Washington and Lee law professor Brant Hellwig has had one of his articles selected for inclusion on a list of Notable Corporate Tax Articles of 2012. The list was compiled by Karen C. Burke of the University of Florida Levin College of Law and Jordan M. Barry of the University of San Diego School of Law for the purpose of drawing attention to the year’s most thoughtful and insightful articles on corporate tax.
Prof. Hellwig’s article, coauthored with Gregg Polsky (North Carolina), is titled “Examining the Tax Advantage of Founders’ Stock” and was published in in the University of Iowa Law Review. From the abstract:
Recent commentary has described founders’ stock as tax-advantaged because it converts founders’ compensation income into capital gains. In this paper we describe various founders’ stock strategies that offer this character conversion and then analyze whether they are, on the whole, tax advantageous. While the founders’ stock strategies favorably convert the character of the founders’ income, they simultaneously turn the company’s compensation deductions into non-deductions. Whether founders’ stock is tax-advantaged overall depends on whether the benefit of the founders’ character conversion outweighs the cost of the company’s lost deductions. We use various hypothetical to illustrate this tradeoff. We conclude that founders’ stock is likely to be significantly tax-advantaged only in those cases where the start up company shows great promise early on but ultimately never develops into a profitable enterprise.
Even in that subset of cases where founders’ stock turns out to be tax-advantaged, the advantage exists only because of the tax law’s overly harsh treatment of net operating losses. Therefore, whatever tax advantage that exists for founders’ stock is best viewed as a partial move towards the optimal treatment of tax losses, not as a stand-alone tax benefit that needs to be eliminated.
The article is available for download from SSRN.