Taxing Shared Economies of Scale

62 Pages Posted: 27 Aug 2009 Last revised: 6 Dec 2009

Date Written: Fall 2009


Economies of scale exist if long-run average costs decline as output rises. All else being equal, the decline in average costs should lead to greater profitability, making economies of scale attractive to businesses. Nobel laureate George Stigler recognized that economies of scale should help determine the optimum size of a firm. To obtain economies of scale and optimum firm size, parties may integrate resources or grant access to resources without integrating. Such arrangements create shared economies of scale. Tax law must consider the effects of shared economies of scale and address them. In particular, the varying degrees of scale-sharing raise tax classification issues. Traditional classification analyses focus on the legal definition of tax partnership, which requires a joint-profit motive. The IRS and courts have concluded that sharing economies of scale satisfies the joint-profit-motive test and that arrangements with a joint-profit motive are tax partnerships. Relying on technical analysis and economic theory, this Article argues, however, that if parties integrate resources without integrating all relevant parts of the production process, they often should not come within the definition of tax partnership. By focusing upon shared economies of scale, the IRS and courts have created a slippery slope. Sharing economies of scale is common even in nonintegrated arrangements, which allow parties to benefit from each other’s specialized skills by granting access to resources. If tax law relies upon shared economies of scale to classify business arrangements, its classification system will include arrangements that are not suited for tax partnership classification.

Keywords: economies of scale, joint-profit, partnership, entity classification

JEL Classification: A10, H10, H25, H26, K00, K22, K34, L23, L33

Suggested Citation

Borden, Bradley T., Taxing Shared Economies of Scale (Fall 2009). Baylor Law Review, Vol. 61, p. 721, 2009, Available at SSRN:

Bradley T. Borden (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States


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