Mergers, Taxes, and Historical Realism

102 Pages Posted: 28 Dec 1999

See all articles by Steven A. Bank

Steven A. Bank

University of California, Los Angeles (UCLA) - School of Law

Date Written: March 2000


Under the Internal Revenue Code, mergers and acquisitions qualifying as "reorganizations" are treated as non-events for tax purposes. Neither the shareholder nor the corporation recognizes gain or loss on the exchange of stock or securities in such transactions. In the midst of the largest merger movement in this country's history, this Article asks why we provide this generally favorable tax treatment. The long-accepted answer, set forth in a 1957 Harvard Law Review article entitled "Mergers, Taxes, and Realism," is that while several rationales were offered originally, changed circumstances have left few plausible justifications. This Article disagrees, arguing that there is an historical and continuing explanation rooted in our conceptual understanding of income that has been largely ignored by commentators. The reorganization provisions were enacted at the height of a conceptual and practical debate between supporters of the consumption and accretion models. Taxpayers worried about the calculation of income based upon paper gains while the government worried about the indefinite deferral of taxation. The tax-free reorganization provision, enacted at a time when the legal status of the government's treatment of capital gains and stock dividends was still uncertain, effected a compromise between these two models of taxation. Given that the struggle between the accretion and consumption tax visions continues to this day, this Article concludes the tax-free reorganization remains an integral part of this compromise.

JEL Classification: K34

Suggested Citation

Bank, Steven A., Mergers, Taxes, and Historical Realism (March 2000). Available at SSRN: or

Steven A. Bank (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
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310-794-7601 (Phone)

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