Business Purpose and the Subchapter S Inspired Reorganization

The potentially advantageous treatment under subchapter S permitting certain corporations to elect to pass through corporate income and losses to the shareholder, and to avoid the corporate tax, is the result of two different pressures. Tax collector and taxpayer have long been at odds over the purported double taxation of corporate earnings. The limited disregard of the corporate entity as a taxpaying entity then becomes another phase in the cycle begun in 1936, when dividends were subjected to full taxation at the shareholder level. The more recent concern for small business and the small business man has resulted in the several tax concessions enacted into law by Congress in 1958.

The dual pressure produced the limited relief from double taxation of corporate earnings provided for the "small business corporation." The tax concessions granted by subchapter S might be attractive to corporations which are now precluded from electing that treatment. This suggests an examination of corporate adjustments enabling elective election.