Can We Clean This Up? A Brief Journey Through the U.S. Rules for Taxing Business Entities

Abstract

This article summarizes the 80-plus year history of the U.S. Federal income tax rules for classifying business entities, concluding that they result largely from administrative and/or legislative reactions to specific problems or legislative accommodations to industry lobbying efforts and do not reflect an effort to develop a comprehensive and coherent system for taxing (or not taxing) business income. While this history does not suggest that comprehensive reform is likely, the article proposes some changes that might be considered – specifically, a single tax system for non-publicly traded businesses and rationalizing the treatment of foreign investment in the US, particularly in the case of investments in stocks, securities and real estate.

Keywords: Entity classification, Federal income tax, Passthroughs, S Corporations, Real Estate Investment Trusts, Regulated Investment Companies, Check the Box Regulations

JEL Classification: K20, K34