Out with the Open-Transaction Doctrine: A New Theory for Taxing Contingent Payment Sales
54 Pages Posted: 1 May 2003
The open-transaction doctrine stems from Burnett v. Logan, one of the most famous Supreme Court cases in the history of the tax law. For more than seven decades, this doctrine has wreaked havoc with the tax treatment of the seller and the buyer of a business whose purchase price is contingent on future profits. Contingent payment sales typically occur when the parties cannot agree on the value of the business. This Article argues that the open-transaction doctrine cannot be justified and that it is time for Congress to put the doctrine to rest. The Article advances a new system for taxing contingent payment sales. The courts have historically treated the seller's right to contingent payments as consideration provided by the buyer of the business. This Article argues that the seller's right to contingent payments should instead be conceptualized as a proprietary interest retained by the seller. This retained-interest theory provides a sound foundation for taxing contingent payment sales and fills a void that has always existed with respect to these common business transactions.
Keywords: contingent payment, installment sales, open transaction doctrine, closed transaction, deferred payment sale, sale of a business
JEL Classification: e62, h21, h24, h25, h26, k34
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