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Law and Finance: The Case of Constructive Sales

Author

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  • Thomas J. Brennan

    (School of Law, Northwestern University, Chicago, Illinois 60611-3059)

Abstract
This review illustrates the interaction between law and finance in the particular case of the taxation of constructive sales. The focus is on the treatment of variable prepaid forward contracts and the rules regarding these instruments articulated by Revenue Ruling 2003-7 and the recent case involving Philip Anschutz ( Anschutz Co. et al. v. Commissioner of Internal Revenue 2011). Simple models are used to show how the tests established by the law fail to reflect important financial considerations, such as the volatility of asset returns and the riskiness of dividend payments. These models provide examples that form the basis for a critique of the current rules and also indicate a possible path for future reform and improvement of the law, namely the addition of a delta-based test to the existing rules. The analysis presented here aims to encourage future work that applies financial theory to critique and improve legal rules in a wide range of other situations.

Suggested Citation

  • Thomas J. Brennan, 2013. "Law and Finance: The Case of Constructive Sales," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 259-276, November.
    • Handle: RePEc:anr:refeco:v:5:y:2013:p:259-276
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101748
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    Cited by:

    1. Mihaela-Cristina Onica & Jalba Silvia & Nedelcu Andreea - Izabela, 2015. "Comparative Analysis Regarding The Study Of The Financial Balance Of Companies Listed On The Stock Market," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 509-525.

    More about this item

    Keywords

    variable prepaid forward contracts; capital gains taxation; Black-Scholes model;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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