A long standing feature of U.S. corporate taxation is a group of doctrinal devices serving to prevent taxpayer attempts to avoid double taxation of corporate earnings. This Article refers to these devices collectively as the constructive dividend doctrine (hereinafter “CDD”) and analyzes the extent to which the CDD ought to be set aside as counterproductive.
This analysis is grounded in contrasting views of the normative tax treatment of corporate enterprise. On the one hand is the perspective in which the double income taxation of corporate income is normative (the “Double Tax Perspective”). The Double Tax Perspective calls for taxation of corporate income a first time as it is received or accrued in the corporation’s hands and a second time as those corporate earnings are distributed to shareholders. The normative shareholder treatment from the Double Tax Perspective is as full ordinary income in shareholders’ hands as corporate earnings are distributed. It treats the reduced rate capital gain taxation for most stock sales and deemed stock sales as a “narrow” exception to this norm.
A contrasting perspective is one in which all income derived from a business enterprise would be taxed exactly once (the “Integrationist Norm”). Under such an idealized Integrationist Norm, all income would be imputed to individuals connected with the corporate enterprise—as shareholders or otherwise—as earned, and all income would be taxed at the individual rate schedules. In principle, the nearest one might come to such a perfect regime is the fiscal transparency of a full pass-through regime. Under such a tax regime, there would be no corporate-level tax. Instead, all of the revenue of the corporation would be taxed as income of some individual. The nearest analog is the tax treatment of partnerships.
This Article is predicated on the wisdom of the Integraionist Norm. Elsewhere, in an article entitled Advancing to Corporate Tax Integration: A Laissez-Faire Approach, I advanced the proposition that, although systematic corporate tax integration is unlikely to be enacted in the foreseeable future, integrationism should be regarded as normative. The Laissez-Faire Approach proposes that, to the extent that legal mechanisms serve to prevent self-help corporate tax integration, they are counterproductive, wasting valuable taxpayer, IRS, and judicial resources. This Article analyzes the CDD in light of the Laissez-Faire Approach in order to identify circumstances in which it is best to dispense with the CDD as a counterproductive mechanism that wastes resources reinforcing the double tax anti-ideal.
Polito, Anthony P.
"Constructive Dividend Doctrine from an Integrationist Perspective,"
Akron Tax Journal: Vol. 27
, Article 1.
Available at: https://ideaexchange.uakron.edu/akrontaxjournal/vol27/iss1/1