Taxation of Private Business Firms: Imagining a Future Without Subchapter K

Congress should radically reshuffle the respective jurisdictions of subchapters K, S, and C. Form of organization should no longer play any role in an entity's tax classification. Subchapter K should only remain available to service entities for which capital is not a material income-producing factor. The more restrictive conduit regime of subchapter S should be opened to all private business fins with simple capital structures and should be revised to incorporate as much of the flexibility of subchapter K as is possible without making it unreasonably susceptible to abuse. All firms with more complex ownership structures should be subject to subchapter C, but the incomes of private business firms within subchapter C should only be taxed once.

The taxable income of a private C entity should be determined without deduction for interest expense, and returns received by the entity's owners and creditors (e.g., dividends and interest) should be exempt from tax.