Subchapter S in the federal tax code

[rangerj]

Does anyone know when Subchapter S was first entered into the Federal tax code. My memory says it was the 1954 tax code, but I'm not sure. Basically Congress recognized that small business corporations, that is "closely held" corporations, are more "form" than "substance". The reality is that they are proprietorships or partnerships and Congress recognized this in order to eliminate the "double taxation" of the owners. In essence the Congress recognized the economic reality of the small business corporation, that is that they were one and the same as the owners. Interestingly enough the Supreme Court reaffirmed this decades old concept and I find it interesting that many folks are acting as if new ground has been broken. 

[billisonboard]

Google knows.

[mwcpa]

1958....a time when the top personal income tax rate was 91% and the highest corporate rate was 52%.... and people cry about 39.6% and 35% today.... we got drunk during the Bush years with low taxes, but now the hang over comes

[Deleted]

Hobby Lobby is a small business now?

[Deleted]

I hope the next time Hobby Lobby is sued, they understand that they are their 'small business'

[rangerj]

Thanks MW. When I got out of the Army in 1969 Congress had enacted a 10% surtax on top of the rates you mention. As it was enacted effectively for the mid-year the first years rate was 5% and 1970 was the full 10%. I do not remember 1971 as I was busy cashing in on the GI Bill, but I do not think the surtax went beyond 1971. Around that time the "Maximum Tax" on earned income was capped at 50% and other income was capped at 70%. Also at that time only 50% of long term capital gains were taxed and for a short time only 40% of LTCGs were taxed (60% section 1202 deduction). The fact that we are in a global economy now necessitates lower taxes in order to be competitive. Unfortunately Congress lowered taxes and increased expenditures at the same time.

And yes Hobby Lobby is a small "Mom and Pop" business.

[Deleted]

Jul 12, 2014 16:22:53 GMT -5 rangerj said:

And yes Hobby Lobby is a small "Mom and Pop" business.

By what definition?

[TheOtherMe]

Jul 12, 2014 17:27:30 GMT -5 oped said:

I wish I could remember the tax rate when we would raise an audit issue for unreasonable compensation back in the day.

[rangerj]

The unreasonable comp cases I saw back in the day would be taxed AT THE 70% RATE OF DIVIDENDS, plus penalties. There are numerous court cases on the unreasonable comp issue and effectively the officer/owner could be paid for every service he/she provides the business, e.g. salesman, accountant, custodian, planner, etc. The other side of the coin is the dividend issue. There must be E&P in order for there to be a dividend. Furthermore the dividend should be based upon comparable businesses with respect to earnings, paid in capital, and the rate of dividends.

Every item on the P&L and the balance sheet are the doing and responsibility of the small group of owners. They personally made the investment, and are responsible for the liabilities, and there is no public money invested. They are a "small" business. They are not subject to SEC rules and they are not Boeing, GMC, ATT, IBM, etc. There is NO public interest in these closely held corporations other than Child Labor Laws, OSHA, EPA, for example. Pay and benefit packages should not be determined by the government, but rather the market. If a prospective employee has the education, experience, and skills the employer wants then the employer will make a competitive offer of wages and benefits. If folks do not take the time and make the effort to make themselves marketable they have no one but themselves to blame. It is not the place of the government to force employers to provide employees with benefits that exceed the market value of the employee, especially recreational drugs. These unearned benefits will be deducted by the business as an expense, and WE will have to make it up in taxes AND pay more for the products. If this prices the product out of range with the foreign competition then the business fails and all of the employees are out of work without benefits. The US was an agrarian society, then an industrial society, and now an information/technology society. Those who failed to prepare for this are simply SOL. Note: I grew up in a Steel town with 5 steel mills in a 15 mile radius. By the time I finished my undergraduate degree they were all gone, but one, and it is a "mini-mill" now. Most manufacturing is done by machines/robots and that is more productive and more efficient AND less expensive that human labor. This is necessary in order to compete with countries where labor and life is cheap.

[billisonboard]

Jul 12, 2014 11:40:25 GMT -5 rangerj said:

... Interestingly enough the Supreme Court reaffirmed this decades old concept and I find it interesting that many folks are acting as if new ground has been broken. 

Where did the Supreme Court reaffirm this?

[TheOtherMe]

Jul 12, 2014 19:21:51 GMT -5 rangerj said:

The unreasonable comp cases I saw back in the day would be taxed AT THE 70% RATE OF DIVIDENDS, plus penalties. There are numerous court cases on the unreasonable comp issue and effectively the officer/owner could be paid for every service he/she provides the business, e.g. salesman, accountant, custodian, planner, etc. The other side of the coin is the dividend issue. There must be E&P in order for there to be a dividend. Furthermore the dividend should be based upon comparable businesses with respect to earnings, paid in capital, and the rate of dividends.

I knew it was a ridiculously high rate of tax and management loved when we told them we were raising it.  

[rangerj]

These issues were being raised by IRS at about the time LEE Iacocha was given a total pay package of $13 million at Chrysler. How could this small corporation owner/officer be excessively compensated at $250,000 or $500,000 when he/she is chief cook and bottle washer and Lee does nor build one single car. And so the argument went. The courts finally settled these issues and they faded away. I have not seen one raised, or heard of one being raised, in a long time. Now with CEO getting hundreds of millions the government would be hard pressed to raise such an issue, besides the low tax rate on dividends also would make the issue worthless to the government.

The 1986 tax reforms closed a lot of loop holes and sheltering, but Congress, being what it is, started in 1987 adding new tax incentives and "simplification". And they are still at it.

[taxref]

"Basically Congress recognized that small business corporations, that is "closely held" corporations, are more "form" than "substance". The reality is that they are proprietorships or partnerships and Congress recognized this in order to eliminate the "double taxation" of the owners. In essence the Congress recognized the economic reality of the small business corporation, that is that they were one and the same as the owners. Interestingly enough the Supreme Court reaffirmed this decades old concept and I find it interesting that many folks are acting as if new ground has been broken. "

I would disagree.  The S corp format was created to provide a way to provide limited liability protection to small businesses, without the onerous double taxation of C corps.  They were always mandated to be a separate legal entity from their owners, just like a C corp.  They also had to be run according to rules and laws for corporations.  Almost all of us who have been in accounting for a while have some horror stories, caused by small corps not being run like real corporations by their shareholders.

Supreme Court decisions of recent years, regarding "constitutional rights" of non-human legal entities, are indeed judicial forays into uncharted territories. 

[mwcpa]

"Almost all of us who have been in accounting for a while have some horror stories, caused by small corps not being run like real corporations by their shareholders."

[TheOtherMe]

Jul 21, 2014 6:07:08 GMT -5 mwcpa said:

"Almost all of us who have been in accounting for a while have some horror stories, caused by small corps not being run like real corporations by their shareholders."

 x 2

[rangerj]

Indeed the Court has opened up Pandora box given the wide range of beliefs (religious or otherwise) held by folks. But, there is still a lot of validity to the recent decision regarding SMALL closely held businesses and their owners being one and the same. An investor in a public business has no more to lose than his/her investment. A small business owner, corporate or otherwise, usually has gone "all in" and has everything to lose. They are a corporation IN form, BUT NOT IN SUBSTANCE. I have had many business clients who have stayed up the night before an audit filling in the corporate minute book. As for limited liability, the small business owner usually has to be a cosigner or make other collateral arrangements to cover liabilities. They ARE the business and it is not just a stock investment, but it usually is their livelihood. The Court, in this latest decision, pierced the corporate veil and looked beyond the form and into the substance. The government has overstepped its bounds in this matter. Employee benefits should be a matter for the market. If an employee has marketable skills then the employer will provide benefits to get and keep that employee, including health insurance. To do this through the tax code is especially galling, and worse yet for an unelected government official to mandate the provision of recreational drugs under the umbrella of "health care". It is indeed time to overhaul the tax code.

[taxref]

"The government has overstepped its bounds in this matter. Employee benefits should be a matter for the market. If an employee has marketable skills then the employer will provide benefits to get and keep that employee, including health insurance. To do this through the tax code is especially galling, and worse yet for an unelected government official to mandate the provision of recreational drugs under the umbrella of "health care"."


I think we are now (again) well outside the parameters of Tax Talk.  I would (again) point out Moonbeam's sticky at the top of Tax Talk.  There are many forums intended for banging pots and pans about ones political beliefs.  We should all try to keep Tax Talk on subject.