. This analysis is especially timely because a multi-billion dollar litigation is pending about this rule.

This Article proposes a three-step approach. First, when faced with a new type of tax planning, policymakers should decide whether a response is really necessary. How harmful is the transaction? How feasible is it to target this transaction without also burdening “good” transactions, which don’t involve the same abuse? This first phase determines what we call “the normative presumption” about the transaction.

Second, Congress should define which transactions are potentially problematic. An “initial filter” should exempt transactions that clearly don’t pose the relevant concern.

Third, once a transaction is deemed to be potentially problematic, a sophisticated test is needed to check whether it actually is. Admittedly, a sophisticated test is costly to administer. This is why initial filters are needed to limit how often it is used.

Along with proposing this three-part framework, this Article offers a novel critique of a sophisticated test the government has begun using: a “delta” test, which measures how closely investments track each other. Although delta is often considered the gold standard, we show how easy it is to manipulate. The trick is to add contingencies (e.g., so the investment terminates when the price reaches a specified level). To head off this gaming, we recommend an alternative test that focuses on value instead of on changes in value–and, more generally, on enduring features instead of temporary quirks.

THE WORST CHOICE FOR SCHOOL CHOICE: TUITION TAX CREDITS ARE A BAD IDEA AND DIRECT FUNDING IS WISER

2024-01-17T13:18:30+00:00

School choice is on the rise, and states use various mechanisms to implement it. One prevalent mechanism is also a uniquely problematic one: the tax credit. Tax credits are deficient at equitably distributing a benefit like school choice; they are costly, and they invite fraud. Instead of using tax credits, states opting for school choice programs should use direct funding. Direct funding will more efficiently achieve the goals of school choice because it can be regulated like any other government benefit, even if it ends up subsidizing religious private schools.

Tax credits’ prevalence is not inexplicable, of course. It is based on a prior legal understanding that states were constitutionally restricted from directly funding religious schools. Historically, states that wanted to include religious private schools in their school choice programs therefore felt pushed to use tax credits as their only constitutionally viable option. However, the landscape has changed. The Supreme Court held in 2022 that direct funding of religious private schools is not only constitutionally permissible, but it is required if a state funds non-religious private schools and provides no neutral basis for excluding religious ones. The initial reason for tax credits’ popularity therefore no longer exists; both tax credits and direct funding alike are constitutionally acceptable. It is time, therefore, to revisit the merits of tax credits and ask whether, knowing what we know now, it is worth disposing of them in favor of direct funding. This Article answers that question with a resounding yes. Tax credits carry significant disadvantages—specifically, inequitable distribution and difficulties in regulation—that direct funding does not. Now that the law is clear, states choosing to sponsor school choice should discontinue their use of tax credits in favor of direct funding.

Columbia Journal of Tax Law

TRANSACTION-SPECIFIC TAX REFORM IN THREE STEPS: THE CASE OF CONSTRUCTIVE OWNERSHIP

THE WORST CHOICE FOR SCHOOL CHOICE: TUITION TAX CREDITS ARE A BAD IDEA AND DIRECT FUNDING IS WISER