Abstract
In one sense, this article does not have a single unifying theme. Rather, it represents an outgrowth of my professional practice advising investment banking and other clients about derivative products and asset securitization, and is intended to introduce generalist tax practitioners to some of the new financial products that have been developed in the swaps and structured finance areas over the last few years, and to some of the tax issues that have arisen with respect to those new products. In another sense, however, the theme linking many of the topics discussed in this article is that of "tax arbitrage." By tax arbitrage I mean a taxpayer's simultaneously holding "long" and "short" positions in the same or similar asset(s), but where the tax treatment of one position differs from the tax treatment of the other, resulting in an after-tax return from the overall transaction that is greater than its pre-tax return. Many of the transactions explored in this article raise questions about the proper scope and content of a general, unifying theory of tax arbitrage.
In particular, tax arbitrage strategies, at least in their "purest" forms, are generally viewed as abusive. Nevertheless, in discussing many of the transactions analyzed in this article with my professional colleagues, I have discovered that, in the tax world, as in so much else, one person's poison is another person's meat. Transactions that strike me as clearly troublesome appear perfectly legitimate to some of my peers and vice versa. The reason for these disagreements is not that some persons are more or less tolerant of tax arbitrage than others. Rather, the disagreements stem from differing conceptions of what makes tax arbitrage abusive and, accordingly, what particular transactions should be considered examples of tax arbitrage in the first place. Some of my colleagues believe that a sine qua non of tax arbitrage is the presence of debt financing. Others believe that tax arbitrage only requires the holding of offsetting "long" and "short" economic positions. Some tax lawyers seem to require a "direct" link between the "long" and "short" positions before a transaction can be considered an example of tax arbitrage. Others view this as merely a rule of administrative convenience, rather than a theoretical requirement.
My purpose in writing this article is far more modest than crafting a general, unifying theory of tax arbitrage. I do believe, however, that many of the transactions described in this article must be accounted for in developing such a theory. Thus, only when one is able to articulate clearly and cogently why the strategy involving a market discount bond and an interest rate swap discussed in Part II either is, or is not, abusive, will the analysis be complete.
Recommended Citation
Lewis R. Steinberg,
Selected Issues in the Taxation of Swaps, Structured Finance, and Other Financial Products,
1 Fla. Tax Rev.
(1994).
Available at: https://scholarship.law.ufl.edu/ftr/vol1/iss1/6