This article conducts an analysis of the Internal Revenue Code's varied income tax treatment between depreciated property and appreciated property transferred into C corporations by shareholders in nonrecognition transactions.7 It is at the entry point of the non-recognition transaction where the lobster pot unfairly doubles up on unrecognized gains at both the corporate and shareholder level notwithstanding that unrecognized losses generally remain singular at either level. The authors call into question this long-standing practice of artificial gain duplication upon corporate entry under Subchapter C. From a tax policy perspective, such disparate treatment makes little sense - particularly when the duplicated gain is not economically associated with the corporate solution (i.e., it was incurred pre-contribution).

To properly appreciate the differing income tax treatment between pre-contribution gains and losses, the first part of this article explores the corporation as a separate taxpaying entity distinct from its shareholders, the lack of a coherent rational behind the double tax system, and the phantom gain enigma associated with pre-contribution gains. The next part of this article discusses the operation of Subchapter C with regard to formation, capital contributions, non-liquidating distributions, and liquidating distributions. We then discuss the general purpose behind Congress' enactment of the loss limitation provisions and how we arrived at the current state of the law where pre-contribution losses generally remain singular while pre-contribution gains are duplicated. We conclude by making certain suggestions primarily designed to eliminate the gain duplication quagmire, such as a partial imputation system or a modified full integration system.

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