The entity principle: tax the incomes of legal persons

First resulting issue: How to coordinate the tax on corporations with that on their human shareholders?

US system: the "classic" two-level corporate income tax

A relic of the 1909-1913 era: corp income tax enacted when supreme court wouldn't allow indiv income tax

Tax income when received by corp.

Tax distributions of corp income (dividends) when received by sh.

Means you need a cumulative tracking account. If a profitless corporation pays $ to owner, it's a refund of  investment, not Y. The "earnings and profits" account

Creates potential for cascading taxes when corps own other corps - the DRD adjustment

No corp deduction for dividend distributions to shareholders

Creates incentive for SH's to engage in non-dividend transactions with co, and need for rules to uncover  "disguised dividends"

The "Substance over Form" principle

Second issue: How tax income-earning business organizations that aren't legal persons?

The partnership "conduit" (pass-thru) model

The organization reports the results of operations, and each member's share of the results of operations

The members individually are taxed on their share, whether the results are left in or removed from the entitiy.

Need tracking rules when year 1 profits are paid out in year 2: "basis adjustments"

Other variants of pass-thru apply to:

S-Corps: "small" number of individual shareholders

Trusts and Estates: funds managed fbo others

RICs and REITS

Third Resulting Issue: How tax individuals in a way that reflects family obligations, which affect ability to pay?

Child is a separate taxpayer: Sec. 73

personal exemption - an untaxed "poverty level" amount: Sec. 151: $ 2,000 per person, w/ infl adj (now about $2,650)

The person providing support generally claims the exemption: Sec. 151(c) a complex, 5 part test