Tuesday, August 8, 2023

Cauble: Taxing Composite Transactions

Emily Cauble (Wisconsin; Google Scholar), Taxing Composite Transactions, 77 SMU L. Rev. ___ (2024):

In a variety of contexts, taxpayers engage in composite transactions — essentially two transactions in one. For instance, when an individual sells property for less than its fair market value to a friend or relative, the transaction involves a sale and a gift. As another example, from time to time, retailers run promotions offering to rebate the price of merchandise if a team wins a sporting event. A buyer of the merchandise, effectively, makes a purchase and also places a bet on the sporting event’s outcome.

Tax law’s treatment of composite transactions is not uniform. In some contexts, tax law fully bifurcates these transactions into their separate components. Under this bifurcated approach, a taxpayer who engages in a composite transaction receives the same tax treatment as a taxpayer who goes through the motions of engaging in the component transactions separately. In other contexts, tax law adopts a collapsed approach under which taxpayers obtain markedly different tax treatment by engaging in a composite transaction instead of carrying out the components as separate transactions.

In still other contexts, tax law employs a hybrid approach that partially disentangles a composite transaction into its separate components but, nonetheless, bestows upon the composite transaction tax treatment that is not identical to what follows from engaging in the components as separate transactions. In addition to the existing approaches to composite transactions, other hypothetical approaches are possible.

Each of the existing approaches and the conceivable alternatives offers various advantages and disadvantages when judged in terms of the approach’s propensity to reduce tax revenue, the approach’s tendency to trap unwary taxpayers while benefiting well-advised taxpayers, the likelihood that the approach will prompt taxpayers to alter their transactions for tax reasons, and the administrability of the approach. This Article undertakes an examination of composite transactions, evaluating advantages and disadvantages of different approaches. In addition, this Article presents new survey results that shed light on the counterintuitive nature of current law.


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