Collapsible Corporations Under the Tax Reform Act of 1986

Abstract

In 1982, the American Law Institute described the collapsible corporation rules, set out in § 341, as "characterized by a pathological degree of complexity, vagueness and uncertainty." Four years later, it became possible to augment this description by saying that § 341 became triply anomalous with the enactment of the Tax Reform Act of 1986. First, as a tax avoidance device, the collapsible corporation rested on a tax rule that was repealed in 1986. Second, § 341 was nevertheless preserved virtually intact by the 1986 Act; indeed, its reach was slightly expanded. Third, the punitive remedy employed by § 341 to discourage the use of collapsible corporations became, at most, a slap on the wrist. Thus, the first and second anomalies are neutralized, rather than multiplied, by the third.