Taxation of Profit Interests and the Reverse Mancur Olson Phenomenon

The Article proceeds from this point through four acts, each of which highlights, largely without subjective judgment whenever possible, the rent-seeking and rent extraction motivations animating the outcomes. Indeed, the Article agrees with the idea that rent seeking and rent extractions are rational behaviors and indeed may even have a legitimate place in tax law. So, in Act I the Article describes the law as it came to be as a result of Diamond v. Commissioner, a relatively small dollar amount case that challenged the unstated political compromise theretofore existing. Diamond and its aftermath provide the first evidence of successful rent-seeking behavior in the tax code with regard to the taxation of profit interests. The case expressed before-the-fact agreement with Fleischer\u27s proposal.\u27 8 Indeed, the legal outcome initially confirmed that rent-seeking would not prevail over sound tax policy. Surprisingly, that is if one ignores rational rent-seeking behavior as a determinate of tax law, the government promptly gave away that confirmation. The give-away was so stark that the judiciary once rejected the government\u27s concession. When, in a case subsequent to Diamond, the IRS attempted to disavow its policy-justified victory, that court explicitly rejected the disavowal. Even in that instance, though, the manner in which the court rejected the rent seeking outcome made possible by the government\u27s attempted disavowal left open the possibility that rent-seeking would eventually be rewarded