Mergers, Taxes, and Historical Materialism
Ajay K. Mehrotra
American Bar Foundation; Northwestern Pritzker School of Law
Indiana Law Journal, Vol. 83, p. 881, 2008
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.
Number of Pages in PDF File: 75
Keywords: tax policy, U.S. political history, tax history, corporate tax law
JEL Classification: H25, K34, N42
Date posted: July 18, 2008