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65 Tax L. Rev. 241 2011-2012 DATE DOWNLOADED: Sun Sep 26 04:12:46 2021 SOURCE: Content Downloaded from HeinOnline Citations: 65 Tax L. Rev. 241 2011-2012 -- Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at https://hn3.giga-lib.com/HOL/License -- The search text of this PDF is generated from uncorrected OCR text. -- To obtain permission to use this article beyond the scope of your license, please use: Copyright Information The Case for a "Super-Matching" Rule YARON Z. REICH* I. Introduction ............................................ 242 II. Overview of Matching and Mismatches ................. 245 III. The Matching Concept and Mismatches in Various A reas ................................................... 248 A. Character: Capital vs. Ordinary .................... 248 B . T im ing .............................................. 251 C. Hedging, Straddles, and Other Approaches to Matching Character and Timing .................... 254 1. Hedging Transactions ........................... 254 2. Section 475 ..................................... 260 3. Straddles ........................................ 263 4. Foreign Currency Hedging Transactions ........ 265 D. International Tax Provisions ........................ 268 1. Source .......................................... 269 a. In G eneral .................................. 269 b. Interest Expense ............................ 270 c. Interest Equivalents ........................ 274 d. Foreign Currency Sourcing Rules ........... 274 e. Personal Property Sales ..................... 275 2. Global D ealing ................................. 275 3. Subpart F ....................................... 277 4. Foreign Tax Credit .............................. 279 E. Related Party Transactions ......................... 281 1. Consolidated Tax Groups ....................... 281 2. Section 267 ..................................... 284 3. Partners and Partnerships ....................... 286 F. Limitations on Individual Deductions ............... 288 G. Financial Transactions and Products ................ 289 H . Tax Shelters ......................................... 291 IV. Observations and Specific Recommendations Regarding Matching and Mismatches .............................. 292 A . O bservations ........................................ 292 * Partner, Cleary Gottlieb Steen & Hamilton, LLP. I am grateful to Victoria Belyavsky, Matthew B. McFeely, and Andrew P. Meisner for their assistance in the preparation of this article, and to James M. Peaslee, Julie A. Roin, Leslie B. Samuels, and David Schulder for their helpful comments. An earlier version of this Article was presented at the Tax Club in New York on September 15, 2011. 241 Imaged with the permission of Tax Law Review of New York University School of Law TAX LAW REVIEW [Vol. 65: B. Specific Recommendations .......................... 294 V. Policy Considerations in Formulating a Super-Matching R ule .................................................... 296 A. The Benefits of a Super-Matching Rule Compared to the Status Quo and to Alternative Approaches to M ism atches ......................................... 296 B. Rules vs. Principles, Certainty vs. Flexibility ........ 298 C. The Substance of Matching: When, What, and How to M atch ............................................ 300 D. Relevance of Accounting or Business Treatment ... 301 E. Elective or Mandatory, and by Whom .............. 302 F. Legislative or Regulatory Guidance, General or T ailored ............................................. 303 VI. A Proposed Super-Matching Rule ...................... 304 A. Description of Proposal ............................. 304 B. D iscussion .......................................... 306 V II. Conclusion .............................................. 310 I. INTRODUCTION Many of the challenges, frustrations, and opportunities faced by tax- payers and tax practitioners arise because of tax rules that result in a "mismatch" of one sort or another in the treatment of offsetting or other related items, including with respect to the character, timing, source, or (non)recognition of items of income or expense. These mismatches can arise in a variety of situations. Some can be managed (or abused) through tax planning or by making appropriate timely elections, while others are difficult or impossible to avoid. Some of these mismatches may be reflections of thoughtful tax policy deci- sions, while others are simply the (unanticipated) result of the inter- face between rules that evolved to address different issues. Taxpayers and their advisers expend an enormous amount of effort dealing with mismatch problems. Mismatches also are problematic for the government because they can facilitate tax arbitrage and other tax minimization transactions that arguably are not consonant with good tax policy. The tax law contains an increasing number of targeted rules in- tended to ameliorate specific mismatch problems that may adversely affect the taxpayer or the government. Obvious examples include the hedging and straddle rules. In addition, there are some general rules that to one extent or another can be read as overriding other technical provisions to require the matching of related items. The promulgation of statutory or regulatory rules addressing prob- lematic mismatches has been a painstakingly slow process. Many seri- Imaged with the permission of Tax Law Review of New York University School of Law 2012] THE CASE FOR A "SUPER-MATCHING" RULE ous mismatch problems have taken years to resolve, and relief remains elusive for many others. Even where a fix is promulgated, it often fails to address all situations covered by the problematic mis- match. To date, the tax law has not explicitly articulated an overarch- ing "matching" rule or principle that would provide guidance to taxpayers and the IRS as to when and how mismatch problems might be resolved and, on the other hand, when they must be accepted as manifestations of considered policy judgments. Current proposals for tax reform generally tend to focus-as they should-on important considerations such as tax rates, equity, simpli- fication, international competitiveness, and deficit reduction.1 Most tax reform proposals seek to simplify the tax law by expanding the tax base and eliminating tax expenditures 2 and other special rules that add complexity. The tax law, however, necessarily will continue to have numerous, detailed rules, which will be a source of continuing 1 See, e.g., Tax Reduction and Reform Act of 2007, H.R. 3970, 110th Cong. § 3001, available at http://www.opencongress.org/bill/l10-h3970/text (proposing, along with many other suggestions, to lower the top corporate marginal tax rates); Staff of H. Comm. on Ways & Means, 112th Cong., Summary of Ways and Means Discussion Draft: Participa- tion Exemption (Territorial) System 1-3 (2011), available at http://www.waysandmeans. house.gov/UploadedFiles/Summary-of Ways-andMeansDraftOption.pdf (proposing revenue-neutral tax reform with reduced tax rates, a broader tax base, and a territorial system to increase international competitiveness of U.S. corporations); The White House & Treasury Dep't, The President's Framework for Business Tax Reform (2012), available at http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Frame work-for-Business-Tax-Reform-02-22-2012.pdf (proposing, along with other suggestions, to simplify and cut taxes for small businesses, establish a new minimum tax on foreign earn- ings to encourage domestic investment, and to restore fiscal responsibility by "not add[ing] a dime to the deficit"); Treasury Dep't, General Explanations of the Administration's Fis- cal Year 2013 Revenue Proposals (2012), available at http://www.treasury.gov/resource- center/tax-policy/Documents/General-Explanations-FY2013.pdf (proposing, among other measures, reform of the international tax system, and reduction of the tax gap and simplifi- cation of the tax system); Nat'l Comm'n on Fiscal Responsibility & Reform, The Moment of Truth 28-29 (2010), available at http://www.fiscalcommission.gov/sites/fiscalcommission. gov/files/documents/TheMomentofrruthl2 1 2010.pdf (proposing tax reform to achieve lower rates, a broader tax base, simplification, progressivity, and international competitive- ness); The President's Econ. Recovery Advisory Bd., The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation 3-4, 53-56, 65-69, 81-94 (2010), availa- ble at http://www.whitehouse.gov/sites/default/files/microsites/PERABTaxReform_ Report.pdf (offering a range of options for simplifying the tax code, improving taxpayer compliance, and reforming corporate taxation in the interest of maintaining international competitiveness, including through a reduction of the corporate tax rate, while maintaining overall revenue neutrality); Bipartisan Pol'y Ctr., Restoring America's Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-growth Tax System 16-21 (2010), available at http://www.bipartisanpolicy.org/sites/default/files/BPC%20FI NAL%20REPORT%20FOR%20PRINTER%2002%2028%2011.pdf (proposing a cut in tax rates and broadening the tax base by eliminating most tax expenditures). 2 See John L. Buckley, Tax Expenditure Reform: Some Common Misconceptions, 132 Tax Notes 255, 257 (July 18, 2011) (noting that "[t]he current tax reform debate ...seems to be almost completely focused on tax expenditures," and discussing the complexity of reforming tax
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