Sage Journals: Discover world-class research

Abstract

This article provides estimates of the effects of corporate taxation on the financial characteristics of firms. For a large number of corporations the corporate tax is voluntary, as they have the choice of operating as an S corporation—a pass-through entity similar to a partnership. Given that firms appear to volunteer to pay an additional tax, this article examines the behavior of firms to identify the relationship between their choice to be subject to the corporate tax and tax minimizing strategies. Analyzing firms with positive and negative income separately, the results suggest that the probability a firm has chosen to be taxable increases with firm size and with activity consistent with mitigating both the corporate and individual tax on corpo rate income. In addition, there is strong evidence that the additional administrative burden caused by a lack of conformity between state and federal tax treatment of S corporations provides a significant disincentive to the use of pass-through corporations.

Get full access to this article

View all access options for this article.

References

Avery, R.B. 1980. Qualitative dependant variable program: Crawtran . Carnegie-Mellon University. Mimeo.

Evans, M. 1991. IRS bashed from all sides over one-class-of-stock regs covering S corporations. Tax Notes 50:704-8.

Fellows, J.A. 1987. Weighing the S election after Tax Reform. The National Public Accountant (August): 18-23.

Guenther, D.A. 1992. Taxes and organizational form: A comparison of corporations and master limited partnerships. The Accounting Review 67:17-45.

Kenoe, A.S. 1982. An overview of the Subchapter S Revision Act of 1982. Tax Notes 17 (12): 883-930.

Lind, S.A. , S. Schwarz , D.J. Lathrope , and J.D. Rosenberg. 1987. Fundamentals of corporate taxation . 2d ed. Mineola, NY: Foundation Press.

MacKie-Mason, J.K. , and R.H. Gordon. 1991. Taxes and the choice of organizational form. Working paper no. 3781, National Bureau of Economic Research.

Maddala, G.S. 1983. Limited-dependent and qualitative variables in econometrics . Cambridge: Cambridge University Press.

—. 1991. A perspective on the use of limited-dependent and qualitative variables models in accounting research. The Accounting Review 66:788-807.

10.

Maule, J.E. 1984. Effect of state law on the use of S corporations . Tax Lawyer 37:535-76.

11.

McLure, C.E., Jr. 1979. Must corporate income be taxed twice? Washington, DC: Brookings Institution.

12.

Nelson, S.C. 1988. Noncorporate business: Before and after the Tax Reform Act of 1986. Working paper no. 59, Office of Tax Analysis U.S. Treasury.

13.

—. 1992. S corporations since the Tax Reform Act of 1986 . Proceedings of the Eighty-fourth Annual Conference , National Tax Association-Tax Institute of America, Columbus

14.

One class of stock requirement for S corporations: Proposed regulations under section 1361. 1990. Tax Notes 49(2): 153.

15.

Plesko, G.A. 1990. Testimony before the Committee on Finance. U.S. Senate. Decline of corporate tax revenues. S.Hrg. 101-1065. Washington, DC: GPO.

16.

Raabe, W.A. , and K.J. Boucher. 1993. 1993 multistate corporate tax guide . New York: Panel Publishers.

17.

Raby, W.L. 1992. How $2 million of compensation can cost $2 million in tax assessments. Tax Notes 54:1117-9.

18.

Reischauer, R.D. 1990. Testimony before the Committee on Finance. U.S. Senate. Decline of corporate tax revenues. S.Hrg. 101-1065. Washington, DC: GPO.

19.

Reynolds, R. , and J. Kessel. 1988. A practical guide to the state tax impact of a subchapter S election. Journal of State Taxation 6:291-326.

20.

Rosen, H.S. 1990. Testimony before the Committee on Finance. U.S. Senate. Decline of corporate tax revenues. S.Hrg. 101-1065. Washington, DC: GPO.

21.

Schmehl, J.W. 1987. How liquidations and S elections may avoid the impact of TRA' 86. Journal of Taxation 67 (1): 30-8.

22.

Sharp, J.H., Jr. 1987. S corporations, choice of entity: A practical guide . Orlando, FL. Mimeo.

23.

Solomon, L.D. , B.K. Lurie , and C.D. Boutwell. 1986. Choice of entity. Tax management guide 456 TM. Washington, DC: Bureau of National Affairs.

24.

U.S. Congress. House. 1987. Committee on the Budget. Omnibus Budget Reconciliation Act of 1987. Report 100-391, part 2.

25.

U.S. Internal Revenue Service. 1987. Statistics of income - 1984: Corporation income tax returns. Publication 16. Washington, DC: U.S. Internal Revenue Service.

26.

—. 1990. One class of stock requirement. Proposed rules (PS-4-73). Washington, DC: U.S. Internal Revenue Service.

Corporate Taxation and the Financial Characteristics of Firms

Abstract

Get full access to this article

References