Last week, Senator Warren unveiled the Accountable Capitalism Act, setting off a firestorm of controversy. By and large, the responses have been all over the map, ranging from an argument that it will help companies do better for all constituencies, including shareholders, to the hyperbolic assertion that it would “help to destroy capitalism.”
I haven’t read the bill super-carefully (in fact, I mostly skimmed it late last night), but a Twitter discussion got me thinking about its potential tax consequences.
Or is the main lever on taxes? That in order to get more favorable corporate tax treatment (as compared to partnership or individual income taxes) you have to comply. If so,what a mess.
— Eric Shytle (@EricShytle) August 18, 2018
So what does the Accountable Capitalism Act do? It requires certain really big corporations (specifically, corporations with more than $1 billion in annual gross revenues) to get a federal charter in addition to their state charters. Getting the federal charter requires a couple things, including allowing board representation for labor and explicitly thinking about constituents other than shareholders in corporate decisionmaking.
And the consequences for not having a charter, or for having that charter revoked? Under section 4(a)(2) of the Act, the corporation won’t be treated as a corporation for purposes of federal law.
“Purposes of federal law” presumably includes the federal income tax. And we know, from Treas. Reg. § 301.7701-3(b)(1)(i) that a domestic entity that isn’t a corporation for tax purposes will be treated as a partnership.
Go a little further in the Code and you arrive at the publicly traded partnership rules. Those rules, enacted to prevent the erosion of the corporate tax base, say that a “publicly traded partnership” are to be treated as a corporation for tax purposes, notwithstanding the fact that it would otherwise be treated as a partnership. And what’s a publicly traded partnership? Among other things, a partnership whose interests are traded on an established securities market.
Now there are certainly private companies with more than $1 billion in gross revenues; whether the PTP rules would apply to them is a potentially-thorny legal issue. But a lot of the >$1 billion club are traded on the NYSE or other securities markets, and would definitely be PTPs.
So the question is, how would a publicly-traded corporation that lost its federal charter under the ACA be treated for tax purposes? Because if it’s not treated as a corporation, it’s a partnership. But because its shares are traded on an exchange, it’s a PTP. And as a PTP it’s treated as a corporation for federal income tax purposes. Only the ACA says that, because it doesn’t have a federal charter, it’s a partnership. But because its shares are traded on an exchange, it’s a PTP. And as a PTP &c. &c. &c.
I mean, Sen. Warren almost certainly didn’t have the PTP rules in mind when she drafted the bill. And frankly, with a Republican Congress and president, it’s not like the bill’s going anywhere. But it’s interesting to see legislation potentially introduce this kind of infinite loop into federal law, and puzzle out where the loop would eventually end.