Law and Finance: The Case of Constructive Sales

Posted: 8 Nov 2013

Multiple version iconThere are 2 versions of this paper

Date Written: November 2013

Abstract

This review illustrates the interaction between law and finance in the particular case of the taxation of constructive sales. The focus is on the treatment of variable prepaid forward contracts and the rules regarding these instruments articulated by Revenue Ruling 2003-7 and the recent case involving Philip Anschutz (Anschutz Co. et al. v. Commissioner of Internal Revenue 2011). Simple models are used to show how the tests established by the law fail to reflect important financial considerations, such as the volatility of asset returns and the riskiness of dividend payments. These models provide examples that form the basis for a critique of the current rules and also indicate a possible path for future reform and improvement of the law, namely the addition of a delta-based test to the existing rules. The analysis presented here aims to encourage future work that applies financial theory to critique and improve legal rules in a wide range of other situations.

Suggested Citation

Brennan, Thomas J., Law and Finance: The Case of Constructive Sales (November 2013). Annual Review of Financial Economics, Vol. 5, pp. 259-276, 2013. Available at SSRN: https://ssrn.com/abstract=2351830 or http://dx.doi.org/10.1146/annurev-financial-110311-101748

Thomas J. Brennan (Contact Author)

Harvard Law School ( email )

1557 Massachusetts Ave
6 Ever
Cambridge, MA 02138
United States
617-495-3141 (Phone)

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