Checking in on 'Check-the-Box'

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SSRN Electronic Journal

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Heather M. Field
Elsevier BV
entity classification; business taxation; tax election; check the box regulations; partnership tax; corporate tax
article description
Twelve years ago, new regulations dramatically changed the manner in which the federal income tax system determines how business entities are taxed. These new explicitly elective "check-the-box" regulations for entity classification replaced a multi-factored corporate resemblance test and drew wide praise for their potential to increase simplicity and certainty, reduce costs, and enhance efficiency and equity. Now, with the benefit of hindsight and with previously unpublished data regarding entity classification elections made since 1997, this Article revisits the check-the-box regulations. As the first comprehensive study of the check-the-box regulations in action, this Article critically examines the successes and failures of arguably the most significant change to the business tax system in the last twenty years. The Article argues that the experience with the check-the-box regulations suggests that while the regulations represent an improvement over the prior entity classification rules, they fall short of their promise. The Article also examines the scope of the check-the-box election itself and argues that the election lacks a coherent set of limitations, which undermines the goals behind an explicit entity classification election. Ultimately, this Article concludes that the policy weaknesses revealed by a close examination of the check-the-box regulations stem fundamentally from the existence of a multi-regime system for taxing businesses, and hence, the regulations expose a problem with the choices themselves, thus adding an additional reason to reform the federal income tax's treatment of businesses.