I want to thank Christine and Vic for inviting me to participate in this Workshop.  I enjoyed having the opportunity to read Heather Field’s article, Checking In on “Check-the-Box.”  The article provides a useful survey of the practical consequences of the introduction of the elective entity classification scheme.  Field also insightfully places the election in a broader tax policy context. 

The credit crisis provides an auspicious moment to read and reflect on Checking In. These days, it is easy to see echoes of that crisis throughout the American economy.  For a tax specialist, the broad impact of the check-the-box election that Professor Field describes presents the strongest parallel.  As Field persuasively argues, the introduction of the election has had both much-touted advantages and more obscure costs.  In a sense, the question Field’s article asks is whether today’s regulatory status quo gives private actors too much freedom or not enough—the same sort of question now being asked in the financial sector.

In recent years, financial innovation has made it possible for banks and other financial institutions to reallocate risk freely.  Likewise, the check-the-box election grants taxpayers the freedom to choose and even change the tax classification of entities.  Frictions that once constrained behavior have either simply fallen away (thanks to the increasing sophistication of our financial architecture) or been eliminated (through regulatory change). 

In many respects, the resulting autonomy has been a blessing. The concerns raised by Field’s article suggest that—in entity classification no less than financial markets— it may also be something of a curse.  Simply put, by liberating entities from the strictures of a mandatory classification regime, the check-the-box election leaves policymakers with the unenviable task of affirmatively deciding what, if any, limits to that freedom should be imposed. 

Obviously, as Professor Polsky has noted, some limits are imposed on, rather than by, the Treasury.  Beyond those basic, and often arbitrary, Congressional requirements (e.g., unless Congress declares otherwise, a state law corporation must be treated as either a “C” or an “S” corporation for tax purposes), the regulators at Treasury have a great deal of discretion.  The information on check-the-box usage that Field presents invites important questions about the ways that taxpayers are allowed to use—and perhaps misuse—check-the-box elections. 

Why, for example, should taxpayers be permitted to file 150,000 elections to treat non-corporate domestic entities as corporations for tax purposes?  With the possible exception of the Kintner doctors, no one has ever needed help securing corporate tax treatment for a domestic entity.  Field offers several plausible explanations to that particular puzzle (footnote 118), but the simple truth is that we have no comprehensive understanding of why and how taxpayers use check-the-box elections. 

As a result, the contours of the systemic impact of check-the-box remain largely unmapped.  Field’s article provides a tantalizing glimpse into how the election has affected taxpayer behavior.  Paired with a decade’s worth of worry about the effects of check-the-box, particularly on the international side, Field’s data is discouraging.  Even though the impact of the credit crisis has been surprisingly broad and deep, it still seems unlikely that we are headed toward a financial apocalypse.  If Field is right, the tax system may not be so lucky. 

Could the ultimate effect of the check-the-box election be, as Field suggests, the complete unraveling of our current “multi-regime system”?  If so, are there limitations—short of entirely eliminating the election—that could forestall such a collapse?  Would eliminating the possibility of elective classification changes (which, according to Field’s data, constitute a surprisingly high 30% of all check-the-box elections) and the virtual transactions they produce help to stanch the bleeding?  More generally, given the information about taxpayer behavior that Field has uncovered, what limitations on check-the-box elections would be appropriate?

Field invites such questions, but ultimately does not answer them.  It would be interesting to hear what Field would do, with the benefit of hindsight, if she were put in the shoes of the creators of the election.  Assuming she was forced to take the “multi-regime system” and the per se corporate treatment of corporations for granted, what would she have created to replace the Kintner regulations?  My guess is that the check-the-box regulations granted taxpayers far more autonomy than was necessary.  Knowing what we know now, could we create a classification regime that avoids the worst excesses of (in David Bradford’s terminology) (i) the rule and compliance complexity of the Kintner regulations on the one hand and (ii) the transactional complexity of check-the-box on the other?

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