Sticks and Snakes: Derivatives and Curtailing Aggressive Tax Planning

The most important tax problem of recent months is the impact of aggressive tax planning on corporate tax revenue. The Secretary of the Treasury blames the tax shelter industry, in which tax lawyers and investment bankers develop and market tax-motivated transactions. This Article analyzes aggressive tax planning, and recommends ways to impede it, in a context rife with opportunities for planning: the tax rules for complex financial instruments known as derivatives. While planning opportunities are prevalent elsewhere in the tax law as well, this Article focuses on derivatives because the problem is particularly acute – indeed, derivatives have been called [tlhe 900-pound gorilla in all the corporate tax shelter discussion – and because the conventionally accepted solution has been applied (or misapplied) in ways that, ironically, may have made the problem worse. The need for reform in this area is widely acknowledged, but existing scholarly guidance is not adequate. There is a consensus that many difficulties would be solved with a comprehensive shift in tax timing rules – from realization to mark-to-market accounting or a more administrable proxy – for all assets and taxpayers. Yet there is also a consensus that such comprehensive reform is not administrable or politically feasible in the near term. The twin hurdles of administrability and politics are thought to be too high