TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, October 17, 2013

Bank: When We Taxed the Pyramids

Steven A. Bank (UCLA), When We Taxed the Pyramids, 41 Fla. St. L. Rev. ___ (2014):

One of the more anomalous features of the corporate income tax is the dividends received deduction, which permits a corporation to deduct from income an amount equal to some or all of the dividends it receives in its capacity as a shareholder of another domestic corporation. It is neither a device for avoiding multiple layers of taxation, since some intercorporate dividends are only partially deductible, nor is it a device for differentiating true dividends from distributions that are mere shifts in money from a corporation’s right pocket to its left pocket, since even a corporation that owns a single share of stock in a large public corporation can still exclude most of the dividend from income. Treasury’s Office of Tax Policy has called the provision distortionary and identified its reform as one method of improving the competitiveness of U.S. businesses abroad.

This paper, written for a Florida State University College of Law symposium on the 100th anniversary of the federal income tax, explores the evolution of the tax treatment of intercorporate dividends. The original rationale for taxing intercorporate dividends was to discourage the formation and continued existence of corporate pyramids, or multi-level corporate chains of ownership in which the investors at the top of the chain are able to leverage a relatively small investment in one corporation in order to exercise power and influence over the entire group. At the time, this pyramidal structure was thought to facilitate corporate governance issues, tax evasion, and undue political power and influence. Although the resulting tax burden from the introduction of intercorporate dividend taxation was too small to force an immediate change in organizational structures, it was part of a multi-faceted campaign against corporate pyramids that included the enactment of the Public Utility Holding Company Act and the repeal of the consolidated return filing privilege. As concern about pyramids declined and the consolidated return was revived, the continued existence of the intercorporate dividends tax was ripped from its original moorings and left to drift toward its current incoherent position. Although reform efforts have been largely ineffective over the last several decades, the rise in multinational corporations may force movement in this area.

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