Collapsible Corporations—Probems and Pitfalls
by EGERTON W. DUNCAN Principal, Executive Office
Presented before the Haskins & Sells Annual Tax Conference, Washington, D.C.—October 1962
THE EVOLUTION of Code section 341, the present Collapsible Corpora-tion statute, can best be described as the story of what happens when Congress does too thorough a job of closing a loophole. Subsections
(a) through (d) of the statute constitute the embodiment of provisions in three separate revenue acts—1950, 1951 and 1954— intended to forestall practices that seriously threatened the revenue. Subsection (e), which was added by the Revenue Act of 1958, represents
the opposite—a strenuous attempt to mitigate penalties that turned out to be harsher than intended, without reopening the loophole.
Subsection (e) sets some sort of a record for verbosity and complexity,
and in sheer volume of printed pages outweighs the rest of the statute by more than two to one. Fortunately for me, Mr. Reinhardt has agreed to tackle subsection (e), and I might add that he is welcome to it. I can, therefore, limit myself to the less abstruse parts of the statute which deal with its basic loophole-closing aspects.
LOOPHOLE-CLOSING PURPOSES OF STATUTE
I realize most of you are familiar with the type of tax avoidance that section 341 was designed to correct and, therefore, I shall not dwell at any great length on the background that gave rise to the enactment of this statute. Suffice it to say the tax avoidance with which Congress was concerned was the conversion to capital gain, by means of a corporate liquidation or sale of stock, of what would otherwise
have been ordinary income in the form of rentals, compensation for personal services, or profits from sale of stock in trade. The principal penalty imposed by section 341 consists of a denial of long-term capital gain treatment on liquidation of, or sale of stock in, a corporation formed or availed of for this type of tax avoidance.
I am not here overly concerned with the application of section 341 to corporations engaged in construction, real estate development, or motion picture production. All of us are at least aware of the possibility
of having collapsible corporation sanctions imposed against such corporations and their shareholders. In fact the taxpayers them-