џWPCІ+ ћџ2rB"JЌl Z|xTimes New Roman (TT)Arial (TT)єCє\  PŽ6QєPєJф2МPБŠQєPћџ2š?ЄЏу’˜йџєщоphoenixйб#єCє\  PŽ6QєP#б comments on 9514 -- revision Larry Edward RibsteinLarry Edward RibsteinџЫ2џћџ2HфЬъАдšкnHeading 1Heading 1S9ХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУФФггб#єCє\  PŽ6QєP#бХХHeading 2Heading 2V<ХХа 44 аааб#XPє\  PŽ6QXP#бггУУУУФФФФггб#єCє\  PŽ6QєP#бХХheading 3heading 3C9ХХааб#ŠWє\  PŽ6QŠP#бггУУФФггб#єCє\  PŽ6QєP#бХХheading 4heading 4F<ХХааб#XPє\  PŽ6QXP#бггУУУ УФФФ Фггб#єCє\  PŽ6QєP#бХХћџ2F Кzv4xЊ$" Default Paragraph FoDefault Paragraph Font11б#XPє\  PŽ6QXP#бггггб#єCє\  PŽ6QєP#бNormal IndentNormal Indent ааггггToc 1Toc 1 аааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџАмааб#XXф2МPБŠQXP#бггУ УУУФ ФФФггб#єCє\  PŽ6QєP#баамќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааtoc 2toc 2ысаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм‚ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ АмааггУ УФ Фггаам‚ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааћџ2№ x – |Д Р0toc 3toc 3 шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм)ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ Амааггггаам)ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааfooterfooter шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџАмааггггаамќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааheaderheader а Œ Œ ааааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџœЌ&џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџАŒ ааб#ŠWє\  PŽ6QŠP#бггггб#єCє\  PŽ6QєP#бааœЌ&џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ Аааfootnote referencefootnote reference 44б#›Wє\  PŽ6Q›P#бггУУФФггб#єCє\  PŽ6QєP#бћџ2 v"Ԙд\д0footnote textfootnote text  ааггггparapara;1ааб#ŠWє\  PŽ6QŠP#бггггб#єCє\  PŽ6QєP#бheadingheadingC9ХХааб#Rrє\  PŽ6QRP#бггУ УФ Фггб#єCє\  PŽ6QєP#бХХtopictopicC9ХХааб#М^є\  PŽ6QМP#бггУУФФггб#єCє\  PŽ6QєP#бХХћџ2|Ъ6фдфФИtitletitle>4ааб#ш†є\  PŽ6QшP#бггУУФФггб#єCє\  PŽ6QєP#бsubtopicsubtopicS9ХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУ УФ Фггб#єCє\  PŽ6QєP#бХХdivisiondivisionC9ХХааб#ŠWє\  PŽ6QŠP#бггУ УФ Фггб#єCє\  PŽ6QєP#бХХindentindent;1ааб#&Jє\  PŽ6Q&P#бггггб#єCє\  PŽ6QєP#бћџ2КФЎРrФ2Фіflush paraflush para;1ааб#ŠWє\  PŽ6QŠP#бггггб#єCє\  PŽ6QєP#бendnote referenceendnote reference44б#XPє\  PŽ6QXP#бггУУФФггб#єCє\  PŽ6QєP#бSPSP;1ааб#XPє\  PŽ6QXP#бггггб#єCє\  PŽ6QєP#бtabletable;1ааб#6є\  PŽ6QP#бггггб#єCє\  PŽ6QєP#бћџ2%дьРо ќ"heading 4heading 4C9ХХааб#ŠWє\  PŽ6QŠP#бггУУФФггб#єCє\  PŽ6QєP#бХХtoc 4toc 4шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмаќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ Амааггггаамаќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааtoc 5toc 5шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмvќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ Амааггггаамvќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааtoc 6toc 6шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ Амааггггаам ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааћџ2L%j'ˆ)toc 7toc 7шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмФ ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ АмааггггаамФ ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааtoc 8toc 8шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмj ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ Амааггггаамj ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааtoc 9toc 9шоаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ Амааггггаам ќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ ` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмАааа АААX аа ААмм ае4л footerлаааа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџмќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџАмаагглл СрСии л footerлллаамќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџммаа4ей Ш йлHeading 1лХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУллаа` И hРpШ xа (#џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџА4ааззCOMMENTS ON NOTICE 95Љ14з_TOC329005751з ззФФ л Heading 1 ллллflush paraлааб#ŠWє\  PŽ6QŠP#бггллааLarry E. RibsteinХХй Ш й G.M.U. Foundation Professor of Law George Mason University School of Law, Arlington, Virginia. л!flush para!ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТСС ТТССThese are comments on the proposal in Notice 95Љ14 (March 30, 1995) to replace the current test under Treas. Reg. РРРР301.7701Љ2 and 301.7701Љ3 for the application of partnership taxation based on whether the firm has three or more "corporate" characteristics (continuity of life, centralization of management, liability for organization debts limited to the organization's assets, and free transferability of interests) with a test based on incorporation under state law. For the reasons discussed below, I believe that (1) the proposed change in the classification rules is a major step forward in tax simplification; (2) the proposal will not cause significant revenue loss because it should not increase the proportion of unincorporated businesses; and (3) the proposed simplification should be extended to unincorporated oneЉowner entities. й Ш й лparaллллHeading 1лХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4ааззI APPROPRIATENESS OF SIMPLIFICATIONз_TOC329005752зззФФ л Heading 1 ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТССA change in the test for applying partnership taxation is long overdue. As I discussed in УУThe Deregulation of Limited Liability and the Death of Partnership, ФФ70 WASH. U. L. Q. 417, 450Љ67 (1992), the current system is not based on coherent tax policy. The system also results in unnecessary administrative costs, encourages firms to adopt contract terms that do not suit their business objectives and inhibits the states from developing new and more efficient forms of business.ХХ лparaллллHeading 2лХХа 44 аааб#XPє\  PŽ6QXP#бггУУУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4ааззA. LACK OF POLICY BASIS FOR CURRENT SYSTEMз_TOC329005753з ззФФФФ л Heading 2 ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТССA potential criticism of making incorporation alone decisive is that this would change the classification rule from a "substance" to a "form" approach. However, as the Service acknowledges in Notice 95Љ14, under УУcurrent ФФrules "taxpayers can achieve partnership tax classification for a nonЉpublicly traded organization that, in all meaningful respects, is virtually indistinguishable from a corporation." ХХй Ш й ТТССThe classification rules reflect the absence of a tax policy basis for distinguishing corporations and partnerships, which is discussed at greater length in the article cited above. The tax ‘classification is based on the supposed distinction between "aggregates" and "entities" which is, at best, highly ambiguous in the law of business associations. See Bromberg & Ribstein on Partnership, РР 1.03 (1988 & Supp.). Even limited liability is no longer peculiarly "corporate." Thus, there is no more policy basis for characterizing a firm as a corporation for tax purposes because it has three or four "corporate" features than there is for doing so on the basis of incorporation alone. й Ш й лparaллллHeading 2лХХа 44 аааб#XPє\  PŽ6QXP#бггУУУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4ааззB. ORGANIZATIONAL COSTS OF CLASSIFICATION RULESз_TOC329005754зззФФФФ л Heading 2 ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТССNot only is the corporate characteristics test unsupported by tax policy, but it is costly to apply. First, it encourages firms to adopt organizational rules that are inappropriate for the firms apart from tax considerations. Second, it deters the evolution of new and more efficient forms of business.ХХ лparaллллheading 3лХХааб#ŠWє\  PŽ6QŠP#бггУУллТТзз1. Inappropriate governance rulesззФФ л heading 3 ллллparaлааб#ŠWє\  PŽ6QŠP#бггллТТССAlthough a combination of three or more corporate characteristics may be the best set of contract terms for some firms apart from tax considerations, firms may limit themselves to two such characteristics in order to avoid the extra tax costs of incorporation. Thus, the corporate characteristics test may cause firms to incur higher nonЉtax governance costs than a classification test that does not force firms to make this sort of tax tradeoff.ХХй Ш й ТТССThis point can be illustrated by considering the example of a firm that manages investment capital. Because people with money to invest are not necessarily the same as those with management skills, such a firm is likely to want to raise capital from passive investors and delegate management to one or more managers. The passive investors certainly would not want to be personally liable for the firm's debts, since this would force them to pay close attention to the business. ТТССIf our sample firm were to combine centralized management and limited liability, it would have to avoid both free transferability and continuity of life in order to be classified as a tax partnership. If the firm organizes as an LLC, this means in effect that it must dissolve upon the death, insanity, bankruptcy, retirement, resignation, or expulsion of any of the managers, subject to a vote to continue by at least a majority of the remaining members. See Rev. Proc. 95Љ10, 1995Љ3 I.R.B., РР 5.01 (December 28, 1994). Yet apart from tax considerations, many unincorporated firms would not want ‘to have to decide whether to continue whenever a manager leaves, any more than a corporation normally would want a shareholder vote on continuation when a director leaves. Such a rule exposes the firm to the potential disruption of an untimely liquidation and empowers individual members or minority factions to extract concessions from the majority as the price of letting them continue. ТТССTo avoid this problem the hypothetical firm could adopt continuity of life and still be taxed as a partnership if it adopts both restricted transferability and decentralized management. But the latter characteristic means that each member can bind the firm in transactions with third parties, such as sales of the firm's real property. As noted above, many investmentЉtype firms would rather keep capital contributors out of management and concentrate management powers in a small group of experts. As long as every member can bind the firm, the firm must either select capital contributors who know how to manage or monitor members to make sure that they do not bind the firm to unwise transactions. ТТССThus, the current classification rules force firms to make a HobsonР Рs choice in deciding on governance rules. Many firms will adopt terms that do not quite suit them, such as dissolution at will or decentralized management in the above example, to get the significant benefits of being taxed as partnerships. This wastes resources by forcing firms to be inefficientУУ. ФФ This problem would not exist if firms could organize as partnerships and write their contracts as they wish without having to worry about looking too much like corporations.й Ш й лparaллллheading 3лХХааб#ŠWє\  PŽ6QŠP#бггУУллТТзз3. Constraints on business association statutesззФФ л heading 3 ллллparaлааб#ŠWє\  PŽ6QŠP#бггллТТССThe classification factors limit not only the terms firms УУwill ФФchoose, but also the menu of statutory terms from which they УУcan ФФchoose. Because of the importance of partnership tax classification, nonЉcorporate business association statutes are unlikely to be widely used unless they include partnership tax characteristics. Even if many nonЉcorporate firms were willing to adopt two or more corporate characteristics, legislators would be reluctant to enact statutes that provide for these features out of concern for misleading less sophisticated firms and their lawyers as to tax classification. Thus, tax law inhibits the development and evolution of forms of business such as joint stock companies, partnership associations and business trusts which combine two or more corporate characteristics.ХХй Ш й ТТССBecause the tax classification effects of state statutes matter, it is not surprising that, as Notice 95Љ14 points out, the Service has ‘been asked to clarify the tax status of numerous LLC statutes. Beyond the obvious administrative burden on the Service, this system makes the Service the last step of the state legislative process and partially federalizes the state law of business associations. Since the Service cannot keep up with legislative developments in all of the jurisdictions, the need for IRS review slows the evolution of state law.й Ш й лparaллллHeading 1лХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4ааззII REVENUE EFFECT OF SIMPLIFICATIONз_TOC329005757зззФФ л Heading 1 ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТССThe proposed simplification is unlikely to cause significant revenue loss by reducing incorporations. Since partnership tax classification is unavailable to most publicly traded firms pursuant to I.R.C. РР7704, the corporate characteristics test is relevant largely to closely held firms. Contracting for restricted transferability is not much of a problem for firms for which there is in any event no established trading market. If the firm restricts transferability but limits member liability, it can be classified as a partnership under current rules by adopting either direct member management or dissolution on dissociation of a memberЉmanager. Although, as discussed above, these rules are costly for many firms, for most closely held firms the classification rules provide enough maneuvering room that the costs of avoiding the corporate tax probably are lower than incurring it. ХХй Ш й ТТССIn short, the costs discussed in Part I are not merely УУan ФФeffect of the current regime but the УУmain ФФeffect. By eliminating the corporate characteristics test, the Service can reduce firms' costs without reducing tax revenues.й Ш й лparaллллHeading 1лХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4ааззIII ONEЉMEMBER FIRMSз_TOC329005758зззФФ л Heading 1 ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТССThe Service has requested comment in Notice 95Љ14 on Р Рthe proper treatment of unincorporated organizations that have a single owner or member.РР It follows from the above analysis that the proposed simplification should extend to recognizing the partnership tax status of oneЉowner firms. First, like the four corporate characteristics, sole proprietorship has nothing to do with the types of firms that ought to be able to take advantage of flowЉthrough taxation. ХХй Ш й ТТССSecond, the twoЉmember requirement results in the kinds of costs discussed in Part I. The requirement may encourage those who would otherwise be sole proprietors to share ownership rights solely for tax reasons. Just as it may be costly for a firm to decentralize ‘management rights among owners, so it may be costly to distribute ownership rights to more than one member. Multiple ownership complicates a relatively simple sole proprietorship by adding such potentially difficult contracting issues as coЉmanagement, voting, transfer of shares, profitЉsharing, and fiduciary duties. ТТССA twoЉmember requirement under tax law also deters development of efficient business forms. For example, tax considerations may explain why there is currently no statute providing for unincorporated limited liability sole proprietorships despite the fact that this could be the most efficient form of business for the oneЉowner firm. The requirement also crimps the development of existing business forms. For example, many states do not permit oneЉmember LLCs or LLPs. See Ribstein & Keatinge on Limited Liability Companies, РР 4.03 (1992 & Supp.). The twoЉmember requirement poses a needless risk to very closely held firms by threatening them with the loss of their limited liability shield if they inadvertently fail to comply with the requirement. Making Subchapter K available to sole proprietors would encourage states to help minimize these problems by experimenting with limited liability sole proprietorships and oneЉmember LLCs and LLPs. й Ш й лparaллллHeading 1лХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4ааззIV CONCLUSIONз_TOC329005759зззФФ л Heading 1 ллллparaлааб#ŠWє\  PŽ6QŠP#бгглла 44мм аааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4мааТТССAdopting the proposal embodied in Notice 95Љ14 would be a significant step toward simplifying the tax system. Such a rule would, without significant revenue loss, reduce firms' organizational costs and free the states to evolve new and more efficient business forms. It is an indication of how much can be accomplished by relatively small, evolutionary changes in the tax system. ХХй Ш й ТТСС лparaллллflush paraлааб#ŠWє\  PŽ6QŠP#бггллТТSubmitted by: ТТ ТТ________________________ ТТLarry E. Ribsteinй Ш йл!flush para!ллл лHeading 1лХХа 44 аааб#ŠWє\  PŽ6QŠP#бггУУллаа4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџм4аазз‘OUTLINE OF ORAL COMMENTSззФФ л Heading 1 ллллflush paraлааб#ŠWє\  PŽ6QŠP#бггллааLarry E. RibsteinХХй Ш й л!flush para!ллллindentлааб#&Jє\  PŽ6Q&P#бгглла 44Œ Œ аааааŒ ф <”ьDœєLЄџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџф <”ьDœєLџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ааGeorge Mason University School of Law лindentллллparaлааб#ŠWє\  PŽ6QŠP#бгглла Œ Œ мм аааф <”ьDœєLџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџ4Œ ф <”ьDœєLЄќ!џџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџџŒ мааТТССI. ORGANIZATIONAL COSTS OF CLASSIFICATION RULES: 5 minutesСС ТТССССA. Inappropriate governance rulesСС ТТССССB. Constraints on business association statutesСС ТТСС ТТССII REVENUE EFFECT OF SIMPLIFICATION: 3 minutesСС ТТССIII ONEЉMEMBER FIRMSСС2 minutes ТТСС ТТСС лparaллллindentлааб#&Jє\  PŽ6Q&P#бггллТТТТ