The term "shell corporation" typically refers to a corporation that is used only for a limited purpose, and which hopefully will not be recognized or respected for other purposes such as taxation. Historically, shell corporations have been used (1) to circumvent usury laws when adequate financing is not available at an interest rate permitted to individuals, (2) to facilitate estate planning, (3) to keep property out of the reach of creditors of its beneficial owners, (4) to satisfy certain state and local laws that require publicly financed projects to be held by corporations, (5) to avoid personal liability during liability-prone periods such as construction of a real estate development, and (6) to serve many other purposes. The use of a shell corporation presents a considerable dilemma to the beneficial owner of property in his role as taxpayer. The limited purpose for which a corporation is used is almost always to obtain a privilege which state law does not give to individuals, but corporate existence involves adverse federal income tax consequences. This dilemma flows from the fact that the corporation is a creature of legislative grace. The law permits individuals and other entities to join together and assume a favored legal status but exacts a "fee" in exchange. On the state level, this "fee" relates primarily to the regulation of the relationship between the parties to the agreement to incorporate as well as requiring organizational and operational formalities. The federal government influences the operation of a corporation by the taxation of its income. The corporation must pay a federal income tax as an entity separate from and in addition to the federal income tax paid by its shareholders. It may be more advantageous from a tax standpoint for the developer to hold property either individually or in a partnership rather than in a corporation. However, in spite of the advantages of using a noncorporate entity to hold property during the construction phase of a development, it is usually essential to assume the corporate form to obtain needed funds. The one statutory exception to double taxation which is allowed to certain classes of corporations, a Subchapter S election, may not be available to the real estate developer. The foregoing considerations have led many taxpayers to treat the corporations which they are forced to use as mere shells, with the hoped-for result that they will not be recognized for tax purposes. This Commentary examines the history and use of shell corporations in light of this problem, with special emphasis on the Tax Court's recent decision in Strong v. Commissioner.
Robert L. Nefsky,
Federal Income Taxation and Real Estate Development: Death Knell for Shell Corporations?,
56 Neb. L. Rev. 659
Available at: http://digitalcommons.unl.edu/nlr/vol56/iss3/6