Borrowing, Return of Capital Conventions, and the Structure of the Income Tax: An Essay in Statutory Interpretation
Anthony P. Polito
Suffolk University Law School
Virginia Tax Review, Vol. 17, p. 467, 1998
This Article concludes that, contrary to the prevailing academic view, the United States transaction-based income tax statute is not usefully seen as the manifestation of a single overarching principle. Instead, the transaction-based income tax is seen to be a series of ad hoc compromises between accrual taxation and consumption taxation. This insight has substantial implications for the manner in which the tax statute is seen and interpreted.
The Article approaches this insight by examining a very common nontaxable transaction, the incurring of a debt. The article examines the traditional explanation of that result - that the obligation to repay offsets the benefit of the loan proceeds - to determine whether it can be given substantive content. The Article concludes that the traditional explanation describes a return of capital rule, termed here the Anticipated Capital Convention. Because the Article identifies alternatives to the Anticipated Capital Convention that would have made a borrowing transaction taxable at least in part, the article examines whether it is possible to identify a single return of capital convention as the uniquely correct convention compelled by the definitional structure of the transaction-based income tax.
This analysis leads to several implications. It is not possible to determine whether the Anticipated Capital Convention, or any other capital convention, is affirmed or rejected by the definitional structure of the transaction-based income tax. The statute has no option but to adopt a series of more or less arbitrary return of capital conventions. Those tasked with interpreting the statute - courts, bureaucrats, and attorneys - should not attempt to discern the economic substance of a transaction. Instead, they should see the statute as it is, a series of arbitrary return of capital regimes reflecting the many ad hoc policy decisions that Congress has no choice but to make. That conclusion calls into doubt a revered icon of the income tax law: the substance over form doctrine.
Number of Pages in PDF File: 71
Date posted: March 7, 2007