Evaluating Subchapter S in a 'Check-in-The-Box' World
Jeffrey A. Maine
University of Maine School of Law
Tax Lawyer, Vol. 51, No. 4, p. 717, 1998
In 1997, the Treasury Department simplified business entity classification for tax purposes by finalizing “check-the-box” regulations. These regulations permit most unincorporated business entities to elect, by in effect “checking a box” on an election form, to be treated as either partnerships or corporations for federal income tax purposes. Although the check-the-box regulations have been applauded, they raise an important question: What impact will the regulations have on subchapter S of the Internal Revenue Code? This article argues on both practical and theoretical grounds that subchapter S has continuing utility in a check-the-box environment.
The article provides a brief overview of subchapter S’s origins. It describes recent events having a dramatic impact on subchapter S, namely the prolif eration of LLCs, finalization of check-the-box regulations, and recent state legislative responses to elective classification. It illustrates the more subtle phenomenon of how efforts to reinvigorate subchapter S have caused subchapter S to more closely resemble subchapter K, thus calling into question the need for two similar pass-through regimes. The article provides several practical reasons why S corporations continue to be the preferred choice of pass-through entity for many businesses. It argues that the convergence of LLCs, federal check-the-box regulations, and state legislative response to elective classification has led to an irrational result - a new corporate-like entity taxed as a partnership. The article describes the proper role of subchapter S in the present world of multiple entity choices, a world in which distinctions among business forms are becoming obscured. The article suggests that a liberalized version of subchapter S would be the appropriate pass-through model if states consolidate existing business forms and create a uniform non-public business association statute, muck like the LLC form that is emerging after state legislative response to check-the-box classification. Subchapter S would have more theoretical merit than would partnership taxation due to the inherent state law characteristics such a business entity would possess and the relative simplicity of subchapter S.
Number of Pages in PDF File: 49
Keywords: check-the-box, entity, classification, entity classification, unincorporated, incorporated, business, business entity, business entities, tax, taxation, choice of entity, regulations, subchapter S, subchapter C, partnership, partnership taxation, LLC, check-the-box regulations, electiveAccepted Paper Series
Date posted: October 7, 2010 ; Last revised: July 13, 2011
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