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Published in the 5th Annual Conference on Tax Planning for the Individual, New York University, Institute on Federal Taxation, 1983, p. 129-150.


This article discusses how interest has been and is being used in tax planning. The tax planning techniques using interest include charging too little interest or none at all, recalssifying interest as principal and allocating interest among time periods to optimize the tax consequences to the parties. The issues raised by these tax planning techniques go to the heart of the tax system. They suggest inadequacies in the development of the case law and in conventional tax thinking. The unifying principal is the divergence between the possible tax consequences and the clear economic consequences of each of the transactions. The overriding policy question is whether the tax system can deal adequately with issues involving the "time value of money." The article discusses tax planning techniques through a series of propositions and a few hypothetical [sic] illustrating application of those propositions and raising questions about them. The article begins, however, with a review of some economic and tax fundamentals which provide the groundwork for the analysis.


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