Allocating Tax Transition Risk

80 Pages Posted: 7 Jan 2021 Last revised: 25 Jan 2022

Date Written: August 20, 2020


The enactment of sweeping tax changes in late 2017 by Republicans without any bipartisan support and the calls by Democrats to reverse those changes (and make more) when they regain political power create an unstable tax landscape that is challenging for taxpayers who are trying to make economic decisions that are affected by tax law. One strategy for grappling with this instability and uncertainty is for taxpayers to use contracts to allocate the economic benefits and burdens of a possible future tax law change among themselves. The literature says almost nothing about this contract-based strategy for managing tax transition risk. This gap is surprising because (a) the leading view on tax transition policy argues that taxpayers should account for the risk of tax law changes the same way they take other market risks into account when making decisions, and (b) private contracting is a well-accepted method for addressing market risks. To fill this gap, this Article uses four case studies—involving derivatives, credit agreements, municipal bonds, and merger agreements—to demonstrate that taxpayers are using tax transition risk-shifting contracts and to illustrate how this risk-management strategy varies. This Article then discusses three implications of this study. First, this Article predicts that private contracting to allocate tax transition risk, which is a potentially useful strategy any time an economic decision is a function of tax law, will increase when the political dynamic creates uncertainty about the stability of tax laws and could even include tax transition insurance and tax change derivatives. Second, this Article makes policy recommendations about the use of tax transition risk-shifting agreements, arguing that these agreements are most likely to be normatively desirable when sophisticated parties contract with each other to manage large tax transition risks well enough to proceed with social-welfare-enhancing transactions, other market mechanisms for managing transition risk fail to satisfy taxpayers’ risk preferences, and this Article’s recommendations are followed to minimize the problems these agreements could otherwise pose. Third, this Article explains how an understanding of tax transition risk-shifting contracts should inform the tax transition policy debate.

Keywords: tax, tax law, tax transitions, legal transitions, change in tax law, tax transition risk, risk allocation, private contracting

JEL Classification: K34, K12

Suggested Citation

Field, Heather M., Allocating Tax Transition Risk (August 20, 2020). 73 Tax Law Review 157 (2020), UC Hastings Research Paper Forthcoming, Available at SSRN:

Heather M. Field (Contact Author)

UC Hastings Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

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