Valuing Pass-Through Entities

Chapter 2The History of Federal Statutory Tax Rates in Maximum Income Brackets and the Evolution of Different Forms of Business Entities

Abraham Lincoln caused the pass-through entity (PTE) conundrum. That's right, blame Honest Abe, who on October 3, 1862, signed the Act of 1862, the first law authorizing a U.S. income tax on individuals. The new law also provided for additional sales and excise taxes and introduced the inheritance tax. Never one to shrink away from a major issue, President Lincoln needed a new revenue source in order to help finance the Civil War, even though he believed “to secure each laborer the whole product of his labor, or as nearly as possible, is a most worthy object of any good government.”¹ Prior to 1862, the government financed its operations from the collection of sales taxes and tariffs.

The Act of 1862 was the forerunner of the current Internal Revenue Code (IRC or Code). It required a person with earnings of $600–$10,000 per year to pay an income tax of 3 percent; a higher rate was applied to earnings in excess of $10,000. President Lincoln had the foresight to enact a progressive tax.²

In addition,

[t]he Act of 1862 established the office of Commissioner of Internal Revenue. The Commissioner was given the power to assess, levy, and collect taxes, and the right to enforce the tax laws through seizure of property and income through prosecution. The [Commissioner's] powers and authority remain very much the same today.³

In 1872, after the Civil ...