Posner on Tax: The Independent Investor Test

14 Pages Posted: 5 Nov 2019

Date Written: September 19, 2019


This paper, written in honor of Judge Richard Posner’s retirement from the federal judiciary, uses his opinion in Exacto Spring v. Commissioner as a lens into his tax law jurisprudence more generally. In Exacto Spring, Posner delivers a devastating rejection of the muddled multifactor test then in effect to distinguish reasonable salaries, which are deductible from corporate income, from disguised dividends, which aren’t. Posner replaces the multifactor test with the independent investor test, which focuses the judicial inquiry on the substance of the transaction. I critique Posner’s application of the independent investor test to the problem of salary disguised as dividends, showing that it yields perverse outcomes by treating equity as a fixed claim, rather than a residual claim. But I show that, when applied to dividends disguised as debt, the independent investor test offers great promise. More generally, I argue that Posner’s shift from form to substance in tax law clarifies an often opaque area of law.

Keywords: Tax, Corporate Tax, Dividends, Substance Over Form

JEL Classification: H2, H25, H26

Suggested Citation

Listokin, Yair, Posner on Tax: The Independent Investor Test (September 19, 2019). University of Chicago Law Review, Vol. 86, No. 1, 2019, Yale Law School, Public Law Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3456820

Yair Listokin (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-436-2567 (Phone)

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