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The Rise of the Partnership economy
2015.01.10Rev.3
Jun Saito
1
Gist
2
You can lead a horse to water, but you cannot make him drink.
You can give him a tax incentive, but you cannot make him do an innovation.
May I be excused first?
3
In the 13th century, Thomas Aquinas recognized:
"Now, a private society is one which is formed for the purpose of carrying out private objects; as when two or three enter into partnership with the view of trading in common.“
Contra impugnantes Dei cultum et religionem, Part 2, ch. 8 (Opera omnia, ed. Vives, Vol. 29, p. 16).
Cited in 1891 Vatican by Leo XIII encyclical Rerum Novarum paragraph 51.
4
Private, Public
5
Japanese Society Western Society
State = Public
People = Private
State Non-State (Church)
People
Public
Private
The Rise of the Partnership economy
2015.01.10
Jun Saito
6
Revival
Abstract
U.S.A.-IRS-SOI Integrated Business Database (IBD) has been developed to provide evidence that businesses do, in fact, pursue optimal organizational structures. They have conducted a big-data calculation on vast tax return data which have been filed by whole business entities from 1980 through 2008. The main conclusion is:
The share of all net income generated by flow-through businesses has more than doubled since the early 1980s; the flow-through share of net income grew from 20 percent in 1980 to 60 percent by 2008.
We can reword flow-through into partnership and non-flow-through into corporate. So, we can say in other words, the fall of corporate business and the rise of partnership business have remarkably happened in the past of about thirty years.
The question is “Why? Why it has happened?” To look for the answer, the author will show differences between corporate and partnership. Let us discuss them and find the answer. My favorite answer is: Difference in Motivation, I mean:
A partnership is more self-motivated They produce goods and services which they want and like. A corporate, however, is motivated by others’ demand, namely money or profit. They want money or profit, more than what they produce.
7
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
The flow-through share of net income grew from 20 percent in 1980 to 60 percent by 2008
Sh
are
s o
f U
S A
ll B
usi
ne
ss N
et
Inco
me
flow through entity
corporate tax entity
Data Source : Internal Revenue Service, Statistics of Income, Integrated Business Data, www.irs.gov/taxstats/bustaxstats/
Net Income = 0.3 trillion $2008
Net In-come = 3 tril-lion $
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9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Number of LLC and C-Corp ( 1992-2011)
LLC
Data Source: http://www.irs.gov/uac/SOI-Tax-Stats-Integrated-Business-Data and http://www.irs.gov/uac/Tax-Stats-2
: the most popular partnership
: the most popular corporate
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Differences between Corporate and Partnership rev.7
No. Item Corporate Partnership1 capacity ownership
entitycontract entity
courtsaccessible entity
accounting entity
ownership entity
contract entity
courtsaccessible entity
accounting aggregate
2 liability in default limited liability The net asset in balance sheet is the solvency margin.
limited liability by at-risk amount(*)
(*) ; 1) cash contributed to partnership, 2) adjusted basis of contributed asset, 3) partner’s personally pledged amount
3 going concern or not going concern not-going concern, term company or at-will company
4 accounting mandatory accrual accounting freedom of accounting. However, collectively proper incomes shall be distributed to the partners.
5 Who has the power to recognize taxable
income?
the state, the tax authority. In tax accounting, the statutory useful life of depreciable assets are legally set. So, the depreciation costs are automatically accrued by rule.
the partners. (So, a tax sheltering is possible.) But for collectively proper accounting, the state should judge the tax shelter abusive. In other words, a tax sheltering is recognized lawful when the activity has economic substance.
6 pass through or not not pass through. The state levy tax both on corporate income and on dividends to shareholders. (double taxation)
pass through. A partnership shall file the information return to the tax authority about the annual income. In the dissolution, the partners shall liquidate the partnership and shall separately pay taxes on the finally distributed incomes. (single taxation)
7 share transferability freely transferable transferable
8 What are the contributions and distributions in?
in cash or cashable property collectively in kind
9 purpose of company profit. motivated by demands of people at large.
economic substance. motivated by the partners’ own demand.
10 collaboration type arm’s length non-arm’s length, closely held company
Lawful tax shelterSupreme Court of the United States,
1935
• For a business reorganization to affect tax liability, the reorganization must have economic substance, not be merely an attempt to reduce tax.
• However, "the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted".
A pronouncement decided in the case: Gregory v. Helvering, 1935
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But, a mere tax shelter is harmful to social economy, because…
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offset deduction
Self-motivated things to do are important.
You can lead a horse to water, but you cannot make him drink.
You can give him a tax incentive, but you cannot make him do an innovation.
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1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Cost Effectiveness (Net Income/Cost)
Partnership(除く個人事業)Corporate
Data Source : IRS-SOI-IBD Table 1 www.irs.gov/file_source/pub/irs-soi/80ot1all.xls )
141986, PAL rule: Passive activity loss can be offset only by passive activity gain.
Bill Clinton administration
1996, Check the Box rule: A business entity that is not per se corporation is classified as a partnership for federal tax purposes, unless an election is made for the entity to be classified as a corporation. (default = partnership)
So, what has happened in 1991? Collapse of Soviet Union?
So, what has happened in 1991?• Information Technology revolution? Indeed, it has
begun about 1991.
• But, also in Japan it has happened. Still, Japan…
15
Non-K.K. are 2-digit less than K.K.
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
K.K.
1212503
1191680
1235720
1171114
1310520
1210010
1215015
1369953
1250514
1055543
992293
931967
920328
903080
897675
Yu-Gen
386486
413519
420626
431879
449401
470455
475298
452389
374410
331056
293880
270191
241143
233601
219568
Go-Do(J-LLC)
NaN NaN NaN NaN NaN NaN NaN 4066 9557 10785 13667 15772 18756 23025 29836
Go-Shi
8367 9830 10397 10495 10345 9977 9625 7933 7933 6999 6056 5473 5009 4799 4425
J-LLP
NaN NaN NaN NaN NaN NaN 366 1781 1725 1715 1650 1540 1537 1458 1378
Go-Mei
1463 1521 1507 1484 1538 1567 1369 1442 1326 1210 1066 1088 946 941 1002
316
3,162
31,623
316,228
3,162,278
Number of Japanese Company (1999-2013 )Data; Ministry of Justice in Japan, http://www.moj.go.jp/TOUKEI/ichiran/touki.html
K.K.: Japanese most popular corporate
Again, what has happened in 1991?
• My guess: Some drastic change in social thought?like…
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Dignity is prior to JusticeIt doesn’t mean selfishness is prior to fairness.
• Even prior to the logic of a fair exchange of goods and the forms of justice appropriate to it, there exists something which is due to man because he is man, by reason of his lofty dignity. Inseparable from that required "something" is the possibility to survive and, at the same time, to make an active contribution to the common good of humanity.
1991 Vatican Encyclical Centesimus Annus paragraph 34
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New Priority of Norms
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Origin of Innovation
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Let us discuss.
Thank you.
21
Hereafters are O-MA-KE.
22
In the first, Microsoft, YouTube, Facebook, and etc. had startuped in partnership tax entity.
23
PartnershipInvestments could be easily compensated for by tax.
Nonlisted Listed
Corporate
Transition of firm form in object economy
Transition of funder
←0→
Time
Time
Darwin’s Ocean(vulnerable to sudden death)Death Valley
gain
loss
Devil’s River Secular world
1976, partnership 2001, LLC 2005, LLC
Transition of founder in monetary economy
Partnership
Investments could be easily compensated for by tax sheltering.