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February 09, 2015 The Tax Lawyer

Subchapter S at 55—Has Time Passed This Passthrough By? Maybe Not

Vol. 68, No. 1 - Fall 2014

David R. Sicular


    The S corporation is 55 years old, roughly my age.  It has been in existence for the entire careers of nearly all active tax practitioners.  Almost all, I suspect, have worked with the S corporation rules to at least some extent.

    It is relatively unusual in my practice to form S corporations. For nearly two decades, there have been readily available (and more flexible) alternatives that provide what was once unique to S corporations – limited liability and flow-through tax treatment.  Instead, most of my encounters have involved S corporations that have grown successful businesses and want to engage in major economic transactions.  At this point, many learn that there are exposures in their S corporation histories, and quite a few learn that the S corporation format does not easily accommodate the transactions they wish to do.  Given these facts, I was surprised to learn, in writing this paper, that S corporations are the most common form of corporation in terms of number of returns filed.  In 2010‑11 approximately 5.8 million corporate tax returns were filed by “active” corporations, and of those, approximately 4.1 million (71 percent) were S corporation returns.

    Despite the continuing popularity of the S corporation regime, I think it makes sense to take a step back and examine it, consider whether it is needed and if so, whether it should be overhauled.  As the recent reform proposal from Representative Camp shows, I am not alone in this view. 

    This paper examines these issues.  Part of this paper sets forth a brief overview of Subchapter S as it exists today and the history of how it got there.  Part discusses a number of problems in the S corporation regime, many of which I have encountered in my practice.  These problems are among the reasons why our clients choose not to structure their businesses as S corporations (or, in some cases, later regret that they did form them as S corporations).  At the same time, there are also some good reasons that might lead sophisticated tax practitioners to suggest S corporations over partnerships.  Part discusses some of those in detail.  Part  discusses selected recent proposals for reforming Subchapter S, including Camp “Option 2” released in Spring , 2013 and the excellent ALI Reporter’s Study released over a decade ago.  Finally, part discusses some of my thoughts as to how Subchapter S might be revised.

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