Evaluating Subchapter S in a 'Check-in-The-Box' World

In 1997, the Treasury Department simplified business entity classification for tax purposes by finalizing “check-the-box” regulations. These regulations permit most unincorporated business entities to elect, by in effect “checking a box” on an election form, to be treated as either partnerships or corporations for federal income tax purposes. Although the check-the-box regulations have been applauded, they raise an important question: What impact will the regulations have on subchapter S of the Internal Revenue Code? This article argues on both practical and theoretical grounds that subchapter S has continuing utility in a check-the-box environment.The article provides a brief overview of subchapter S's origins. It describes recent events having a dramatic impact on subchapter S, namely the prolif eration of LLCs, finalization of check-the-box regulations, and recent state legislative responses to elective classification. It illustrates the more subtle phenomenon of how efforts to reinvigorate subchapter S have caused subchapter S to more closely resemble subchapter K, thus calling into question the need for two similar pass-through regimes. The article provides several practical reasons why S corporations continue to be the preferred choice of pass-through entity for many businesses. It argues that the convergence of LLCs, federal check-the-box regulations, and state legislative response to elective classification has led to an irrational result - a new corporate-like entity taxed as a partnership. The article describes the proper role of subchapter S in the present world of multiple entity choices, a world in which distinctions among business forms are becoming obscured. The article suggests that a liberalized version of subchapter S would be the appropriate pass-through model if states consolidate existing business forms and create a uniform non-public business association statute, muck like the LLC form that is emerging after state legislative response to check-the-box classification. Subchapter S would have more theoretical merit than would partnership taxation due to the inherent state law characteristics such a business entity would possess and the relative simplicity of subchapter S