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The Rationales of Tax Entities

Philip Laroma Jezzi



1. Introduction - 2. Affirmative asset partitioning and the entification of organisations for tax purposes - 3. The limits of the partnership approach - 4. Rationalization of double taxation - NOTE

1. Introduction

The theoretical justification of a separate tax applicable to companies and other organizations is a long-standing, though still current issue object of research. Two approaches have been taken in this respect. On the one hand, it is argued that the need for an autonomous tax draws from the early 20th century belief that certain organizations are legal entities separate from their own founders, members and third parties in general (“Entity Theory”). The entity’s ability to provide for a separate income tax is thus due to its qualification as an “entity” under commercial law [1]. On the other hand, it is argued that the introduction and preservation of a tax which applies to taxable subjects different from physical beings is legitimate only for corporate organizations and, in particular, for the purpose of advancing the taxation which, after the distribution of dividends, company members will be subject to (“Substitute” or “Proxy Theory”) [2]. The corollary to this approach is the structural need for a legal regulation resolving the problem of double taxation – of companies and their members – ensuing from two distinct taxes being applied to the same income. I shall argue that none of the above traditional approaches is convincing; rather, the logical antecedent of a separate tax on income yielded by (or through) organizations is represented by one of their structural features: [continua ..]

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2. Affirmative asset partitioning and the entification of organisations for tax purposes

Any theoretical study on the rationale underpinning separate taxation applicable to companies – as well as other organizations, with or without legal personality – must start by analysing the particular regime of usewhich the income produced thereby is subject to: the latter – representing an increase and thus a component of the separate patrimony – may be used and pledged only for the spontaneous or coerced satisfaction of obligations that are functional to the purpose that underlies the constitution of the organisation. Said particular legal condition of the organization’s assets – or, rather, of the increase in wealth which the latter incorporate, independently of subsequent transformations – is a consequence of their partitioning, and thus of the in rem relevance legally attributed to their prefixed use: precisely because they are assigned to the satisfaction of a predetermined purpose, such assets can be objectively used only for the spontaneous or coerced satisfaction of obligations logically compatible therewith, thus derogating from the principle of indivisibility of an individual’s assets and of his unlimited liability as debtor [4]. The above notion of in rem relevance, as opposed to ad personam relevance of the limits imposed on the use of the assets object thereof, accounts for the reinstating, [continua ..]

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3. The limits of the partnership approach

To put it shortly, the central nexus of the above reasoning is the objective unsuitability of income increases in a separate patrimony to supply the economic means needed for payment of a personal tax which said patrimony is not the taxable subject of. The corollary to this conceptualisation is that, unless the ability to pay principle is disregarded, the legislator cannot refer the ability to pay, which said increases are an expression of, to other taxable subjects, even if these have, on various grounds, the functional availability of the patrimony in question. Yet, contrary to the above arguments, the law views separate patrimonies as “transparent” in a number of instances; hence, any corresponding income concurs in determining the overall tax predisposition of a taxable subject which does not identify itself with said assets: this is the case, more precisely, of partnership members. We thus need to assess whether said fiscal transparency provisions are in conflict with our above arguments or whether they have an autonomous justification. Firstly, it should be pointed out that partnerships’ income, given the “weakness” of their affirmative asset partitioning [16], may be more easily suited to pursue and satisfy the partner’s own interests and needs; this accounts for the fact that, in terms of personal tax liability, said income is referred to the partner, so that it concurs in forming his overall [continua ..]

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4. Rationalization of double taxation

 As seen above, the main objection to personal separate taxation of company-like organizations is the double taxation it brings about – failing any corrective actions – whenever their profit is distributed to their members as dividends. In this respect, we should stress what follows: the fact that the wealth generated through and within an organisation flows first into the separate patrimony and then – in line with the profit-making aim of the organization itself – into the personal patrimony of the corporate members does not deprive it of its income relevance; in other words, it does not turn from income into patrimony [18]. The cognitive value of the idea that a company’s organizational structure is the form whereby a purpose-oriented activity is carried out, rather than a legal subject, is precisely the following one: the relationship between the structure itself and corporate members is interpreted not in terms of a relationship between separate entities, but as a relationship between distinct centres of interests [19]. In this light, the circumstance that the wealth generated by functional modes of activity is legally available, firstly, to satisfy the interests underpinning the function itself, and then, at a logically subsequent time, to satisfy the “private” interests of the separate patrimony’s “owners”, does not imply that, when shifting from one kind of use to the [continua ..]

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