Linking limited liability and entity taxation: A critique of the ALI Reporters' study on the taxation of private business enterprises

University of Pittsburgh Law Review

Volumn 62, Issue 2, 2000, Pages 223-278

  Maine, Jeffrey A ^a  

^a NONE

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EID: 0347742709     PISSN: 00419915     EISSN: None     Source Type: Journal    
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References (398)

1. AMERICAN LAW INSTITUTE, FEDERAL INCOME TAX PROJECT - TAXATION OF PRIVATE BUSINESS ENTERPRISES (George K. Yin & David J. Shakow reps.) (1999) [hereinafter REPORTERS' STUDY]. The Reporters' Study focuses solely on the taxation of private business firms. The Study defines private business firms as firms "whose ownership interests are neither traded on an established securities market nor readily tradable on a secondary market (or the substantial equivalent thereof)." Id. at Proposal 2-1. Public firms, no matter how organized, would continue to be taxed under the double-tax regime of Subchapter C. See I.R.C. § 7704(a); Treas. Regs. § 301.7701-2(b)(7). Unless otherwise indicated, all references to the Code are to the Internal Revenue Code of 1986, as amended through January 2001.
2. This simplified conduit system would be available to a subset of eligible firms, referred to as Simple Private Business Firms ("SPBFs"). An SPBF is a private firm that satisfies a number of conditions. First, all SPBF owners must be either domestic individuals, estates, certain trusts, or other SPBFs. Second, an SPBF can have only a single class of residual ownership interests, with each interest conferring identical rights as to income, loss, distributions, and liquidation proceeds. Finally, an SPBF may not be a corporation described in I.R.C. § 1361(b)(2). REPORTERS' STUDY, supra note 1, at Proposal 4-1. The proposed eligibility rules for an SPBF are more liberal than the eligibility restrictions under current Subchapter S. See infra note 83, for the eligibility rules under subchapter S. An SPBF, unlike an S corporation, can have an unlimited number of owners. The proposed operating rules of the SPBF system are slightly different from the Subchapter S rules. Unlike Subchapter S, the proposed SPBF system permits income allocations to be made in accordance with a limited form of preferred interests. In addition, entity debt is allocated to owners and included in their outside basis, consistent with current partnership rules. REPORTERS' STUDY, supra note 1, at Proposals 4-2, 4-3.
3. This simplified conduit system would be available to a subset of eligible firms, referred to as Simple Private Business Firms ("SPBFs"). An SPBF is a private firm that satisfies a number of conditions. First, all SPBF owners must be either domestic individuals, estates, certain trusts, or other SPBFs. Second, an SPBF can have only a single class of residual ownership interests, with each interest conferring identical rights as to income, loss, distributions, and liquidation proceeds. Finally, an SPBF may not be a corporation described in I.R.C. § 1361(b)(2). REPORTERS' STUDY, supra note 1, at Proposal 4-1. The proposed eligibility rules for an SPBF are more liberal than the eligibility restrictions under current Subchapter S. See infra note 83, for the eligibility rules under subchapter S. An SPBF, unlike an S corporation, can have an unlimited number of owners. The proposed operating rules of the SPBF system are slightly different from the Subchapter S rules. Unlike Subchapter S, the proposed SPBF system permits income allocations to be made in accordance with a limited form of preferred interests. In addition, entity debt is allocated to owners and included in their outside basis, consistent with current partnership rules. REPORTERS' STUDY, supra note 1, at Proposals 4-2, 4-3.
4. The Reporters' Study adopted, as a starting point, Subchapter K as the regular conduit system for those private firms ineligible for, or choosing not to elect, the simplified system. The Study proposed, however, the adoption of more pass-through principles into Subchapter K. For these proposed revisions, see REPORTERS' STUDY, supra note 1, at Proposals 5-1 through 5-9.
5. Note, however, that a private firm may elect to be taxed under the provisions of Subchapter C if it has over 100 owners or is a member of an affiliated group that includes a public firm. Id. at Proposal 3-2 (stating the reason for this exception "is to prevent the potentially harsh tax consequences to firms that straddle the public/private line, and that may unintentionally change from one status or another"). Accordingly, under the Study's proposal, private firms with over 100 owners have three possible tax choices: a modified Subchapter K, a liberalized version of Subchapter S, and existing Subchapter C.
6. The tax treatment of public firms would be the same as under current law. Current law taxes all public firms, no matter how organized, under the double tax regime of Subchapter C. See I.R.C. § 7704(a); Treas. Regs. § 301.7701-2(b)(7).
7. The Study noted four reasons to favor a tax classification rule based on limited liability. See REPORTERS' STUDY, supra note 1, at 53-54. First, limited liability provides a meaningful economic benefit to business firms, which itself provides some justification for separate entity taxation. Id. Second, an entity level tax might be considered a statutory price to pay for the statutory benefit of limited liability (e.g., the avoidance of private costs associated with obtaining liability protection by contract). Id. at 54. Third, the profits of the firm would provide an indication of the value of the benefit of limited liability, namely the ability to engage in activities with greater financial potential. Id. Finally, separate entity taxation does not permit losses to pass through to owners, an appropriate result when owners do not personally bear the risk of those losses. Id.
8. The Study noted four reasons to favor a tax classification rule based on limited liability. See REPORTERS' STUDY, supra note 1, at 53-54. First, limited liability provides a meaningful economic benefit to business firms, which itself provides some justification for separate entity taxation. Id. Second, an entity level tax might be considered a statutory price to pay for the statutory benefit of limited liability (e.g., the avoidance of private costs associated with obtaining liability protection by contract). Id. at 54. Third, the profits of the firm would provide an indication of the value of the benefit of limited liability, namely the ability to engage in activities with greater financial potential. Id. Finally, separate entity taxation does not permit losses to pass through to owners, an appropriate result when owners do not personally bear the risk of those losses. Id.
9. The Study noted four reasons to favor a tax classification rule based on limited liability. See REPORTERS' STUDY, supra note 1, at 53-54. First, limited liability provides a meaningful economic benefit to business firms, which itself provides some justification for separate entity taxation. Id. Second, an entity level tax might be considered a statutory price to pay for the statutory benefit of limited liability (e.g., the avoidance of private costs associated with obtaining liability protection by contract). Id. at 54. Third, the profits of the firm would provide an indication of the value of the benefit of limited liability, namely the ability to engage in activities with greater financial potential. Id. Finally, separate entity taxation does not permit losses to pass through to owners, an appropriate result when owners do not personally bear the risk of those losses. Id.
10. The Study noted four reasons to favor a tax classification rule based on limited liability. See REPORTERS' STUDY, supra note 1, at 53-54. First, limited liability provides a meaningful economic benefit to business firms, which itself provides some justification for separate entity taxation. Id. Second, an entity level tax might be considered a statutory price to pay for the statutory benefit of limited liability (e.g., the avoidance of private costs associated with obtaining liability protection by contract). Id. at 54. Third, the profits of the firm would provide an indication of the value of the benefit of limited liability, namely the ability to engage in activities with greater financial potential. Id. Finally, separate entity taxation does not permit losses to pass through to owners, an appropriate result when owners do not personally bear the risk of those losses. Id.
11. The Study noted four reasons to favor a tax classification rule based on limited liability. See REPORTERS' STUDY, supra note 1, at 53-54. First, limited liability provides a meaningful economic benefit to business firms, which itself provides some justification for separate entity taxation. Id. Second, an entity level tax might be considered a statutory price to pay for the statutory benefit of limited liability (e.g., the avoidance of private costs associated with obtaining liability protection by contract). Id. at 54. Third, the profits of the firm would provide an indication of the value of the benefit of limited liability, namely the ability to engage in activities with greater financial potential. Id. Finally, separate entity taxation does not permit losses to pass through to owners, an appropriate result when owners do not personally bear the risk of those losses. Id.
12. Id. at 51 ("For example, firms with that characteristic might be subject to the double-tax regime of Subchapter C, and other firms might be taxed under Subchapter K.").
13. Id. at 54 ("Although a classification line based on limited liability has . . . certain appeal, on balance, Proposal 2-1 does not recommend development of such a line."). Others have similarly argued against developing a classification rule based on limited liability. See H. Lawrence Fox, The Maximum Scope of the Association Concept, 25 TAX L. REV. 311, 364 (1970) (preferring to ignore limited liability in the classification of entities); Susan Pace Hamill, The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question, 95 MICH. L. REV. 393, 431 (1996) (noting that a limited liability-based corporate tax, although beyond the scope of her article, would "violate fundamental principals of horizontal equity"); William A. Klein & Eric M. Zolt, Business Form, Limited Liability, and Tax Regimes: Lurching Toward A Coherent Outcome?, 66 U. COLO. L. REV. 1001, 1008 (1995) ("Although the tax issue and the limited liability issue historically have been intertwined, we find no good reason why that should be."). Although no commentator has yet advocated an extension of the entity tax based on limited liability, proposals have been made that focus on a classification line other than limited liability. See Hamill, supra, at 434 n.196.
14. Id. at 54 ("Although a classification line based on limited liability has . . . certain appeal, on balance, Proposal 2-1 does not recommend development of such a line."). Others have similarly argued against developing a classification rule based on limited liability. See H. Lawrence Fox, The Maximum Scope of the Association Concept, 25 TAX L. REV. 311, 364 (1970) (preferring to ignore limited liability in the classification of entities); Susan Pace Hamill, The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question, 95 MICH. L. REV. 393, 431 (1996) (noting that a limited liability-based corporate tax, although beyond the scope of her article, would "violate fundamental principals of horizontal equity"); William A. Klein & Eric M. Zolt, Business Form, Limited Liability, and Tax Regimes: Lurching Toward A Coherent Outcome?, 66 U. COLO. L. REV. 1001, 1008 (1995) ("Although the tax issue and the limited liability issue historically have been intertwined, we find no good reason why that should be."). Although no commentator has yet advocated an extension of the entity tax based on limited liability, proposals have been made that focus on a classification line other than limited liability. See Hamill, supra, at 434 n.196.
15. Id. at 54 ("Although a classification line based on limited liability has . . . certain appeal, on balance, Proposal 2-1 does not recommend development of such a line."). Others have similarly argued against developing a classification rule based on limited liability. See H. Lawrence Fox, The Maximum Scope of the Association Concept, 25 TAX L. REV. 311, 364 (1970) (preferring to ignore limited liability in the classification of entities); Susan Pace Hamill, The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question, 95 MICH. L. REV. 393, 431 (1996) (noting that a limited liability-based corporate tax, although beyond the scope of her article, would "violate fundamental principals of horizontal equity"); William A. Klein & Eric M. Zolt, Business Form, Limited Liability, and Tax Regimes: Lurching Toward A Coherent Outcome?, 66 U. COLO. L. REV. 1001, 1008 (1995) ("Although the tax issue and the limited liability issue historically have been intertwined, we find no good reason why that should be."). Although no commentator has yet advocated an extension of the entity tax based on limited liability, proposals have been made that focus on a classification line other than limited liability. See Hamill, supra, at 434 n.196.
16. Id. at 54 ("Although a classification line based on limited liability has . . . certain appeal, on balance, Proposal 2-1 does not recommend development of such a line."). Others have similarly argued against developing a classification rule based on limited liability. See H. Lawrence Fox, The Maximum Scope of the Association Concept, 25 TAX L. REV. 311, 364 (1970) (preferring to ignore limited liability in the classification of entities); Susan Pace Hamill, The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question, 95 MICH. L. REV. 393, 431 (1996) (noting that a limited liability-based corporate tax, although beyond the scope of her article, would "violate fundamental principals of horizontal equity"); William A. Klein & Eric M. Zolt, Business Form, Limited Liability, and Tax Regimes: Lurching Toward A Coherent Outcome?, 66 U. COLO. L. REV. 1001, 1008 (1995) ("Although the tax issue and the limited liability issue historically have been intertwined, we find no good reason why that should be."). Although no commentator has yet advocated an extension of the entity tax based on limited liability, proposals have been made that focus on a classification line other than limited liability. See Hamill, supra, at 434 n.196.
17. Id. at 54 ("Although a classification line based on limited liability has . . . certain appeal, on balance, Proposal 2-1 does not recommend development of such a line."). Others have similarly argued against developing a classification rule based on limited liability. See H. Lawrence Fox, The Maximum Scope of the Association Concept, 25 TAX L. REV. 311, 364 (1970) (preferring to ignore limited liability in the classification of entities); Susan Pace Hamill, The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question, 95 MICH. L. REV. 393, 431 (1996) (noting that a limited liability-based corporate tax, although beyond the scope of her article, would "violate fundamental principals of horizontal equity"); William A. Klein & Eric M. Zolt, Business Form, Limited Liability, and Tax Regimes: Lurching Toward A Coherent Outcome?, 66 U. COLO. L. REV. 1001, 1008 (1995) ("Although the tax issue and the limited liability issue historically have been intertwined, we find no good reason why that should be."). Although no commentator has yet advocated an extension of the entity tax based on limited liability, proposals have been made that focus on a classification line other than limited liability. See Hamill, supra, at 434 n.196.
18. REPORTERS' STUDY, supra note 1, at 55.
19. Id.
20. Id. at 56.
21. Id. at 55-56. Consider, for example, the difference between a partner in a general partnership whose activities are financed by nonrecourse debt and a shareholder in a corporation who has personally guaranteed the company's debt.
22. Id. at 55. A related objection was that the amount of an entity tax could not, in any event, properly reflect the value of the benefit of limited liability. Id. (providing "an extra tax burden (in the form, for example, of an entity-level tax in addition to one imposed on the owners) would not, in any event, measure properly the value of the benefit obtained"). See also Thomas D. Griffith, Integration of the Corporate and Personal Income Taxes and the ALI Proposals, 23 SANTA CLARA L. REV. 715, 723 (1983) ("The United States tax system seldom levies taxes on a benefits-received basis.").
23. Id. at 55. A related objection was that the amount of an entity tax could not, in any event, properly reflect the value of the benefit of limited liability. Id. (providing "an extra tax burden (in the form, for example, of an entity-level tax in addition to one imposed on the owners) would not, in any event, measure properly the value of the benefit obtained"). See also Thomas D. Griffith, Integration of the Corporate and Personal Income Taxes and the ALI Proposals, 23 SANTA CLARA L. REV. 715, 723 (1983) ("The United States tax system seldom levies taxes on a benefits-received basis.").
24. Id. at 55. A related objection was that the amount of an entity tax could not, in any event, properly reflect the value of the benefit of limited liability. Id. (providing "an extra tax burden (in the form, for example, of an entity-level tax in addition to one imposed on the owners) would not, in any event, measure properly the value of the benefit obtained"). See also Thomas D. Griffith, Integration of the Corporate and Personal Income Taxes and the ALI Proposals, 23 SANTA CLARA L. REV. 715, 723 (1983) ("The United States tax system seldom levies taxes on a benefits-received basis.").
25. See infra notes 18-25 and accompanying text.
26. For a discussion of early revenue laws and regulations linking tax classification and limited liability, see infra notes 18-41 and accompanying text.
27. For a discussion of the role of limited liability under the "Kintner regulations" and how the regulations were unsupported in many details by earlier cases and regulations, see infra notes 42-73 and accompanying text.
28. For a discussion of the "check-the-box" entity classification system, under which limited liability became irrelevant in the taxation of domestic entities, see infra notes 74-77 and accompanying text.
29. Act of Aug. 27, 1894, ch. 349, 28 Stat. 509. For a history of early revenue laws, see Patrick E. Hobbs, Entity Classification: The One Hundred-Year Debate, 44 CATH. U. L. REV. 437, 441-59 (1995); Marjorie E. Kornhauser, Corporate Regulation and the Origins of the Corporate Income Tax, 66 IND. L.J. 53 (1990); Stephen B. Scallen, Federal Income Taxation of Professional Associations and Corporations, 49 MINN. L. REV. 603, 610-13 (1965). Corporations were not subject to the first federal income tax, which was enacted in 1861. Act of Aug. 5, 1861, ch. 45, 12 Stat. 292. The 1861 Act imposed a tax on "every person residing in the United States." Act of Aug. 5, 1861, ch. 45, § 49, 12 Stat. 309 (emphasis added). The term "person" apparently meant that individuals were taxed, but not corporations. See Scallen, supra, at 610 n.38.
30. Act of Aug. 27, 1894, ch. 349, 28 Stat. 509. For a history of early revenue laws, see Patrick E. Hobbs, Entity Classification: The One Hundred-Year Debate, 44 CATH. U. L. REV. 437, 441-59 (1995); Marjorie E. Kornhauser, Corporate Regulation and the Origins of the Corporate Income Tax, 66 IND. L.J. 53 (1990); Stephen B. Scallen, Federal Income Taxation of Professional Associations and Corporations, 49 MINN. L. REV. 603, 610-13 (1965). Corporations were not subject to the first federal income tax, which was enacted in 1861. Act of Aug. 5, 1861, ch. 45, 12 Stat. 292. The 1861 Act imposed a tax on "every person residing in the United States." Act of Aug. 5, 1861, ch. 45, § 49, 12 Stat. 309 (emphasis added). The term "person" apparently meant that individuals were taxed, but not corporations. See Scallen, supra, at 610 n.38.
31. Act of Aug. 27, 1894, ch. 349, 28 Stat. 509. For a history of early revenue laws, see Patrick E. Hobbs, Entity Classification: The One Hundred-Year Debate, 44 CATH. U. L. REV. 437, 441-59 (1995); Marjorie E. Kornhauser, Corporate Regulation and the Origins of the Corporate Income Tax, 66 IND. L.J. 53 (1990); Stephen B. Scallen, Federal Income Taxation of Professional Associations and Corporations, 49 MINN. L. REV. 603, 610-13 (1965). Corporations were not subject to the first federal income tax, which was enacted in 1861. Act of Aug. 5, 1861, ch. 45, 12 Stat. 292. The 1861 Act imposed a tax on "every person residing in the United States." Act of Aug. 5, 1861, ch. 45, § 49, 12 Stat. 309 (emphasis added). The term "person" apparently meant that individuals were taxed, but not corporations. See Scallen, supra, at 610 n.38.
32. Act of Aug. 27, 1894, ch. 349, 28 Stat. 509. For a history of early revenue laws, see Patrick E. Hobbs, Entity Classification: The One Hundred-Year Debate, 44 CATH. U. L. REV. 437, 441-59 (1995); Marjorie E. Kornhauser, Corporate Regulation and the Origins of the Corporate Income Tax, 66 IND. L.J. 53 (1990); Stephen B. Scallen, Federal Income Taxation of Professional Associations and Corporations, 49 MINN. L. REV. 603, 610-13 (1965). Corporations were not subject to the first federal income tax, which was enacted in 1861. Act of Aug. 5, 1861, ch. 45, 12 Stat. 292. The 1861 Act imposed a tax on "every person residing in the United States." Act of Aug. 5, 1861, ch. 45, § 49, 12 Stat. 309 (emphasis added). The term "person" apparently meant that individuals were taxed, but not corporations. See Scallen, supra, at 610 n.38.
33. The 1894 Act imposed a two percent income tax on "all other corporations, companies, or associations doing business for profit in the United States, no matter how created or organized, but not including partnerships." Act of Aug. 27, 1894, ch. 349, § 32, 28 Stat. 556. As individuals received an exclusion for dividends paid, corporate income was not subject to double taxation. Id. ch. 349, § 28, 28 Stat. 553.
34. 26 CONG. REC. 1594-95 (1894) (proposed amendment § 59), discussed in Hobbs, supra note 18, at 445 n.37. As originally introduced, the bill was limited to organizations that have limited liability. The limited liability language was deleted, however, without comment. See Hobbs, supra note 18, at 445 n.37.
35. 26 CONG. REC. 1594-95 (1894) (proposed amendment § 59), discussed in Hobbs, supra note 18, at 445 n.37. As originally introduced, the bill was limited to organizations that have limited liability. The limited liability language was deleted, however, without comment. See Hobbs, supra note 18, at 445 n.37.
36. 26 CONG. REC. 1594-95 (1894) (proposed amendment § 59), discussed in Hobbs, supra note 18, at 445 n.37. As originally introduced, the bill was limited to organizations that have limited liability. The limited liability language was deleted, however, without comment. See Hobbs, supra note 18, at 445 n.37.
37. Kornhauser, supra note 18, at 125 n.125 (quoting William L. Wilson, The Income Tax on Corporations, 158 N. AM. REV. 1, 7 (1894); 26 CONG. REC. 6831 (June 26, 1894)).
38. Kornhauser, supra note 18, at 125 n.125 (quoting William L. Wilson, The Income Tax on Corporations, 158 N. AM. REV. 1, 7 (1894); 26 CONG. REC. 6831 (June 26, 1894)).
39. Kornhauser, supra note 18, at 125 n.125 (quoting William L. Wilson, The Income Tax on Corporations, 158 N. AM. REV. 1, 7 (1894); 26 CONG. REC. 6831 (June 26, 1894)).
40. 26 CONG. REC. 6867 (1894) (statements of Sen. Vest).
41. 26 CONG. REC. 6863 (1894) (statements of Sen. Hoar).
42. See Scallen, supra note 18, at 613 ("Over and over again legislators recognized that corporations were formed to provide limited liability . . . although apparently no one mentioned transferability of interests or centralization of management.").
43. The Supreme Court held that the 1894 tax was a direct tax on property, not apportioned among the states in proportion to the population as required by the U.S. Constitution. See Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895), vacating 157 U.S. 429 (1895).
44. The tax was imposed on the net income of "every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares." Act of Aug. 5, 1909, ch. 6, § 38, 36 Stat. 112.
45. 44 CONG. REC. 3344 (June 16, 1909), discussed in Kornhauser, supra note 18, at 100.
46. 44 CONG. REC. 3344 (June 16, 1909), discussed in Kornhauser, supra note 18, at 100.
47. Joseph Nocera, The Corporation Comes Home, FORTUNE, Mar. 6, 2000, at F-74. See also Paul Halpern et al., An Economic Analysis of Limited Liability in Corporation Law, 30 U. TORONTO L.J. 117 (1980) (discussing the merits of the doctrine of limited liability). But see Joseph A. Snoe, Entity Classification Under the Internal Revenue Code: A Proposal to Replace the Resemblance Model, 15 J. CORP. L. 647, 708-09 (1990) (suggesting "the importance of limited liability may be overstated").
48. Joseph Nocera, The Corporation Comes Home, FORTUNE, Mar. 6, 2000, at F-74. See also Paul Halpern et al., An Economic Analysis of Limited Liability in Corporation Law, 30 U. TORONTO L.J. 117 (1980) (discussing the merits of the doctrine of limited liability). But see Joseph A. Snoe, Entity Classification Under the Internal Revenue Code: A Proposal to Replace the Resemblance Model, 15 J. CORP. L. 647, 708-09 (1990) (suggesting "the importance of limited liability may be overstated").
49. Joseph Nocera, The Corporation Comes Home, FORTUNE, Mar. 6, 2000, at F-74. See also Paul Halpern et al., An Economic Analysis of Limited Liability in Corporation Law, 30 U. TORONTO L.J. 117 (1980) (discussing the merits of the doctrine of limited liability). But see Joseph A. Snoe, Entity Classification Under the Internal Revenue Code: A Proposal to Replace the Resemblance Model, 15 J. CORP. L. 647, 708-09 (1990) (suggesting "the importance of limited liability may be overstated").
50. See Kose John et al., Corporate Limited Liability and the Design of Corporate Taxation, N.Y.U. WORKING PAPER SERIES 1,5 (noting "limited liability has been an important feature in the evolution of the modern corporation" and that "the provision of limited liability was an important determinant of the growth of the manufacturing sector in the late 1800s and early 1900s"); Nocera, supra note 28, at F-74 (noting limited liability "erased some of the uncertainty then surrounding the new manufacturing industries that were cropping up in America, for it allowed investors to feel that the risks they were taking with their money were acceptable ones"); P.L. Payne, The Emergence of the Large-Scale Company in Great Britain, 1870-1914, 21 ECON. HIST. REV. 519, 520 (1967) (noting limited liability "removed an important limitation on the growth and ultimate size of the business firm when it destroyed the connection between the extent and nature of a firm's operations and the personal financial position of the owners"). As discussed in Part III, infra, limited liability gives corporations and other limited liability entities a competitive advantage in the market for capital. Limited liability decreases the need for investors to monitor managers since less is at risk for them and, accordingly, reduces agency costs. Limited liability encourages diversified, more liquid investment, allowing corporations to receive large amounts of capital. See infra notes 129-40 and accompanying text.
51. See Kose John et al., Corporate Limited Liability and the Design of Corporate Taxation, N.Y.U. WORKING PAPER SERIES 1,5 (noting "limited liability has been an important feature in the evolution of the modern corporation" and that "the provision of limited liability was an important determinant of the growth of the manufacturing sector in the late 1800s and early 1900s"); Nocera, supra note 28, at F-74 (noting limited liability "erased some of the uncertainty then surrounding the new manufacturing industries that were cropping up in America, for it allowed investors to feel that the risks they were taking with their money were acceptable ones"); P.L. Payne, The Emergence of the Large-Scale Company in Great Britain, 1870-1914, 21 ECON. HIST. REV. 519, 520 (1967) (noting limited liability "removed an important limitation on the growth and ultimate size of the business firm when it destroyed the connection between the extent and nature of a firm's operations and the personal financial position of the owners"). As discussed in Part III, infra, limited liability gives corporations and other limited liability entities a competitive advantage in the market for capital. Limited liability decreases the need for investors to monitor managers since less is at risk for them and, accordingly, reduces agency costs. Limited liability encourages diversified, more liquid investment, allowing corporations to receive large amounts of capital. See infra notes 129-40 and accompanying text.
52. See Kose John et al., Corporate Limited Liability and the Design of Corporate Taxation, N.Y.U. WORKING PAPER SERIES 1,5 (noting "limited liability has been an important feature in the evolution of the modern corporation" and that "the provision of limited liability was an important determinant of the growth of the manufacturing sector in the late 1800s and early 1900s"); Nocera, supra note 28, at F-74 (noting limited liability "erased some of the uncertainty then surrounding the new manufacturing industries that were cropping up in America, for it allowed investors to feel that the risks they were taking with their money were acceptable ones"); P.L. Payne, The Emergence of the Large-Scale Company in Great Britain, 1870-1914, 21 ECON. HIST. REV. 519, 520 (1967) (noting limited liability "removed an important limitation on the growth and ultimate size of the business firm when it destroyed the connection between the extent and nature of a firm's operations and the personal financial position of the owners"). As discussed in Part III, infra, limited liability gives corporations and other limited liability entities a competitive advantage in the market for capital. Limited liability decreases the need for investors to monitor managers since less is at risk for them and, accordingly, reduces agency costs. Limited liability encourages diversified, more liquid investment, allowing corporations to receive large amounts of capital. See infra notes 129-40 and accompanying text.
53. See, e.g., Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573, 591 (1986) ("The increase in the number of corporations did not occur without arousing considerable hostility."); William A. Klein, Income Taxation and Legal Entities, 20 UCLA L. REV. 13, 69-70 (1972) (noting the "public's . . . lingering image of the corporation as the embodiment of evil . . . that of a small group of wealthy, heartless individuals endowed with enormous economic power and determined to increase their riches with callous disregard for the interests of all other people"); John et al., supra note 29, at 6 (noting concerns over "the increase in industrial concentration and monopoly power that accompanied the development of the corporation"); Kornhauser, supra note 18, at 135 (noting strong "hostility to large corporations as centers of power and wealth").
54. See, e.g., Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573, 591 (1986) ("The increase in the number of corporations did not occur without arousing considerable hostility."); William A. Klein, Income Taxation and Legal Entities, 20 UCLA L. REV. 13, 69-70 (1972) (noting the "public's . . . lingering image of the corporation as the embodiment of evil . . . that of a small group of wealthy, heartless individuals endowed with enormous economic power and determined to increase their riches with callous disregard for the interests of all other people"); John et al., supra note 29, at 6 (noting concerns over "the increase in industrial concentration and monopoly power that accompanied the development of the corporation"); Kornhauser, supra note 18, at 135 (noting strong "hostility to large corporations as centers of power and wealth").
55. See, e.g., Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573, 591 (1986) ("The increase in the number of corporations did not occur without arousing considerable hostility."); William A. Klein, Income Taxation and Legal Entities, 20 UCLA L. REV. 13, 69-70 (1972) (noting the "public's . . . lingering image of the corporation as the embodiment of evil . . . that of a small group of wealthy, heartless individuals endowed with enormous economic power and determined to increase their riches with callous disregard for the interests of all other people"); John et al., supra note 29, at 6 (noting concerns over "the increase in industrial concentration and monopoly power that accompanied the development of the corporation"); Kornhauser, supra note 18, at 135 (noting strong "hostility to large corporations as centers of power and wealth").
56. See, e.g., Phillip I. Blumberg, Limited Liability and Corporate Groups, 11 J. CORP. L. 573, 591 (1986) ("The increase in the number of corporations did not occur without arousing considerable hostility."); William A. Klein, Income Taxation and Legal Entities, 20 UCLA L. REV. 13, 69-70 (1972) (noting the "public's . . . lingering image of the corporation as the embodiment of evil . . . that of a small group of wealthy, heartless individuals endowed with enormous economic power and determined to increase their riches with callous disregard for the interests of all other people"); John et al., supra note 29, at 6 (noting concerns over "the increase in industrial concentration and monopoly power that accompanied the development of the corporation"); Kornhauser, supra note 18, at 135 (noting strong "hostility to large corporations as centers of power and wealth").
57. Professor Kornhauser has suggested that the 1909 corporate tax was "a legitimate, though moderate, attempt to impose some regulation on corporations," and that it "achieved its regulatory purposes through its reporting and publicity features." Kornhauser, supra note 18, at 134. Professor Hobbs has described the 1909 tax as the "result of political necessity, not of any theoretical calling." Hobbs, supra note 18, at 518.
58. Professor Kornhauser has suggested that the 1909 corporate tax was "a legitimate, though moderate, attempt to impose some regulation on corporations," and that it "achieved its regulatory purposes through its reporting and publicity features." Kornhauser, supra note 18, at 134. Professor Hobbs has described the 1909 tax as the "result of political necessity, not of any theoretical calling." Hobbs, supra note 18, at 518.
59. 44 CONG. REC. 4007 (July 1, 1909) (statement of Sen. Root), discussed in Kornhauser, supra note 18, at 115 & n.276.
60. 44 CONG. REC. 4007 (July 1, 1909) (statement of Sen. Root), discussed in Kornhauser, supra note 18, at 115 & n.276.
61. Kornhauser, supra note 18, at 115.
62. See Flint v. Stone Tracy Co., 220 U.S. 107, 177 (1911). The Supreme Court held that The tax is imposed not upon the franchises of the corporation, irrespective of their use in business, nor upon the property of the corporation, but upon the doing of corporate or insurance business, and with respect to the carrying on thereof . . .; that is, when imposed in this manner it is a tax upon the doing of business, with the advantages which inhere in the peculiarities of corporate or joint stock organization of the character described. Id. at 145-46. See JOSEPH A. PECHMAN, FEDERAL TAX POLICY 135-36 (5th ed. 1987) (noting that the "Supreme Court's acceptance of the constitutionality of the corporation income tax was based on the view that the corporation owes its life, rights, and power to the government," but then suggesting that "[f]ew experts accept this rationale for a substantial tax on corporate profits").
63. The Sixteenth Amendment, adopted in 1913, provides: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." U.S. CONST. amend. XVI. The Sixteenth Amendment set the stage for the Revenue Act of 1913.
64. Rev. Act of 1913, ch. 16, 38 Stat. 114. The Revenue Act of 1913 imposed a tax upon the net income of "every corporation, joint stock company or association no matter how organized, not including partnerships." By mentioning "associations," Congress intended to impose entity taxation on more than state law corporations. Congress left to the Treasury the formidable task of promulgating regulations to determine which unincorporated entities would be treated as associations and subject to entity taxation.
65. For a discussion of the early Treasury regulations, see Scallen, supra note 18, at 653-66.
66. Regulations under the 1913 Act stated: "Limited partnerships are held to be corporations within the meaning of this act and these regulations, and in their organized capacity are subject to the income tax as corporations." Treas. Reg. 33, art. 86 (1914). The regulations promulgated under the Revenue Acts of 1916 and 1917 continued to tax limited partnerships as corporations with "limited liability still the controlling characteristic." Scallen, supra note 18, at 655. Those regulations provided: Limited partnerships - that is partnerships having one or more special partners who may share in the profits of the firm but whose liability for the debts of the company is limited to the amount of capital invested by such special partner or partners - are held to be associations within the meaning of the title, and as such are required to make returns of annual net income and pay any tax thereby shown to be due. The income received by the members out of the earnings of such limited partnerships will be treated in their personal returns in the same manner as if it were dividends on the stock of corporations and will be subject to the additional or surtaxes in the hands of the recipient. Id at 655 n.266 (quoting Treas. Reg. 33, art. 62 (rev. 1918)) (emphasis added).
67. The regulations under the Revenue Act of 1918 modified the classification of limited partnerships by creating two categories: "limited partnership as corporation" and "limited partnership as partnership." Treas. Reg. 45, arts. 1505, 1508 (1920). The regulations promulgated under the Revenue Acts of 1924, 1928, 1932, and 1934 continued the "limited partnership as corporation" and "limited partnership as partnership" provisions. Treas. Reg. 65, art. 1506 (1924); Treas. Reg. 74, arts. 1315-16 (1929); Treas. Reg. 77, arts. 1315-16 (1933); Treas. Reg. 86, arts. 801-5 to -6 (1935).
68. Scallen, supra note 18, at 664 (discussing Treas. Reg. 86, art. 801-05). The regulations provided: Limited partnerships of the type of partnerships with limited liability . . . are only nominally partnerships. Such so-called partnerships, offering opportunity for limiting the liability of all the members, providing for the transferability of partnership shares, or having other material characteristics of corporate form, must make returns of income and pay the tax as corporations. Treas. Reg. 86, art. 801-05 (1933).
69. See, e.g., Treas. Reg. 65, art. 1506 (1924) ("In all doubtful cases limited partnerships will be treated as corporations unless they submit satisfactory proof that they are not in effect so organized."); Treas. Reg. 74, arts. 1315-16 (1929); Treas. Reg. 77, arts. 1315-16 (1933); Treas. Reg. 86, arts. 801-5 to -6 (1935).
70. 296 U.S. 344 (1935).
71. Interests in the trust were evidenced by share certificates. Management was vested in the trustees. The trust would continue upon the death of a beneficiary or trustee. Id. at 347-48.
72. Id. at 359. The Court addressed the question: "what, then, are the salient features of a trust - when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains - which may be regarded as making it analogous to a corporate organization?" Id.
73. Id. at 360.
74. See Scallen, supra note 18, at 633 (observing that the Court "had no occasion to comment upon the relative weight of each point in its decision").
75. It was not clear whether the trust had actual, or just asserted, limited liability. See id. at 635-36 (noting that business trusts "will not provide limited liability for the beneficial owners when the owners control the selection or exercise of the duties of the trustee").
76. See id. at 637 (suggesting limited liability was "a slender reed supporting classification of business trusts generally as associations").
77. For instance, a year later in Pelton v. Commissioner, 82 F.2d 473 (5th Cir. 1936), the Seventh Circuit held that a medical clinic was subject to entity taxation despite "what appears to be no more than an assertion of limited liability." Scallen, supra note 18, at 638. In the early Treasury regulations, most organizations, except for the pure partnership, were subject to entity taxation with limited liability being a controlling factor. See supra notes 37-41 and accompanying text. After Morrissey, however, the regulations were amended, seemingly weakening the significance of that benefit. Consider the treatment of limited partnerships. Under the early regulations, limited liability was "the most significant, perhaps only important, factor" in taxing limited partnerships as corporations. See Scallen, supra note 18, at 664. Under later amended regulations, the relevance of limited liability diminished while other corporate characteristics seemed to take on increased relevance. For example, under the 1940 regulations, the limited partnership provisions provided: If the organization is not interrupted by the death of a general partner or by a change in the ownership of his participating interest, and if the management of its affairs is centralized in one or more persons acting in a representative capacity, it is taxable as a corporation. For want of these essential characteristics, a limited partnership is to be considered as an ordinary partnership notwithstanding other characteristics conferred upon it by local law. Treas. Reg. § 19.3797-5 (1940). See also Treas. Reg. 111, § 29.3797-5 (1941).
78. For instance, a year later in Pelton v. Commissioner, 82 F.2d 473 (5th Cir. 1936), the Seventh Circuit held that a medical clinic was subject to entity taxation despite "what appears to be no more than an assertion of limited liability." Scallen, supra note 18, at 638. In the early Treasury regulations, most organizations, except for the pure partnership, were subject to entity taxation with limited liability being a controlling factor. See supra notes 37-41 and accompanying text. After Morrissey, however, the regulations were amended, seemingly weakening the significance of that benefit. Consider the treatment of limited partnerships. Under the early regulations, limited liability was "the most significant, perhaps only important, factor" in taxing limited partnerships as corporations. See Scallen, supra note 18, at 664. Under later amended regulations, the relevance of limited liability diminished while other corporate characteristics seemed to take on increased relevance. For example, under the 1940 regulations, the limited partnership provisions provided: If the organization is not interrupted by the death of a general partner or by a change in the ownership of his participating interest, and if the management of its affairs is centralized in one or more persons acting in a representative capacity, it is taxable as a corporation. For want of these essential characteristics, a limited partnership is to be considered as an ordinary partnership notwithstanding other characteristics conferred upon it by local law. Treas. Reg. § 19.3797-5 (1940). See also Treas. Reg. 111, § 29.3797-5 (1941).
79. 216 F.2d 418 (9th Cir. 1954), aff'g 107 F. Supp. 976 (D. Mont. 1952).
80. Under the "Articles of Association," the association would not dissolve upon the death or retirement of a doctor. 216 F.2d at 420. Management was vested in an executive committee and beneficial interests in the association were not assignable.
81. Id at 428.
82. The court noted that under the Articles of Association, "[o]nly the members were to be liable to third parties for professional misconduct." Id. at 420. See also Note, Professional Corporations and Associations, 75 HARV. L. REV. 776, 778 (1962) (interpreting this language to mean that "no member would be liable for another's professional misconduct"); Scallen, supra note 18, at 639 (suggesting that the language meant that "only the member committing misconduct was to be liable for professional misconduct").
83. The court noted that under the Articles of Association, "[o]nly the members were to be liable to third parties for professional misconduct." Id. at 420. See also Note, Professional Corporations and Associations, 75 HARV. L. REV. 776, 778 (1962) (interpreting this language to mean that "no member would be liable for another's professional misconduct"); Scallen, supra note 18, at 639 (suggesting that the language meant that "only the member committing misconduct was to be liable for professional misconduct").
84. Kinter, 216 F.2d at 424.
85. See Scallen, supra note 18, at 639. Limited liability was apparently not found by the court in Kintner, despite asserted limited liability. Compare this decision with Morrissey, in which limited liability was found despite the fact it was unclear whether the business trust actually offered such protection to beneficial owners. See supra notes 42-48 and accompanying text. Also compare Kintner with the decision in Pelton, in which limited liability was found despite mere assertion of that benefit. See supra note 49.
86. Former Treas. Reg. §§ 301.7701-1 to -11 (1960 amended 1996). These new classification regulations were adopted by the Treasury in 1960. They were known as the "Kintner regulations," as they were in response to the Ninth Circuit's decision in Kintner. Actually, the 1935 Supreme Court decision in Morrissey was the foundation on which the Kintner regulations were built.
87. Id. § 301.7701-2 (listing the major corporate characteristics and then stating that an entity "will be treated as an association if the corporate characteristics are such that the organization more nearly resembles a corporation than a partnership or trust").
88. This was made clear in Larson v. Commissioner, 66 T.C. 159 (1976). In Larson, the Tax Court noted that if it were permitted to weigh each factor according to the degree of corporate similarity it provided, the court would have been inclined to find that the limited partnerships at issue were taxable as corporations. Id. at 185 ("Were not the regulations' thumb upon the scales, it appears to us that the practical ... limited liability of both entities would decisively tip the balance in respondent's favor.").
89. Former Treas. Reg. § 301.7701-2(d)(1) (1960 amended 1996).
90. Id. § 301.7701-2(d)(2).
91. Note, Tax Classification of Limited Partnerships, 90 HARV.L.REV. 745, 753 & n.74 (1977) ("As the court pointed out in Zuckman, if the general partner is not a dummy then it is personally liable by definition, and if it is a dummy the limited partners become personally liable.") (citing Zuckman v. United States, 524 F.2d 729, 741 (Ct. Cl. 1975)). A general partner generally was considered a "dummy" if it was merely acting as the agent of the limited partners.
92. Note, supra note 61, at 753.
93. See supra notes 18-34 and accompanying text.
94. See supra notes 35-41 and accompanying text.
95. The Kintner regulations were criticized on practical grounds as well. Under the Kintner classification test, clients and tax practitioners spent considerable amounts of time and resources in ensuring desirable tax classification, despite the fact that partnership classification was usually a foregone conclusion. On the other side, the Service spent considerable amounts of time and resources interpreting each factor and issuing rulings to those seeking assurance as to classification. For criticisms of the Kintner approach, see William B. Brannan, Lingering Partnership Classification Issues (Just When You Thought It Was Safe to Go Back Into The Water), 1 FLA. TAX REV. 197, 261 (1992); Hobbs, supra note 18, at 440; Snoe, supra note 28, at 652.
96. The Kintner regulations were criticized on practical grounds as well. Under the Kintner classification test, clients and tax practitioners spent considerable amounts of time and resources in ensuring desirable tax classification, despite the fact that partnership classification was usually a foregone conclusion. On the other side, the Service spent considerable amounts of time and resources interpreting each factor and issuing rulings to those seeking assurance as to classification. For criticisms of the Kintner approach, see William B. Brannan, Lingering Partnership Classification Issues (Just When You Thought It Was Safe to Go Back Into The Water), 1 FLA. TAX REV. 197, 261 (1992); Hobbs, supra note 18, at 440; Snoe, supra note 28, at 652.
97. The Kintner regulations were criticized on practical grounds as well. Under the Kintner classification test, clients and tax practitioners spent considerable amounts of time and resources in ensuring desirable tax classification, despite the fact that partnership classification was usually a foregone conclusion. On the other side, the Service spent considerable amounts of time and resources interpreting each factor and issuing rulings to those seeking assurance as to classification. For criticisms of the Kintner approach, see William B. Brannan, Lingering Partnership Classification Issues (Just When You Thought It Was Safe to Go Back Into The Water), 1 FLA. TAX REV. 197, 261 (1992); Hobbs, supra note 18, at 440; Snoe, supra note 28, at 652.
98. See, e.g., Daniel S. Goldberg, The Tax Treatment of Limited Liability Companies: Law in Search of Policy, 50 BUS. LAW. 995, 1006 (1995) (arguing that the four characteristic classification test "is a failure because it does not express any policy objective for making the classification determination in the first place"); Milton B. Hyman & Peter M. Hoffman, Partnerships and "Associations": A Policy Critique of the Morrissey Regulations, 3 J. REAL EST. TAX'N 377, 384 (1976) (arguing the Kintner approach told "us nothing about the federal tax policies, if any, underlying the tax distinctions between 'associations' and 'partnerships'"); Klein & Zolt, supra note 8, at 1010 (arguing that "any tax test that seeks to distinguish between entities based on nontax characteristics, without regard for tax objectives, will be arbitrary"); George K. Yin, The Taxation of Private Business Enterprises: Some Policy Questions Stimulated by "Check-the-Box" Regulations, 51 SMU L. REV. 125, 138 (1997) (arguing that "relevant tax policy considerations" rather than state law differences among businesses should determine how an entity should be taxed); Note, supra note 61, at 747 (arguing that courts and the Service have "faced the task of formulating standards for distinguishing among businesses without knowing the precise goals their line drawing is to serve").
99. See, e.g., Daniel S. Goldberg, The Tax Treatment of Limited Liability Companies: Law in Search of Policy, 50 BUS. LAW. 995, 1006 (1995) (arguing that the four characteristic classification test "is a failure because it does not express any policy objective for making the classification determination in the first place"); Milton B. Hyman & Peter M. Hoffman, Partnerships and "Associations": A Policy Critique of the Morrissey Regulations, 3 J. REAL EST. TAX'N 377, 384 (1976) (arguing the Kintner approach told "us nothing about the federal tax policies, if any, underlying the tax distinctions between 'associations' and 'partnerships'"); Klein & Zolt, supra note 8, at 1010 (arguing that "any tax test that seeks to distinguish between entities based on nontax characteristics, without regard for tax objectives, will be arbitrary"); George K. Yin, The Taxation of Private Business Enterprises: Some Policy Questions Stimulated by "Check-the-Box" Regulations, 51 SMU L. REV. 125, 138 (1997) (arguing that "relevant tax policy considerations" rather than state law differences among businesses should determine how an entity should be taxed); Note, supra note 61, at 747 (arguing that courts and the Service have "faced the task of formulating standards for distinguishing among businesses without knowing the precise goals their line drawing is to serve").
100. See, e.g., Daniel S. Goldberg, The Tax Treatment of Limited Liability Companies: Law in Search of Policy, 50 BUS. LAW. 995, 1006 (1995) (arguing that the four characteristic classification test "is a failure because it does not express any policy objective for making the classification determination in the first place"); Milton B. Hyman & Peter M. Hoffman, Partnerships and "Associations": A Policy Critique of the Morrissey Regulations, 3 J. REAL EST. TAX'N 377, 384 (1976) (arguing the Kintner approach told "us nothing about the federal tax policies, if any, underlying the tax distinctions between 'associations' and 'partnerships'"); Klein & Zolt, supra note 8, at 1010 (arguing that "any tax test that seeks to distinguish between entities based on nontax characteristics, without regard for tax objectives, will be arbitrary"); George K. Yin, The Taxation of Private Business Enterprises: Some Policy Questions Stimulated by "Check-the-Box" Regulations, 51 SMU L. REV. 125, 138 (1997) (arguing that "relevant tax policy considerations" rather than state law differences among businesses should determine how an entity should be taxed); Note, supra note 61, at 747 (arguing that courts and the Service have "faced the task of formulating standards for distinguishing among businesses without knowing the precise goals their line drawing is to serve").
101. See, e.g., Daniel S. Goldberg, The Tax Treatment of Limited Liability Companies: Law in Search of Policy, 50 BUS. LAW. 995, 1006 (1995) (arguing that the four characteristic classification test "is a failure because it does not express any policy objective for making the classification determination in the first place"); Milton B. Hyman & Peter M. Hoffman, Partnerships and "Associations": A Policy Critique of the Morrissey Regulations, 3 J. REAL EST. TAX'N 377, 384 (1976) (arguing the Kintner approach told "us nothing about the federal tax policies, if any, underlying the tax distinctions between 'associations' and 'partnerships'"); Klein & Zolt, supra note 8, at 1010 (arguing that "any tax test that seeks to distinguish between entities based on nontax characteristics, without regard for tax objectives, will be arbitrary"); George K. Yin, The Taxation of Private Business Enterprises: Some Policy Questions Stimulated by "Check-the-Box" Regulations, 51 SMU L. REV. 125, 138 (1997) (arguing that "relevant tax policy considerations" rather than state law differences among businesses should determine how an entity should be taxed); Note, supra note 61, at 747 (arguing that courts and the Service have "faced the task of formulating standards for distinguishing among businesses without knowing the precise goals their line drawing is to serve").
102. Goldberg, supra note 66, at 1006. Professor Goldberg argues that "in adopting its four characteristic test, the Treasury made no attempt to accomplish a policy objective other than precluding professional associations from qualifying as corporations and obtaining retirement tax benefits available only to corporations." Id.
103. See Klein & Zolt, supra note 8, at 1003 ("Creative lawyers concocted the limited partnership with a corporate general partner, and the Treasury Department cooperated by accepting the notion that such entities should be taxed as partnerships."). See supra notes 59-62 and accompanying text for the Kintner classification of limited partnerships with corporate general partners.
104. For overviews of the early LLC movement in the United States, see Karen C. Burke, The Uncertain Future of Limited Liability Companies, 12 AM. J. TAX POL'Y 13, 15-23 (1995); Wayne M. Gazur & Neil M. Goff, Assessing the Limited Liability Company, 41 CASE W. RES. L. REV. 387, 389-91 (1991); Hamill, supra note 8, at 399-400 (describing the lobbying efforts behind the first LLC statute); Larry E. Ribstein, The Emergence of the Limited Liability Company, 51 BUS. LAW. 1, 3-4 (1995).
105. For overviews of the early LLC movement in the United States, see Karen C. Burke, The Uncertain Future of Limited Liability Companies, 12 AM. J. TAX POL'Y 13, 15-23 (1995); Wayne M. Gazur & Neil M. Goff, Assessing the Limited Liability Company, 41 CASE W. RES. L. REV. 387, 389-91 (1991); Hamill, supra note 8, at 399-400 (describing the lobbying efforts behind the first LLC statute); Larry E. Ribstein, The Emergence of the Limited Liability Company, 51 BUS. LAW. 1, 3-4 (1995).
106. For overviews of the early LLC movement in the United States, see Karen C. Burke, The Uncertain Future of Limited Liability Companies, 12 AM. J. TAX POL'Y 13, 15-23 (1995); Wayne M. Gazur & Neil M. Goff, Assessing the Limited Liability Company, 41 CASE W. RES. L. REV. 387, 389-91 (1991); Hamill, supra note 8, at 399-400 (describing the lobbying efforts behind the first LLC statute); Larry E. Ribstein, The Emergence of the Limited Liability Company, 51 BUS. LAW. 1, 3-4 (1995).
107. For overviews of the early LLC movement in the United States, see Karen C. Burke, The Uncertain Future of Limited Liability Companies, 12 AM. J. TAX POL'Y 13, 15-23 (1995); Wayne M. Gazur & Neil M. Goff, Assessing the Limited Liability Company, 41 CASE W. RES. L. REV. 387, 389-91 (1991); Hamill, supra note 8, at 399-400 (describing the lobbying efforts behind the first LLC statute); Larry E. Ribstein, The Emergence of the Limited Liability Company, 51 BUS. LAW. 1, 3-4 (1995).
108. In addition to offering flexibility in structure and operations, the LLC most importantly offers limited liability for all members (as in a corporation)
109. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC- related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
110. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC- related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
111. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC- related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
112. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC- related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
113. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC- related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
114. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC-related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
115. In 1988, the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360. After this ruling, which clarified the tax classification of LLCs, states jumped on the LLC bandwagon and enacted LLC statutes. As one commentator described it, "state legislators willingly traded off limited liability in the hope of luring new businesses that might otherwise migrate to states with LLC legislation." Burke, supra note 69, at 21 (offering explanations of the LLC movement); see also Wayne M. Gazur, The Limited Liability Company Experiment: Unlimited Flexibility, Uncertain Role, 58 LAW & CONTEMP. PROBS. 135, 139-43 (1995) (discussing the LLC boom). The LLC is now a universally recognized entity, as all fifty states and the District of Columbia have LLC statutes. It has been described by many commentators as the future entity of choice. See Richard A. Booth, The Limited Liability Company and the Search for a Bright Line Between Corporations and Partnerships, 32 WAKE FOREST L. REV. 79 (1997); Hamill, supra note 8, at 393-94, 405 (noting that the LLC "may in fact become the entity of choice in the future"); Don W. Llewellyn & Anne O'Connell Umbrecht, No Choice of Entity After Check-the-Box, 52 TAX LAW. 1, 2 (1998) (predicting the LLC will be "the entity of choice for the next millennium"). In retrospect, the Service should have consulted with Congress before issuing the 1988 ruling that classified an LLC as a partnership for tax purposes. See, e.g., David M. Benson et al., Is All Calm, Now that Check-the-Box Is Final?, TAX ADVISER, Feb. 1, 1997, at 1, 2 (noting Chief of Staff of the Joint Committee on Taxation argued that "the 1RS should have consulted with Congress before issuing the string of LLC- related rulings"); William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 33 (1995) (suggesting that a full scale review of passthrough entities would have made sense in 1988, perhaps adopting "stop-gap legislation . . . by making Limited Liability Companies meet the Subchapter S standards as a prerequisite to being treated as conduits").
116. As the Service issued rulings on the tax classification of LLCs, it became more flexible in permitting partnership classification. For example, in Revenue Ruling 93-91, the Service held that an LLC lacked free transferability of interest where the LLC required merely a majority to admit an assignee as a member. Rev. Rul. 93-91, 1993-2 C.B. 316. In Revenue Ruling 93-93, the Service held that an LLC lacked continuity of life where the LLC required merely a majority to avoid dissolution. Rev. Rul. 93-93, 1993-2 C.B. 321. As the Service became more liberal in classifying LLCs as partnerships, states responded by creating more flexible LLC statutes.
117. The current check-the-box entity classification system, discussed infra, is more enabling than the Kintner approach was. See infra notes 74-78 and accompanying text. The ALI Reporters' Study goes even further. For example, the Reporters' Study proposes that private firms with over 100 owners have three possible tax choices: a modified Subchapter K, a liberalized Subchapter S, and existing Subchapter C.
118. The check-the-box regulations became effective January 1, 1997. 61 Fed. Reg. 66,584 (1996) (codified at Treas. Reg. § 301.7701-1 to -3). Just as congressional oversight should have occurred in 1988 when the Service first issued a ruling that an LLC could be treated as a partnership for tax purposes, Congress should also have been consulted before the Treasury finalized the check-the-box regulations. In November 1996, it appeared that efforts to simplify entity classification would stall. The Chief of Staff of the Joint Committee on Taxation ("JCT") announced that the JCT planned to conduct a study of the proposed regulations. Congress May Need to Codify Check-the-Box Rules, Kies Says, DAILY TAX REP. (BNA), Nov. 26, 1996, at 228, D5. Although it appeared that the JCT might become involved, any fear of congressional oversight was short lived. A month later the regulations were finalized, effective January 1, 1997. See Benson et al., supra note 71 (noting JCT Chief of Staff comment that "the Treasury Department and the 1RS 'made a mistake' by not consulting more with Congress before going ahead with the new regulations").
119. The check-the-box regulations became effective January 1, 1997. 61 Fed. Reg. 66,584 (1996) (codified at Treas. Reg. § 301.7701-1 to -3). Just as congressional oversight should have occurred in 1988 when the Service first issued a ruling that an LLC could be treated as a partnership for tax purposes, Congress should also have been consulted before the Treasury finalized the check-the-box regulations. In November 1996, it appeared that efforts to simplify entity classification would stall. The Chief of Staff of the Joint Committee on Taxation ("JCT") announced that the JCT planned to conduct a study of the proposed regulations. Congress May Need to Codify Check-the-Box Rules, Kies Says, DAILY TAX REP. (BNA), Nov. 26, 1996, at 228, D5. Although it appeared that the JCT might become involved, any fear of congressional oversight was short lived. A month later the regulations were finalized, effective January 1, 1997. See Benson et al., supra note 71 (noting JCT Chief of Staff comment that "the Treasury Department and the 1RS 'made a mistake' by not consulting more with Congress before going ahead with the new regulations").
120. Under "check-the-box" entity classification regulations, certain business entities, such as state law corporations and publicly traded entities, are automatically classified as corporations for tax purposes (and taxed under Subchapter C unless the entities qualify and elect to be taxed under Subchapter S). Treas. Reg. § 301.7701-2(b). Other business entities, such as limited partnerships and LLCs, with two or more members, can freely elect to be a corporation or partnership for tax purposes. Id. § 301.7701-2(a), -3(a). Single-owner entities can freely elect to be a corporation or to be "disregarded" for tax purposes (e.g., activities are treated in the same manner as a sole proprietorship or as a branch or division in case of a corporate-owned LLC). Id. If these noncorporate entities elect corporate status, they may further elect to be taxed under Subchapter S if they qualify. I.R.C. §§ 1361, 1362; see infra note 83.
121. An important criterion for good tax policy is "administrability." PHILIP D. OLIVER & FRED W. PEEL, JR., TAX POLICY - READINGS AND MATERIALS 2 (Foundation Press 1996). The check-the-box entity classification regulations (1) make it easier and cheaper for taxpayers to achieve partnership classification, something that could have been achieved anyway under the Kintner regulations; (2) eliminate the risk that the Service would challenge desired classification for failing to meet a technical requirement under the Kintner regulations; and (3) "eliminate a vast body of arbitrary technical rules, and permit large amounts of time to be shifted to more productive pursuits." Michael L. Schler, Initial Thoughts on the Proposed "Check-the-Box"Regulations, 71 TAXNOTES 1679, 1681 (1996). See also Hugh M. Dougan et al., "Check the Box" - Looking Under the Lid, 75 TAX NOTES 1141, 1155 (1997) ("The regulations clearly are a bold effort to fashion a simpler and more administrable classification system for the future."); see also Roger F. Pillow et al., Check-the-Box Proposed Regs. Simplify the Entity Classification Process, 85 J. TAX'N 72, 72 (1996) (describing the regulations as a "breath of fresh air").
122. An important criterion for good tax policy is "administrability." PHILIP D. OLIVER & FRED W. PEEL, JR., TAX POLICY - READINGS AND MATERIALS 2 (Foundation Press 1996). The check-the-box entity classification regulations (1) make it easier and cheaper for taxpayers to achieve partnership classification, something that could have been achieved anyway under the Kintner regulations; (2) eliminate the risk that the Service would challenge desired classification for failing to meet a technical requirement under the Kintner regulations; and (3) "eliminate a vast body of arbitrary technical rules, and permit large amounts of time to be shifted to more productive pursuits." Michael L. Schler, Initial Thoughts on the Proposed "Check-the-Box"Regulations, 71 TAXNOTES 1679, 1681 (1996). See also Hugh M. Dougan et al., "Check the Box" - Looking Under the Lid, 75 TAX NOTES 1141, 1155 (1997) ("The regulations clearly are a bold effort to fashion a simpler and more administrable classification system for the future."); see also Roger F. Pillow et al., Check-the-Box Proposed Regs. Simplify the Entity Classification Process, 85 J. TAX'N 72, 72 (1996) (describing the regulations as a "breath of fresh air").
123. An important criterion for good tax policy is "administrability." PHILIP D. OLIVER & FRED W. PEEL, JR., TAX POLICY - READINGS AND MATERIALS 2 (Foundation Press 1996). The check-the-box entity classification regulations (1) make it easier and cheaper for taxpayers to achieve partnership classification, something that could have been achieved anyway under the Kintner regulations; (2) eliminate the risk that the Service would challenge desired classification for failing to meet a technical requirement under the Kintner regulations; and (3) "eliminate a vast body of arbitrary technical rules, and permit large amounts of time to be shifted to more productive pursuits." Michael L. Schler, Initial Thoughts on the Proposed "Check-the-Box"Regulations, 71 TAXNOTES 1679, 1681 (1996). See also Hugh M. Dougan et al., "Check the Box" - Looking Under the Lid, 75 TAX NOTES 1141, 1155 (1997) ("The regulations clearly are a bold effort to fashion a simpler and more administrable classification system for the future."); see also Roger F. Pillow et al., Check-the-Box Proposed Regs. Simplify the Entity Classification Process, 85 J. TAX'N 72, 72 (1996) (describing the regulations as a "breath of fresh air").
124. An important criterion for good tax policy is "administrability." PHILIP D. OLIVER & FRED W. PEEL, JR., TAX POLICY - READINGS AND MATERIALS 2 (Foundation Press 1996). The check-the-box entity classification regulations (1) make it easier and cheaper for taxpayers to achieve partnership classification, something that could have been achieved anyway under the Kintner regulations; (2) eliminate the risk that the Service would challenge desired classification for failing to meet a technical requirement under the Kintner regulations; and (3) "eliminate a vast body of arbitrary technical rules, and permit large amounts of time to be shifted to more productive pursuits." Michael L. Schler, Initial Thoughts on the Proposed "Check-the-Box"Regulations, 71 TAXNOTES 1679, 1681 (1996). See also Hugh M. Dougan et al., "Check the Box" - Looking Under the Lid, 75 TAX NOTES 1141, 1155 (1997) ("The regulations clearly are a bold effort to fashion a simpler and more administrable classification system for the future."); see also Roger F. Pillow et al., Check-the-Box Proposed Regs. Simplify the Entity Classification Process, 85 J. TAX'N 72, 72 (1996) (describing the regulations as a "breath of fresh air").
125. REPORTERS' STUDY, supra note 1, at 2 (suggesting that the current system violates these two important criteria for good tax policy). A recent tax symposium also addressed whether "radical surgery" was necessary "to reduce the choices and complexity" of the current system. Martin J. McMahon, Jr., Closely Held Business Entity Symposium Introduction, 4 FLA. TAX REV. vii (1998). For an earlier criticism of the check-the-box classification system, see generally Aaron W. Brooks, Chuck the Box: Proposed Entity Classification Regulations Bring Bad Policy, 70 TAX NOTES 1669 (1996).
126. REPORTERS' STUDY, supra note 1, at 2 (suggesting that the current system violates these two important criteria for good tax policy). A recent tax symposium also addressed whether "radical surgery" was necessary "to reduce the choices and complexity" of the current system. Martin J. McMahon, Jr., Closely Held Business Entity Symposium Introduction, 4 FLA. TAX REV. vii (1998). For an earlier criticism of the check-the-box classification system, see generally Aaron W. Brooks, Chuck the Box: Proposed Entity Classification Regulations Bring Bad Policy, 70 TAX NOTES 1669 (1996).
127. REPORTERS' STUDY, supra note 1, at 2 (suggesting that the current system violates these two important criteria for good tax policy). A recent tax symposium also addressed whether "radical surgery" was necessary "to reduce the choices and complexity" of the current system. Martin J. McMahon, Jr., Closely Held Business Entity Symposium Introduction, 4 FLA. TAX REV. vii (1998). For an earlier criticism of the check-the-box classification system, see generally Aaron W. Brooks, Chuck the Box: Proposed Entity Classification Regulations Bring Bad Policy, 70 TAX NOTES 1669 (1996).
128. See REPORTERS' STUDY, supra note 1, at 2. For example, an LLC can elect to be taxed as a partnership or a C corporation. In addition, an LLC can be taxed as an S corporation if it firsts elects to be taxed as a corporation and then makes a valid election under Subchapter S.
129. See id. State law corporations are taxed under the rules of Subchapter C, unless they qualify for and elect to be taxed under the rules of Subchapter S. I.R.C. §§ 1361, 1362. See infra note 83. Publicly traded entities are taxed under the rules of Subchapter C. I.R.C. § 7704. The Subchapter K partnership rules are not available to these entities.
130. After the introduction of check-the-box entity classification regulations, state-law provisions in business statutes intended to cope with the Kintner classification regulations became unnecessary. States responded to check-the-box by eliminating statutory restrictions dealing with continuity of life, centralized management, and free transferability of interests. For example, some states eliminated the requirement that an LLC's Articles of Organization set forth a period of duration. Some states eliminated dissociation provisions (default rules providing that dissociation causes dissolution) from their LLC statutes. States also eliminated statutory restrictions intended to avoid the corporate characteristic of centralized management. Whether representative management is vested in all members or a smaller group is irrelevant under check-the-box. For articles discussing amendments to state LLC acts in response to check-the-box, see Gary W. Derrick, Oklahoma Limited Liability Companies and Limited Liability Partnerships, 11 OKLA. CITY U. L. REV. 643 (1997); Susan Kalinka, The Louisiana Limited Liability Company Law After "Check-the-Box," 57 LA. L. REV. 715 (1997).
131. After the introduction of check-the-box entity classification regulations, state-law provisions in business statutes intended to cope with the Kintner classification regulations became unnecessary. States responded to check-the-box by eliminating statutory restrictions dealing with continuity of life, centralized management, and free transferability of interests. For example, some states eliminated the requirement that an LLC's Articles of Organization set forth a period of duration. Some states eliminated dissociation provisions (default rules providing that dissociation causes dissolution) from their LLC statutes. States also eliminated statutory restrictions intended to avoid the corporate characteristic of centralized management. Whether representative management is vested in all members or a smaller group is irrelevant under check- the-box. For articles discussing amendments to state LLC acts in response to check-the-box, see Gary W. Derrick, Oklahoma Limited Liability Companies and Limited Liability Partnerships, 11 OKLA. CITY U. L. REV. 643 (1997); Susan Kalinka, The Louisiana Limited Liability Company Law After "Check-the-Box," 57 LA. L. REV. 715 (1997).
132. As a result of check-the-box regulations, which recognize a single-member LLC as a sole proprietorship, several states amended their state statutes to allow one member. See, e.g., DEL. CODE ANN., tit. 6, § 18-101(6) (WESTLAW through End of 1999 First Spec. Session). For commentary on the single-member LLC, see Robert R. Keatinge, The Single-Member LLC: Operating Agreement Questions and Other Issues, 3 J. LIMITED LIABILITY COMPANIES 87 (1996); David S. Miller, The Tax Nothing, 74 TAX NOTES 619 (1997); Larry E. Ribstein, The Loneliest Number: The Unincorporated Limited Liability Sole Proprietorship, J. ASSET PROTECTION, May-June 1996, at 46.
133. As a result of check-the-box regulations, which recognize a single-member LLC as a sole proprietorship, several states amended their state statutes to allow one member. See, e.g., DEL. CODE ANN., tit. 6, § 18-101(6) (WESTLAW through End of 1999 First Spec. Session). For commentary on the single- member LLC, see Robert R. Keatinge, The Single-Member LLC: Operating Agreement Questions and Other Issues, 3 J. LIMITED LIABILITY COMPANIES 87 (1996); David S. Miller, The Tax Nothing, 74 TAX NOTES 619 (1997); Larry E. Ribstein, The Loneliest Number: The Unincorporated Limited Liability Sole Proprietorship, J. ASSET PROTECTION, May-June 1996, at 46.
134. As a result of check-the-box regulations, which recognize a single-member LLC as a sole proprietorship, several states amended their state statutes to allow one member. See, e.g., DEL. CODE ANN., tit. 6, § 18-101(6) (WESTLAW through End of 1999 First Spec. Session). For commentary on the single- member LLC, see Robert R. Keatinge, The Single-Member LLC: Operating Agreement Questions and Other Issues, 3 J. LIMITED LIABILITY COMPANIES 87 (1996); David S. Miller, The Tax Nothing, 74 TAX NOTES 619 (1997); Larry E. Ribstein, The Loneliest Number: The Unincorporated Limited Liability Sole Proprietorship, J. ASSET PROTECTION, May-June 1996, at 46.
135. After check-the-box, many commentators predicted that amended LLC statutes would become "corporation law look-alikes." Symposium, Check-the-Box and Beyond: The Future of Limited Liability Entities, 52 BUS. LAW. 605, 611 (1997) (statement of Bernard Black); Scott E. Grimes et al., Proposed Entity Classification Regs. Greatly Simplify Rules, 25 TAX'N FOR LAW. (WGL) 68, 75 (1996) (noting after check-the-box, "it will be possible to create an LLC that will look virtually identical to a corporation, at least in terms of the traditional corporate attributes of limited liability, centralized management, continuity of life, and free transferability of interest"); Payson R. Peabody, Check-the-Box Treasury Regs. Encourage States to Authorize Single Member LLCs, J. MULTISTATE TAX'N, May/June 1997, at 79 (describing how state legislative response to check-the-box will make LLCs look like corporations); Joseph Scocca, Note, The "Check-the-Box" Treasury Regulations: The Calm Before the Storm, 29 RUTGERS L.J. 201, 208 (1997) (predicting that state legislative response to check-the-box will provide the flexibility "to structure LLCs to look more like corporations").
136. After check-the-box, many commentators predicted that amended LLC statutes would become "corporation law look-alikes." Symposium, Check-the-Box and Beyond: The Future of Limited Liability Entities, 52 BUS. LAW. 605, 611 (1997) (statement of Bernard Black); Scott E. Grimes et al., Proposed Entity Classification Regs. Greatly Simplify Rules, 25 TAX'N FOR LAW. (WGL) 68, 75 (1996) (noting after check-the-box, "it will be possible to create an LLC that will look virtually identical to a corporation, at least in terms of the traditional corporate attributes of limited liability, centralized management, continuity of life, and free transferability of interest"); Payson R. Peabody, Check-the-Box Treasury Regs. Encourage States to Authorize Single Member LLCs, J. MULTISTATE TAX'N, May/June 1997, at 79 (describing how state legislative response to check-the-box will make LLCs look like corporations); Joseph Scocca, Note, The "Check-the-Box" Treasury Regulations: The Calm Before the Storm, 29 RUTGERS L.J. 201, 208 (1997) (predicting that state legislative response to check-the-box will provide the flexibility "to structure LLCs to look more like corporations").
137. After check-the-box, many commentators predicted that amended LLC statutes would become "corporation law look-alikes." Symposium, Check-the-Box and Beyond: The Future of Limited Liability Entities, 52 BUS. LAW. 605, 611 (1997) (statement of Bernard Black); Scott E. Grimes et al., Proposed Entity Classification Regs. Greatly Simplify Rules, 25 TAX'N FOR LAW. (WGL) 68, 75 (1996) (noting after check-the-box, "it will be possible to create an LLC that will look virtually identical to a corporation, at least in terms of the traditional corporate attributes of limited liability, centralized management, continuity of life, and free transferability of interest"); Payson R. Peabody, Check-the-Box Treasury Regs. Encourage States to Authorize Single Member LLCs, J. MULTISTATE TAX'N, May/June 1997, at 79 (describing how state legislative response to check-the-box will make LLCs look like corporations); Joseph Scocca, Note, The "Check-the-Box" Treasury Regulations: The Calm Before the Storm, 29 RUTGERS L.J. 201, 208 (1997) (predicting that state legislative response to check-the-box will provide the flexibility "to structure LLCs to look more like corporations").
138. After check-the-box, many commentators predicted that amended LLC statutes would become "corporation law look-alikes." Symposium, Check-the-Box and Beyond: The Future of Limited Liability Entities, 52 BUS. LAW. 605, 611 (1997) (statement of Bernard Black); Scott E. Grimes et al., Proposed Entity Classification Regs. Greatly Simplify Rules, 25 TAX'N FOR LAW. (WGL) 68, 75 (1996) (noting after check-the-box, "it will be possible to create an LLC that will look virtually identical to a corporation, at least in terms of the traditional corporate attributes of limited liability, centralized management, continuity of life, and free transferability of interest"); Payson R. Peabody, Check-the-Box Treasury Regs. Encourage States to Authorize Single Member LLCs, J. MULTISTATE TAX'N, May/June 1997, at 79 (describing how state legislative response to check-the-box will make LLCs look like corporations); Joseph Scocca, Note, The "Check-the-Box" Treasury Regulations: The Calm Before the Storm, 29 RUTGERS L.J. 201, 208 (1997) (predicting that state legislative response to check-the-box will provide the flexibility "to structure LLCs to look more like corporations").
139. Certain qualified domestic corporations, newly formed under state law or preexisting, may elect to be taxed under the conduit provisions of Subchapter S, I.R.C. §§ 1371-78, rather than the provisions of Subchapter C, I.R.C. §§ 301-85. Subchapter S is similar in many respects to Subchapter K partnership taxation, although many differences exist between the two pass-through regimes. Eligibility for Subchapter S status is much more restricted than is eligibility for partnership membership. An S corporation is limited in the number and type of shareholders it can have. For instance, an S corporation cannot have more than 75 shareholders and cannot have another corporation, partnership, or nonresident alien as a shareholder. I.R.C. § 1361(b)1)(A)-(C). In addition, an S corporation's capital structure is limited to only one class of stock. I.R.C. § 1361(b)(1)(D). The Small Business Job Protection Act of 1996 relaxed the S corporation eligibility requirements. Pub. L. No. 104-188, 110 Stat. 1755. Limitations, however, still remain. The rules of Subchapter K offer a greater degree of flexibility to members than do the Subchapter S rules. For example, special allocations are not permitted to S corporation shareholders, whereas special allocations are permitted in Subchapter K provided the allocations have substantial economic effect. See I.R.C. § 704(b). Subchapter S also does not permit S corporation shareholders to increase their stock basis for entity debt, whereas Subchapter K does allow partners to increase the basis in their partnership interest for their share of debt, even nonrecourse debt. See I.R.C. § 752; Treas. Regs. § 1.752-1, -2, -3. Subchapter S also does not allow a step up in the basis of inside assets upon a shareholder's death or stock redemption, whereas Subchapter K does allow an inside basis adjustment in his or her share of partnership property upon the death of a partner or liquidation of a partner's interest. See I.R.C. § 754.
140. The problem is magnified when one considers the significant differences between the two pass-through regimes (Subchapter K and Subchapter S). Under current law, for example, some investors with limited liability protection (e.g., LLC members) can increase outside basis for a share of entity debt and achieve greater tax deductions, whereas other investors with the same limited liability protection (e.g., S corporation shareholders) are not permitted to increase outside basis for entity debt. See supra note 83 for additional differences.
141. See REPORTERS' STUDY, supra note 1, at 2. The Reporters' Study is no improvement to the current system in this regard since it would give private firms with over 100 members three tax choices: a modified Subchapter K, a liberalized version of Subchapter S, or the existing Subchapter C.
142. No minimum duration exists for an entity's initial election. If an entity elects to change its tax classification, however, it cannot change its classification again for 60 months. See Treas. Reg. § 301.7701-3(c)(1)(iv).
143. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
144. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
145. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
146. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
147. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
148. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
149. Tax scholars have identified "equity" as perhaps the most important criterion for good tax policy. OLIVER & PEEL, supra note 76, at 1-3 (stating "equity" as the most important criterion "to be applied in wisely structuring taxes"). See also Goldberg, supra note 66, at 998 (noting the decision whether business firms should be subject to entity taxation and, if so, which firms should be subject to an entity-level tax "should be grounded on some policy objective that is, to achieve . . . fairness"); Klein, supra note 30, at 57-61 (discussing importance of "uniformity in the tax treatment of seemingly similar organizations"). "Economic efficiency versus economic distortions" is another important goal of tax policy. See OLIVER & PEEL, supra note 76, at 1-3. There are other federal tax policy goals, such as "administrability," "practicality," "raising revenue," and "certainty of tax consequences." See, e.g., id. at 2 (noting "administrability" is an important criterion); Hyman & Hoffman, supra note 66, at 383 (noting "certainty of tax consequences" is "an important goal or policy of the tax law"); Klein, supra note 30, at 71-72 (noting "practicality" and "raising revenue" are important goals); Joseph T. Sneed, The Criteria of Federal Income Tax Policy, 17 STAN. L. REV. 567, 572-73 (1965) (noting "practicality" as an important criterion).
150. Professor Lawrence Lokken proposed recently that all private business firms with simple capital structures be taxed under a liberalized version of Subchapter S. He recommended that all firms with complex capital structures be subject to an entity-level tax under Subchapter C. Lawrence Lokken, Taxation of Private Business Firms: Imagining a Future Without Subchapter K, 4 FLA. TAX REV. 249 (1999). See also Jeffrey A. Maine, Evaluating Subchapter S in a "Check-the-Box" World, 51 TAX LAW. 717 (1998) (proposing a liberalized version of Subchapter S for private firms with relatively simple economic arrangements and Subchapter C for public companies and complex private entities that fail to qualify for the single conduit regime, in the event states consolidate existing business statutes in the wake of check-the-box entity classification). Another commentator recently proposed a single conduit regime for taxing all private business firms - either a streamlined version of Subchapter K or a liberalized version of Subchapter S. Jerald David August, Benefits and Burdens of Subchapter S in a Check-the-Box World, 4 FLA. TAX REV. 287 (1999). These proposals are similar to the proposal in the recent Reporters' Study, in that form of organization would no longer be relevant in distinguishing entities for tax purposes. These proposals differ from the Study's proposal in that the latter maintains complexity by utilizing the present regimes - all private business firms would be taxed under a dual-track conduit system (Subchapter K or a liberalized version of Subchapter S) and all public firms be subject to entity taxation under Subchapter C. See supra notes 1-5 and accompanying text for a summary of the ALI Reporters' Study.
151. Professor Lawrence Lokken proposed recently that all private business firms with simple capital structures be taxed under a liberalized version of Subchapter S. He recommended that all firms with complex capital structures be subject to an entity-level tax under Subchapter C. Lawrence Lokken, Taxation of Private Business Firms: Imagining a Future Without Subchapter K, 4 FLA. TAX REV. 249 (1999). See also Jeffrey A. Maine, Evaluating Subchapter S in a "Check-the-Box" World, 51 TAX LAW. 717 (1998) (proposing a liberalized version of Subchapter S for private firms with relatively simple economic arrangements and Subchapter C for public companies and complex private entities that fail to qualify for the single conduit regime, in the event states consolidate existing business statutes in the wake of check-the-box entity classification). Another commentator recently proposed a single conduit regime for taxing all private business firms - either a streamlined version of Subchapter K or a liberalized version of Subchapter S. Jerald David August, Benefits and Burdens of Subchapter S in a Check-the-Box World, 4 FLA. TAX REV. 287 (1999). These proposals are similar to the proposal in the recent Reporters' Study, in that form of organization would no longer be relevant in distinguishing entities for tax purposes. These proposals differ from the Study's proposal in that the latter maintains complexity by utilizing the present regimes - all private business firms would be taxed under a dual-track conduit system (Subchapter K or a liberalized version of Subchapter S) and all public firms be subject to entity taxation under Subchapter C. See supra notes 1-5 and accompanying text for a summary of the ALI Reporters' Study.
152. Professor Lawrence Lokken proposed recently that all private business firms with simple capital structures be taxed under a liberalized version of Subchapter S. He recommended that all firms with complex capital structures be subject to an entity-level tax under Subchapter C. Lawrence Lokken, Taxation of Private Business Firms: Imagining a Future Without Subchapter K, 4 FLA. TAX REV. 249 (1999). See also Jeffrey A. Maine, Evaluating Subchapter S in a "Check-the-Box" World, 51 TAX LAW. 717 (1998) (proposing a liberalized version of Subchapter S for private firms with relatively simple economic arrangements and Subchapter C for public companies and complex private entities that fail to qualify for the single conduit regime, in the event states consolidate existing business statutes in the wake of check-the-box entity classification). Another commentator recently proposed a single conduit regime for taxing all private business firms - either a streamlined version of Subchapter K or a liberalized version of Subchapter S. Jerald David August, Benefits and Burdens of Subchapter S in a Check-the-Box World, 4 FLA. TAX REV. 287 (1999). These proposals are similar to the proposal in the recent Reporters' Study, in that form of organization would no longer be relevant in distinguishing entities for tax purposes. These proposals differ from the Study's proposal in that the latter maintains complexity by utilizing the present regimes - all private business firms would be taxed under a dual-track conduit system (Subchapter K or a liberalized version of Subchapter S) and all public firms be subject to entity taxation under Subchapter C. See supra notes 1-5 and accompanying text for a summary of the ALI Reporters' Study.
153. This article assumes that integration of the corporate and personal income taxes will not occur anytime soon and, therefore, focuses on an appropriate tax classification rule to replace the existing check-the-box entity classification system. The article recommends adoption of a tax classification rule based on limited liability. As noted in this article, the limited liability based entity tax could be the first tax in a two-tier tax system much like the existing Subchapter C regime. Those entities without limited liability, as well as those engaged in socially desirable investments, would be taxed as conduits. The articles recommends adoption of a liberalized version of Subchapter S, eliminating completely the need for Subchapter K. Although the conduit regime would permit limited special allocations, it would not permit debt to be allocated to owners and included in their outside basis.
154. See supra notes 18-34 and accompanying text.
155. See generally Kornhauser, supra note 18 (discussing theories of corporate personality).
156. Professor Klein has offered two views of the entity theory. See Klein, supra note 30. Under an extreme view of the entity theory, "[t]he corporation and the shareholders are separate entities with separate taxpaying capacities and with no reason to be concerned with the taxpaying activities of each other." Id. at 43. The corporation is a nonphysical legal devise that has been "converted into a person - or at least into a thing with many of the qualities of a person," and, hence, should pay a tax like a person. Id. at 53. Under a less extreme view of the entity theory, the "fictional qualities of the corporate person" are analyzed to determine whether the entity is really separate and apart from its owners. Id. If the corporation is seen as separate for nontax purposes, then an entity tax is justified. Id. See also Jennifer Arlen & Deborah M. Weiss, A Political Theory of Corporate Taxation, 105 YALE L.J. 325, 331 (1995) (suggesting the "entity theory was indeed the original basis for imposing a separate corporate tax").
157. Professor Klein has offered two views of the entity theory. See Klein, supra note 30. Under an extreme view of the entity theory, "[t]he corporation and the shareholders are separate entities with separate taxpaying capacities and with no reason to be concerned with the taxpaying activities of each other." Id. at 43. The corporation is a nonphysical legal devise that has been "converted into a person - or at least into a thing with many of the qualities of a person," and, hence, should pay a tax like a person. Id. at 53. Under a less extreme view of the entity theory, the "fictional qualities of the corporate person" are analyzed to determine whether the entity is really separate and apart from its owners. Id. If the corporation is seen as separate for nontax purposes, then an entity tax is justified. Id. See also Jennifer Arlen & Deborah M. Weiss, A Political Theory of Corporate Taxation, 105 YALE L.J. 325, 331 (1995) (suggesting the "entity theory was indeed the original basis for imposing a separate corporate tax").
158. Arlen & Weiss, supra note 92, at 329 (noting most commentators view the corporate entity "as simply a conduit of profits to shareholders and thus see it as an inappropriate unit of taxation"); Kornhauser, supra note 18, at 104 (noting aggregate theorists view that no difference exists between the corporate and partnership forms; "they are combinations of men to do business").
159. Arlen & Weiss, supra note 92, at 329 (noting most commentators view the corporate entity "as simply a conduit of profits to shareholders and thus see it as an inappropriate unit of taxation"); Kornhauser, supra note 18, at 104 (noting aggregate theorists view that no difference exists between the corporate and partnership forms; "they are combinations of men to do business").
160. See Thomas F. Blackwell, The Revolution Is Here: The Promise of a Unified Business Entity Code, 24 J. CORP. L. 333 (1999) (noting many economists and scholars have come to accept the "nexus of contracts'" theory, which is in contrast to the entity theory); Kornhauser, supra note 18, at 136 (noting that "[t]oday's pet theory, the economic theory of the firm as a nexus of contracts between individuals, tends to eliminate the corporation as a separate entity").
161. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts.
162. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
163. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
164. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
165. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
166. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
167. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
168. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
169. The reliance on entity theory may explain why integration efforts have failed. See Kornhauser, supra note 18, at 136 ("So long as various conceptions of the corporation exist, as they do today, economic theory's justification of integration is a claim of theology, not of truth."). Entity theory's block to integration may explain why opponents of the entity tax have relied on the nexus of contracts theory to support integration efforts. See, e.g., William W. Bratton, Jr., The "Nexus of Contracts" Corporation: A Critical Appraisal, 74 CORNELL L. REV. 407, 426, 436-38 (1989). For Treasury proposals to integrate the corporate and personal income taxes, see DEP'T OF TREAS., INTEGRATION OF THE INDIVIDUAL AND CORPORATE TAX SYSTEMS: TAXING BUSINESS INCOME ONCE (1992) [hereinafter TREASURY REPORT]. For analysis of integration, see Arlen & Weiss, supra note 92; Glenn E. Coven, Corporate Tax Policy for the Twenty-First Century: Integration and Redeeming Social Value, 50 WASH. & LEE L. REV. 495 (1993); Jeffrey L. Kwall, The Uncertain Case Against the Double Taxation of Corporate Income, 68 N.C. L. REV. 613 (1990); Charles E. McLure, Jr., Must Corporate Income Be Taxed Twice? (1979); Colloquium on Corporate Integration, 47 TAX L. REV. 427 (1992). For commentary supporting the separate corporate tax, see RICHARD B. GOODE, THE CORPORATION INCOME TAX 24-43 (1951); Jasper L. Cummings, Jr., Taxing Business Income Once: Where's the Beef? A Review and Critique of the Treasury Integration Study, 54 TAX NOTES 1391, 1394 (1992).
170. This early view of the corporation has been termed the "grant theory" or "artificial entity theory" of legal personality. See Kornhauser, supra note 18, at 121 (quoting Trustees of Dartmouth Coll. v. Woodward, 17 U.S. 518, 636 (1819) ("A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers on it, or as incidental to its very existence.")).
171. See Kornhauser, supra note 18, at 135.
172. See id.
173. See id.
174. See id. (noting that during the last quarter of the nineteenth century, the natural entity view of the corporation had developed and ultimately dominated the aggregate view).
175. See supra notes 18-34. Moreover, early cases and Treasury regulations pushed most organizations in the corporate category with limited liability being the controlling reason. See supra notes 35-41 and accompanying text.
176. Blumberg, supra note 30, at 575-76, 595 ("Limited liability did not spring irresistibly from the concept of the corporation as a separate legal person."); Klein & Zolt, supra note 8, at 1029-30 (suggesting limited liability was not "a logical concomitant of the conception of the corporation as a separate entity").
177. Blumberg, supra note 30, at 575-76, 595 ("Limited liability did not spring irresistibly from the concept of the corporation as a separate legal person."); Klein & Zolt, supra note 8, at 1029-30 (suggesting limited liability was not "a logical concomitant of the conception of the corporation as a separate entity").
178. Blumberg, supra note 30, at 595 (noting limited liability "emerged after the initial period of industrialization and came as a political response to economic and political pressure, rather than as a necessary consequence of the entity concept"); see also Klein & Zolt, supra note 8, at 1030 n.84 (noting limited liability "represents the triumph of the rising political power of business interests").
179. Blumberg, supra note 30, at 595 (noting limited liability "emerged after the initial period of industrialization and came as a political response to economic and political pressure, rather than as a necessary consequence of the entity concept"); see also Klein & Zolt, supra note 8, at 1030 n.84 (noting limited liability "represents the triumph of the rising political power of business interests").
180. Klein, supra note 30, at 15.
181. See supra notes 57-67 and accompanying text.
182. Section 351(a) provides: "No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control ... of the corporation." I.R.C. § 351(a). See also Klein, supra note 30, at 44 (describing § 351 as "[o]ne of the most significant provisions mitigating the effects of entity theory").
183. See Klein, supra note 30, at 45 (describing Subchapter S as a "far more significant departure from entity-level taxation").
184. For Subchapter S rules, see supra note 83.
185. See I.R.C. §§ 1361-78.
186. See I.R.C. §§ 301-85.
187. Subchapter S is similar in many respects to Subchapter K partnership taxation, although many differences exist between the two pass-through regimes. See supra note 83, for the major differences.
188. See Frank Zaffino, Projections of Returns To Be Filed in Calendar Years 1999-2005, 18 SOI BULLETIN No. 3, at 179 fig. A.
189. Section 267 provides that no deduction shall be allowed for a loss arising from a direct or indirect sale or exchange of property between an "individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual." I.R.C. § 267(a)(1), (b)(2). Section 267 also has constructive stock ownership rules, under which stock that is owned by a corporation "shall be considered as being owned proportionately by or for its shareholders." I.R.C. § 267(c)(1). These rules are departures from entity theory in that they treat corporations as not wholly independent from their shareholders.
190. Section 269 provides that if a person acquires fifty percent control of a corporation, and the principal purpose of that acquisition is evasion or avoidance of tax by securing the benefit of a deduction, credit, or other allowance which that person or corporation would not otherwise enjoy, then that deduction, credit, or allowance may be disallowed by the Service. I.R.C. § 269(a). For example, assume an individual acquires all of the stock of X Corporation, an unprofitable business that has large net operating loss carryovers. Shortly after the acquisition, the individual causes to be transferred to X Corporation the assets of another corporation that the individual previously controlled and that has profits sufficient to absorb a substantial portion of X Corporation's net operating loss carryovers. The transfer of the profitable business, which has the effect of using net operating loss carryovers of an unrelated business, indicates that the principal purpose for acquiring control of X Corporation was evasion or avoidance of federal income tax. See Treas. Reg. 1.269-3(b)(1) (example). In this situation, the corporation may not be treated as separate and independent of its shareholders, as allowance of the net operating loss carryovers may depend on the fifty percent shareholder's purpose for acquiring control of X Corporation.
191. Section 341 treats, for certain purposes, corporate assets as noncapital assets if they would have such character in the hands of a shareholder. I.R.C. § 341(e)(5)(A).
192. Section 382 limits the use of a corporation's net operating loss carryovers following a corporate reorganization or other substantial change of ownership (fifty percent change over a period of three years or less). I.R.C. § 382(g)(1), (i).
193. Section 532 imposes a penalty tax ("accumulated earnings tax") on a corporation "formed or availed of for the purpose of avoiding the income tax with respect to its shareholders ... by permitting earnings and profits to accumulate instead of being divided or distributed." I.R.C. § 532(a). Circumstances that might prove the existence of the purpose to avoid income tax with respect to shareholders include "[d]ealings between the corporation and its shareholders, such as withdrawals by the shareholders as personal loans or the expenditure of funds by the corporation for the personal benefit of the shareholders." Treas. Reg. § 1.533-1(a)(2)(i). Other circumstances indicating the presence of a proscribed tax avoidance purpose include unrelated corporate investments and a poor dividend history. Id. § 1.533-1 (a)(2)(ii)-(iii). By focusing on dealings between a corporation and its shareholders, the accumulated earnings tax is a good example of the federal tax law failing to treat the corporation as independent from its owners.
194. Section 541 imposes a penalty tax ("personal holding company tax") on the "undistributed personal holding company income" of every "personal holding company." I.R.C. § 541. This provision is a departure from entity theory in that a personal holding company is defined in part by reference to the number of shareholders.
195. Klein, supra note 30, at 45 ("One searches in vein for an elegant theory to explain these departures from entity theory.").
196. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
197. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
198. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
199. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
200. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
201. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
202. Id. at 46. It seems odd to rely on entity theory to justify an entity tax when one considers that the entity does not ultimately bear the tax. See Joint Committee on Taxation, Tax Treatment of Master Limited Partnerships (JCS-18-87), June 29, 1987, at 29 (noting "ultimately all income tax liability is borne by individuals, either directly or indirectly in the form of increased costs of goods and services or decreased return of capital"); PECHMAN, supra note 34, at 136 (noting that some believe the entity tax is borne by stockholders, some believe the tax is "passed on to consumers through higher prices or may be shifted back to the workers in lower wages," some believe that "it is borne by all three groups - stockholders, consumers, and wage earners - in varying proportions); J.E. STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR (2d ed. 1988) (finding unpersuasive entity theory because "it is not the corporation that pays the taxes, but the people: those who work for the corporation, those who supply capital to it, and those who buy goods produced by it"); Arlen & Weiss, supra note 92, at 332 (suggesting the "public does not understand that it ultimately bears the burden of the tax"); John et al., supra note 29, at 9 & n.9 (noting evidence is unclear and conflicting regarding who bears the tax burden); Klein, supra note 30, at 54 (stating "people do not really think of the corporation itself as bearing the burden of taxation" but then noting that the burden could also be thought to be on consumers or on labor or on a combination of each group); Edward J. McCaffery, Cognitive Theory and Tax, 41 UCLA L. REV. 1861, 1883 (1994) (noting that the trouble with the corporate tax, "simply put, is that no one is sure who pays the tax" and suggesting the "dollars paid by corporations must come out of the pockets of real humans - shareholders, managers, employees, suppliers, customers, capitalists").
203. See supra note 9 and accompanying text.
204. Although the social security tax is typically labeled a "contribution," it is a payroll tax. McCaffery, supra note 120, at 1886.
205. Griffith, supra note 13, at 723 ("[S]ocial security taxes are earmarked for the payment of social security benefits. To some extent the benefits a worker receives from the system depends on the payment he has made into it.").
206. See McCaffery, supra note 120, at 1886 (comparing the corporate income and payroll taxes). The corporate tax is hidden in that it is not clear who ultimately bears the tax burden. See supra note 120.
207. As income of a corporation best measures the value of limited liability to a particular corporation, net income was the proper base for entity taxation. See, e.g., PECHMAN, supra note 34, at 135 (stating "privilege of doing corporate business could be measured by the corporation's profits"). See also REPORTERS' STUDY, supra note 1, at 54 (agreeing that income of a firm might be the best method of assessing the value of the benefit of limited liability since "the presence of limited liability enables the firm to engage in activities with greater risks and greater potential rewards"). But see Griffith, supra note 13, at 724 (arguing benefits of corporate form bear little relation to the level of corporate profits).
208. As income of a corporation best measures the value of limited liability to a particular corporation, net income was the proper base for entity taxation. See, e.g., PECHMAN, supra note 34, at 135 (stating "privilege of doing corporate business could be measured by the corporation's profits"). See also REPORTERS' STUDY, supra note 1, at 54 (agreeing that income of a firm might be the best method of assessing the value of the benefit of limited liability since "the presence of limited liability enables the firm to engage in activities with greater risks and greater potential rewards"). But see Griffith, supra note 13, at 724 (arguing benefits of corporate form bear little relation to the level of corporate profits).
209. As income of a corporation best measures the value of limited liability to a particular corporation, net income was the proper base for entity taxation. See, e.g., PECHMAN, supra note 34, at 135 (stating "privilege of doing corporate business could be measured by the corporation's profits"). See also REPORTERS' STUDY, supra note 1, at 54 (agreeing that income of a firm might be the best method of assessing the value of the benefit of limited liability since "the presence of limited liability enables the firm to engage in activities with greater risks and greater potential rewards"). But see Griffith, supra note 13, at 724 (arguing benefits of corporate form bear little relation to the level of corporate profits).
210. See supra notes 31-33 and accompanying text.
211. REPORTERS' STUDY, supra note 1, at 55 ("For example, efficiency gains may result from a reduction in the monitoring costs of investors, the promotion of diversified, more liquid investments, and the creation of a default rule that facilitates bargaining between creditors and business owners.").
212. Id.
213. See generally Richard A. Booth, Limited Liability and the Efficient Allocation of Resources, 89 NW. U. L. REV. 140 (1994); William W. Bratton & Joseph A. McCahery, An Inquiry into the Efficiency of the Limited Liability Company: Of Theory of the Firm and Regulatory Competition, 54 WASH. & LEE L. REV. 629 (1997); Burke, supra note 69, at 30-34; Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89 (1985); Robert W. Hamilton & Larry E. Ribstein, Limited Liability and the Real World, 54 WASH. & LEE L. REV. 687 (1997).
214. See generally Richard A. Booth, Limited Liability and the Efficient Allocation of Resources, 89 NW. U. L. REV. 140 (1994); William W. Bratton & Joseph A. McCahery, An Inquiry into the Efficiency of the Limited Liability Company: Of Theory of the Firm and Regulatory Competition, 54 WASH. & LEE L. REV. 629 (1997); Burke, supra note 69, at 30-34; Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89 (1985); Robert W. Hamilton & Larry E. Ribstein, Limited Liability and the Real World, 54 WASH. & LEE L. REV. 687 (1997).
215. See generally Richard A. Booth, Limited Liability and the Efficient Allocation of Resources, 89 NW. U. L. REV. 140 (1994); William W. Bratton & Joseph A. McCahery, An Inquiry into the Efficiency of the Limited Liability Company: Of Theory of the Firm and Regulatory Competition, 54 WASH. & LEE L. REV. 629 (1997); Burke, supra note 69, at 30-34; Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89 (1985); Robert W. Hamilton & Larry E. Ribstein, Limited Liability and the Real World, 54 WASH. & LEE L. REV. 687 (1997).
216. See generally Richard A. Booth, Limited Liability and the Efficient Allocation of Resources, 89 NW. U. L. REV. 140 (1994); William W. Bratton & Joseph A. McCahery, An Inquiry into the Efficiency of the Limited Liability Company: Of Theory of the Firm and Regulatory Competition, 54 WASH. & LEE L. REV. 629 (1997); Burke, supra note 69, at 30-34; Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89 (1985); Robert W. Hamilton & Larry E. Ribstein, Limited Liability and the Real World, 54 WASH. & LEE L. REV. 687 (1997).
217. See generally Richard A. Booth, Limited Liability and the Efficient Allocation of Resources, 89 NW. U. L. REV. 140 (1994); William W. Bratton & Joseph A. McCahery, An Inquiry into the Efficiency of the Limited Liability Company: Of Theory of the Firm and Regulatory Competition, 54 WASH. & LEE L. REV. 629 (1997); Burke, supra note 69, at 30-34; Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89 (1985); Robert W. Hamilton & Larry E. Ribstein, Limited Liability and the Real World, 54 WASH. & LEE L. REV. 687 (1997).
218. See Easterbrook & Fischel, supra note 129.
219. Id. at 94 (noting that "costs of separation of investment and management (agency costs) may be substantial," but that "[l]imited liability reduces the costs of this separation and specialization").
220. Id. ("Limited liability makes diversification and passivity a more rational strategy and so potentially reduces the cost of operating the corporation."); Henry G. Manne, Our Two Corporation Systems: Law and Economics, 53 VA. L. REV. 259 (1967) (noting limited liability permits more efficient diversification of investment).
221. Id. ("Limited liability makes diversification and passivity a more rational strategy and so potentially reduces the cost of operating the corporation."); Henry G. Manne, Our Two Corporation Systems: Law and Economics, 53 VA. L. REV. 259 (1967) (noting limited liability permits more efficient diversification of investment).
222. Limited liability is important to small firms as well. Klein & Zolt, supra note 8, at 1030 ("[L]imited liability was perceived as a means of encouraging the small scale entrepreneur, and of keeping the entry into business markets competitive and democratic."); Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democracy, and Economics, 87 NW. U.L. REV. 148, 163 (1992) (stating "limited liability's present stronghold in American corporate law was a desire to encourage individual investment in smaller firms"). See also PAUL HALPERN ET AL., AN ECONOMIC ANALYSIS OF LIMITED LIABILITY IN CORPORATION LAW 117, 148-49 (1980) (stating "an unlimited liability regime is the most efficient regime for small, closely held companies").
223. Limited liability is important to small firms as well. Klein & Zolt, supra note 8, at 1030 ("[L]imited liability was perceived as a means of encouraging the small scale entrepreneur, and of keeping the entry into business markets competitive and democratic."); Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democracy, and Economics, 87 NW. U.L. REV. 148, 163 (1992) (stating "limited liability's present stronghold in American corporate law was a desire to encourage individual investment in smaller firms"). See also PAUL HALPERN ET AL., AN ECONOMIC ANALYSIS OF LIMITED LIABILITY IN CORPORATION LAW 117, 148-49 (1980) (stating "an unlimited liability regime is the most efficient regime for small, closely held companies").
224. Limited liability is important to small firms as well. Klein & Zolt, supra note 8, at 1030 ("[L]imited liability was perceived as a means of encouraging the small scale entrepreneur, and of keeping the entry into business markets competitive and democratic."); Stephen B. Presser, Thwarting the Killing of the Corporation: Limited Liability, Democracy, and Economics, 87 NW. U.L. REV. 148, 163 (1992) (stating "limited liability's present stronghold in American corporate law was a desire to encourage individual investment in smaller firms"). See also PAUL HALPERN ET AL., AN ECONOMIC ANALYSIS OF LIMITED LIABILITY IN CORPORATION LAW 117, 148-49 (1980) (stating "an unlimited liability regime is the most efficient regime for small, closely held companies").
225. Several scholars have suggested that limited liability is what makes public trading possible: [L]imited liability is necessary for the existence of an organized securities market. If equity investors could be required to contribute additional capital, the value of shares would not be the same to every investor. The greater a particular investor's wealth in relation to that of other investors in the same firm, the higher the probability that the investor's personal wealth would be reached in the event of corporate default. The greater the anticipated cost of this additional capital contribution, the less this investor would be willing to pay for shares. Because different investors would attach different values to shares, depending on the investors' wealth, it would be impossible to conduct an organized liquid market. Limited liability makes markets possible. Easterbrook & Fischel, supra note 129, at 92; see also HALPERN ET AL., supra note 133, at 129-31.
226. Several scholars have suggested that limited liability is what makes public trading possible: [L]imited liability is necessary for the existence of an organized securities market. If equity investors could be required to contribute additional capital, the value of shares would not be the same to every investor. The greater a particular investor's wealth in relation to that of other investors in the same firm, the higher the probability that the investor's personal wealth would be reached in the event of corporate default. The greater the anticipated cost of this additional capital contribution, the less this investor would be willing to pay for shares. Because different investors would attach different values to shares, depending on the investors' wealth, it would be impossible to conduct an organized liquid market. Limited liability makes markets possible. Easterbrook & Fischel, supra note 129, at 92; see also HALPERN ET AL., supra note 133, at 129-31.
227. See HALPERN ET AL., supra note 133, at 117 (noting limited liability reduces costs of monitoring other owners).
228. An LLP is a regular partnership that registers with the state to receive limited liability protection in limited circumstances. A partner in an LLP is liable for his or her own acts of negligence or malpractice, but is not liable for negligent acts committed by another partner or partnership employee not working under the partner's supervision. See, e.g., TEX. REV. CIV. STAT. ANN. art. 6132b, § 15 (2000). In some states, the liability shield has been broadened to cover contract claims. See ROBERT W. HAMILTON, CORPORATIONS INCLUDING PARTNERSHIPS AND LIMITED LIABILITY COMPANIES 37-38 (6th ed. 1998).
229. This is true unless the partner was directly involved in the act and had notice or knowledge of the act at the time it occurred. Partners who themselves commit malpractice or negligent acts, of course, are personally liable for their own conduct. HAMILTON, supra note 136.
230. Id.
231. State LLC statutes provide flexibility in management structure by generally permitting members to choose the managerial relationships they want through the LLC's operating agreement. Fallany O. Stover & Susan Pace Hamill, The LLC Versus LLP Conundrum: Advice for Businesses Contemplating the Choice, 50 ALA. L. REV. 813, 817 (1999) (discussing management options in an LLC).
232. This has been touted as the "most important and controversial feature of the LLC form." See generally McMahon, supra note 70, at 511 (praising "limited liability for member-managed business organizations").
233. See supra notes 74-89 and accompanying text, for a discussion of the current check-the-box entity classification system.
234. See supra notes 1-5 and accompanying text, for a summary of the Reporters' Study.
235. See supra note 87 (discussing importance in tax policy of equity and "uniformity in the tax treatment of seemingly similar organizations").
236. It might be suggested that a separate tax on entities that enjoy limited liability is not necessary to neutralize the economic benefit of limited liability, since limited liability itself serves merely to offset the agency costs associated with the separation of management from investment. In other words, as the argument might go, centralized management (which creates monitoring costs) and limited liability (which decreases those monitoring costs and facilitates broad investment) wipe each other out. Hence, a statutory price (entity taxation) for the statutory benefit of limited liability would be inappropriate since firms with centralized management and limited liability are already economically similar to firms with decentralized management and ulimited liability. There are problems with this line of thought. First, the costs generated by agency relations are not equal to the economic gains created by limited liability. See Easterbrook & Fischel, supra note 129, at 94 (suggesting "from the survival of large corporations that the costs generated by agency relations are outweighed by the gains from separation and specialization of function"). Second, new business forms have emerged that offer decentralized management and limited liability. These firms, such as the member-managed LLC, do have economic advantages, since they enjoy reduced agency costs (because management is not separate from investment). In sum, in both situations, the entity tax could be seen as a statutory price to pay for the benefit of limited liability, which undoubtedly outweighs any agency costs.
237. Consider the LLC movement: In a relatively short period of time, a state created the LLC business form; the Service then issued a ruling holding that an LLC could receive favorable conduit tax treatment; states then jumped on the LLC bandwagon to compete for business; subsequently, the Treasury made classification easy with check-the-box regulations, and states again reacted to simplified classification and made the LLC corporate-like.
238. Some commentators have proposed that, because the lines between business forms are becoming blurred, now is the time for states to create one generic, flexible business statute with limited liability. See, e.g., Dale A. Oesterle & Wayne M. Gazur, What's in a Name?: An Argument for a Small Business "Limited Liability Entity" Statute (with Three Subsets of Default Rules), 32 WAKE FOREST L. REV. 101 (1997); see also Symposium, supra note 82, at 610-19. An ad hoc committee of the State Bar of Texas' Business Law Section drafted a new code that would consolidate all existing Texas statutes governing the formation and internal affairs of entities in Texas. Thomas F. Blackwell, Finally Adding Method to Madness: Applying Principles of Object-Oriented Analysis and Design to Legislative Drafting, 3 N.Y.U.J. LEGIS. & PUB. POL'Y 227, 249-50 (2000) (discussing Ad Hoc Codification Committee, State Bar of Texas, Preliminary Report of the Codification Committee of the Section of Business Law of the State Bar of Texas on the Proposed Business Organizations Code 1 (Mar. 1999)). A draft of the proposed code was introduced to the Texas Legislature in 1999, H.B. 2681, 76th Leg., Reg. Sess (Tex. 1999), but was not passed. Id at 250 n.80. The committee that drafted the unified code is considering revising it for reintroduction to the Texas Legislature later. Id. See also Blackwell, supra note 94. There is an argument that maintaining distinctions among business forms and permitting businesses to choose among a proliferation of different forms, each serving a different purpose and each with its own coherent set of default rules, would be more desirable than forcing businesses to use one unified business entity form. See, e.g., Bruce H. Kobayashi & Larry E. Ribstein, Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company, 34 ECON. INQUIRY 464, 469-70 (1996) (arguing that states without a variety of statutes will be at a competitive disadvantage); Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 WASH. U.L.Q. 369, 381-82 (1995) (noting each alternative business form would represent a coherent system, something a unified flexible business form could not easily achieve).
239. Some commentators have proposed that, because the lines between business forms are becoming blurred, now is the time for states to create one generic, flexible business statute with limited liability. See, e.g., Dale A. Oesterle & Wayne M. Gazur, What's in a Name?: An Argument for a Small Business "Limited Liability Entity" Statute (with Three Subsets of Default Rules), 32 WAKE FOREST L. REV. 101 (1997); see also Symposium, supra note 82, at 610-19. An ad hoc committee of the State Bar of Texas' Business Law Section drafted a new code that would consolidate all existing Texas statutes governing the formation and internal affairs of entities in Texas. Thomas F. Blackwell, Finally Adding Method to Madness: Applying Principles of Object-Oriented Analysis and Design to Legislative Drafting, 3 N.Y.U.J. LEGIS. & PUB. POL'Y 227, 249-50 (2000) (discussing Ad Hoc Codification Committee, State Bar of Texas, Preliminary Report of the Codification Committee of the Section of Business Law of the State Bar of Texas on the Proposed Business Organizations Code 1 (Mar. 1999)). A draft of the proposed code was introduced to the Texas Legislature in 1999, H.B. 2681, 76th Leg., Reg. Sess (Tex. 1999), but was not passed. Id at 250 n.80. The committee that drafted the unified code is considering revising it for reintroduction to the Texas Legislature later. Id. See also Blackwell, supra note 94. There is an argument that maintaining distinctions among business forms and permitting businesses to choose among a proliferation of different forms, each serving a different purpose and each with its own coherent set of default rules, would be more desirable than forcing businesses to use one unified business entity form. See, e.g., Bruce H. Kobayashi & Larry E. Ribstein, Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company, 34 ECON. INQUIRY 464, 469-70 (1996) (arguing that states without a variety of statutes will be at a competitive disadvantage); Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 WASH. U.L.Q. 369, 381-82 (1995) (noting each alternative business form would represent a coherent system, something a unified flexible business form could not easily achieve).
240. Some commentators have proposed that, because the lines between business forms are becoming blurred, now is the time for states to create one generic, flexible business statute with limited liability. See, e.g., Dale A. Oesterle & Wayne M. Gazur, What's in a Name?: An Argument for a Small Business "Limited Liability Entity" Statute (with Three Subsets of Default Rules), 32 WAKE FOREST L. REV. 101 (1997); see also Symposium, supra note 82, at 610-19. An ad hoc committee of the State Bar of Texas' Business Law Section drafted a new code that would consolidate all existing Texas statutes governing the formation and internal affairs of entities in Texas. Thomas F. Blackwell, Finally Adding Method to Madness: Applying Principles of Object-Oriented Analysis and Design to Legislative Drafting, 3 N.Y.U.J. LEGIS. & PUB. POL'Y 227, 249-50 (2000) (discussing Ad Hoc Codification Committee, State Bar of Texas, Preliminary Report of the Codification Committee of the Section of Business Law of the State Bar of Texas on the Proposed Business Organizations Code 1 (Mar. 1999)). A draft of the proposed code was introduced to the Texas Legislature in 1999, H.B. 2681, 76th Leg., Reg. Sess (Tex. 1999), but was not passed. Id at 250 n.80. The committee that drafted the unified code is considering revising it for reintroduction to the Texas Legislature later. Id. See also Blackwell, supra note 94. There is an argument that maintaining distinctions among business forms and permitting businesses to choose among a proliferation of different forms, each serving a different purpose and each with its own coherent set of default rules, would be more desirable than forcing businesses to use one unified business entity form. See, e.g., Bruce H. Kobayashi & Larry E. Ribstein, Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company, 34 ECON. INQUIRY 464, 469-70 (1996) (arguing that states without a variety of statutes will be at a competitive disadvantage); Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 WASH. U.L.Q. 369, 381-82 (1995) (noting each alternative business form would represent a coherent system, something a unified flexible business form could not easily achieve).
241. Some commentators have proposed that, because the lines between business forms are becoming blurred, now is the time for states to create one generic, flexible business statute with limited liability. See, e.g., Dale A. Oesterle & Wayne M. Gazur, What's in a Name?: An Argument for a Small Business "Limited Liability Entity" Statute (with Three Subsets of Default Rules), 32 WAKE FOREST L. REV. 101 (1997); see also Symposium, supra note 82, at 610-19. An ad hoc committee of the State Bar of Texas' Business Law Section drafted a new code that would consolidate all existing Texas statutes governing the formation and internal affairs of entities in Texas. Thomas F. Blackwell, Finally Adding Method to Madness: Applying Principles of Object-Oriented Analysis and Design to Legislative Drafting, 3 N.Y.U.J. LEGIS. & PUB. POL'Y 227, 249-50 (2000) (discussing Ad Hoc Codification Committee, State Bar of Texas, Preliminary Report of the Codification Committee of the Section of Business Law of the State Bar of Texas on the Proposed Business Organizations Code 1 (Mar. 1999)). A draft of the proposed code was introduced to the Texas Legislature in 1999, H.B. 2681, 76th Leg., Reg. Sess (Tex. 1999), but was not passed. Id at 250 n.80. The committee that drafted the unified code is considering revising it for reintroduction to the Texas Legislature later. Id. See also Blackwell, supra note 94. There is an argument that maintaining distinctions among business forms and permitting businesses to choose among a proliferation of different forms, each serving a different purpose and each with its own coherent set of default rules, would be more desirable than forcing businesses to use one unified business entity form. See, e.g., Bruce H. Kobayashi & Larry E. Ribstein, Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company, 34 ECON. INQUIRY 464, 469-70 (1996) (arguing that states without a variety of statutes will be at a competitive disadvantage); Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 WASH. U.L.Q. 369, 381-82 (1995) (noting each alternative business form would represent a coherent system, something a unified flexible business form could not easily achieve).
242. Some commentators have proposed that, because the lines between business forms are becoming blurred, now is the time for states to create one generic, flexible business statute with limited liability. See, e.g., Dale A. Oesterle & Wayne M. Gazur, What's in a Name?: An Argument for a Small Business "Limited Liability Entity" Statute (with Three Subsets of Default Rules), 32 WAKE FOREST L. REV. 101 (1997); see also Symposium, supra note 82, at 610-19. An ad hoc committee of the State Bar of Texas' Business Law Section drafted a new code that would consolidate all existing Texas statutes governing the formation and internal affairs of entities in Texas. Thomas F. Blackwell, Finally Adding Method to Madness: Applying Principles of Object-Oriented Analysis and Design to Legislative Drafting, 3 N.Y.U.J. LEGIS. & PUB. POL'Y 227, 249-50 (2000) (discussing Ad Hoc Codification Committee, State Bar of Texas, Preliminary Report of the Codification Committee of the Section of
243. Some commentators have proposed that, because the lines between business forms are becoming blurred, now is the time for states to create one generic, flexible business statute with limited liability. See, e.g., Dale A. Oesterle & Wayne M. Gazur, What's in a Name?: An Argument for a Small Business "Limited Liability Entity" Statute (with Three Subsets of Default Rules), 32 WAKE FOREST L. REV. 101 (1997); see also Symposium, supra note 82, at 610-19. An ad hoc committee of the State Bar of Texas' Business Law Section drafted a new code that would consolidate all existing Texas statutes governing the formation and internal affairs of entities in Texas. Thomas F. Blackwell, Finally Adding Method to Madness: Applying Principles of Object-Oriented Analysis and Design to Legislative Drafting, 3 N.Y.U.J. LEGIS. & PUB. POL'Y 227, 249-50 (2000) (discussing Ad Hoc Codification Committee, State Bar of Texas, Preliminary Report of the Codification Committee of the Section of Business Law of the State Bar of Texas on the Proposed Business Organizations Code 1 (Mar. 1999)). A draft of the proposed code was introduced to the Texas Legislature in 1999, H.B. 2681, 76th Leg., Reg. Sess (Tex. 1999), but was not passed. Id at 250 n.80. The committee that drafted the unified code is considering revising it for reintroduction to the Texas Legislature later. Id. See also Blackwell, supra note 94. There is an argument that maintaining distinctions among business forms and permitting businesses to choose among a proliferation of different forms, each serving a different purpose and each with its own coherent set of default rules, would be more desirable than forcing businesses to use one unified business entity form. See, e.g., Bruce H. Kobayashi & Larry E. Ribstein, Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company, 34 ECON. INQUIRY 464, 469-70 (1996) (arguing that states without a variety of statutes will be at a competitive disadvantage); Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 WASH. U.L.Q. 369, 381-82 (1995) (noting each alternative business form would represent a coherent system, something a unified flexible business form could not easily achieve).
244. The proposed Texas unified code "has moved the overall issue of liability into a 'hub' provision, stating a general rule of limitation of liability on the part of owners, members, and subscribers and managerial officials of domestic entities for contractual or contractually related obligations of the entity, debts and contracts of the entity or tortious acts or omissions of the entity ... with appropriate exceptions ...." Blackwell, supra note 94, at 360. There is some thought, however, that limited liability should only be available if ownership and control are separated. See, e.g., HALPERN ET AL., supra note 133, at 148-49 (suggesting "an unlimited liability regime is the most efficient regime for small, closely held corporations); Manne, supra note 132, at 259; Laurence E. Mitchell, Close Corporations Reconsidered, 63 TUL. L. REV. 1143 (1989).
245. The proposed Texas unified code "has moved the overall issue of liability into a 'hub' provision, stating a general rule of limitation of liability on the part of owners, members, and subscribers and managerial officials of domestic entities for contractual or contractually related obligations of the entity, debts and contracts of the entity or tortious acts or omissions of the entity ... with appropriate exceptions ...." Blackwell, supra note 94, at 360. There is some thought, however, that limited liability should only be available if ownership and control are separated. See, e.g., HALPERN ET AL., supra note 133, at 148-49 (suggesting "an unlimited liability regime is the most efficient regime for small, closely held corporations); Manne, supra note 132, at 259; Laurence E. Mitchell, Close Corporations Reconsidered, 63 TUL. L. REV. 1143 (1989).
246. The proposed Texas unified code "has moved the overall issue of liability into a 'hub' provision, stating a general rule of limitation of liability on the part of owners, members, and subscribers and managerial officials of domestic entities for contractual or contractually related obligations of the entity, debts and contracts of the entity or tortious acts or omissions of the entity ... with appropriate exceptions ...." Blackwell, supra note 94, at 360. There is some thought, however, that limited liability should only be available if ownership and control are separated. See, e.g., HALPERN ET AL., supra note 133, at 148-49 (suggesting "an unlimited liability regime is the most efficient regime for small, closely held corporations); Manne, supra note 132, at 259; Laurence E. Mitchell, Close Corporations Reconsidered, 63 TUL. L. REV. 1143 (1989).
247. The proposed Texas unified code "has moved the overall issue of liability into a 'hub' provision, stating a general rule of limitation of liability on the part of owners, members, and subscribers and managerial officials of domestic entities for contractual or contractually related obligations of the entity, debts and contracts of the entity or tortious acts or omissions of the entity ... with appropriate exceptions ...." Blackwell, supra note 94, at 360. There is some thought, however, that limited liability should only be available if ownership and control are separated. See, e.g., HALPERN ET AL., supra note 133, at 148-49 (suggesting "an unlimited liability regime is the most efficient regime for small, closely held corporations); Manne, supra note 132, at 259; Laurence E. Mitchell, Close Corporations Reconsidered, 63 TUL. L. REV. 1143 (1989).
248. See infra notes 233-37 and accompanying text, for a recommendation of the appropriate conduit system.
249. Blackwell, supra note 94, at 338.
250. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 49-50 (1991) ("Because limited liability increases the probability that there will be insufficient assets to pay creditors' claims, shareholders of a firm reap all the benefits of risky activities, but do not bear all of the costs. These are borne by creditors."); Easterbrook & Fischel, supra note 129, at 104 (noting "incentive to engage in overly risky activities" created by limited liability); Goldberg, supra note 66, at 1012 (stating "companies are able to take greater risk because their owners are insulated from those risks"); KOSE JOHN & LEMMA SENBET, LIMITED LIABILITY, TAX DEDUCTIBILITY OF CORPORATE DEBT, AND PUBLIC POLICY (M.D. & N.Y.U., Working Paper, 1990) (arguing that limited liability engenders social agency problems, such as oil spills, chemical accidents, product liability suits, and nuclear disasters).
251. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 49-50 (1991) ("Because limited liability increases the probability that there will be insufficient assets to pay creditors' claims, shareholders of a firm reap all the benefits of risky activities, but do not bear all of the costs. These are borne by creditors."); Easterbrook & Fischel, supra note 129, at 104 (noting "incentive to engage in overly risky activities" created by limited liability); Goldberg, supra note 66, at 1012 (stating "companies are able to take greater risk because their owners are insulated from those risks"); KOSE JOHN & LEMMA SENBET, LIMITED LIABILITY, TAX DEDUCTIBILITY OF CORPORATE DEBT, AND PUBLIC POLICY (M.D. & N.Y.U., Working Paper, 1990) (arguing that limited liability engenders social agency problems, such as oil spills, chemical accidents, product liability suits, and nuclear disasters).
252. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 49-50 (1991) ("Because limited liability increases the probability that there will be insufficient assets to pay creditors' claims, shareholders of a firm reap all the benefits of risky activities, but do not bear all of the costs. These are borne by creditors."); Easterbrook & Fischel, supra note 129, at 104 (noting "incentive to engage in overly risky activities" created by limited liability); Goldberg, supra note 66, at 1012 (stating "companies are able to take greater risk because their owners are insulated from those risks"); KOSE JOHN & LEMMA SENBET, LIMITED LIABILITY, TAX DEDUCTIBILITY OF CORPORATE DEBT, AND PUBLIC POLICY (M.D. & N.Y.U., Working Paper, 1990) (arguing that limited liability engenders social agency problems, such as oil spills, chemical accidents, product liability suits, and nuclear disasters).
253. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 49-50 (1991) ("Because limited liability increases the probability that there will be insufficient assets to pay creditors' claims, shareholders of a firm reap all the benefits of risky activities, but do not bear all of the costs. These are borne by creditors."); Easterbrook & Fischel, supra note 129, at 104 (noting "incentive to engage in overly risky activities" created by limited liability); Goldberg, supra note 66, at 1012 (stating "companies are able to take greater risk because their owners are insulated from those risks"); KOSE JOHN & LEMMA SENBET, LIMITED LIABILITY, TAX DEDUCTIBILITY OF CORPORATE DEBT, AND PUBLIC POLICY (M.D. & N.Y.U., Working Paper, 1990) (arguing that limited liability engenders social agency problems, such as oil spills, chemical accidents, product liability suits, and nuclear disasters).
254. It has been argued that "a well-designed structure of corporate taxation can provide the right degree of investment disincentives to counteract the overinvestment incentives of limited liability. John et al., supra note 29, at 2. "In other words, a well-structured scheme of taxation can be a means by which the society mitigates costly externalities imposed by the private sector and still preserves the desirable features of downside protection afforded by limited liability." Id. See also Hideki Kanda & Saul Levmore, Taxes, Agency Costs, and the Price of Incorporation, 77 VA. L. REV. 211, 228 (1991) (stating "[c]orporate tax offers a way of offsetting the social costs imposed by corporations because of their limited liability").
255. It has been argued that "a well-designed structure of corporate taxation can provide the right degree of investment disincentives to counteract the overinvestment incentives of limited liability. John et al., supra note 29, at 2. "In other words, a well-structured scheme of taxation can be a means by which the society mitigates costly externalities imposed by the private sector and still preserves the desirable features of downside protection afforded by limited liability." Id. See also Hideki Kanda & Saul Levmore, Taxes, Agency Costs, and the Price of Incorporation, 77 VA. L. REV. 211, 228 (1991) (stating "[c]orporate tax offers a way of offsetting the social costs imposed by corporations because of their limited liability").
256. Goldberg, supra note 66, at 1012 ("A separate tax on entities that enjoy limited liability might be viewed as equalizing the relative government-bestowed benefits and detriments among these entities.").
257. Easterbrook & Fischel, supra note 129, at 93 (also stating "various formulations that have been advanced by the courts can be understood ... as attempts to balance the benefits of limited liability against the costs associated with excessive risk taking"). Professor Presser has suggested: "As the corporation has come under increasing public criticism in the last two decades, the existence of limited liability has been ... challenged." Presser, supra note 133, at 178 (noting there is now "a much greater willingness to pierce the veil than their has been for years").
258. Easterbrook & Fischel, supra note 129, at 93 (also stating "various formulations that have been advanced by the courts can be understood ... as attempts to balance the benefits of limited liability against the costs associated with excessive risk taking"). Professor Presser has suggested: "As the corporation has come under increasing public criticism in the last two decades, the existence of limited liability has been ... challenged." Presser, supra note 133, at 178 (noting there is now "a much greater willingness to pierce the veil than their has been for years").
259. Easterbrook & Fischel, supra note 129, at 109-10; Robert B. Thomas, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1047 (1991) (noting no cases in which a publicly traded entity's veil was pierced).
260. Easterbrook & Fischel, supra note 129, at 109-10; Robert B. Thomas, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1047 (1991) (noting no cases in which a publicly traded entity's veil was pierced).
261. The distinctions between public and private companies might be explained if corporate shareholders (risk bearers) in public entities were truly separate from professional managers. In many cases, however, managers of public companies own stock (in some cases, lots of stock), creating incentives to engage in risky activities, albeit to a lesser extent than in a close corporation setting.
262. For treatment of veil piercing in the LLC context, see generally James D. Cox & Brian W. Woods, Piercing the Veil in Limited Liability Companies, J. LIMITED LIABILITY COMPANIES, Summer 1997, at 30 ("There appears to be no optimal statutory solution for LLCs."); Eric Fox, Note, Piercing the Veil of Limited Liability Companies, 62 GEO. WASH. L. REV. 1143, 1177 (1994) (stating "certain factors normally used in corporate veil piercing are either poorly suited or entirely inappropriate for LLCs"); Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability Company, From Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd., 22 IOWA J. CORP. L. 131, 151 (1996) (analyzing one court's refusal to pierce the veil of an LLC, "seemingly treating an LLC differently from a corporation").
263. For treatment of veil piercing in the LLC context, see generally James D. Cox & Brian W. Woods, Piercing the Veil in Limited Liability Companies, J. LIMITED LIABILITY COMPANIES, Summer 1997, at 30 ("There appears to be no optimal statutory solution for LLCs."); Eric Fox, Note, Piercing the Veil of Limited Liability Companies, 62 GEO. WASH. L. REV. 1143, 1177 (1994) (stating "certain factors normally used in corporate veil piercing are either poorly suited or entirely inappropriate for LLCs"); Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability Company, From Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd., 22 IOWA J. CORP. L. 131, 151 (1996) (analyzing one court's refusal to pierce the veil of an LLC, "seemingly treating an LLC differently from a corporation").
264. For treatment of veil piercing in the LLC context, see generally James D. Cox & Brian W. Woods, Piercing the Veil in Limited Liability Companies, J. LIMITED LIABILITY COMPANIES, Summer 1997, at 30 ("There appears to be no optimal statutory solution for LLCs."); Eric Fox, Note, Piercing the Veil of Limited Liability Companies, 62 GEO. WASH. L. REV. 1143, 1177 (1994) (stating "certain factors normally used in corporate veil piercing are either poorly suited or entirely inappropriate for LLCs"); Shaun M. Klein, Comment, Piercing the Veil of the Limited Liability Company, From Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd., 22 IOWA J. CORP. L. 131, 151 (1996) (analyzing one court's refusal to pierce the veil of an LLC, "seemingly treating an LLC differently from a corporation").
265. States that have statutorily addressed the issue of piercing in the LLC context have adopted established law with regard to piercing the corporate veil. See, e.g., COLO. REV. STAT. § 7-80-107 (1997) (providing that courts "shall apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under Colorado law"); MINN. STAT. § 422B.303(2) (1995) ("The case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies."); WASH. REV. CODE § 25.15.060 (1997) (stating that LLC members shall be liable "to the extent that shareholders of a Washington business corporation would be liable in analogous circumstances," and stating that courts "may consider the factors and policies set forth in established case law with regard to piercing the corporate veil"). See also CAL. CORP. CODE § 17101(b) (West Supp. 1997); HAW. REV. STAT. § 428-1202 (Michie 1997); N.D. CENT CODE § 10-32-29(3) (1995); WIS. STAT. ANN. § 183.0304(2) (West Supp. 1996). Some commentators would apply the existing law of veil piercing to LLCs. See David L. Cohen, Theories of the Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company?, 51 OKLA. L. REV. 427, 429 (1998).
266. Some commentators believe that courts will readily use equitable considerations of fairness to pierce the veil of LLCs "with increased vigilance." See Symposium, supra note 82, at 644-45 (Smith) (predicting that "equity will play an even larger role in future cases" and that courts "will turn to an analysis of the fairness of maintaining limited liability"). This is a concern especially with regard to LLCs with only one member. See Keatinge, supra note 81, at 88-89 ("One must assume that the courts will scrutinize the relationship and transactions between the LLC and its sole member."); see Ribstein, supra note 81, at 48 (noting that a "proprietor may have only a slim margin for error in operating the LLC before a court will pierce the veil and impose personal liability on the owner").
267. Some commentators believe that courts will readily use equitable considerations of fairness to pierce the veil of LLCs "with increased vigilance." See Symposium, supra note 82, at 644-45 (Smith) (predicting that "equity will play an even larger role in future cases" and that courts "will turn to an analysis of the fairness of maintaining limited liability"). This is a concern especially with regard to LLCs with only one member. See Keatinge, supra note 81, at 88-89 ("One must assume that the courts will scrutinize the relationship and transactions between the LLC and its sole member."); see Ribstein, supra note 81, at 48 (noting that a "proprietor may have only a slim margin for error in operating the LLC before a court will pierce the veil and impose personal liability on the owner").
268. Some commentators believe that courts will readily use equitable considerations of fairness to pierce the veil of LLCs "with increased vigilance." See Symposium, supra note 82, at 644-45 (Smith) (predicting that "equity will play an even larger role in future cases" and that courts "will turn to an analysis of the fairness of maintaining limited liability"). This is a concern especially with regard to LLCs with only one member. See Keatinge, supra note 81, at 88-89 ("One must assume that the courts will scrutinize the relationship and transactions between the LLC and its sole member."); see Ribstein, supra note 81, at 48 (noting that a "proprietor may have only a slim margin for error in operating the LLC before a court will pierce the veil and impose personal liability on the owner").
269. John et al., supra note 29, at 12. For this historical progression, see supra notes 13-33 and accompanying text.
270. Under check-the-box regulations, a single-member limited liability company ("SMLLC") is "disregarded" for tax purposes (e.g., activities are treated in the same manner as a sole proprietorship). If the SMLLC is corporate-owned, activities are treated in the same manner as a branch or division. The federal tax treatment of SMLLCs is "one of the most significant innovations in the check-the-box regulations." Schier, supra note 76, at 1682. For additional commentary on the SMLLC, see Keatinge, supra note 81; Miller, supra note 81.
271. Under check-the-box regulations, a single-member limited liability company ("SMLLC") is "disregarded" for tax purposes (e.g., activities are treated in the same manner as a sole proprietorship). If the SMLLC is corporate-owned, activities are treated in the same manner as a branch or division. The federal tax treatment of SMLLCs is "one of the most significant innovations in the check-the-box regulations." Schier, supra note 76, at 1682. For additional commentary on the SMLLC, see Keatinge, supra note 81; Miller, supra note 81.
272. Under check-the-box regulations, a single-member limited liability company ("SMLLC") is "disregarded" for tax purposes (e.g., activities are treated in the same manner as a sole proprietorship). If the SMLLC is corporate-owned, activities are treated in the same manner as a branch or division. The federal tax treatment of SMLLCs is "one of the most significant innovations in the check-the-box regulations." Schier, supra note 76, at 1682. For additional commentary on the SMLLC, see Keatinge, supra note 81; Miller, supra note 81.
273. Some commentators predict that the LLP will become the form of choice for many businesses and eventually surpass the LLC. See Robert R. Keatinge et al., Limited Liability Partnerships: The Next Evolution of the Unincorporated Business Organization, 51 BUS. LAW. 147 (1995). See also Susan S. Fortney, Are Law Firm Partners Islands Unto Themselves? An Empirical Study of Law Firm Peer Review and Culture, 10 GEO. J. LEGAL ETHICS 271, 278-79 (1996).
274. Some commentators predict that the LLP will become the form of choice for many businesses and eventually surpass the LLC. See Robert R. Keatinge et al., Limited Liability Partnerships: The Next Evolution of the Unincorporated Business Organization, 51 BUS. LAW. 147 (1995). See also Susan S. Fortney, Are Law Firm Partners Islands Unto Themselves? An Empirical Study of Law Firm Peer Review and Culture, 10 GEO. J. LEGAL ETHICS 271, 278-79 (1996).
275. The cost of limited liability for these entities is merely compliance with state law technicalities and, in some cases, state taxation. For a recent summary of the state tax treatment of LLCs and LLPs, see Bruce P. Ely & Christopher R. Grissom, LLC and LLP Scoreboard: An Update, TAX NOTES (July 24, 2000).
276. See Hobbs, supra note 18, at 523 (predicting that a § 7704-type remedy taxing LLCs as corporations "likely will result in the immediate extinction of the LLC").
277. Prior to 1988, the LLC was not widely accepted as a practical alternative business form because of the uncertainty regarding its classification for federal income tax purposes. For example, the Service took the position in 1980 that an LLC - offering state law benefits of limited liability to all owners - was treated as a corporation for tax purposes, but the Service withdrew that position several years later after much criticism. See infra notes 212-15 and accompanying text, for a discussion of 45 Fed. Reg. 75, 709 (1980), withdrawn, 48 Fed. Reg. 14,389 (1983). Tax classification was clarified in 1988 when the Service issued Revenue Ruling 88-76, which classified a Wyoming LLC as a partnership for federal income tax purposes. Rev. Rul. 88-76, 1988-2 C.B. 360 (1988) (concluding that the Wyoming LLC lacked a preponderance of corporate characteristics under the Kintner regulations).
278. Although it was possible to achieve Subchapter K conduit taxation by using a limited partnership with a corporate general partner, there were drawbacks. Namely, the technique required the filing of two tax returns, maintenance of duplicate books, and was subject to risks if the general partner was not properly funded. For a discussion of problems with using a corporation as a general partner, see generally Walter D. Schwidetzky, Is It Time to Give the S Corporation a Proper Burial?, 15 VA. TAX REV. 591, 612-16 (1996).
279. Although it was possible to achieve conduit taxation by forming a corporation and making an S election, Subchapter S had some drawbacks. See supra note 83, describing significant differences between Subchapter K and Subchapter S.
280. A third choice, of course, would be whether to get limited liability from both - e.g., purchasing insurance as well as operating in a business form that provides limited liability for owners.
281. If states adopted a single, unified business entity code, businesses would presumably elect out of limited liability to avoid the entity tax if the Reporters' Study is correct.
282. EASTERBROOK. & FISCHEL, supra note 150, at 47.
283. Id. ("Each shareholder would have to negotiate with the insurer. The insurer would have to monitor the wealth of each insured and all other shareholders to assess the riskiness of its own position.").
284. Id. at 48 ("Limited liability also makes a difference if the firm would purchase inadequate insurance or if insurance would not be available in a competitive market. It is hard to imagine, for example, a market for insurance against all bankruptcy."); HAMILTON, supra note 136, at 164.
285. HAMILTON, supra note 136, at 163 ("Probably the most common justification for using a limited liability entity is protection against these types of claims.").
286. See supra notes 129-41 and accompanying text. According to Professor Hamilton: [T]here are a wide variety of alternative investment opportunities in modern society that carry no risk of liability (and may also have the advantage of instant liquidity). As a result, if outside capital from inactive investors is sought, a business form that provides them with limited liability will almost always be necessary. HAMILTON, supra note 136, at 164.
287. Ely & Grissom, supra note 162, at *2. "Tennessee and Alabama became the latest to join the growing number of states that impose significant entity-level taxes on LLEs." Id. (noting Alabama (imposing $100 minimum and $15,000 maximum franchise tax); California (imposing $800 minimum franchise tax and maximum gross receipts tax of $9,377); District of Columbia (imposing 9.975% tax on D.C.-source income earned by unincorporated entities); Illinois (imposing 1.5% income tax on partnerships and LLCs); Kansas (imposing franchise tax on net capital accounts); Michigan (imposing 2.2% of specified LLC tax base); New Hampshire (imposing 5% on dividends and interest, 8% on business profits, and .5% on "business enterprise tax base" of the LLC); Pennsylvania (imposing on LLCs .899% tax on taxable capital stock value); Tennessee (imposing an excise franchise tax of $.25 per $100 of net worth and 6% of net earnings); Texas (imposing the greater of .25% of capital or 4.5% of earned surplus of LLCs); Washington (imposing tax of .138% to 1.5% of gross income); West Virginia (imposing the greater of $50 or .7% of capital)).
288. Larry E. Ribstem, The Deregulation of Limited Liability and the Death of Partnership, 70 WASH. U.L.Q. 417, 457 (1992).
289. See John W. Lee, A Populist Political Perspective of the Business Tax Entities Universe: "Hey the Stars Might Lie But the Numbers Never Do," 78 TEX. L. REV. 885 (2000).
290. Id. at 887 (noting C corporation or S corporation "tends in most market segments to be the tax entity of choice for small businesses conducted in an entity form rather than as a sole proprietorship"). Professor Lee notes, however, that most of the growth in LLCs and LLPs is in the real estate and professional services market segments. Id. at 889.
291. Id. at 887 (noting C corporation or S corporation "tends in most market segments to be the tax entity of choice for small businesses conducted in an entity form rather than as a sole proprietorship"). Professor Lee notes, however, that most of the growth in LLCs and LLPs is in the real estate and professional services market segments. Id. at 889.
292. Id. Professor Lee notes the fact that "for most small businesses conducted in entity form with small positive income after payment of compensation to principals and a need for retention of capital (e.g., for expansion), the tax constraints currently run in favor of the C corporation and against the passthrough form." Id. at 900. "This may be even more true for many capital intensive, moderate income private C corporations." Id.
293. Id. Professor Lee notes the fact that "for most small businesses conducted in entity form with small positive income after payment of compensation to principals and a need for retention of capital (e.g., for expansion), the tax constraints currently run in favor of the C corporation and against the passthrough form." Id. at 900. "This may be even more true for many capital intensive, moderate income private C corporations." Id.
294. Id. Professor Lee notes the fact that "for most small businesses conducted in entity form with small positive income after payment of compensation to principals and a need for retention of capital (e.g., for expansion), the tax constraints currently run in favor of the C corporation and against the passthrough form." Id. at 900. "This may be even more true for many capital intensive, moderate income private C corporations." Id.
295. Id. at 887, 906, 909-11.
296. Id. at 887, 909-10, 916.
297. Id. at 887-88, 919-20.
298. The significance of limited liability to a business depends in large part on the business' possible exposure to tort liability. For some general thoughts on limited liability, see HAMILTON, supra note 136, at 162-64 (noting some "businesses obviously involve a greater risk of tort liability than others, e.g., for malpractice in a law partnership or for an accident involving a delivery truck owned by a wholesale or retail business"). As noted earlier, most firms would opt to use an entity form that statutorily conferred limited liability. See supra notes 160-81 and accompany ing text.
299. Choosing the optimum tax rate would be difficult in that different industries have varying risk characteristics. But see John et al., supra note 29 (proposing an optimum, single economy-wide tax rate, but then proposing a set of technology specific tax features such as investment based deductions and credits).
300. The comprehensive business income tax (CBIT) model proposed by the Treasury in its 1992 integration study imposes a tax at the entity level and eliminates any taxes at the owner level. See TREASURY REPORT, supra note 95, at 39-60. Professor Yin has proposed an approach to integration "that retains both the shareholder and corporate level taxes but integrates them to produce a total tax burden from corporate-source income that is comparable to that from noncorporate source income." George Yin, Corporate Tax Integration and the Search for the Pragmatic Ideal, 47 TAX L. REV. 431, 504 (1992). See also Charles E. McLure, Jr., Integration of the Personal and Corporate Income Taxes: The Missing Element in Recent Tax Reform Proposals, 88 HARV. L. REV. 532, 549-61 (1975) (noting "most corporate integration proposals anticipate that an initial tax at the entity level followed by subsequent tax relief is appropriate").
301. The comprehensive business income tax (CBIT) model proposed by the Treasury in its 1992 integration study imposes a tax at the entity level and eliminates any taxes at the owner level. See TREASURY REPORT, supra note 95, at 39-60. Professor Yin has proposed an approach to integration "that retains both the shareholder and corporate level taxes but integrates them to produce a total tax burden from corporate-source income that is comparable to that from noncorporate source income." George Yin, Corporate Tax Integration and the Search for the Pragmatic Ideal, 47 TAX L. REV. 431, 504 (1992). See also Charles E. McLure, Jr., Integration of the Personal and Corporate Income Taxes: The Missing Element in Recent Tax Reform Proposals, 88 HARV. L. REV. 532, 549-61 (1975) (noting "most corporate integration proposals anticipate that an initial tax at the entity level followed by subsequent tax relief is appropriate").
302. The comprehensive business income tax (CBIT) model proposed by the Treasury in its 1992 integration study imposes a tax at the entity level and eliminates any taxes at the owner level. See TREASURY REPORT, supra note 95, at 39-60. Professor Yin has proposed an approach to integration "that retains both the shareholder and corporate level taxes but integrates them to produce a total tax burden from corporate-source income that is comparable to that from noncorporate source income." George Yin, Corporate Tax Integration and the Search for the Pragmatic Ideal, 47 TAX L. REV. 431, 504 (1992). See also Charles E. McLure, Jr., Integration of the Personal and Corporate Income Taxes: The Missing Element in Recent Tax Reform Proposals, 88 HARV. L. REV. 532, 549-61 (1975) (noting "most corporate integration proposals anticipate that an initial tax at the entity level followed by subsequent tax relief is appropriate").
303. REPORTERS' STUDY, supra note 1, at 56. The Reporters' Study goes on: "Given the absence of any strong justification for double taxing the income of any firm, it is difficult to defend strongly a classification standard based on limited liability or any other characteristic of the firm." Id
304. REPORTERS' STUDY, supra note 1, at 56. The Reporters' Study goes on: "Given the absence of any strong justification for double taxing the income of any firm, it is difficult to defend strongly a classification standard based on limited liability or any other characteristic of the firm." Id
305. Under the check-the-box regulations, an entity is domestic if it is created or organized in the United States or under the law of the United States or of any State; all entities which are not domestic are deemed foreign. Treas. Reg. § 301.7701-1(d).
306. See supra note 75 and accompanying text.
307. Terence F. Cuff, The "Check the Box Regulations" and Partnership Tax Status, in 1 TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS, LLCs, JOINT VENTURES & OTHER STRATEGIC ALLIANCES 57, 68 (Practising Law Institute 2000).
308. Treas. Reg. § 301.7701-2(b)(8) provides a selected list of eighty foreign business entities deemed to be corporations, "apparently based on the fact that the entity was previously unable to be treated as a partnership under the prior four-factor test or is the type most commonly publicly traded with the jurisdiction." Barbara Spudis de Marigny, The "Check-the-Box" Regulations: Elective Entity Classification Under Section 7701, in 1 TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS, LLCs, JOINT VENTURES & OTHER STRATEGIC ALLIANCES 39, 41 (Practicing Law Institute 2000).
309. The Preamble to the "check-the-box" regulations states: "In order to provide most eligible entities with the classification they would choose without requiring them to file an election, the regulations provide default classification rules that aim to match taxpayers' expectations (and thus reduce the number of elections that will be needed)." Simplification of Entity Classification Rules, 61 Fed. Reg. 66584, 66585 (Dec. 18, 1996) (to be codified at 26 C.F.R. parts 1,301 and 602). The default rule for domestic entities is conduit taxation. As explained in this part, however, the default rule for foreign entities is corporate taxation if all members have limited liability. An election would be necessary only if a foreign entity did not want the default status and wished instead to obtain pass-through tax treatment or change its tax classification.
310. Treas. Reg. § 301.7701-3(b)(2).
311. Id.
312. Id. "Disregarded entities may be used to achieve benefits or avoid detriments related to foreign taxes, foreign tax credits, CFC income, etc." Thomas M. Stephens & Paul J. Housey, Tax Planning for Single Member Entities: Check-the-Box, Qualified Subsidiaries and S-Corp Subsidiaries, in 1 TAX PLANNING FOR DOMESTIC & FOREIGN PARTNERSHIPS, LLCs, JOINT VENTURES & OTHER STRATEGIC ALLIANCES 81, 115 (Practising Law Institute 2000) (listing as benefits (1) the "use of cross-border disregarded entities to reduced foreign taxes"; (2) the "use of disregarded entities in lieu of lower-tier CFCs to reduce Subpart F income"; (3) the "use of foreign SMLLCs to move operations offshore for non-tax reasons without altering U.S. federal tax consequences"; and (4) the "[a]voidance of the three-tier deemed-paid foreign tax credit limitation").
313. Note that an entity that is classified under the default rules retains that classification, regardless of changes in members' liability, unless it makes an election to change it. Treas. Reg. § 301.7701-3(a).
314. Treas. Reg. § 301.7701-3(b)(2)(ii). "A member has personal liability if the creditors of the entity may seek satisfaction of all or any portion of the debts or claims against the entity from the member by reason of him being a member, as opposed to collateral guarantees or undertaking that he may have made." Cuff, supra note 188, at 69.
315. Treas. Reg. § 301.7701-3(b)(2)(ii). This is qualified by an exception which provides that a foreign entity's organizational documents may be relevant if limited liability can be specified in them. Id. (providing that "if the underlying statute or law allows the entity to specify in its organizational documents whether the members will have limited liability, the organizational documents may also be relevant").
316. Cuff, supra note 188, at 69. Consider the following example provided by Cuff: An entity is formed under the laws of a foreign jurisdiction and operates business activities within the United States. The entity has two members, who are foreigners. Under the laws of the foreign country under which the entity is formed, a member has no personal liability for the debts of or claims against the entity by reason of being a member. One of the members of the entity enters into an undertaking to guarantee the bank debt of the entity. The entity does not make any election under the "check-the-box" regulations. Id. at 70. This foreign entity will be classified for U.S. tax purposes as a corporation. "A member has no personal liability for the debts of or claims against the entity by reason of being a member under the laws of the country of formation of the entity." Id.
317. See Spudis de Marigny, supra note 189, at 45.
318. Simplification of Entity Classification Rules, 61 Fed. Reg. 66585, 66585 (Dec. 18, 1996) (to be codified at 26 C.F.R. parts 1,301 and 602) (preamble to check-the-box regulations).
319. The default rule could have ignored limited liability and provided that all foreign eligible entities would be taxed as corporations. Apparently, that classification would not have matched taxpayers' expectations.
320. The accuracy of these assumptions will be determined in the near future by analyzing the number of affirmative elections made out of default classification.
321. Classification of Organizations for Purposes of Federal Taxation, 42 Fed. Reg. 1038-39 (Jan. 5, 1977) (to be codified at 26 C.F.R. part 301).
322. The proposed regulations provided: An organization resembles a corporation with respect to limited liability when the percentage of the interest in the organization that do not entail personal liability for claims against the organization is substantially in excess of the percentage of interests that do entail personal liability. An interest does not entail personal liability when the member owning that interest is not subject to substantial risk of loss as to assets not invested in the organization. Organizations engaged in certain activities which are covered by insurance and principally financed through nonrecourse indebtedness resemble corporations with respect to limited liability since the members are protected as to their other assets. Id. at 1039. The proposed regulations disregarded the characteristic of limited liability in determining overall corporate resemblance in two situations: first, when "[t]he nature of the business operation may preclude the possibility of any claim against the organization for an amount in excess of the capital invested"; and second, when "no member of an organization has any substantial assets other than those invested in the organization." Id.
323. See id. For the Treasury's treatment of limited liability under the Kintner regulations before this 1977 proposal, see supra notes 59-62 and accompanying text.
324. See, e.g., Fred W. Peel, Definition of a Partnership: New Suggestions on an Old Issue, WIS.L. REV. 989, 1000-01 (1979); Note, supra note 61, at 762 n.118 (referring to Alan S. Oser, Battle is Joined in I.R.S. Partnership-Corporation Ruling, N.Y. TIMES, Jan. 7, 1977, at A11) (noting that evaluation of limited liability in this regard would "decisively tip the balance to corporate taxation").
325. See, e.g., Fred W. Peel, Definition of a Partnership: New Suggestions on an Old Issue, WIS.L. REV. 989, 1000-01 (1979); Note, supra note 61, at 762 n.118 (referring to Alan S. Oser, Battle is Joined in I.R.S. Partnership-Corporation Ruling, N.Y. TIMES, Jan. 7, 1977, at A11) (noting that evaluation of limited liability in this regard would "decisively tip the balance to corporate taxation").
326. See, e.g., Fred W. Peel, Definition of a Partnership: New Suggestions on an Old Issue, WIS.L. REV. 989, 1000-01 (1979); Note, supra note 61, at 762 n.118 (referring to Alan S. Oser, Battle is Joined in I.R.S. Partnership-Corporation Ruling, N.Y. TIMES, Jan. 7, 1977, at A11) (noting that evaluation of limited liability in this regard would "decisively tip the balance to corporate taxation").
327. See Peel, supra note 205, at 1002. Moreover, "[l]imited liability would be found in any event if the practical circumstances were such that no claims would be pressed beyond the organization's assets, for example, where no member had substantial outside assets." Id.
328. 66 T.C. 159 (1976).
329. Id. Although the Tax Court concluded that it was required to follow the Kintner regulations, weighing equally each corporate characteristic, the court suggested that the Kintner regulations "might not effectively identify those entities that had an overall corporate resemblance." Id.
330. See id. at 185 (stating "if the overall corporate resemblance test ... permits us to weigh each factor according to the degree of corporate similarity it provides, we would be inclined to find that these entities were taxable as corporations").
331. Goldberg, supra note 66, at 1001 (stating, "[i]n response to the growth of tax-shelter limited partnerships, the treasury again sought to modify its regulations to accomplish its goal of the moment, which was then to limit the scope of organizations that could be considered partnerships for tax purposes").
332. 42 Fed. Reg. 1489 (Jan. 7, 1977). See Oser, supra note 205 (noting changes would have "wiped out the tax advantages that draw investment capital into housing construction and rehabilitation" and "Department of Housing and Urban Development ... depends on tax shelters available under the partnership form of organization to generate the private funds needed for Government-subsidized low-income and moderate-income housing"); Peel, supra note 205, at 1000 (noting concern from the real estate industry that "the threatened withdrawal of the tax benefits of direct ownership would hurt real estate investments" and discourage "private investment to low-income housing"); Hobbs, supra note 18, at 500 (noting the proposed regulations "would have adversely affected the Department of Housing and Urban Development's low income housing projects").
333. 42 Fed. Reg. 1489 (Jan. 7, 1977). See Oser, supra note 205 (noting changes would have "wiped out the tax advantages that draw investment capital into housing construction and rehabilitation" and "Department of Housing and Urban Development ... depends on tax shelters available under the partnership form of organization to generate the private funds needed for Government-subsidized low- income and moderate-income housing"); Peel, supra note 205, at 1000 (noting concern from the real estate industry that "the threatened withdrawal of the tax benefits of direct ownership would hurt real estate investments" and discourage "private investment to low-income housing"); Hobbs, supra note 18, at 500 (noting the proposed regulations "would have adversely affected the Department of Housing and Urban Development's low income housing projects").
334. 42 Fed. Reg. 1489 (Jan. 7, 1977). See Oser, supra note 205 (noting changes would have "wiped out the tax advantages that draw investment capital into housing construction and rehabilitation" and "Department of Housing and Urban Development ... depends on tax shelters available under the partnership form of organization to generate the private funds needed for Government-subsidized low- income and moderate-income housing"); Peel, supra note 205, at 1000 (noting concern from the real estate industry that "the threatened withdrawal of the tax benefits of direct ownership would hurt real estate investments" and discourage "private investment to low-income housing"); Hobbs, supra note 18, at 500 (noting the proposed regulations "would have adversely affected the Department of Housing and Urban Development's low income housing projects").
335. Classification of Limited Liability Companies, 45 Fed. Reg. 75,709 (1980), withdrawn, Classification of Limited Liability Companies, 48 Fed. Reg. 14,389, 14,390 (1983).
336. See 45 Fed. Reg. 75,709 (1980) (stating that "[s]ince a limited liability company does not satisfy this condition, it cannot be classified as a partnership").
337. 48 Fed. Reg. 14,389, 14,390 (1983).
338. Id. The Treasury concluded its study in 1988 with the issuance of Revenue Ruling 88-76, concluding that limited liability was to be given equal weight with the other three Kintner factors. Rev. Rul. 88-76, 1988-2 C.B. 360 (concluding that a Wyoming LLC lacked a preponderance of corporate characteristics). This ruling clarified that an LLC could get conduit tax treatment even though all members had limited liability as long as the LLC lacked two of the other three major factors.
339. See Peel, supra note 205, at 1003 (noting although "[t]he partnership form does not itself ordinarily create tax shelters," it does, however, "permit persons to band together to benefit from the tax shelter potential that is available to a sole proprietor with sufficient financial resources and access to investment opportunities").
340. There are a number of tax credits available for real estate. See, e.g., I.R.C. § 25 (providing a credit for a portion of interest paid or accrued on qualified home mortgages); I.R.C. § 42 (providing a credit for a portion of investment in qualified low-income housing); I.R.C. § 44 (providing a credit for a portion of expenditures made to facilities or programs accessible to disabled individuals); I.R.C. § 46 (describing investment tax credit); I.R.C. § 47 (providing a credit for a portion of expenditures made in rehabilitating qualified property); I.R.C. § 48(b) (providing a credit for a portion of expenditures made for reforestation expenditures).
341. See, e.g., I.R.C. § 167 (describing depreciation deductions); I.R.C. § 168 (describing accelerated cost recovery deductions); I.R.C. § 197 (describing amortization deductions).
342. See, e.g., I.R.C. § 175 (providing deductions for soil and water conservation expenditures); I.R.C. § 179 (describing certain asset expensing); I.R.C. § 180 (providing deductions for farmers' land conditioning expenditures); I.R.C. § 190 (providing deductions for architectural barrier removal expenses); I.R.C. § 194 (providing deductions for reforestation expenditures); I.R.C. § 195 (providing deductions for start-up expenditures); I.R.C. § 248 (providing deductions for organizational expenditures for corporations); I.R.C. § 709 (providing deductions for organizational expenditures for partnerships).
343. Under Crane, nonrecourse debt incurred to acquire property is included in the property's basis. Crane v. Comm'r, 331 U.S. 1, 13 (1947). Under Subchapter K partnership taxation, partners are allowed to increase the basis in their partnership interest for their share of partnership nonrecourse debt. See I.R.C. § 752 (permitting partners to include a share of nonrecourse liabilities of an entity in the basis of their interests); Treas. Reg. § 1.752-1 to -3 (providing rules for determining partners' shares of entity nonrecourse debt). Peel, supra note 205, at 1003 (noting "[a]ccelerated depreciation and amortization deductions, investment credits, current deduction of capital outlays, and basis expanded by nonrecourse liabilities create the tax shelters").
344. See supra note 87 and accompanying text.
345. OLIVER & PEEL, supra note 76, at 1-3.
346. Note, supra note 61, at 762. See also OLIVER & PEEL, supra note 76, at 1-3 (noting importance of equity and economic efficiency in structuring taxes, but also noting importance "of structuring taxes so as not to encourage unproductive decisions and actions").
347. Note, supra note 61, at 762. See also OLIVER & PEEL, supra note 76, at 1-3 (noting importance of equity and economic efficiency in structuring taxes, but also noting importance "of structuring taxes so as not to encourage unproductive decisions and actions").
348. See supra note 220.
349. See supra note 220, for the current treatment of debt. The government considered the alternative of treating limited liability vehicles "as separate entities, rather than conduits, in determining the effect of" certain transactions (e.g., partnership liabilities on a limited partner's basis). Joint Committee on Taxation, supra note 120, at 40. Under this approach, "Crane ... would simply become inapplicable in the limited partnership context to which it was extended" and, hence, a limited partner would not be able to include partnership debt in her basis. Id. at 41. See also Hyman & Hoffman, supra note 66, at 392 n.43a (wondering "why the Congress and the Service have never challenged the rule that a limited partner may include a share of nonrecourse liabilities of the partnership in the basis of his partnership interest").
350. Section 465 limits the deduction of losses from income producing or business activities to the amount with respect to which the taxpayer is "at risk." I.R.C. § 465(a), (d) (defining loss to mean the excess of deductions allowable to the activity over income derived from the activity). A taxpayer is considered to be at risk to the extent of money contributed to the activity, the adjusted basis of property contributed to the activity, and amounts borrowed for use in the activity, but only if the taxpayer is personally liable for repayment of the borrowed funds. See I.R.C. § 465(b). A taxpayer generally is not considered to be at risk with respect to nonrecourse loans. There is an exception, however, for nonrecourse financing with respect to real estate activities. I.R.C. § 465(b)(6); see infra note 227. Section 465 is applicable to individuals and closely held C corporations. I.R.C. § 465(a). Although § 465 is inapplicable to partnerships and S corporations, it does apply to the partners or S corporation shareholders at their individual levels.
351. In general, a taxpayer is "at risk" with respect to nonrecourse financing of real estate activities if the financing is from the government, guaranteed by the government, or from a qualified person who is in the business of lending money. I.R.C. § 465(b)(6)(B)(ii). A qualified person must not be related to the taxpayer, be a person from whom the taxpayer acquired the property, or be a person who receives a fee for the taxpayer's investment. I.R.C. § 49(a)(1)(D)(iv)(I)-(III). The exception for qualified nonrecourse financing with respect to real estate is broad.
352. Section 469, added in 1986, disallows the deduction of passive activity losses. I.R.C. § 469. Although partnerships and S corporations are not subject to the passive activity loss rules, the partners and S corporation shareholders are generally governed by § 469 with respect to passive activity losses passed through to them. Id. A passive activity is any business or profit seeking activity in which the taxpayer-owner does not materially participate. I.R.C. § 469(c). Material participating is satisfied only if the taxpayer-owner is involved on a regular, continuous, and substantial basis in the operations of the activity. I.R.C. § 469(h)(1). The Service has promulgated regulations that provide a substantially mechanical set of rules to determine whether the material participation test is satisfied. See Treas. Reg. § 1.469-5T(a) (1996) (providing seven situations in which the test may be satisfied).
353. A rental activity is generally passive, even if the taxpayer materially participates in the activity. I.R.C. § 469(c)(2). However, Congress has created exceptions to this general disallowance rule for real estate. Under one exception, a rental real property trade or business of a taxpayer is treated as an active as opposed to a passive activity (and, thus, not subject to the passive activity loss rules) if more than one half of the personal services performed by the taxpayer in all trades or businesses during the year (and more than 750 hours) are performed in real property trades or businesses in which taxpayer materially participates. I.R.C. § 469(c)(7). Under another exception, up to $25,000 of losses attributable to rental real estate activities can be offset against income from nonpassive activities if the taxpayer actively participates in the rental activity and if the taxpayer owns at least ten percent of all interests in the activity. I.R.C. § 469(1). The active participation requirement is not as stringent as the material participation rule.
354. See supra note 71 and accompanying text.
355. See supra note 75 and accompanying text.
356. Under Subchapter K partnership taxation, an increase in a partner's share of partnership debt is treated as a deemed contribution of money by the partner to the partnership. I.R.C. § 752(a). A constructive contribution of cash to the partnership increases the partner's adjusted basis of his or her partnership interest. I.R.C. §§ 705(a), 722. As a result of including a partner's share of debt in his or her basis, greater opportunity exists for losses to pass through to the partner and for cash distributions to be received tax free. I.R.C. § 704(d) (stating that losses are limited to basis of partnership interest; I.R.C. § 731(a) (stating that cash distributions can be received tax free to the extent they do not exceed basis of partnership interest)). The regulations under § 752 provide complex rules for determining how partnership debt is allocated among partners. Recourse debt is allocated in accordance with the manner in which the partners bear economic risk of loss for a partnership liability. Treas. Reg. § 1.752-2(a). Nonrecourse debt is allocated under a different set of principles, generally in proportion to each partner's interest in partnership profits. Treas. Reg. § 1.752-3(a)(3).
357. The main passthrough regimes are Subchapter K, I.R.C. §§ 701-761, and Subchapter S, I.R.C. §§ 1361-78. On different views regarding the appropriate conduit regime for those entities not subject to entity taxation, see, e.g., Curtis J. Berger, W(h)ither Partnership Taxation?, 47 TAX L. REV. 105, 107-08 (1991) (proposing to combine Subchapters S and K); Martin D. Ginsburg, Maintaining Subchapter S in a Tax Integrated World, 47 TAX L. REV. 665 (1992); Jerome Kurtz, The Limited Liability Company and the Future of Business Taxation: A Comment on Professor Berger's Plan, 47 TAXL.REV. 815,818,821 (1992) (proposing partnership taxation as the best approach);
358. The main passthrough regimes are Subchapter K, I.R.C. §§ 701-761, and Subchapter S, I.R.C. §§ 1361-78. On different views regarding the appropriate conduit regime for those entities not subject to entity taxation, see, e.g., Curtis J. Berger, W(h)ither Partnership Taxation?, 47 TAX L. REV. 105, 107-08 (1991) (proposing to combine Subchapters S and K); Martin D. Ginsburg, Maintaining Subchapter S in a Tax Integrated World, 47 TAX L. REV. 665 (1992); Jerome Kurtz, The Limited Liability Company and the Future of Business Taxation: A Comment on Professor Berger's Plan, 47 TAXL.REV. 815,818,821 (1992) (proposing partnership taxation as the best approach); Lokken, supra note 88 (proposing a liberalized version of Subchapter S); Maine, supra note 88 (proposing a liberalized version of Subchapter S in the event states create a unified business entity code in the wake of check-the-box entity classification).
359. The main passthrough regimes are Subchapter K, I.R.C. §§ 701-761, and Subchapter S, I.R.C. §§ 1361-78. On different views regarding the appropriate conduit regime for those entities not subject to entity taxation, see, e.g., Curtis J. Berger, W(h)ither Partnership Taxation?, 47 TAX L. REV. 105, 107-08 (1991) (proposing to combine Subchapters S and K); Martin D. Ginsburg, Maintaining Subchapter S in a Tax Integrated World, 47 TAX L. REV. 665 (1992); Jerome Kurtz, The Limited Liability Company and the Future of Business Taxation: A Comment on Professor Berger's Plan, 47 TAXL.REV. 815,818,821 (1992) (proposing partnership taxation as the best approach); Lokken, supra note 88 (proposing a liberalized version of Subchapter S); Maine, supra note 88 (proposing a liberalized version of Subchapter S in the event states create a unified business entity code in the wake of check-the-box entity classification).
360. The main passthrough regimes are Subchapter K, I.R.C. §§ 701-761, and Subchapter S, I.R.C. §§ 1361-78. On different views regarding the appropriate conduit regime for those entities not subject to entity taxation, see, e.g., Curtis J. Berger, W(h)ither Partnership Taxation?, 47 TAX L. REV. 105, 107-08 (1991) (proposing to combine Subchapters S and K); Martin D. Ginsburg, Maintaining Subchapter S in a Tax Integrated World, 47 TAX L. REV. 665 (1992); Jerome Kurtz, The Limited Liability Company and the Future of Business Taxation: A Comment on Professor Berger's Plan, 47 TAXL.REV. 815,818,821 (1992) (proposing partnership taxation as the best approach); Lokken, supra note 88 (proposing a liberalized version of Subchapter S); Maine, supra note 88 (proposing a liberalized version of Subchapter S in the event states create a unified business entity code in the wake of check-the-box entity classification).
361. The main passthrough regimes are Subchapter K, I.R.C. §§ 701-761, and Subchapter S, I.R.C. §§ 1361-78. On different views regarding the appropriate conduit regime for those entities not subject to entity taxation, see, e.g., Curtis J. Berger, W(h)ither Partnership Taxation?, 47 TAX L. REV. 105, 107-08 (1991) (proposing to combine Subchapters S and K); Martin D. Ginsburg, Maintaining Subchapter S in a Tax Integrated World, 47 TAX L. REV. 665 (1992); Jerome Kurtz, The Limited Liability Company and the Future of Business Taxation: A Comment on Professor Berger's Plan, 47 TAXL.REV. 815,818,821 (1992) (proposing partnership taxation as the best approach); Lokken, supra note 88 (proposing a liberalized version of Subchapter S); Maine, supra note 88 (proposing a liberalized version of Subchapter S in the event states create a unified business entity code in the wake of check-the-box entity classification).
362. Instead of using Subchapter K or Subchapter S, the government could use one of the special conduit regimes currently available for certain real estate activities. For example, the government could choose a liberalized version of the Real Estate Investment Trust (REIT) for specified real estate investment. See I.R.C. §§ 856-60. A REIT is generally taxed as a conduit provided certain requirements are satisfied that ensure that the REIT remains predominantly a real estate entity. See Steven F. Mount, Real Estate Investment Trusts, 742 TAX MGMT. A-1 (BNA 1996).
363. Subchapter S has already undergone substantial liberalization. Major revisions were made in 1982, Subchapter S Revision Act of 1982, Pub. L. No. 97-354, 96 Stat. 1669 (1982), and again in 1996, Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755. The 1996 Act, for example, increased the number of permitted shareholders from thirty-five to seventy-five, I.R.C. § 1361(b)(1)(A), permitted as shareholders new electing small business trusts, which can sprinkle income to trust beneficiaries, I.R.C. §§ 1361(c)(2)(A)(v), 1361(e), permitted S corporations to owns stock of another corporation (but not to file consolidated returns), I.R.C. § 1361(b)(3), permitted tax exempt organizations as shareholders, I.R.C. § 1361(b)(1)(B), permitted certain financial institutes to be S corporations, I.R.C. § 1361(b)(2)(A), broadened the straight-debt safe harbor to provide some financial flexibility, I.R.C. § 1361(c)(5)(B)(iii), and made invalid S elections easier to correct. I.R.C. § 1362(f). For a summary of the 1996 changes, see Barbara Bryniarski, Changes to the S Corporation Provisions by the Small Business Job Protection Act of 1996, 25 TAX MGMT. WKLY. REP. 1322 (BNA, Sept. 2, 1996). For an American Bar Association report recommending that several partnership rules should be incorporated into Subchapter S, see James Edward Maule, Subcommittee Chair, ABA Section of Taxation Committee on S corporations, Subcommittee on the Comparison of S Corporations and Partnerships, Report on the Comparison of S Corporations and Partnerships Part I, 44 TAX LAW. 483 (1991); see also James Edward Maule, Subcommittee Chair, ABA section of Taxation Committee on S Corporations, Subcommittee on the Comparison of S Corporations and Partnership, Report on the Comparison of S Corporations and Partnerships Part II, 44 TAX LAW. 813, 864-65 (1991).
364. Subchapter S has already undergone substantial liberalization. Major revisions were made in 1982, Subchapter S Revision Act of 1982, Pub. L. No. 97-354, 96 Stat. 1669 (1982), and again in 1996, Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755. The 1996 Act, for example, increased the number of permitted shareholders from thirty-five to seventy-five, I.R.C. § 1361(b)(1)(A), permitted as shareholders new electing small business trusts, which can sprinkle income to trust beneficiaries, I.R.C. §§ 1361(c)(2)(A)(v), 1361(e), permitted S corporations to owns stock of another corporation (but not to file consolidated returns), I.R.C. § 1361(b)(3), permitted tax exempt organizations as shareholders, I.R.C. § 1361(b)(1)(B), permitted certain financial institutes to be S corporations, I.R.C. § 1361(b)(2)(A), broadened the straight-debt safe harbor to provide some financial flexibility, I.R.C. § 1361(c)(5)(B)(iii), and made invalid S elections easier to correct. I.R.C. § 1362(f). For a summary of the 1996 changes, see Barbara Bryniarski, Changes to the S Corporation Provisions by the Small Business Job Protection Act of 1996, 25 TAX MGMT. WKLY. REP. 1322 (BNA, Sept. 2, 1996). For an American Bar Association report recommending that several partnership rules should be incorporated into Subchapter S, see James Edward Maule, Subcommittee Chair, ABA Section of Taxation Committee on S corporations, Subcommittee on the Comparison of S Corporations and Partnerships, Report on the Comparison of S Corporations and Partnerships Part I, 44 TAX LAW. 483 (1991); see also James Edward Maule, Subcommittee Chair, ABA section of Taxation Committee on S Corporations, Subcommittee on the Comparison of S Corporations and Partnership, Report on the Comparison of S Corporations and Partnerships Part II, 44 TAX LAW. 813, 864-65 (1991).
365. Subchapter S has already undergone substantial liberalization. Major revisions were made in 1982, Subchapter S Revision Act of 1982, Pub. L. No. 97-354, 96 Stat. 1669 (1982), and again in 1996, Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755. The 1996 Act, for example, increased the number of permitted shareholders from thirty-five to seventy-five, I.R.C. § 1361(b)(1)(A), permitted as shareholders new electing small business trusts, which can sprinkle income to trust beneficiaries, I.R.C. §§ 1361(c)(2)(A)(v), 1361(e), permitted S corporations to owns stock of another corporation (but not to file consolidated returns), I.R.C. § 1361(b)(3), permitted tax exempt organizations as shareholders, I.R.C. § 1361(b)(1)(B), permitted certain financial institutes to be S corporations, I.R.C. § 1361(b)(2)(A), broadened the straight-debt safe harbor to provide some financial flexibility, I.R.C. § 1361(c)(5)(B)(iii), and made invalid S elections easier to correct. I.R.C. § 1362(f). For a summary of the 1996 changes, see Barbara Bryniarski, Changes to the S Corporation Provisions by the Small Business Job Protection Act of 1996, 25 TAX MGMT. WKLY. REP. 1322 (BNA, Sept. 2, 1996). For an American Bar Association report recommending that several partnership rules should be incorporated into Subchapter S, see James Edward Maule, Subcommittee Chair, ABA Section of Taxation Committee on S corporations, Subcommittee on the Comparison of S Corporations and Partnerships, Report on the Comparison of S Corporations and Partnerships Part I, 44 TAX LAW. 483 (1991); see also James Edward Maule, Subcommittee Chair, ABA section of Taxation Committee on S Corporations, Subcommittee on the Comparison of S Corporations and Partnership, Report on the Comparison of S Corporations and Partnerships Part II, 44 TAX LAW. 813, 864-65 (1991).
366. As the rules of Subchapter K are overly complex compared to those of Subchapter S, the author's preference would be to give Subchapter K its proper burial. In the check-the-box entity classification regulations, the Treasury chose as the default rule Subchapter K and partnership taxation - "the most complex of all the possibilities." William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 38 (1995). The Joint Committee on Taxation responded: "Some provisions of Subchapter K may give anomalous results, may have unforeseen problems in application, or may have become anachronistic." Joint Committee on Taxation, Review of Selected Entity Classification and Partnership Tax Issues (JCS-6-97), Apr. 8, 1997, reprinted in WILLIAM S. MCKEE ET AL., 1 FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS ¶ 89 (Cum. Supp. 1997). For additional commentary on the complexities of Subchapter K, see Berger, supra note 233, at 107-08 (describing Subchapter K as "one of the most inaccessible and burdensome features of the entire tax system"); Jeffrey L. Kwall, Taxing Private Enterprise in the New Millennium, 51 TAX LAW. 229, 232 (1998) (describing Subchapter K as "an unwieldy system" that "plagues many unincorporated small businesses utilizing relatively simple arrangements").
367. As the rules of Subchapter K are overly complex compared to those of Subchapter S, the author's preference would be to give Subchapter K its proper burial. In the check-the-box entity classification regulations, the Treasury chose as the default rule Subchapter K and partnership taxation - "the most complex of all the possibilities." William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 38 (1995). The Joint Committee on Taxation responded: "Some provisions of Subchapter K may give anomalous results, may have unforeseen problems in application, or may have become anachronistic." Joint Committee on Taxation, Review of Selected Entity Classification and Partnership Tax Issues (JCS-6-97), Apr. 8, 1997, reprinted in WILLIAM S. MCKEE ET AL., 1 FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS ¶ 89 (Cum. Supp. 1997). For additional commentary on the complexities of Subchapter K, see Berger, supra note 233, at 107-08 (describing Subchapter K as "one of the most inaccessible and burdensome features of the entire tax system"); Jeffrey L. Kwall, Taxing Private Enterprise in the New Millennium, 51 TAX LAW. 229, 232 (1998) (describing Subchapter K as "an unwieldy system" that "plagues many unincorporated small businesses utilizing relatively simple arrangements").
368. As the rules of Subchapter K are overly complex compared to those of Subchapter S, the author's preference would be to give Subchapter K its proper burial. In the check-the-box entity classification regulations, the Treasury chose as the default rule Subchapter K and partnership taxation - "the most complex of all the possibilities." William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 38 (1995). The Joint Committee on Taxation responded: "Some provisions of Subchapter K may give anomalous results, may have unforeseen problems in application, or may have become anachronistic." Joint Committee on Taxation, Review of Selected Entity Classification and Partnership Tax Issues (JCS-6-97), Apr. 8, 1997, reprinted in WILLIAM S. MCKEE ET AL., 1 FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS ¶ 89 (Cum. Supp. 1997). For additional commentary on the complexities of Subchapter K, see Berger, supra note 233, at 107-08 (describing Subchapter K as "one of the most inaccessible and burdensome features of the entire tax system"); Jeffrey L. Kwall, Taxing Private Enterprise in the New Millennium, 51 TAX LAW. 229, 232 (1998) (describing Subchapter K as "an unwieldy system" that "plagues many unincorporated small businesses utilizing relatively simple arrangements").
369. As the rules of Subchapter K are overly complex compared to those of Subchapter S, the author's preference would be to give Subchapter K its proper burial. In the check-the-box entity classification regulations, the Treasury chose as the default rule Subchapter K and partnership taxation - "the most complex of all the possibilities." William J. Rands, Passthrough Entities and Their Unprincipled Differences Under Federal Tax Law, 49 SMU L. REV. 15, 38 (1995). The Joint Committee on Taxation responded: "Some provisions of Subchapter K may give anomalous results, may have unforeseen problems in application, or may have become anachronistic." Joint Committee on Taxation, Review of Selected Entity Classification and Partnership Tax Issues (JCS-6-97), Apr. 8, 1997, reprinted in WILLIAM S. MCKEE ET AL., 1 FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS ¶ 89 (Cum. Supp. 1997). For additional commentary on the complexities of Subchapter K, see Berger, supra note 233, at 107-08 (describing Subchapter K as "one of the most inaccessible and burdensome features of the entire tax system"); Jeffrey L. Kwall, Taxing Private Enterprise in the New Millennium, 51 TAX LAW. 229, 232 (1998) (describing Subchapter K as "an unwieldy system" that "plagues many unincorporated small businesses utilizing relatively simple arrangements").
370. In this regard, the recommended conduit system would differ from the simplified conduit system for Simple Private Business Firms recommended by the Reporters' Study. REPORTERS' STUDY, supra note 1, at Proposals 4-2, 4-3.
371. The government could take a different approach and permit conduit tax treatment for those members of an entity that have personal unlimited liability, but prevent flow through treatment for those members of the entity that have limited liability. Professor Peel has proposed such a dual tax system that would treat each category of members, limited and general, consistently with their interests and risks. Peel, supra note 205, at 1007-09. Under his dual tax treatment, entities would be broken down into their component parts - those ownership interests that entail personal unlimited liability and those ownership interests that entail limited liability. Id. at 1007. The latter component would be treated as a corporation. Id. This constructive corporation (a composite of all the limited liability interests) would be treated as a member along with those members who have personal liability. Id. Its share of income would be subject to an entity tax. Items would not directly pass-through to the individual members, as is the case with conduit taxation. Id.
372. See supra notes 78-89 and accompanying text, for criticisms of the current tax classification system.
373. See supra notes 233-37 and accompanying text.
374. A taxpayer-owner of a limited liability entity must first pass through the hoops of § 704(d) after passing through the hoops of § 752 to determine outside basis. Then the taxpayer must pass through the hoops of § 465 including the exceptions pertaining to real estate, and finally the taxpayer must pass through the hoops of § 469 including again the exception pertaining to real estate. See supra notes 220, 226-29, 232.
375. REPORTERS' STUDY, supra note 1, at 55-56.
376. See, e.g., Philip F. Postlewaite et al., A Critique of the ALI's Federal Income Tax Project - Subchapter K: Proposals on the Taxation of Partners, 75 GEO. L.J. 423, 451, 461 (1986) (proposing to treat all business organizations, whether publicly traded or not, as corporations for federal income tax purposes unless fifty percent or more of the members have unlimited personal liability). Snoe notes that the Code accords special treatment to organizations "if members owning less than all the interests in the organization meet the requisite criteria." Snoe, supra note 28, at 681. He cites examples throughout the Code in which ownership percentage interest is the reference criteria. Id. at n. 199.
377. See, e.g., Philip F. Postlewaite et al., A Critique of the ALI's Federal Income Tax Project - Subchapter K: Proposals on the Taxation of Partners, 75 GEO. L.J. 423, 451, 461 (1986) (proposing to treat all business organizations, whether publicly traded or not, as corporations for federal income tax purposes unless fifty percent or more of the members have unlimited personal liability). Snoe notes that the Code accords special treatment to organizations "if members owning less than all the interests in the organization meet the requisite criteria." Snoe, supra note 28, at 681. He cites examples throughout the Code in which ownership percentage interest is the reference criteria. Id. at n. 199.
378. See, e.g., Note, supra note 61, at 759 (proposing to tax limited partnerships as corporations unless the general partnership interest was the "most substantial").
379. This was the approach taken by the Treasury in its 1977 proposed regulations. 42 Fed. Reg. 1038, 1039 (Jan. 4, 1977) ("An organization resembles a corporation with respect to limited liability when the percentage of the interest in the organization that do not entail personal liability for claims against the organization is substantially in excess of the percentage of interests that do entail personal liability.").
380. The Treasury has taken this approach in the current default classification rules for foreign eligible entities under the check-the-box regulations. See Treas. Reg. § 301.7701-3(b)(2) (providing a foreign eligible entity will be taxed as a corporation if all members have limited liability). See supra notes 189-97 and accompanying text. It should come as no surprise that Treasury took an all or nothing approach in the foreign context. The 1960 Kintner regulations, for example, stated that an entity possessed the corporate characteristic of limited liability only if no member was personally liable for the entity's obligations. See Former Treas. Reg. § 301.7701-2(d)(1) (1960) (amended 1996). See supra note 59 and accompanying text. The Treasury's 1980 proposed regulations, which would have made limited liability a super criterion, stated that "the term partnership can apply only to an organization some member of which is personally liable." 45 Fed. Reg. 75,709 (1980), withdrawn, 48 Fed. Reg. 14,389 (1983). See supra notes 212-15 and accompany ing text. See also Peel, supra note 205, at 1015.
381. See, e.g., Peel, supra note 205, at 1013 (proposing under previous regulations that the corporate characteristic of limited liability be found "if any member is not personally liable").
382. See Postlewaite et al., supra note 243, at 461 (using similar rationale to support fifty-percent test).
383. Hobbs, supra note 18, at 520 (noting that if an entity level tax were based on limited liability, one "would have to determine whether the test would be based on statutory limited liability or whether all of the facts and circumstances would have to be examined, such as personal guarantees, insurance, and perhaps even the nature of the business being conducted").
384. The Treasury has taken this approach in the current default classification rules for foreign eligible entities under the check-the-box regulations. Treas. Reg. § 301.7701-3(b)(2)(ii). The federal check-the-box regulations include an exception that "if the underlying statute or law allows the entity to specify in its organizational documents whether the members will have limited liability, the organizational documents may also be relevant." Id. See supra notes 189-97 and accompanying text, for a discussion of the foreign check-the-box regulations.
385. Merely because Kintner failed to achieve federal policies does not mean that we need to search for a tax system that ignores the importance of local law labels, such as limited liability. Reliance on state bestowed limited liability would be necessary to enforce important tax policies as discussed in Part III supra.
386. See supra notes 169-72 and accompanying text.
387. Although Professor Hamill does not recommend a limited liability based corporate tax, she does suggest that such a tax, "to be remotely fair and consistent" would have to be imposed on "businesses providing substantive protection rather than confining the rules to statutory protection." Hamill, supra note 8, at 431 n.180. See also David R. Keyser, Publicly Traded Partnerships: The Treasury Fights the Wrong War, 27 TAX NOTES 527 (Apr. 29, 1985) (proposing partnership taxation only when a general partner has genuine unlimited liability, when "the debt incurred by the enterprise creates a genuine risk that payment pursuant to that unlimited liability might occur").
388. Although Professor Hamill does not recommend a limited liability based corporate tax, she does suggest that such a tax, "to be remotely fair and consistent" would have to be imposed on "businesses providing substantive protection rather than confining the rules to statutory protection." Hamill, supra note 8, at 431 n.180. See also David R. Keyser, Publicly Traded Partnerships: The Treasury Fights the Wrong War, 27 TAX NOTES 527 (Apr. 29, 1985) (proposing partnership taxation only when a general partner has genuine unlimited liability, when "the debt incurred by the enterprise creates a genuine risk that payment pursuant to that unlimited liability might occur").
389. See supra note 242 and accompanying text.
390. The Service went down a similar path under the Kintner classification regulations, when it imposed minimum net worth requirements for corporate general partners. See Rev. Proc. 72-13, 1972-1 C.B. 735.
391. The Reporters' Study raised this issue. REPORTERS' STUDY, supra note 1, at 55-56.
392. See, e.g., HAMILTON, supra note 136, at 38.
393. See id. (noting that "several states that originally adopted limited shields have amended, or are considering amending, their statutes to broaden them" to cover "all liabilities of every kind"). This is the approach of the Uniform Partnership Act, as amended in 1994. See RUPA § 306(c).
394. See, e.g., Keatinge et al., supra note 161, at 180 ("There is no policy justification not to provide a complete limitation on vicarious individual liability similar to that applicable to shareholders in a corporation or members in an LLC."); Ribstein, supra note 175 (making policy arguments that broad shield LLP statutes "get it right"). But see Robert W. Hamilton, Registered Limited Liability Partnerships: Present at the Birth (Nearly), 66 COLO. L. REV. 1065 (1995) (arguing against a default rule of limited liability); Snoe, supra note 28 (suggesting the importance of limited liability may be overstated).
395. See, e.g., Keatinge et al., supra note 161, at 180 ("There is no policy justification not to provide a complete limitation on vicarious individual liability similar to that applicable to shareholders in a corporation or members in an LLC."); Ribstein, supra note 175 (making policy arguments that broad shield LLP statutes "get it right"). But see Robert W. Hamilton, Registered Limited Liability Partnerships: Present at the Birth (Nearly), 66 COLO. L. REV. 1065 (1995) (arguing against a default rule of limited liability); Snoe, supra note 28 (suggesting the importance of limited liability may be overstated).
396. See, e.g., Keatinge et al., supra note 161, at 180 ("There is no policy justification not to provide a complete limitation on vicarious individual liability similar to that applicable to shareholders in a corporation or members in an LLC."); Ribstein, supra note 175 (making policy arguments that broad shield LLP statutes "get it right"). But see Robert W. Hamilton, Registered Limited Liability Partnerships: Present at the Birth (Nearly), 66 COLO. L. REV. 1065 (1995) (arguing against a default rule of limited liability); Snoe, supra note 28 (suggesting the importance of limited liability may be overstated).
397. See, e.g., Keatinge et al., supra note 161, at 180 ("There is no policy justification not to provide a complete limitation on vicarious individual liability similar to that applicable to shareholders in a corporation or members in an LLC."); Ribstein, supra note 175 (making policy arguments that broad shield LLP statutes "get it right"). But see Robert W. Hamilton, Registered Limited Liability Partnerships: Present at the Birth (Nearly), 66 COLO. L. REV. 1065 (1995) (arguing against a default rule of limited liability); Snoe, supra note 28 (suggesting the importance of limited liability may be overstated).
398. See supra notes 146-48 and accompanying text.