1 

TAXES AND CORPORATE CHOICE 

OF ORGANIZATIONAL FORM 

Robert Carroll and David Joulfaian 

U.S. Department of the Treasury 

OTA Paper 73 October 1997 

OTA Papers and Briefs are circulated so that the preliminary findings of tax research conducted 

by staff members and others associated with the Office of Tax Analysis may reach a wider 

audience. The views expressed are those of the authors, and do not reflect Treasury policy. 

Comments are invited, but OTA Papers and Briefs should not be quoted without permission from 

the authors. Additional copies of this publication may be purchased from the National Technical 

Information Service, 5285 Port Royal Road, Springfield, VA 22161. 

Office of Tax Analysis 

U. S. Treasury Department 

Washington, DC 20220 

We thank Bill Gentry, Lowell Dworin, Michael McDonald, Laura Kalambokidis, Susan Nelson, 

Tom Neubig, George Plesko, and Karl Scholz for their helpful comments and suggestions. 
ABsmcT 

This paper investigates the determinants of the corporate choice of organizational form and 

the effect of thischoice on hperformance. We analyze the corporate income tax returns of a large 

number of corporations before and after the Tax Reform Act of 1986 and determine how the 

substantial changes in tax rates associated with this tax reform affected corporations decisions to 

organize as C corporations or S corporations, which are taxed only at the personal level. We find 

that taxrates exert a statistically significant influence on a firm’s choice of organizational form with 

an implied tax rate elasticity of 0.20 percent. Our results also show that firms that switched to S 

corporation status after the Tax Reform Act of 1986 grew about 20 percent faster than the general 

corporate population. 
TAXES AND CORPORATE CHOICE OF ORGANTZATIONALFORM 

I. INTRODUCTION 

Following the Tax Reform Act of 1986 (TRA86), an increasing number of corporations 

chose to organize as S corporations (Nelson, 1991; Plesko, 1994). Lower individual income tax 

rates relative to corporate tax rates increased the tax benefits associated with S corporation 

election. Recent research suggests that tax rates play a key role in a firm's choice of 

organizational form (Gordon and MacKie-Mason, 1991; Carroll and Joulfaian, 1994; Gentry, 

1994; Plesko, 1994; Ayers et al., 1996). 

The tax code treats the income of S corporations in a manner similar to that of 

partnerships. An S corporation's profits or losses are passed through to shareholders (i.e., only 

taxable on their personal tax returns) and thus avoid the double taxation of corporate earnings. 

S Corporations, however, face a number of restrictions. For example, prior to 1997, S 

corporations could have no more than 35 shareholders, could not issue more than one class of 

stock, nor be part of an affiliated group, were required to be a domestic corporation, and, once 

S corporation status was revoked, a firm could not reelect S corporation status for 5 years.' 

These restrictions on S corporations may inhibit the growth of firms that expect to grow by 

constraining their ability to raise capital through expansion of ownership and stock issues. 

'The Small Business Job Protection Act of 1996 included a number of provisions affecting 

S corporations. For example, this Act increased the limit on the maximum number of 

shareholders for S corporations from 35 to 75, to some extent liberalized the rules governing 

who can hold shares in an S corporation (e.g., certain trusts and tax-exempt entities) and under 

what circumstances S corporations can own part or all of another corporation, and extended 

the option of organizing as an S corporation to other types of businesses (e.g., certain financial 

institutions). 
2 

While the choice of organizational form merits attention, the consequences of the choice 

on a firm’s performance have been overlooked in @eliterature. Firms that converted from C to 

S status in the aftermath of the TRA86 may have reduced their taxes significantly. At the 

theoretical level, if changes in taxes lead to changes in the behavior of these corporations, then 

we should expect toobserve faster growth as well. However, it is not clear whether this reduction 

in taxes, and the concomitant decrease in the cost of capital and increase in labor supply 

incentives, has led to an increase in output or improvement in firm performance, as firms electing 

S corporation status may have limited their ability to raise capital relative to similar C 

corporations.2 

In this paper, we investigate the determinants of S corporation elections with an emphasis 

on the role of taxes. In addition, this paper is the first to attempt to study the effect of S election 

on a firm‘s post-TRA86 sales, controlling for its pre-TRA86 attributes. We use a panel of 

corporate income tax returns for tax years 1985 and 1990. These years span the TRA86 which 

brought about significant changes in tax rates. In studying organizational choice, our data help 

avoid aggregation bias common to group data (MacKie-Mason and Gordon, 1991), are superior 

to cross-sectional data (Carroll and Joulfaian, 1994; Ayers et al., 1994)3, and avoid sample 

selectivity bias common to studies using panel data on corporations with a small number of 

See Gravelle and Kotlikoff (1989). For a contrarian view see Gordon and MacKie-Mason 

(1994). 

mese studies focus on small corporations. 
3 

shareholders, where the latter is defined using post-TRA86, post-behavior data on the number of 

shareholders (Plesko, 1994).4 

The next section briefly summarizes the growing importance of S corporations since the 

TRA86. The third section develops a theoretical model of firm choice of organizational form. 

The fourth section discusses the data sources, development of our panel, and variable construction. 

The fifth section presents the empirical results. The final section concludes the paper. 

II. RISE IN S CORPORATIONS 

The changes in tax rates brought about by the TRA86 led to a significant increase in S 

corporation elections. Prior to TRA86, the maximum statutory tax rate for corporations was 46 

percent, with 50 percent for the non-corporate sector. Under the TRA86, a firm organized as a 

C corporation faced a maximum tax rate of 34 per~ent.~This firm may distribute after-tax income 

in the form of dividends or retain such income for future investments. Distributed dividends will 

be taxed as ordinary income, while retained earnings will be taxed as capital gains when realized, 

both at a maximum statutory tax rate of 28 percent. In contrast, S corporations are able to pass 

"The sample selection problem may bias the results because C corporations with large 

numbers of shareholders that convert to S corporations by reducing the number of shareholders 

are included in panels that define the number of shareholders using post-TRA86, post-behavior 

data. 

'The Omnibus Budget Reconciliation Act of 1993 raised the maximum corporate tax rate 

for C corporations to 35 percent. 
4 

income through to the shareholders directly and avoid double taxation. The income of an S 

corporation is taxed only once at the individual (non-corporate) level as ordinary income. 

Table 1 presents tabulations of data from the Corporate Statistics of Income (SOI) to 

illustrate the growth in S corporations following the TRA86. The increase in both the number of 

S corporations and their income after the TRA86 was dramatic. The number of firms electing S 

corporation status rose two-fold, from 0.7 million to 1.4 million between 1984 and 1990. During 

this period, S Corporations as a share of all Corporations rose from 22 percent to 42 percent.6 The 

rise in S corporations is equally dramatic when income is used to measure their growth. S 

corporation income as a share of total corporate income rose from 5.4 percent to 9.3 percent 

between 1984 and 1990. 

The growth in assets and sales is even more dramatic. The share of corporate assets held 

by S Corporationsrose from 1.6 percent in 1984 to 4.1 percent in 1990.7 The comparable figures 

for sales are 6.3 percent and 16.1 percent, respectively. Whether the number, income, or assets 

are used to measure growth, the growth of S coprations was very dramatic after the TRA86. 

In fact, some researchers have pointed to the growth of S corporations as a significant source of 

erosion for the corporate income tax base after the TRA86, depressing corporate tax receipts 

during the late 1980's (for example, see Gordon and MacKie-Mason, 1991; Poterba, 1991). 

6Althoughnot reported on Table 1, the fraction of new incorporations electing S status rose 

from 30 to 55 percent. 

7Scorporations comprise a small share of the corporate sector when income or assets is 

used, rather than returns, because S corporations tend to be smaller. 
Table 1 also shows that the increase in S corporation elections was strongest in 1987 

tapering off quickly in later years. These trends are also evident when using income or assets. 

The representation of S corporations within the corporate sector stabilized by the end of the 

decade. These trends may reflect the timing of the tax rate changes. The largest fall in the 

individual/corporate rate differential occurred between 1986 and 1987, while the individual rate 

cuts were not fully phased-in until 1988. 

A comparison of S Corporation status by industry, also presented on Table 1, indicates that 

S corporation elections are more important for some industries than others. By 1990 over 32 

percent of all S corporations were in the services industry. The dominance of S corporations in 

the services industry, and to a lesser extent wholesale and retail trade industries, probably reflects 

.the smaller size of firms in these industries. 

III. AN ANALYTICAL F'RAMEWORK OF CORPORATE ORGANIZATIONALCHOICE 

Entrepreneurs may choose from four forms of legal organization: partnership, 

proprietorship, C corporation, and S corporation. The choice between the corporate and 

noncorporate forms is a complex one and beyond the scope of this paper.8 Once a decision is 

made to incopmte, firms will compare the tax benefit from S corporation election to the non-tax 

benefits of C corporation election. Prior to the changes enacted by the Congress in 1996, S 

Limited liability laws are likely to play a dominant role in the choice between the two 

forms of organization. Papers that address diverse aspects of the effect of the tax treatment of 

the corporate and noncorporate sectors include Gentry (1991), Guenther (1992), Jones and 

Taggart (1984), and Terando and Omer (1993). 
6 

corporations were not able to reap many of the benefits available to publicly traded firms or firms 

with many shareholders because S corporations were limited to 35 or fewer shareholders and one 

class of stock.' Thus, in choosing between the two forms of corporate organization, a firm would 

compare the expected after-tax income under each organizational form or regime." If the firm 

decides to become an S corporation, its after-tax return or profit is given by, 

ns = Y(l-znc) (1) 

where n is after-tax profit, Y is pre-tax profit, zmis the noncorporate income tax rate, and the 

subscript s denotes S corporation. 

In contrast, the after-tax profit of a firm electing to become a C corporation is given by, 

n, = (Y + VA)(l -z,) (2) 

where, 

z, = z+(l -z)[(l - a) tcg+ CLZd ] , 

v is the expected additional earnings from being a C corporation as a fraction of assets, A, zis 

the statutory corporate tax rate, and c denotes C corporation. The subscripts cg and d denote 

capital gains and dividends, ais the fraction of earnings distributed as dividends, and (1-4is the 

fraction retained." 

%e Small Business Job Protection Act of 1996 limited S corporations to 75 or fewer 

shareholders. 

lo The theoretical model provided below draws on MacKie-Mason and Gordon (1991). 

Also see Scholes and Wolfson (1992, chapter 4). 

"As described in greater detail below, we adjust the tax ratk on capital gains realizations to 

account for deferrals. 
7 

A firm is indifferent to its choice at the point where the tax benefits for S corporation 

election are eqd to the non-tax benefits from C corjmration status, or 

Y(zc - TJ = VA(l-Tc) (3) 

Equation (3) assumes that tax considerations are proportional to income, Y,whereas non-tax 

factors depend on the assets of the firm, A. 

To derive the probability of a firm choosing S corporation status from equation (3) we 

assume that there is stochastic variation in behavior across firms such that the standard deviation 

of the error term is proportional to the size of the firm's assets, A, and rewrite equation (3) as, 

y(zc - tnc)= vAeE(l-TC) (3') 

It follows that the value of e at which the firm is indifferent to its choice must satisfy, 

Thus, the cut-off value, or the S corporation choice, depends positively on the ratio of income to 

assets, a gross measure of profitability, and the grossed-up tax wedge between the corporate and 

non-corporate sector, and negatively on the non-tax benefits of C election. It follows that for a 

given change in tax regimes, the change in the cut-off value depends directly on the change in the 

second term in equation (4). 

N.DATA AND ESTIMATION STRATEGY 

Panel data on corporations were developed from the 1985 and 1990 Statistics of Income 

(SO0 cross-sectionalsamples of corporate income tax returns. This period witnessed significant 
8 

variations in tax rates and reflects the fully phased-in provisions of TRA86. Each cross-sectional 

sample consists of about 80,000 corporate tax returns prepared by the Statistics of Income (SOI) 

division of the Internal Revenue Service. We were able to link about 41,400 corporate tax returns 

across these two years. The age of each firm in the constructed panel is at least 6 years by 1990, 

and thus by-passes the birth and death cycle of corporations. 

Since our paper focuses on a firm's choice between C and S status, we only want to 

consider firms that either are or could become S corporations. Therefore, we exclude firms with 

foreign shareholders, or that conduct business in the insurance and banking industries. Also, we 

exclude net deficit firms as well as those with no assets.I2 After these adjustments, 20,045 tax 

returns remain in our panel. 

These data allow us to identify a firm's choice of organizational form both before and after 

the TRA86. Hence, we can consider all possible transitions between C corporation and S 

corporation status between the two years. There are four possible outcomes: (1) C corporations 

in 1985could have chosen to become S corporations by 1990, (2)C corporations in 1985 could 

have chosen to remain as C corporations, (3) S Corporations in 1985 could have chosen to become 

C corporations, or (4) S corporations in 1985 could have chosen to remain as S corporations. 

l2 Net deficit fms may have an incentive to elect S corporation status in the face of 

relatively higher individual tax rates to take advantage of the pass-through of losses. To the 

extent that the corporate tax rate is not observed in the presence of carry-forwards, even 

though it is zero at present, we are unable to address the role of taxes for these firms. Also 

note that information on the number of shareholders is not available in 1985; information in 

the 1990 data is limited to 35 or fewer shareholders. 
9 

Table 2 provides a transition matrix of the choices firms made between C and S status in 

our panel. Ofthe 20,045 firms in the panel, 15,302 (76 percent) elected C corporation status in 

1990 and the remaining 4,743 (24 percent) elected S corporation status. However, of those 

corporations that elected S corporation status in 1990, only 1,733 (37 percent) also had elected 

S Corporaton status in 1985. In 1985, 18,229 firms were organized as C corporations. Of these, 

3,010 (17 percent) elected S corporation status in 1990, while 15,219 retained their C corporation 

status. 

We use two specificationsto model the transition between organizational form. First, we 

consider a firm's choice of organizational form in 1990 controlling for its choice in 1985. The 

dependent variable takes on a value of one if a firm elected S corporation status in 1990, zero 

otherwise. In this case, we include all firms that were eligible to be S corporations in 1990 

regardless of their status in 1985. A lagged dependent variable indicating a firm's choice of 

organizational form in 1985 is included. In an altemative specification, we consider a fm's 

choice of organizationalform in 1990 but exclude firms that were organized as S corporations in 

1985. In this specification we restrict the sample to firms organized as C corporations in 1985. 

A motivation for this restriction is that income and asset statements of C and S corporations are 

very likely to have been constructed differently. 

Table 3 provides the means and standard deviations of select variables by type of 

organizational form elected in 1990. We begin with the ratio of income to assets in 1985, which 

reflects the gross profitability of the firm.Since this variable is based on a firm's pre-TRA86 
10 

attributes, it is exogenous to a firm's organizational choice in 1990.13 Income is defined as net 

income reported on a firm's corporate income tax form (Form 1120, line 28). Assets are obtained 

from the balance sheet information reported on ScheduleL. For the panel of 20,045 corporations, 

the average asset size is $248 million, and the ratio of income to assets is 0.202. For the 18,229 

corporations electing C status in 1985 (column 2), average assets are $270 million with an average 

ratio of income to assets of 0.102. 

The change in the grossed-up tax wedge between the corporate and non-corporate sector, 

the second term in equation (4), reflects the change in the advantage of S corporation election due 

to the TRA86. For each firm, we compute tax liability as if it were a C corporation and divide 

it by income to compute 2.14 Although we are able to compute each firm's corporate level tax 

rate, t, we do not have any information on each shareholder's individual tax rate, t,, nor their 

tax rate on capital gains and holding period needed to compute 2,. Therefore, we set the tax rate 

on dividends and non-corporate income at 0.37 in 1985 and 0.28 in 1990. Similarly the capital 

gains tax rates are set at 0.10 and 0.14, respectively." We use aggregate data and set the dividend 

payout rate, a,to 0.6, which is exogenous to the choice of organizational form. The average 

l3 Note that using 1990 information does not change the qualitative results. 

140nedifference between S and C corporations is that S corporations do not report a 

deduction for net operating losses (NOLs) on their corporate tax returns nor certain tax credits. 

We account for these differences by computing tax rates for all firms before NOLs and 

credits. 

"All the tax rates are computed for individuals with AGI in excess of $50,000 using SO1 

individual data. We assume that deferrals reduce the tax rate on capital gains by one-half. 
11 

reduction in the grossed-up tax wedge, denoted by T in Table 3, is 13.7 percent over the period. 

The reduction in the grossed-up tax wedge computed for the 18,179 firms organized as C 

corporations in 1985 is 13.1 percent. 

Table 3 also provides information on the industrial classification of firms in the panel. 

About two percent of the firms in our panel are in agriculture, one percent in mining, seven 

percent in construction, four percent in transportation and utilities, 15 percent in retail trade, 14 

percent in wholesale trade, 27 percent in finance, and 9 percent in services. 

V. RESULTS 

1. Choice of Organizational Form 

Table 4 provides weighted probit estimates for S corporation elections in 1990. Column 

1of Table 4 provides estimates for the panel of 20,045 fms.16 The change in the grossed-up tax 

wedge from equation (4), is included to capture the effects of the taxrate changes under TRA86 

on organizational form. Additional variables are also included to control for firm characteristics 

in 1985, prior to the changes under TRA86. These include variables such as the ratio of income 

16Scorporations tend to be under sampled in the cross-sectional files used to construct our 

panel, as a comparison of Table 1and 2 would suggest. To correct for this under 

representation, the probit and ordinary least squares equations presented below are estimated 

using 1985 weights. Qualitatively similar results are obtained using the greater of the 1985 

and 1990 weights. 
12 

to assets, organizational form in 1985, and dummy variables for major industry to control for 

otherwise unobservable industry-specific effects. l7 

The coefficient on the ratio of income to assets is positive, consistent with theory, and is 

estimated at 0.16 with a standard error of 0.012. The marginal effect is 0.02 which yields an 

elasticity of 0.16 for the probability of electing S status with respect to a firm's return on its 

assets. This result implies that greater profitability encourages firms to organize as S 

corporations. 

The tax rate coefficient is positive, also consistent with theory, with an estimate of 0.20 

and standard error of 0.023. This indicates that firms with the greatest increase in the corporatenoncorporate tax wedge between 1985 and 1990 are more likely to have elected S corporation 

status, where the tax savings are greatest for profitable firms. The marginal effect is 0.03, with 

an implied elasticity of 0.20 for the probability of S status election. This low elasticity coefficient 

should not be surprising because larger C corporations may find that the cost imposed by the 

restrictions of S corporation status (or the benefits of C status), such as the number of shareholders 

and access to capital, outweigh its tax advantages and simply retain their C corporation stat~s.'~ 

I7Themanufacturing industry dummy is excluded from the model to allow estimation. 

l8 This is consistent with findings from the 1990 SO1 file which show that only one third of 

the fms incorporated in 1985 or earlier are organized as S corporations, while 55 percent of 

firms incorporated in later years made this election. (Additional information is available upon 

request.) In addition to the number of shareholders, recapture taxes, which we are unable to 

model, resulting from C to S conversions are more binding for older fms such as those in the 

panel. Note that in addition to the omitted variable (benefit of C corporation) bias, the 

estimate may suffer from aggregation bias since we do not observe the individual shareholder's 

tax rate. 
13 

Column 2 of Table 4 replicatesthe probit estimates of column 1but limited to the 18,179 

firms organized as C corporations in 1985. Because all the S corporations in this subpanel had 

elected the C status in 1985, they represent firms that switched their status over the two years. 

The estimated coefficients, as well as a computed marginal effects and elasticity coefficients, are 

very similar to those observed in column 1, except for the industry coefficients. 

Both estimated coefficients of the taxwedge reported in columns 1and 2 of Table 4 imply 

an elasticity of about 0.2. This would suggest that, in the absence of the rate changes brought 

about by TRA86, the number of profitable C corporations would have been 20 percent higher. 

This would roughly translate into an additional 3,000 corporations choosing to retain C 

corporation status in our sample, or about 360,000 in the population. 

2. Organizational form and firm performance 

Moving to the effect of S elections on firm performance, Table 5 presents ordinary least 

squares estimates for the growth rate of firm sales between 1985 and 1990.19 The dependent 

variable is defined as the difference of the natural logarithm of sales over the two periods. We use 

the amount of sales as the dependent variable as a proxy for firm output which is not observed in 

the data. The explanatory variables consist of pre-TRA86 attributes and include sales in 1985, 

l9 As an altemative to sales, one may compare income or asset changes over time. Because 

income and asset statements of C and S corporations may be constructed differently, however, 

such comparisons may not be appropriate. 
14 

industrial classification to control for industry specific effects, and indicators of whether a firm 

was an S corporation in 1985 or had switched to S corporation status by 1990. 

Controlling for size and industry, weighted regression results in column (1) show that the 

sales of S corporations grew by 32 percent and that C firms that had switched to the S status 

between 1985and 1990grew 23 percent faster than the remaining C corporations. Similar results 

are obtained in column (2) which is restricted to firms organized as S corporations in 1985. This 

specification indicates that the sales of firms that switched to the S status in the aftermath of 

TRA86 grew 18 percent faster than the remaining C corporations over the period.2oWhile these 

estimated response parameters seem large, they are well below the growth pattern observed in 

Table 1which shows that S corporations' share of receipts more than tripled between 1985 and 

1990 while their share of the number of corporations only doubled. 

In an alternative specification, we limit the sample to firms that are of comparable size. 

Specifically, we exclude C Corporations with assets in excess of the largest S corporation in 1990 

(slightly over $1 billion). We do this for two reasons: (1) firms with tens and hundreds of billions 

in assets may find it very difficult to convert, and (2) very large firms may grow at slow rates, 

which may bias our estimates. Both probit and regression estimates were little affected using the 

reduced sample. 

*' Similar results are obtained using a log-log specification, in place of growth rates, except 

that the adjusted R square more than doubles in value. 
15 

VI. CONCLUSION 

This paper investigates the determinants of the corporate choice of organizational form and 

the effect of this choice on firm performance. Using a panel of corporation income tax retums 

before and after the Tax Reform Act of 1986, we evaluate the role of taxes on the election of S 

corporation status. 

Our results show that higher corporate-noncorporate tax rate differentials increase the 

likelihood that a firm wil convert from C to S corporation status, where the tax savings are the 

greatest for profitable firms. Such effect, though significant, is likely to be small for established 

fms, which tend to be large and require greater access to capital. This is consistent with the 

observed pattem of low S elections by older firms, but high S elections by newer firms. This may 

indicate that non-tax factors (e.g., access to capital) may mitigate the distortionary effects of the 

differential tax treatment and the consequences for government revenue. This, however, may 

need to be directly verified by studying the longitudinal pattem of organizational choice of S 

corporations. 

Our results also indicate that firms organized as S corporations tend to grow faster than C 

Corporations. For the average firm in our sample, the sales of C corporations that switched to S 

status after TRA86 grew about 20 percent faster thanthe average corporation during the 1985 and 

1990period. 
REFERENCES 

Ayers, Benjamin C., C. Bryan Cloyd, and John R. Robinson. (1996). "OrganizationalForm and 

Taxes: An Empirical Analysis of Small Businesses." The Joumal of the American 

Taxation Association ,forthcoming. 

Carroll, Robert and David Joulfaian (1994). "Do Taxes Affect Corporate Financial 

Decisions?" Office of Tax Analysis, U.S.Treasury Department, mimeo. 

Gentry, William M. (1991). "Taxes and Organizational Form: The Rise and Fall of Publicly 

Traded Partnerships." Proceedings of the National Tax Association Meetings. 

(November). 

(1994). "Taxes, Financial Decision and Organizational Form: Evidence from Publicly 

Traded Partnerships." Journal of Public Economics 53: 223-244. 

Gordon, Roger G. and Jeffrey MaclGe-Mason (1991). "Effects of the tax Reform Act of 1986 on 

CorporateFinancial Policy and organizational Form," in Joel B. Slemrod, ed., Do Taxes 

Matter? The Impact of the Tax Refom Act of 1986 (Cambridge: MIT Press), 91-131. 

' Gravelle, Jane G. and Larry J. Kotlikoff (1989). "The Incidence and Efficiency Costs of 

Corporate Taxation when Corporate and Noncorporate Firms Produce the Same Good." 

Journal of Political Economy 97, 749-781. 

Guenther, D. A. (1992)."Taxes and Organizational Form: A Comparison of Corporations 

and Master Limited Partnerships." The Accounn'ng Review 67, 17-54. 

Jones, E. Philip and Robert A. Taggart (1984). "Taxes and Ownership Structure: 

Corporations, Partnerships and Royalty Trusts." NBER Working Paper No. 1441. 

Internal Revenue Service, Sta&istics of Income -Corporation Income Tax Returns, selected years. 

MacKie-Mason, Jeffrey and Roger Gordon (1991). "Taxes and the Choice of Organizational 

Form." NBER Working Paper No. 3781. 

(1994). "Tax Distortions to the Choice of Organizational Form." Joumal of Public 

Economics 55, 279-306. 

Nelson, Susan (1991). "S Corporations Since the Tax Reform Act of 1986."Proceedings of the 

National Tax Association Meetings. (November). 
Plesko, George A. (1994). "Entity Choice: Financial Characteristics of S and C Corporations." 

Public Finance Quarterly 22~3,311-34. 

(1994). "The Role of Taxes in Organizational Choice: S Conversions After the Tax 

Reform Act of 1986." Working Paper, Northeastern University. 

Poterba, James M. (1991). "Why Didn't the Tax Reform Act of 1986 Raise Corporate Taxes?", 

in James M. Poterba, ed., Tax Policy and the Economy, NBER. 

Scholes, Myron S. and Mark K. Wolfson, Taxes and Business Strategy: A Planning Approach 

(Prentice-Hall, Inc, 1992.) 

Terando, William D. and Thomas C. Omer. (1993). "Corporate Characteristics Associated with 

MasterLimited Partnership Formation. %Jounuzl of the American Taxation 

Association, 23-45. 


TABLE 3 

SAMPLE MEANS AND STANDARD DEVIATIONS OF SELECT VARIABLES 

Variable 

AlnT 

Assets ($l,OOO) 

In Assets 

Income/assets 

In Income/assets 

Agriculture 

Mining 

Constmction 

UtiIities 

Wholesale Trade 

Retail Trade 

(standan 

All 

corporations 

-0.137 

(0.546) 

247,900 

(2,984,400) 

17.462 

I (1.181) 

0.202 

(8.610) 

-2.911 

(1.405) 

0.024 

0.011 

0.075 

I 0.039 

0.136 

0.149 

Finance,Insurance, and 0.265 

RealEstate 

Services 0.090 

Number ofCorporations 20,045 

S Corporations in 1990 4,743 

leviation) 

Limited to C 

corporations* 

-0.131 

(0.550) 

270,030 

(3,128,600) 

17.531 

(1.184) 

0.102 

(0.725) 

-3.009 

(1.389) 

0.022 

0.010 

0.073 

0.039 

0.031 

~ 

0.148 

0.284 

0.083 

18,229 

3,010 
-- 

TABLE 4 

(Standard errors in 

Variable 

constant 

In (home I Assets) 

AlnT 

Agriculture 

~~~~ 

Mining 

Construction 

utilities 

Wholesale Trade 

RetailTrade 

Finance, Insurance, and 

RealEstate 

Services 

S Corp in 1985 

Log Likelihood 

P~eud0-R~ 

Number of Observations 

Positive observations (S Corporations) 

T = [T~-T,JI[~-TJ 

arentheses) 

(1) (2) 

-1.690* -2.549* 

(0.051) (0.107) 

0.157* 0.143* 

(0.014) (0.014) 

0.1%* 0.187* 

(0.023) (0.021) 

0.256* -0.262 

(0.108) (0.426) 

0.284* -0.342 

(0.130) (0.556) 

0.625* 1.708* 

(0.058) (0.111) 

0.829* 1.607* 

(0.082) (0.123) 

0.729* 1.554* 

(0.061) (0.113) 

0.316* 1.091* 

(0.072) (0.125) 

0.338* 1.085* 

(0.063) (0.117) 

1.064* 1.948* 

(0.050) (0.107) 

3.008* 

(0.035) -

-5,264 -5,590 

0.61 0.53 

20,045 18,229 

4,743 3,010 

'Estimatesire statistically significant at the 5 percent level. 
-- 

TABLE 5 

REGRESSION ESTIMATES OF'THE GROWTH OF 

(Standard errors in parentheses) 

Variabie (1) 

constant 6.682* 

(0.118) 

In Sales in 1985 -0.970* 

(0.024) 

(In Sales in 1985)' 0.034* 

(0.001) 

Agriculture -1.423* 

(0.153) 

Mining -1.013* 

(0.193) 

Construction -0.069 

(0.090) 

Utilities -0.409* 

(0.130) 

Wholesale Trade -0.458* 

(0.091) 

RetailTrade -0.407* 

(0.104) 

Finance, Insurance, and -0.453* 

Real Estate (0.091) 

Services -0.137 

(0.071) 

S Corporation in 1985 0.324* 

(0.049) 

Switched from C to S 0.227* 

(0.089) 

RZ 0.195 

Number of Observations 20,045 

'Estimates are statistically significant at the 5 percent level. 

SALES 

(2) 

6.146* 

(0.125) 

-1.004* 

(0.025) 

0.038* 

(0.001) 

-1.618* 

(0.175) 

-3.778* 

(0.229) 

0.220* 

(0.098) 

-0.534* 

(0.140) 

-0.673* 

(0.102) 

0.129 

(0.114) 

-0.093 

(0.099) 

-0.172* 

(0.075) 

-

0.178* 

(0.081) 

0.203 

18,229