Tuesday, September 22, 2009
Twelve years ago, new regulations dramatically changed the manner in which the federal income tax system determines how business entities are taxed. The new explicitly elective “check-the-box” regulations for entity classification drew wide praise when they replaced the old multifactored corporate resemblance test. Now, with the benefit of hindsight and with previously unpublished data regarding entity classification elections made since 1997, this Article revisits the check-the-box regulations. As the first comprehensive study of these regulations in action, this Article critically examines the successes and failures of arguably the most significant change to the business tax system in the last twenty years. The Article argues that the experience with the check-the-box regulations suggests that they fall short of their promise even though they are an improvement over the prior entity classification rules. The Article also examines the scope of the check-the-box election itself and argues that the election lacks a coherent set of limitations, which undermines the goals behind the provision of the election. Ultimately, this Article concludes that the policy weaknesses revealed by an examination of the check-the-box regulations stem fundamentally from the existence of a multi-regime system for taxing businesses. Hence, the regulations expose a problem with the business tax regimes among which taxpayers can choose, thus adding an additional reason to reform the federal income tax treatment of businesses.