Corporate Elections Under Subchapter S

Abstract

Over the years, there have been many suggestions that the Internal Revenue Code be amended to permit (or require) the shareholders of closely-held corporations to be taxed as though they were carrying on their activities as partners, i.e., relieving the corporation from taxation on condition that each stockholder report his share of the corporation's income, whether distributed to him or not, on his individual income tax return. Such a proposal was passed by the Senate in 1954 to permit "small corporations which are essentially partnerships to enjoy the advantages of the corporate form of organization without being made subject to possible tax disadvantages of the corporation" and to "eliminate the influence of the federal income tax in the selection of the form of business organization which may be most desirable under the circumstances." The 1954 proposal was eliminated by the conference committee; but the idea was revived in 1958 and enacted into law as Subchapter S of the Internal Revenue Code (§§ 1371-77), for the announced purposes of allowing businesses to select their legal forms free of undue tax influence, aiding small business by taxing the corporation's income to shareholders who may be in lower brackets than their corporations, and permitting the shareholders of corporations that are suffering losses to offset the losses against individual income from other sources.