Mergers, Taxes, and Historical Realism

Article by Steven A. Bank

Under the Internal Revenue Code, mergers and acquisitions qualifying as “reorganizations” are treated as nonevents for tax purposes. Neither the shareholder nor the corporation recognizes gain or loss on the exchange of stock or securities in such transactions. In the midst of the largest merger movement in this country's history, this Article asks why we provide this generally favorable tax treatment. The long-accepted answer is that, while several rationales were offered originally, changed circumstances have left few plausible justifications. This Article argues that there is a historical and continuing explanation, rooted in our conceptual understanding of income, that has been largely ignored. The reorganization provisions were enacted at the height of a debate over the consumption and accretion models of taxation. Taxpayers worried about the calculation of income based upon paper gains, while the government worried about the indefinite deferral of taxation. The tax-free reorganization provision, enacted at a time when the legal status of the government's treatment of capital gains and stock dividends was still uncertain, was part of a compromise between these two models of taxation. Given that the struggle between the accretion and consumption tax visions continues to this day, this Article concludes that the tax-free reorganization remains a logical part of this compromise.


About the Author

Steven A. Bank. Assistant Professor, Florida State University College of Law. B.A. 1991, University of Pennsylvania; J.D. 1994, University of Chicago.

Citation

75 Tul. L. Rev. 1 (2000)