Copyright (c) 2008 All rights reserved. http://works.bepress.com/brad_borden Recent documents in Brad Borden en-us Wed, 27 Aug 2008 06:09:14 PDT 3600 http://works.bepress.com/brad_borden/21 http://works.bepress.com/brad_borden/21 Mon, 25 Aug 2008 16:06:42 PDT The current model for classifying tax entities enables sophisticated taxpayers to privately affect the placement of the incidence of taxation. Business participants' ability to affect tax consequences through entity selection derives from the current model's reliance on taxpayer elections and the formalism of labels. The current model disregards the economic aspects of business arrangements, a deviation that is unusual in an area of law traditionally dominated by economic thought. Rejecting the current model, this Article presents a classification system based on economic theory. Economic theory suggests that residual risk should determine the different types of tax entities. Residual risk is the value of assets remaining after a business satisfies its obligations. It measures the economic position of members of arrangements (i.e., the residual risk bearers) and suggests the proper tax treatment for the members. To build the residual-risk model, the Article identifies three different types of residual risk: (1) unitary residual risk, (2) allocation-dependent residual risk, and (3) distribution-dependent residual risk. The three types of residual risk naturally divide the various tax entities. The residual-risk model suggests that an arrangement should be subject to the tax regime that naturally fits its type of residual risk. The Article demonstrates that a classification model rooted in economic theory helps eliminate the use of entity selection as a tool for privately placing the incidence of taxation and justifies the application of the various entity tax regimes. Brad Borden Taxation