1. The Rise of the Partnership economy 2015.01.10 Rev.3 Jun Saito 1

2. Gist 2 You can lead a horse to water, but you cannot make him drink. You can give him a tax incentive, but you cannot make him do an innovation.

3. May I be excused first? 3

4. In the 13 th century, Thomas Aquinas recognized: "Now, a private society is one which is formed for the purpose of carrying out private objects; as when two or three enter into partnership with the view of trading in common.“ Contra impugnantes Dei cultum et religionem, Part 2, ch. 8 (Opera omnia, ed. Vives, Vol. 29, p. 16). Cited in 1891 Vatican by Leo XIII encyclical Rerum Novarum paragraph 51.Rerum Novarum 4

5. Private, Public 5 Japanese SocietyWestern Society State = Public People = Private State Non-State (Church) People Public Private

6. The Rise of the Partnership economy 2015.01.10 Jun Saito 6 Revival

7. Abstract U.S.A.-IRS-SOI Integrated Business Database (IBD) has been developed to provide evidence that businesses do, in fact, pursue optimal organizational structures. They have conducted a big-data calculation on vast tax return data which have been filed by whole business entities from 1980 through 2008. The main conclusion is: The share of all net income generated by flow-through businesses has more than doubled since the early 1980s; the flow-through share of net income grew from 20 percent in 1980 to 60 percent by 2008. We can reword flow-through into partnership and non-flow-through into corporate. So, we can say in other words, the fall of corporate business and the rise of partnership business have remarkably happened in the past of about thirty years. The question is “Why? Why it has happened?” To look for the answer, the author will show differences between corporate and partnership. Let us discuss them and find the answer. My favorite answer is: Difference in Motivation, I mean: A partnership is more self-motivated They produce goods and services which they want and like. A corporate, however, is motivated by others’ demand, namely money or profit. They want money or profit, more than what they produce. 7

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10. 10 Differences between Corporate and Partnership rev.7 No.ItemCorporatePartnership 1 capacity ownership entity contract entity courts accessible entity accounting entity ownership entity contract entity courts accessible entity accounting aggregate 2 liability in default limited liability The net asset in balance sheet is the solvency margin. limited liability by at-risk amount (*) (*) ； 1) cash contributed to partnership, 2) adjusted basis of contributed asset, 3) partner’s personally pledged amount 3 going concern or not going concernnot-going concern, term company or at-will company 4 accounting mandatory accrual accountingfreedom of accounting. However, collectively proper incomes shall be distributed to the partners. 5 Who has the power to recognize taxable income? the state, the tax authority. In tax accounting, the statutory useful life of depreciable assets are legally set. So, the depreciation costs are automatically accrued by rule. the partners. (So, a tax sheltering is possible.) But for collectively proper accounting, the state should judge the tax shelter abusive. In other words, a tax sheltering is recognized lawful when the activity has economic substance. 6 pass through or not not pass through. The state levy tax both on corporate income and on dividends to shareholders. (double taxation) pass through. A partnership shall file the information return to the tax authority about the annual income. In the dissolution, the partners shall liquidate the partnership and shall separately pay taxes on the finally distributed incomes. (single taxation) 7 share transferability freely transferabletransferable 8 What are the contributions and distributions in? in cash or cashable propertycollectively in kind 9 purpose of company profit. motivated by demands of people at large. economic substance. motivated by the partners’ own demand. 10 collaboration type arm’s lengthnon-arm’s length, closely held company

11. Lawful tax shelter Supreme Court of the United States, 1935 For a business reorganization to affect tax liability, the reorganization must have economic substance, not be merely an attempt to reduce tax. However, "the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted". A pronouncement decided in the case: Gregory v. Helvering, 1935 11

12. But, a mere tax shelter is harmful to social economy, because… 12 offset deduction

13. Self-motivated things to do are important. You can lead a horse to water, but you cannot make him drink. You can give him a tax incentive, but you cannot make him do an innovation. 13

14. 14 1986, PAL rule: Passive activity loss can be offset only by passive activity gain. Bill Clinton administration 1996, Check the Box rule: A business entity that is not per se corporation is classified as a partnership for federal tax purposes, unless an election is made for the entity to be classified as a corporation. (default = partnership) So, what has happened in 1991? Collapse of Soviet Union?

15. So, what has happened in 1991? Information Technology revolution? Indeed, it has begun about 1991. But, also in Japan it has happened. Still, Japan… 15

16. Non-K.K. are 2-digit less than K.K. 16 K.K.: Japanese most popular corporate

17. Again, what has happened in 1991? My guess: Some drastic change in social thought? like… 17

18. Dignity is prior to Justice It doesn’t mean selfishness is prior to fairness. Even prior to the logic of a fair exchange of goods and the forms of justice appropriate to it, there exists something which is due to man because he is man, by reason of his lofty dignity. Inseparable from that required "something" is the possibility to survive and, at the same time, to make an active contribution to the common good of humanity. 1991 Vatican Encyclical Centesimus Annus paragraph 34Centesimus Annus 18

19. New Priority of Norms 19

20. Origin of Innovation 20

21. Let us discuss. Thank you. 21

22. Hereafters are O-MA-KE. 22

23. In the first, Microsoft, YouTube, Facebook, and etc. had startuped in partnership tax entity. 23 Partnership Investments could be easily compensated for by tax. NonlistedListed Corporate Transition of firm form in object economy Transition of funder Time Darwin’s Ocean (vulnerable to sudden death) Death Valley gain loss Devil’s River Secular world 1976, partnership2001, LLC 2005, LLC Transition of founder in monetary economy

24. Partnership Investments could be easily compensated for by tax sheltering.