Wednesday, February 14, 2018
Bret Wells (Houston), Reform of Corporate Distributions in Subchapter C, 37 Va. Tax Rev. 365 (2018):
Subchapter C’s corporation distribution provisions contain significant complexity aimed at obsolete bail-out concerns that needlessly create schizophrenic outcomes in today’s context. Subchapter C’s corporation distribution provisions were designed in an era when dividends were taxed at a different rate than were long-term capital gains, but now in this era it is important to note that Section 1(h)(11) provides that dividends received by individuals generally are taxed at the same rate as long-term capital gains, and the American Taxpayer Relief Act of 2012 made this tax rate parity permanent. Thus, unlike most of the US income tax history, individuals now are entitled to receive the same preferential tax rate for qualified dividends as long-term capital gains. When one examines subchapter C’s provisions that deal with corporate distributions in light of this relatively new reality, the statutory picture reveals significant complexity aimed at obsolete bail-out concerns that now only serve to create schizophrenic outcomes in today’s context.
Thus, it is important to view these relics for what they now represent: a public nuisance regardless of whether one seeks to promote the classic double taxation of corporate earnings and profits or one seeks to promote a dividends paid deduction form of corporate-shareholder integration. Now that the historic bail-out of earnings and profits at capital gains rates is no longer a critical policy factor, the subchapter C distribution provisions should be rethought in terms of the policy factors that are relevant for today’s context. This paper sets forth a reform proposal that attempts to reform Subchapter C’s corporate distribution provisions for the current era.