Journal of Law and Policy


Michael Haber


The ratification of the Sixteenth Amendment to the United States Constitution granted Congress the right to tax income “from whatever source derived.” Since its inception, the tax code has become long and complicated, filled with broad taxation rules and innumerable exceptions. Over time, the tax code has been amended with the stated purpose of promoting “fairness, efficiency, and enforceability.” However, the complexity of the tax code has led to abuse of “tax loopholes” by wealthy taxpayers who want to avoid paying their fair share of taxes. While abuse is likely to continue, as legislators remain intent on lowering taxes on the wealthy, there exists a “tax loophole” that can benefit the working class. Subchapter T of the Tax Code provides that worker cooperatives, businesses that are jointly owned by their workers, can pass through their income to their worker-owners in the form of patronage dividends, avoiding the entity level taxes that corporations are generally required to pay. However, the IRS has maintained that worker cooperatives must pay their worker-owners a “reasonable salary,” subject to payroll taxes, rather than allowing worker-owners to be paid their entire salaries as patronage dividends to circumvent payroll taxes. This Note argues that the IRS has incorrectly interpreted Subchapter T of the tax code, as Subchapter T allows worker cooperatives to avoid corporate taxes at the entity level and allows worker-owners to avoid payroll taxes on their entire income by structuring their salaries as patronage dividends. Further, this Note argues that, as a matter of policy, the IRS ought to endorse this understanding of Subchapter T, as offering tax incentives to worker cooperatives will benefit the working class.