When you run a business as a C corporation, the government takes two bites of the apple. The corporation pays income tax on its profits at the corporate level. Then, when those after‑tax profits are distributed to you as a dividend, you pay income tax again at the individual level.
Under § 61(a)(7), dividends are included in your gross income. The corporation can’t deduct the dividend under § 162. So a dollar of corporate profit can be whittled down by two separate tax liabilities before it ever reaches your pocket.
Courts have long recognized this double‑tax structure. As the Supreme Court put it in Flint v. Stone Tracy Co., 220 U.S. 107, 151‑52 (1911), the Constitution does not require apportionment of an excise on the privilege of doing business in corporate form, even though the result is two layers of tax on the same economic earnings.
Why does that matter? Because it drives many planning decisions. Closely‑held business owners often try to recast distributions as something other than dividends – reasonable compensation, interest on debt, bargain purchases of property – in hopes of turning two layers of tax into one. Later articles will explore those strategies, but you always need to keep the double‑tax baseline in mind. If you ignore it, you might structure a transaction that looks good on paper but leaves you with a much higher effective tax rate than you anticipated.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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