Evaluating Subchapter S in a 'Check-in-The-Box' World

49 Pages Posted: 7 Oct 2010 Last revised: 13 Jul 2011

See all articles by Jeffrey A. Maine

Jeffrey A. Maine

University of Maine School of Law

Date Written: 1998

Abstract

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.

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, elective

Suggested Citation

Maine, Jeffrey A., Evaluating Subchapter S in a 'Check-in-The-Box' World (1998). Tax Lawyer, Vol. 51, No. 4, p. 717, 1998. Available at SSRN: https://ssrn.com/abstract=1688390

Jeffrey A. Maine (Contact Author)

University of Maine School of Law ( email )

246 Deering Avenue
Portland, ME 04102
United States

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