DOCSLIB.ORG

The Deferral of Income Earned Through US Controlled

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Deferral of Income Earned Through US Controlled The Deferral of Income Earned Through U.S. Controlled Foreign Corporations A Policy Study Office of Tax Policy Department of the Treasury December 2000 TABLE OF CONTENTS INTRODUCTION PURPOSE, STRUCTURE, BASIC CONCEPTS, AND DESCRIPTION OF SUBPART F Statement of Purpose ............................................vii Structure of the Study .......................................... viii Basic Concepts ................................................ viii Brief Description of the Subpart F Regime ............................ xi CHAPTER 1 WHY SUBPART F WAS ENACTED: DEVELOPMENTS IN THE LAW BEFORE 1962 General ........................................................1 The Underlying Need for Anti-Deferral Rules: Structural Tensions in the U.S. Tax System ..................................................1 The Need for Restrictions on Deferral: Tax Avoidance and Response ........4 Conclusion ....................................................10 CHAPTER 2 THE INTENT OF SUBPART F Introduction ...................................................12 Concerns Leading to Enactment of Subpart F ..........................12 Conclusions on Intent of Subpart F ..................................22 CHAPTER 3 ECONOMIC WELFARE AND THE TAXATION OF FOREIGN INCOME Introduction and Overview ........................................23 A Note on Economic Methodology .................................24 Optimal Taxation of International Investment Income ....................25 The Economic Effects of the Foreign-to-Foreign Related Party Rules ........42 Conclusions Relating to Economic Welfare and the Taxation of Foreign Income .......................................................53 CHAPTER 4 COMPETITIVENESS AND THE TAXATION OF FOREIGN INCOME Introduction ...................................................55 Has Subpart F Affected Competitiveness? .............................56 Has Subpart F Substantially Affected Comparative Tax Burdens of U.S. Multinational Corporations? .................................57 Conclusion on Competitiveness and the Taxation of Foreign Income ........61 CHAPTER 5 AVOIDING THE RULES OF SUBPART F General .......................................................62 Illustrations of Techniques to Avoid Subpart F .........................62 Is Subpart F Still Effective? .......................................67 CHAPTER 6 CHALLENGES TO SUBPART F: ENTITY CLASSIFICATION, SERVICES AND ELECTRONIC COMMERCE Introduction ...................................................68 Impact of the Check-The-Box Entity Classification Rules .................68 Subpart F and Services ...........................................70 The Challenges to Subpart F Posed by Electronic Commerce ..............75 Conclusions Relating to Challenges to Subpart F .......................81 CHAPTER 7 CRITERIA AND OPTIONS FOR CHANGE Introduction ...................................................82 Criteria for Evaluating Changes to Subpart F ..........................82 Alternatives ...................................................86 Conclusion on Options for Change ..................................95 CHAPTER 8 RESTATEMENT OF CONCLUSIONS Conclusions ...................................................96 Summary of Conclusions .........................................99 APPENDIX A HISTORICAL REVIEW OF U.S. LAWS RELEVANT TO CURRENT U.S. ANTI- DEFERRAL REGIMES AND ENTITY CLASSIFICATION U.S. ANTI-DEFERRAL REGIMES ...............................101 Structural Features of U.S. Tax System Giving Rise to Deferral and the Need for Anti-Deferral Rules .........................101 Anti-Deferral Provisions Prior to 1962 ........................105 Subpart F ..............................................111 Specific Provisions of 1962 Legislation ........................126 Significant Amendments to Subpart F Since 1962 Act .............135 FEDERAL TAX ENTITY CLASSIFICATION .......................163 Background ............................................163 Morrissey, the Changing Resemblance Test and the Kintner Regulations ................................................165 General Changes in the Entity Classification Rules since 1962 .......167 Specific Changes in the Entity Classification Rules for Foreign Entities since 1962 ........................................172 Promulgation and Purpose of the Check-the-Box Regulations .......175 APPENDIX B SURVEY OF QUANTITATIVE ECONOMIC STUDIES THAT EXAMINE THE INTERNATIONAL MOBILITY OF CAPITAL Taxes and U.S. Direct Investment Abroad, Suggestive Evidence of Capital Mobility ...............................................177 Taxes and the Decision to Invest in the United States or Overseas, Additional Evidence of Capital Mobility ................................182 Macroeconomic Research on International Capital Mobility ..............184 Conclusion ...................................................187 APPENDIX C THE MEASUREMENT OF TAX RATES Foreign Effective Tax Rates on the Earnings and Profits of Foreign Manufacturing Subsidiaries of U.S. Multinationals ...........................191 Average Effective Total Tax Rate on Foreign Source Income of U.S. Manufacturing Companies ..................................193 The U.S. Tax Rate on Domestic Income of U.S. Manufacturing Corporations ......................................................195 APPENDIX D SURVEY OF QUANTITATIVE ECONOMIC STUDIES THAT EXAMINE INCOME SHIFTING BY MULTINATIONAL COMPANIES Foreign Tax Rates and Reported Profits: Evidence That Suggests Multinationals Shift Income in Response to Differences in Tax Rules in Foreign Countries ......................................................198 Tax Reforms and Reported Profits: Evidence That Suggests Reported Earnings in a Particular Country Change When the Incentive to Shift Income Changes ......................................................202 Reported Profitability of U.S. Companies and U.S. Affiliates of Foreign Multi- nationals ...............................................205 Conclusion ...................................................208 INTRODUCTION: PURPOSE, STRUCTURE, BASIC CONCEPTS, AND DESCRIPTION OF SUBPART F I. Statement of Purpose On December 11, 1998, Assistant Secretary of the Treasury for Tax Policy, Donald C. Lubick, announced that the Treasury Department would study the U.S. anti-deferral rules contained in subpart F of the Internal Revenue Code. These rules restrict the deferral of tax on foreign income for certain U.S. owners of “controlled foreign corporations” (“CFCs”). Subpart F was enacted in 1962 and, while amended often since then, has retained its basic structure. After nearly four decades, however, Treasury, practitioners, and the business community1 believe it is time to reexamine whether subpart F is the most appropriate – or effective – way to tax foreign income. As Assistant Secretary Lubick noted, “It has been suggested that, at least in some respects, the current deferral rules have failed to adequately take into account significant developments since their enactment. [W]e plan to study the extent to which changes in our anti-deferral rules are warranted.”2 Assistant Secretary Lubick outlined the fundamental international tax policy principles that would guide the Treasury in its evaluation of the options for reforming or replacing the current subpart F regime: In preparation for this study, we have identified some of the principles that have long guided policymakers in determining the appropriate taxation of international income. We doubt that there is significant controversy over what policy principles are appropriate. Although there are differences over the 1 See, e.g., Robert J. Peroni, J. Clifton Fleming, Jr., Stephen E. Shay, Getting Serious about Curtailing Deferral of U.S. Tax on Foreign Source Income, 52 SMU L. Rev. 455, 458 (1999) (“The complex, incomplete, and anachronistic nature of . .[the anti-deferral] rules has prompted us to reconsider the appropriate scope of the U.S. anti-deferral regimes.”); National Foreign Trade Council, The NFTC Foreign Income Project: International Tax Policy for the 21st Century, Part One: A Reconsideration of Subpart F, at viii (Washington, 1999) (“[R]e-evaluation of the balance of policies that underlie subpart F is long overdue.”); David R. Tillinghast, An Old- Timer’s Comment on Subpart F, 98 TNI 61-24 (Mar. 31, 1998) (“Subpart F is now over 35 years old and it may be time to reexamine its policy premises . .”). 2 Hon. Donald C. Lubick, Assistant Secretary (Tax Policy), U.S. Department of the Treasury, Address at the GWU/IRS Annual Institute on Current Issues in International Taxation (Dec. 11, 1998). Assistant Secretary Lubick also described Treasury’s goals in undertaking the study, noting, “We intend to conduct this study in a comprehensive manner, relying on evidence over anecdotes, analysis over agenda. We intend that we shall neither be bound to nor ignore the policies which have guided us for the past three decades. We expect to set forth whatever conclusions a fresh slate review of the evidence leads us to.” vii viii application and relative weight to be given to some of these principles, five policy goals in the international tax area are generally recognized: • Meet the revenue needs determined by Congress in an adequate and fair manner; • Minimize compliance and administrative burdens; • Minimize distortion of investment decisions through tax considerations; • Conform with international norms, to the extent possible; and • Avoid placing an undue burden on the competitive position of our nationals.3 This study is intended to
Load more

Recommended publications
  • A Brief Description of Federal Taxes
    A BRIEF DESCRIFTION OF FEDERAL TAXES ON CORPORATIONS SINCE i86i WMUAu A. SU. ND* The cost to the federal government of financing the Civil War created a need for increased revenue, and Congress in seeking new sources tapped theretofore un- touched corporate and individual profits. The Act of July x, x862, amending the Act of August 5, x86i, is the first law under which any federal income tax was collected and is considered to be largely the basis of our present system of income taxation. The tax acts of the Civil War period contained provisions imposing graduated taxes upon the gain, profits, or income of every person2 and providing that corporate profits, whether divided or not, should be taxed to the stockholders. Certain specified corporations, such as banks, insurance companies and transportation companies, were taxed at the rate of 5%, and their stockholders were not required to include in income their pro rata share of the profits. There were several tax acts during and following the War, but a description of the Act of 1864 will serve to show the general extent of the coiporate taxes of that period. The tax or "duty" was imposed upon all persons at the rate of 5% of the amount of gains, profits and income in excess of $6oo and not in excess of $5,000, 7Y2/ of the amount in excess of $5,ooo and not in excess of -$o,ooo, and io% of the amount in excess of $Sxooo.O This tax was continued through the year x87i, but in the last two years of its existence was reduced to 2/l% upon all income.
    [Show full text]
  • The Death of the Income Tax (Or, the Rise of America's Universal Wage
    Indiana Law Journal Volume 95 Issue 4 Article 5 Fall 2000 The Death of the Income Tax (or, The Rise of America’s Universal Wage Tax) Edward J. McCaffery University of Southern California;California Institute of Tecnology, [email protected] Follow this and additional works at: https://www.repository.law.indiana.edu/ilj Part of the Estates and Trusts Commons, Law and Economics Commons, Taxation-Federal Commons, Taxation-Federal Estate and Gift Commons, Taxation-State and Local Commons, and the Tax Law Commons Recommended Citation McCaffery, Edward J. (2000) "The Death of the Income Tax (or, The Rise of America’s Universal Wage Tax)," Indiana Law Journal: Vol. 95 : Iss. 4 , Article 5. Available at: https://www.repository.law.indiana.edu/ilj/vol95/iss4/5 This Article is brought to you for free and open access by the Law School Journals at Digital Repository @ Maurer Law. It has been accepted for inclusion in Indiana Law Journal by an authorized editor of Digital Repository @ Maurer Law. For more information, please contact [email protected]. The Death of the Income Tax (or, The Rise of America’s Universal Wage Tax) EDWARD J. MCCAFFERY* I. LOOMINGS When Representative Alexandria Ocasio-Cortez, just weeks into her tenure as America’s youngest member of Congress, floated the idea of a sixty or seventy percent top marginal tax rate on incomes over ten million dollars, she was met with a predictable mixture of shock, scorn, and support.1 Yet there was nothing new in the idea. AOC, as Representative Ocasio-Cortez is popularly known, was making a suggestion with sound historical precedent: the top marginal income tax rate in America had exceeded ninety percent during World War II, and stayed at least as high as seventy percent until Ronald Reagan took office in 1981.2 And there is an even deeper sense in which AOC’s proposal was not as radical as it may have seemed at first.
    [Show full text]
  • BEYOND PUBLIC CHOICE and PUBLIC INTEREST: a STUDY of the LEGISLATIVE PROCESS AS ILLUSTRATED by TAX LEGISLATION in the 1980S
    University of Pennsylvania Law Review FOUNDED 1852 Formerly American Law Register VOL. 139 NOVEMBER 1990 No. 1 ARTICLES BEYOND PUBLIC CHOICE AND PUBLIC INTEREST: A STUDY OF THE LEGISLATIVE PROCESS AS ILLUSTRATED BY TAX LEGISLATION IN THE 1980s DANIEL SHAVIRO" TABLE OF CONTENTS I. INTRODUCTION ................................. 3 II. HISTORICAL OVERVIEW OF CYCLICAL TAX LEGISLATION ... 11 A. Legislation From the Beginning of the Income Tax Through the 1970s: The Evolution of Tax Instrumentalism and Tax Reform ..................................... 11 t Assistant Professor, University of Chicago Law School. The author was a Legislation Attorney with theJoint Committee of Taxation during the enactment of the 1986 tax bill discussed in this Article. He is grateful to Walter Blum, Richard Posner, Cass Sunstein, and the participants in a Harvard Law School seminar on Current Research in Taxation, held in Chatham, Massachusetts on August 23-26, 1990, for helpful comments on earlier drafts, to Joanne Fay and Michael Bonarti for research assistance, and to the WalterJ. Blum Faculty Research Fund and the Kirkland & Ellis Faculty Fund for financial support. 2 UNIVERSITY OF PENNSYLVANIA LAW REVIEW [Vol. 139: 1 B. The 1981 Act and Its Aftermath ................... 19 C. The 1986 Act ............................... 23 D. Aftermath of the 198.6 Act ......................... 29 E. Summary .................................. 30 III. THE PUBLIC INTEREST THEORY OF LEGISLATION ........ 31 A. The Various Strands of Public Interest Theory .......... 31 1. Public Interest Theory in Economics ............ 31 2. The Pluralist School in Political Science .......... 33 3. Ideological Views of the Public Interest .......... 35 B. Criticisms of PublicInterest Theory .................. 36 1. (Largely Theoretical) Criticisms by Economists ... 36 a. When Everyone "Wins," Everyone May Lose ..
    [Show full text]
  • Sixteenth Amendment
    The Sixteenth Amendment 100 Years of the Federal Income Tax “The hardest thing in the world to understand is the income tax.” ~ Albert Einstein Americans have now been grappling with the income tax for 100 years. Since the 16th Amendment was ratified by Congress in 1913, U.S. citizens have been attempting to accurately complete Form 1040. While the annual income tax exercise is fresh in our minds, we thought it would be informative and somewhat gratifying to look back at the process that brought us here, and the tax rates that confronted tax payers on this anniversary in prior years. History of the Sixteenth Amendment Prior to 1913, the main source of revenue for the federal government was tariffs. Tariffs, it was argued, disproportionately affected the poor and were unpredictable. It was felt by many that the solution was a federal income tax. The resolution proposing the Sixteenth Amendment was passed by Congress on July 12, 1909 and ratified in 1913. The Amendment stated “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” What followed was The Revenue Act of 1913, also called the Tariff Act, since its purpose was to lower basic tariff rates and compensate for lost revenues by imposing a federal income tax. The first tax filing in 1914 The federal income tax started at 1% on personal income of more than $3,000 (over $71,000 in today’s dollars1) for single filers or $4,000 for couples, with a surtax of 6% on incomes over $500,000.
    [Show full text]
  • RESTORING the LOST ANTI-INJUNCTION ACT Kristin E
    COPYRIGHT © 2017 VIRGINIA LAW REVIEW ASSOCIATION RESTORING THE LOST ANTI-INJUNCTION ACT Kristin E. Hickman* & Gerald Kerska† Should Treasury regulations and IRS guidance documents be eligible for pre-enforcement judicial review? The D.C. Circuit’s 2015 decision in Florida Bankers Ass’n v. U.S. Department of the Treasury puts its interpretation of the Anti-Injunction Act at odds with both general administrative law norms in favor of pre-enforcement review of final agency action and also the Supreme Court’s interpretation of the nearly identical Tax Injunction Act. A 2017 federal district court decision in Chamber of Commerce v. IRS, appealable to the Fifth Circuit, interprets the Anti-Injunction Act differently and could lead to a circuit split regarding pre-enforcement judicial review of Treasury regulations and IRS guidance documents. Other cases interpreting the Anti-Injunction Act more generally are fragmented and inconsistent. In an effort to gain greater understanding of the Anti-Injunction Act and its role in tax administration, this Article looks back to the Anti- Injunction Act’s origin in 1867 as part of Civil War–era revenue legislation and the evolution of both tax administrative practices and Anti-Injunction Act jurisprudence since that time. INTRODUCTION .................................................................................... 1684 I. A JURISPRUDENTIAL MESS, AND WHY IT MATTERS ...................... 1688 A. Exploring the Doctrinal Tensions.......................................... 1690 1. Confused Anti-Injunction Act Jurisprudence .................. 1691 2. The Administrative Procedure Act’s Presumption of Reviewability ................................................................... 1704 3. The Tax Injunction Act .................................................... 1707 B. Why the Conflict Matters ....................................................... 1712 * Distinguished McKnight University Professor and Harlan Albert Rogers Professor in Law, University of Minnesota Law School.
    [Show full text]
  • Four States Challenge the Cap on SALT Deductions Erik M
    Four States Challenge the Cap on SALT Deductions Erik M. Jensen* The attorneys general of New York, Connecticut, New Jersey, and Maryland have fi led a complaint in New York v. Mnuchin, chal- lenging the constitutionality of the $10,000 cap on the deduction for state and local taxes established the Tax Cut and Jobs Act of 2017. This article considers the most important of the states’ claims and concludes that none of them is convincing. Introduction In a recent article in the Journal, I set out my preliminary thoughts as to why the cap on the deductibility of state and local taxes (SALT), included in what is generally called the Tax Cuts and Jobs Act of 2017 (the Tax Cuts Act),1 should survive constitutional challenge.2 (The cap: Starting this year—and, at least for now, scheduled to expire after 2025—individual taxpayers will be able to deduct no more than $10,000 per year of the otherwise potentially deductible taxes paid to state and local governments (generally income and property taxes).3) I noted that the leaders of three blue (Democratic) states— New York, Connecticut, and New Jersey—intended to challenge the cap on constitutional grounds because of the unhappy consequences the cap will have on many taxpayers in their states. The complaint in that suit, New York v. Mnuchin (with Maryland added to the list of plaintiffs), was fi led by the four state attorneys general, all Democrats, in July.4 The complaint makes a * Erik M. Jensen is the Coleman P. Burke Professor Emeritus of Law at Case Western Reserve University School of Law, and is Editor-in-Chief of the Journal.
    [Show full text]
  • The Progressive Movement and the Reforming of the United States of America, from 1890 to 1921
    2014 Democratic and Popular Republic of Algeria. Ministry of Higher Education and Scientific Research. University of Oran. Faculty of Letters, Languages, and Arts. Department of English. Research Paper Submitted for a Doctorate Thesis in American Civilisation Entitled: The Progressive Movement and the Reforming of the United States of America, from 1890 to 1921. Presented by: Benketaf, Abdel Hafid. Jury Members Designation University Pr. Bouhadiba, Zoulikha President Oran Pr. Borsali, Fewzi Supervisor Adrar Pr. Bedjaoui, Fouzia Examiner 1 Sidi-Belabes Dr. Moulfi, Leila Examiner 2 Oran Dr. Belmeki, Belkacem Examiner 3 Oran Dr. Afkir, Mohamed Examiner 4 Laghouat Academic Year: 2013-2014. 1 Acknowledgements Acknowledgments are gratefully made for the assistance of numerous friends and acquaintances. The largest debt is to Professor Borsali, Fewzi because his patience, sound advice, and pertinent remarks were of capital importance in the accomplishment of this thesis. I would not close this note of appreciation without alluding to the great aid provided by my wife Fatima Zohra Melki. 2 Dedication To my family, I dedicate this thesis. Pages Contents 3 List of Tables. ........................................................................................................................................................................ vi List of Abbreviations......................................................................................................................................................... vii Introduction. ........................................................................................................................................................................
    [Show full text]
  • The "Public Trust" As It Is Used in Article VI
    THE "PUBIC TRUST" JenniferAnglim Kreder ABSTRACT It seems as if no one really knows the meaning of the term "public Trust" used in the Religious Test Clause of Article VI of the U.S. Constitution. 7iis Article is the first scholarly attempt to define the term by exploring historical evidence pre-dating the nation's jounding through the Constitution's adoption, including British and colonial trust law that influenced the Founders' conception of the term. Today, one can find the term used only in the cases and scholarship concerning environmental law, tax law and museum law. After a thorough analysis of the old and new sources, this Article proposes the following original definition of term "public Trust": "Any entity given special privilege by the government, beyond the simple grant of a state corporate charteroften coupled with state or federal tax waivers, so long as that entity is legally obligated to engage in conduct that could traditionally have been performed by the government itself for the public's benefit." TABLE OF CONTENTS INTRODUCTION ..................................... ..... 1426 I. HISTORICAL BACKGROUND OF ARTICLE VI............ .... 1428 A. The Stuart Period & Colonial Era......... ............... 1429 B. The Foundingand Early Republic ................... 1430 C. InterpretationalFoundations .................. ..... 1434 D. Fiduciary Underpinnings .......................... 1438 II. MODERN SIGNIFICANCE OF THE PUBLIC TRUST....... ..... 1440 A. Judicially Recognized Trusts and Non-Profit Corporations.. 1441 B. EnvironmentalRegulation ......................... 1443 1. Historical Origins of the Environmental "PublicTrust * Professor of Law, Salmon P. Chase College of Law. The author wishes to disclose that she has done a limited amount of legal work for American Atheists, Inc., including in Ameri- can Atheists, Inc.
    [Show full text]
  • Vol. 6, No. 2: Full Issue
    Denver Journal of International Law & Policy Volume 6 Number 2 Spring Article 11 May 2020 Vol. 6, no. 2: Full Issue Denver Journal International Law & Policy Follow this and additional works at: https://digitalcommons.du.edu/djilp Recommended Citation 6 Denv. J. Int'l L. & Pol'y This Full Issue is brought to you for free and open access by the University of Denver Sturm College of Law at Digital Commons @ DU. It has been accepted for inclusion in Denver Journal of International Law & Policy by an authorized editor of Digital Commons @ DU. For more information, please contact [email protected],dig- [email protected]. DENVER JOURNAL OF INTERNATIONAL LAW AND POLICY VOLUME 6 1976-1977 Denver Journal OF INTERNATIONAL LAW AND POLICY VOLUME 6 NUMBER 2 SPRING 1977 INTERNATIONAL ASPECTS OF THE TAX REFORM ACT OF 1976 TAXING BoYcorrs AND BRIBES ........................................... G. C . Hufbauer J. G. Taylor 589 The authors examine the tax penalty provisions of the Tax Reform Act of 1976 and the Export Administration Act Amendments of 1977 in relation to U.S. persons who "participate in or cooperate with" international boycotts or bribery. The article discusses the various types of international boycotts and the penalty, computational, and reporting requirements imposed on participants as clarified by the Treasury Guidelines and Revenue Proce- dures. The authors conclude with a discussion of the novelty, complexity, and potential impact of the legislation. TAKING SIDES: AN OVERVIEW OF THE U.S. LEGISLATIVE RESPONSE TO THE ARAB BOYCOTT ............................................ John M . Tate Ralph B. Lake 613 The current legislative scheme in opposition to the Arab boycott is generally directed against the Arab League countries' secondary and tertiary, indirect forms of boycott.
    [Show full text]
  • Individual Capital Gains Income: Legislative History
    Order Code 98-473 Individual Capital Gains Income: Legislative History Updated April 11, 2007 Gregg A. Esenwein Specialist in Public Finance Government and Finance Division Individual Capital Gains Income: Legislative History Summary Since the enactment of the individual income tax in 1913, the appropriate taxation of capital gains income has been a perennial topic of debate in Congress. Almost immediately legislative steps were initiated to change and modify the tax treatment of capital gains and losses. The latest changes in the tax treatment of individual capital gains income occurred in 1998 and 2003. It is highly probable that capital gains taxation will continue to be a topic of legislative interest in the 109th Congress. Capital gains income is often discussed as if it were somehow different from other forms of income. Yet, for purposes of income taxation, it is essentially no different from any other form of income from capital. A capital gain or loss is merely the result of a sale or exchange of a capital asset. An asset sold for a higher price than its acquisition price produces a gain, an asset sold for a lower price than its acquisition price produces a loss. Ideally, a tax consistent with a theoretically correct measure of income would be assessed on real (inflation-adjusted) income when that income accrues to the taxpayer. Conversely, real losses would be deducted as they accrue to the taxpayer. In addition, under an ideal comprehensive income tax, any untaxed real appreciation in the value of capital assets given as gifts or bequests would be subject to tax at the time of transfer.
    [Show full text]
  • International Tax Policy for the 21St Century
    NFTC1a Volume1_part2Chap1-5.qxd 12/17/01 4:23 PM Page 147 The NFTC Foreign Income Project: International Tax Policy for the 21st Century Part Two Relief of International Double Taxation NFTC1a Volume1_part2Chap1-5.qxd 12/17/01 4:23 PM Page 148 NFTC1a Volume1_part2Chap1-5.qxd 12/17/01 4:23 PM Page 149 Origins of the Foreign Tax Credit Chapter 1 Origins of the Foreign Tax Credit I. Introduction The United States’ current system for taxing international income was creat- ed during the period from 1918 through 1928.1 From the introduction of 149 the income tax (in 1913 for individuals and in 1909 for corporations) until 1918, foreign taxes were deducted in the same way as any other business expense.2 In 1918, the United States enacted the foreign tax credit,3 a unilat- eral step taken fundamentally to redress the unfairness of “double taxation” of foreign-source income. By way of contrast, until the 1940s, the United Kingdom allowed a credit only for foreign taxes paid within the British 1 For further description and analysis of this formative period of U.S. international income tax policy, see Michael J. Graetz & Michael M. O’Hear, The ‘Original Intent’ of U.S. International Taxation, 46 DUKE L.J. 1021, 1026 (1997) [hereinafter “Graetz & O’Hear”]. The material in this chapter is largely taken from this source. 2 The reasoning behind the international tax aspects of the 1913 Act is difficult to discern from the historical sources. One scholar has concluded “it is quite likely that Congress gave little or no thought to the effect of the Revenue Act of 1913 on the foreign income of U.S.
    [Show full text]
  • Entity Classification: the One Hundred-Year Debate
    Catholic University Law Review Volume 44 Issue 2 Winter 1995 Article 3 1995 Entity Classification: The One Hundred-Year Debate Patrick E. Hobbs Follow this and additional works at: https://scholarship.law.edu/lawreview Recommended Citation Patrick E. Hobbs, Entity Classification: The One Hundred-Year Debate, 44 Cath. U. L. Rev. 437 (1995). Available at: https://scholarship.law.edu/lawreview/vol44/iss2/3 This Article is brought to you for free and open access by CUA Law Scholarship Repository. It has been accepted for inclusion in Catholic University Law Review by an authorized editor of CUA Law Scholarship Repository. For more information, please contact [email protected]. ENTITY CLASSIFICATION: THE ONE HUNDRED-YEAR DEBATE Patrick E. Hobbs* I. Introduction ................................................. 437 II. Evolution of the Tax Definition of the Term "Corporation".. 441 A. The Revenue Act of 1894 ............................... 441 B. The Corporate Excise Tax of 1909 ....................... 452 C. After the Sixteenth Amendment: A Case of Floating Commas and Misplaced Modifiers ....................... 459 D. Developing a Corporate Composite ..................... 468 III. The Failure of the Resemblance Test ........................ 481 A. The Professional Corporation ............................ 481 B. The Limited Partnership ................................. 491 C. The Limited Liability Company .......................... 510 IV . Conclusion .................................................. 518 I. INTRODUCTION One hundred years ago, in the Revenue Act of 1894,1 Congress en- acted our Nation's first peacetime income tax.2 Although the Supreme Court declared it unconstitutional within a year of its enactment,3 at least * Associate Professor of Law, Seton Hall University School of Law. B.S., 1982, Se- ton Hall University; J.D., 1985, University of North Carolina; LL.M., 1988, New York Uni- versity.
    [Show full text]