"GIMME SHELTER?" CLOSELY HELD CORPORATIONS SINCE TAX REFORM

• Published in: National tax journal 1995-09, Vol.48 (3), p.409-416
• Main Author: PLESKO, GEORGE A.
• Format: Article
• Language: English
• Subjects: Alternative minimum tax; Built-in gains & losses; Business forms; Business structures; C corporations; Close corporations; Closely held corporations; Corporate income tax; Corporate income taxes; Corporate taxes; Corporations; Earnings; Economic aspects; Effects; Incentives; Income taxes; Net income; Organizational structure; Present value; S corporation; S corporations; Shareholders; Stockholders; Tax rates; Tax reform; Tax Reform Act 1986-US; Taxable income; Taxation; Trends
• ISSN: 0028-0283; 1944-7477
• DOI: 10.1086/NTJ41789158

The Tax Reform Act of 1986 (TRA) changed a large number of incentives facing individuals and corporations. One area where individual and corporate tax incentives interact the most in the tax treatment of closely held corporations, where owners can choose whether to be subject to individual or corporate tax treatment. The benefits of operating as taxable (C) or pass-through (S) corporation depend on the relative tax rates on corporate and individual income. TRA dramatically changed the incentives for using the taxable corporate form to defer the recognition of taxable income. The centerpiece of the 1986 act was to shift $120 billion of tax payments from individuals to corporations over 5 years. TRA also repealed the General Utilities doctrine. Under General Utilities, a C corporation that sold its assets was able to distribute the proceeds to shareholders as a part of a liquidation, without a corporate-level tax. The repeal of this doctrine meant this income would now be subject to the corporate-level tax. As pass-through entities, S corporations are not subject to an entity-level tax.