[Congressional Record Volume 146, Number 136 (Thursday, October 26, 2000)]
[Extensions of Remarks]
[Pages E1955-E1956]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                      C-CORPORATIONS TAX FAIRNESS

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                           HON. PHIL ENGLISH

                            of pennsylvania

                    in the house of representatives

                       Thursday, October 26, 2000

  Mr. ENGLISH. Mr. Speaker, today I am introducing legislation which 
will bring a measure of fairness to our corporate tax system. 
Currently, closely-held C-corporations pay a 35% tax on capital gains, 
while all other closely-held corporations and individuals pay only a 
20% tax. This kind of tax treatment is unfair to the owners of closely-
held C-corporations.
  Unfortunately, current tax law prevents closely-held C-corporations 
from competing on a level-playing field with other forms of enterprise 
with respect to capital gains. Widely-held C-corporations are not 
subject to the same provisions that limit closely-held C-corporations. 
In addition, closely-held C-corporations are subject to a much higher-
tax rate than individuals or pass-through entities.
  Closely-held C-corporations have become a sort of hybrid form of 
business which, from a federal income tax perspective, operates in the 
worst of worlds. First, they are subject to all the Internal Revenue 
Service provisions that apply to widely-held C-corporations. Second, 
they are subject to two important limitation provisions that normally 
apply only to individuals or pass-through entities: the passive loss 
rules and the at-risk rules. Third, they are subject to the personal 
holding company and accumulated earnings tax provisions, which 
generally do not apply either to individuals or widely-held C-
corporations. for the owners of closely-held C-corporations, things are 
even worse. Not only are capital gains initially deprived of a 
favorable tax rate at the corporate level, but when these capital gains 
are distributed, they are taxed as ordinary income in the hands of the 
owners.
  The penalty provisions described above were intended to prevent 
especially wealthy individuals from using C-corporations to avoid tax 
liabilities. However, multiple changes over recent years in the tax 
treatment of C-corporations have all but eliminated any possibility of 
using a C-corporation in such a manner. S-corporations, on the other 
hand, have experienced a liberalization of regulation and now present a 
better ownership vehicle, from a tax point of view, than any closely-
held C-corporation.
  Current tax law prevents closely-held C-corporations from competing 
fairly for capital gains investments. These companies cannot compete 
against widely-held C-corporations because the latter generally are not 
subject to the limitation provision with which the closely-

[[Page E1956]]

held C-corporation must grapple. In addition, they cannot compete 
fairly with individuals or pass-through entities because they pay a 
much higher capital gains tax rate. This kind of discrimination in tax 
treatment is unfair to the owners of these businesses and is unhealthy 
for the economy as a whole.
  My proposal would reduce the tax rate applicable to the capital gains 
of closely-held C-corporations from the current 35% to 20%. However, in 
order to benefit from the lower capital gains rate, these corporations 
must subject their ordinary income to the individual 39.6% tax rate. If 
the net effect of these two rates is a reduction in tax liability, the 
corporation will pay the lower amount. If not, the corporations would 
pay the current 35% tax rate on capital gains and ordinary income. As a 
result, all closely-held corporations would pay the same rate and thus 
compete fairly.
  This proposal is obviously not the entire solution, but it would make 
a dent in dealing with the inequity of this particular situation.

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