Limitations Of The Old Classification Regulations

1454 Words Dec 9th, 2015 6 Pages
Generally, an entity is taxed as either a corporation or a partnership and in the past there were major differences between the two, specifically, limited liability. The main benefit of a corporation was limited liability, while a partnership was subject to individual liability for partnership debts. Partnerships began to devise new configurations that were aimed at limiting their liability. They succeeded in creating limited partnerships, which took the main advantage of a corporation and shared that advantage with partnerships. The elimination of the limited liability distinction between corporations and partnerships came the need for a new entity classification system. However, the basis of the old classification regulations was formed by the economic differences between corporations and partnerships, limited liability. As those distinctions began to disappear, the classification tests of the old regulations became insignificant. Essentially, the old regulations only applied to those taxpayers that could afford to manipulate the regulations in their favor, hence the need for a change. In order to fully appreciate the new regulations and why they were needed, an analysis of the old classification regulations is needed.

The development of the first corporate classification system came from the Supreme Court in Morrisey v. Commissioner. In this case, the Court was to determine whether a state law trust that was formed to develop a golf course for profit was an…
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