The Story of the Corporate Reorganization Provisions : From 'Purely Paper' to Corporate Welfare

Corporate reorganizations occupy a special place in American business tax law. As defined by the Internal Revenue Code, specific corporate reorganizations are granted the benefit of non-recognition treatment. That is, neither corporations nor shareholders recognize the gain or loss on the exchange of securities related to a reorganization, even though such an exchange constitutes a tax realization event. This chapter charts the historical beginnings and early development of this tax benefit for corporate reorganizations.By chronicling the changing political, economic and social contexts from which this tax law arose, this chapter explores how and why the justifications for this corporate tax preference have changed over time. In contrast to past scholarship on this topic, which has generally tended to dwell on singular explanations for the origins of this provision, this chapter contends that the corporate reorganization provisions were created and broadened for historically specific reasons. The explanations and rationales for tax-favored treatment varied over time just as the social, political and economic conditions that supported them changed.To be sure, institutional and bureaucratic inertia played a pivotal part in the persistence of these tax laws. But, ultimately, it was the tractable and protean nature of these justifications and rationales that explain the longevity of these tax rules. The multi-valence of the reorganization provisions across time, in turn, helped to create entrenched political interests that facilitated institutional inertia and frustrated systematic reform. By focusing in greater detail on the historical processes at work during the formative development of this tax law, this chapter seeks to illustrate the contingent evolution of this tax rule; it seeks to show how current policy is the result of past political choices - choices often made among several alternatives.This paper will be published as a chapter in a book entitled Business Tax Stories, to be published by Foundation Press later this year (2005)