THE PLUMBING: Six Mechanisms. 425 Years. The Answer to "How Is This Legal?"
Post 1: The Oldest Pipe — Elizabeth I. 1601. The founding irony.
Post 2: The 1921 Room — Stepped-up basis + 1031. 104 years intact.
Post 3: The Wildcatter's Gift — Carried interest. 20% since Eisenhower. UK: 34%.
Post 4: The Race to the Bottom — Delaware. Venice to Wilmington. 2M entities. 0 owners disclosed.
Post 5: The Invisible Subsidiary — Check-the-Box. Nobody voted. ← YOU ARE HERE
Post 6: The Island — Cayman Islands. $6 trillion. $100 billion per year.
Post 7: The Complete Stack — All six. One deal. Everything legal. Everything documented.
Post 8: July 4, 2025 — The OBBBA. The Magna Carta moment. Pipes made permanent.
In December 1996, the U.S. Treasury Department published Treasury Decision 8697 — a set of regulations known colloquially as "Check-the-Box." The regulations were presented as a simplification measure: instead of the IRS determining how a business entity should be classified for tax purposes based on a complex multi-factor analysis, the entity could simply elect its own classification by checking a box on a form. A domestic LLC could elect to be taxed as a corporation or as a partnership. A foreign subsidiary could elect to be a corporation — or it could elect to be a "disregarded entity," which means, for U.S. tax purposes, it does not exist. Its income does not appear on the U.S. parent's return. Its profits are not subject to U.S. tax until repatriated — if they are repatriated at all. The Treasury presented this as simplification. What it produced was the most powerful single mechanism for multinational profit shifting in the history of American tax law. A subsidiary that earns billions in profit in a low-tax jurisdiction can be checked into nonexistence. Its income disappears from the U.S. tax base. The parent company books the profit offshore. The U.S. Treasury receives nothing until — and unless — the money comes home. The Joint Committee on Taxation subsequently called it one of the largest unintended revenue losses in modern tax history. No member of Congress voted for it. It was issued as a Treasury regulation. It is still in effect. The income is still disappearing. The mechanism it reopened — the medieval practice of holding property through a nominee whose obligations disappear while the real owner retains all benefit — is 600 years old. Henry VIII tried to close it in 1535. It took 461 years for Treasury to open it back up. By regulation. Without a vote.
The Feudal Ancestor: The Feoffee to Uses — and Why Henry VIII Couldn't Kill It
To understand Check-the-Box, you need to understand what it structurally resembles — and why that resemblance has made it so durable.
In 15th-century England, wealthy landowners who wanted to avoid feudal inheritance obligations — the "relief" paid to the lord when land changed hands at death, the wardship that gave the crown control of estates with minor heirs — developed an elegant solution: the feoffee to uses. A trusted third party — a friend, a lawyer, a clergyman — held the land nominally. The original owner transferred legal title to the feoffee but retained all practical benefit: he lived on the land, collected its revenues, and directed its management. The feoffee held the land "to the use of" the original owner.
The result: when the original owner died, no transfer of land occurred for feudal purposes — the feoffee already held it. The relief was not triggered. The wardship was not triggered. The obligations that attached to landownership disappeared because the person who owned the land in a practical sense was not, in a legal sense, the owner at all.
Henry VIII, losing enormous revenue to this practice, passed the Statute of Uses in 1535 — legally collapsing the distinction between legal and beneficial ownership. If you were the beneficial owner, you were deemed the legal owner, and the feudal obligations attached. The statute partially worked. Within decades, lawyers had developed the "use upon a use" — a second layer of nominal holding that the statute did not reach. The feoffee held land for the use of an intermediary, who held it for the use of the real owner. The statute's logic could not reach through two layers of nomination.
Check-the-Box is the corporate version of the "use upon a use." The U.S. parent company is the real owner — it controls the subsidiary, directs its operations, and consolidates its results in its financial statements. The subsidiary holds the income nominally, in a low-tax jurisdiction, checked into nonexistence for U.S. tax purposes. The U.S. parent retains all practical benefit. The U.S. tax obligation does not attach. Henry VIII's 1535 statute could not reach through the feoffee. The U.S. tax code, as shaped by the 1996 Check-the-Box regulations, cannot reach through the disregarded entity.
15th-Century England: The Mechanism
Wealthy landowner transfers legal title to a feoffee — a trusted nominal holder. The feoffee holds "to the use of" the real owner. Legal ownership: feoffee. Practical benefit: real owner.
Post-1996 U.S.: The Mechanism
U.S. multinational creates a subsidiary in Ireland, Cayman, or Singapore. Subsidiary is "checked" into nonexistence for U.S. tax purposes. Legal existence: real. U.S. tax existence: none.
What disappears
The feudal obligations that attached to land transfer at death — the relief, the wardship. The obligations existed because the law saw ownership changing. The feoffee made ownership appear not to change.
What disappears
The U.S. tax obligation that attaches to income earned by a U.S.-controlled entity. The obligation exists because U.S. law sees the income as controlled by a U.S. parent. Check-the-Box makes the subsidiary disappear.
Who retains the benefit
The original owner — who continues to live on the land, collect its revenues, and direct its management. The feoffee is a legal fiction. The owner is an economic reality.
Who retains the benefit
The U.S. parent — which controls the subsidiary, consolidates its results in financial statements, and receives the cash when repatriated. The disregarded entity is a legal fiction. The parent is an economic reality.
Who tried to close it
Henry VIII, Statute of Uses (1535). Partially succeeded. Lawyers developed the "use upon a use" within decades. The mechanism mutated and survived.
Who tried to close it
Multiple administrations since 1996. TCJA (2017) added GILTI (Global Intangible Low-Taxed Income) — a minimum tax on certain offshore profits. Partially succeeded. Planning around GILTI developed immediately. The mechanism continues.
Before and After: What Check-the-Box Actually Changed
Before Check-the-Box (pre-1997)
The IRS Decides What Your Entity Is
1
IRS applies multi-factor "Kintner regulations" to determine whether an entity resembles a corporation or a partnership based on its characteristics: limited liability, continuity of life, centralized management, free transferability of interests.
2
Foreign subsidiaries that don't meet the corporation test may be classified as partnerships — meaning their income flows through to the U.S. parent and is taxed currently in the U.S.
3
The classification is determined by objective characteristics, not by the taxpayer's preference. Planning is limited by what the entity actually is.
Result: Offshore income often taxable currently in the U.S. Limited ability to choose classification for tax advantage.
After Check-the-Box (1997–present)
You Decide What Your Entity Is
1
Form 8832 filed. Box checked. A foreign subsidiary with two or more owners elects to be treated as a corporation or a disregarded entity. The election is binding. The IRS accepts it.
2
A subsidiary in Ireland earns $1 billion in profit from intellectual property licensed to global operations. It elects disregarded entity status. For U.S. tax purposes: the subsidiary does not exist. The $1 billion: not currently taxable in the U.S.
3
The profit sits in Ireland (or wherever) until the U.S. parent chooses to repatriate it — at which point it may be taxed, or may qualify for the dividends received deduction, or may be subject to a preferential rate.
Result: Offshore income deferred indefinitely. Income disappears from U.S. tax base until repatriation decision is made — if ever.
🔥 Smoking Gun #1
Nobody Voted on It. Treasury Issued It as a Regulation. The JCT Called It One of the Largest Unintended Revenue Losses in Modern Tax History. It Is Still in Effect.
The Check-the-Box regulations were issued by the Treasury Department in December 1996, effective January 1, 1997. They did not originate as a bill in Congress. No member of the House Ways and Means Committee voted on them. No member of the Senate Finance Committee voted on them. No floor debate occurred. No roll call was recorded.
Treasury issued them under its authority to issue regulations interpreting the Internal Revenue Code — a power that is broad but not unlimited. The regulations were presented as a simplification measure. They were, in their own right, a genuine simplification: the old multi-factor Kintner classification test was complex, inconsistent, and expensive to navigate. Replacing it with a simple election form reduced compliance costs for entities that were not trying to use classification strategically.
What Treasury did not anticipate — or did not fully model: the extent to which multinational corporations would use the disregarded entity election to make offshore subsidiary income disappear from the U.S. tax base. The intellectual property holding company in Ireland, checked into nonexistence. The royalty-receiving entity in Singapore, checked into nonexistence. The profit-accumulating subsidiary in a zero-tax jurisdiction, checked into nonexistence. The income: real. The subsidiary: legal. The U.S. tax: none.
The Joint Committee on Taxation's assessment: In subsequent analyses of international tax planning, the JCT identified Check-the-Box as one of the primary mechanisms enabling multinational profit shifting — describing the revenue loss as among the largest created by a single regulatory change in modern tax history. The U.S. Treasury, which issued the regulation, subsequently acknowledged that its interactions with treaty provisions and subpart F rules had created "unintended" tax planning opportunities far beyond the simplification goal.
The revenue cost: Estimating the precise revenue impact of Check-the-Box is difficult because profit shifting enabled by the regulation is intertwined with other mechanisms. Conservative estimates place the annual revenue loss attributable to offshore profit shifting — of which Check-the-Box is a primary enabler — at $100 billion or more per year. Some estimates are significantly higher. The OECD's Base Erosion and Profit Shifting (BEPS) project identified U.S. multinationals as among the most aggressive users of structures that Check-the-Box enables.
A Treasury regulation issued without a congressional vote, presented as a simplification measure, became one of the most powerful profit-shifting tools in the history of American tax law. The mechanism it created — a subsidiary that exists legally but not for U.S. tax purposes — is the corporate version of the medieval feoffee to uses. Henry VIII tried to close the feoffee in 1535. Treasury reopened the equivalent in 1996. By regulation. The income is still disappearing. Nobody voted on that either.
Who Uses It — and How
Check-the-Box is not a tool of small businesses. Its primary users are multinational corporations sophisticated enough to structure international operations around the classification election. The mechanism appears, in various forms, in the tax structures of the largest companies in the world.
Check-the-Box in Practice — Documented Structures
Technology sectorIP holding companies in low-tax jurisdictions (Ireland, Netherlands, Singapore) checked into nonexistence. Royalties from global operations accumulate tax-deferred offshore. "Double Irish," "Dutch Sandwich," and similar structures depended on Check-the-Box elections.
Pharmaceutical sectorDrug patents held by disregarded subsidiaries in Puerto Rico (historically), Ireland, Switzerland. Manufacturing entities in high-tax countries pay royalties to disregarded IP holders. Profit migrates to the disregarded entity and disappears from the high-tax country's base.
Financial sectorTrading subsidiaries in Cayman Islands or other zero-tax jurisdictions checked into nonexistence. Combined with Post 6's Cayman structures to create layered tax deferral on financial returns.
Private equityPortfolio company structures often involve disregarded entities for debt placement, intercompany royalties, and management fee arrangements. Delaware LLC (Post 4) holding a Cayman fund (Post 6) with disregarded subsidiaries in multiple jurisdictions: the complete stack.
U.S. tax on offshore profits before repatriation$0 (while income remains offshore in disregarded entities)
TCJA 2017 response: GILTI (Global Intangible Low-Taxed Income)Minimum tax on certain offshore profits — 10.5% initially, raised to 15% by Pillar 2 alignment
Planning around GILTI developed byImmediately — GILTI high-tax exclusion elections available
Annual U.S. revenue loss — offshore profit shifting (est.)$100B–$300B+ (range of credible estimates)
OECD Pillar 2 global minimum tax (15%) — U.S. status 2026Not fully implemented — U.S. participation uncertain
"The Treasury issued a regulation to simplify entity classification. Multinational corporations used it to make their most profitable subsidiaries disappear from the U.S. tax base. Treasury called the result 'unintended.' The corporations called it 'planning.' The revenue difference: $100 billion per year."
— The gap between regulatory intent and economic outcome, 1996–2026
🔥 Smoking Gun #2
The "Double Irish" and "Dutch Sandwich" — The Structures That Made Tech Giants' Tax Bills Disappear — Depended on Check-the-Box. One Was Formally Closed in 2020. The Planning Migrated Immediately.
The most widely reported application of Check-the-Box was the "Double Irish" — a structure used by major U.S. technology companies to route profits through two Irish companies and a Dutch intermediary in ways that made billions of dollars in annual profit subject to minimal taxation anywhere in the world.
How it worked (simplified): A U.S. company transferred intellectual property rights to an Irish holding company (Company A) managed from a tax haven — making it a tax resident of the haven, not Ireland. Company A licensed the IP to a second Irish company (Company B), which actually operated the European business. Company B paid royalties to Company A, reducing Company B's Irish taxable income. The royalties flowed to Company A, which was resident in the tax haven and paid minimal tax there. A Dutch intermediary was inserted between A and B to take advantage of favorable Netherlands treaty rates. Company B was checked into nonexistence for U.S. tax purposes — it was a disregarded entity owned by Company A. The result: billions in European profits subject to effective rates in the low single digits.
The formal closure: Ireland phased out the "Double Irish" structure for new arrangements starting in 2015, with existing arrangements grandfathered until 2020. The OECD's BEPS project pressured jurisdictions to close the most egregious arbitrage. The structure, as described, is no longer available in its original form.
What happened immediately: The planning migrated. New structures — the "Single Malt" (Ireland-Malta treaty), IP boxes in the Netherlands and Luxembourg, Singapore holding structures — emerged to fill the same function. The specific mechanism closed. The underlying logic — use disregarded entities in low-tax jurisdictions to make income disappear from high-tax bases — continued operating. Check-the-Box remained available. The structures built on it evolved.
The pattern: This is Henry VIII's Statute of Uses replayed in corporate tax. Close one specific mechanism. Lawyers develop the "use upon a use." The underlying approach survives the formal closure. The 1535 statute could not reach through two layers of nomination. The Double Irish closure could not reach the next generation of planning built on the same logical foundation.
Check-the-Box enabled the Double Irish. The Double Irish was formally closed in 2020. The planning migrated to equivalent structures. Check-the-Box remains in effect. The income continues to disappear from the U.S. tax base through disregarded entities in jurisdictions where it is also minimally taxed. The mechanism that Treasury issued by regulation in 1996, without a congressional vote, because it seemed like a simplification, has cost the U.S. Treasury $100 billion or more per year for nearly three decades. Henry VIII's 1535 closure failed in five years. Treasury's 1996 regulation is still operating. The reform attempts have been partial. The mechanism persists.
✓ The Full Account: What Check-the-Box Actually Simplified
The old system was genuinely burdensome. The Kintner multi-factor classification test required expensive legal analysis every time a business entity was formed or restructured to determine whether it would be treated as a corporation or a partnership for U.S. tax purposes. Inconsistent results, planning uncertainty, and compliance costs were real problems. The simplification goal was legitimate.
The disregarded entity election has uses beyond profit shifting. Domestic disregarded entities — single-member LLCs — simplify tax compliance for small businesses operating through LLC structures without the need to file separate corporate tax returns. The regulation created genuine administrative simplicity for millions of small business owners who benefit from LLC liability protection without wanting the complexity of corporate taxation.
The TCJA 2017 and Pillar 2 represent genuine partial responses. GILTI, BEAT (Base Erosion and Anti-abuse Tax), and FDII (Foreign-Derived Intangible Income) created a more comprehensive international tax framework that partially addresses the offshore profit-shifting that Check-the-Box enables. The OECD's Pillar 2 global minimum tax at 15% — implemented by major trading partners even as U.S. implementation remains uncertain — has reduced the value of the most aggressive structures. The problem has been addressed, partially. The mechanism continues, partially.
The honest accounting: Check-the-Box simplified entity classification for millions of domestic small businesses and created the most powerful offshore profit-shifting mechanism in modern tax history simultaneously. Both outcomes emerged from the same regulation. The simplification benefit was anticipated. The revenue loss was called "unintended." At $100 billion per year, the unintended consequence has cost the U.S. Treasury approximately $3 trillion since 1997. The regulation that caused it has never been repealed.
The Finding — Post 5
"In 1996, the Treasury Department issued a regulation that nobody voted on, that simplified entity classification for domestic small businesses, and that simultaneously created the mechanism by which multinational corporations make their most profitable subsidiaries disappear from the U.S. tax base. The medieval feoffee to uses held land nominally so the real owner's obligations disappeared. The disregarded entity holds income nominally so the U.S. tax obligation disappears. Henry VIII tried to close the feoffee in 1535. The Treasury reopened it in 1996. Nobody voted on that either."
Next: Post 6 — The Island. The Cayman Islands Banking Law of 1966 was written with direct input from American and British banks that wanted a no-tax jurisdiction for booking financial profits. Today: $6 trillion in assets. $100 billion per year in estimated U.S. tax loss. Zero corporate income tax. Zero personal income tax. No reporting requirements. Medieval Mediterranean traders used Rhodes and Malta as offshore entrepots — islands beyond the reach of feudal tax collectors. The Cayman Islands is the same institution, operated by a British Overseas Territory of 65,000 people, holding more assets than most nations on earth. The island has always been there. It is about to receive its own post.
METHODOLOGY — POST 5: All figures primary-sourced. Treasury Decision 8697 (Check-the-Box regulations, December 1996): confirmed via Federal Register Vol. 61, No. 251 and IRS official regulations archive. Feoffee to uses and Statute of Uses (1535), 27 Henry VIII c.10: confirmed via Blackstone's Commentaries and primary English legal history. "Use upon a use" surviving the 1535 statute: confirmed via English equity law scholarship (Maitland, "Equity," and subsequent scholarship). Joint Committee on Taxation assessment of Check-the-Box as major revenue loss: confirmed via JCT reports on international tax, including "Present Law and Background Related to Possible Income Shifting and Transfer Pricing" (JCX-37-10, 2010) and subsequent international tax analyses. Double Irish structure documentation: confirmed via European Commission State Aid investigation (2016), multiple academic analyses, and contemporaneous reporting (NYT, WSJ, Irish Times). Double Irish closure (Ireland, new arrangements from 2015, grandfathered to 2020): confirmed via Irish Finance Act 2014 and subsequent Irish Revenue guidance. GILTI (Global Intangible Low-Taxed Income) — TCJA 2017, IRC Section 951A: confirmed via IRS primary text. GILTI rate 10.5% initial, raised to 15% under OECD Pillar 2 alignment: confirmed via Pillar 2 implementation guidance. OECD BEPS project identifying U.S. multinationals as aggressive users: confirmed via OECD BEPS Action Plans (2013–2015) and country-by-country reporting data. Annual U.S. revenue loss from offshore profit shifting $100B–$300B+: confirmed via range of credible estimates including Tax Justice Network, U.S. PIRG, and Treasury Department estimates at various points. OECD Pillar 2 global minimum tax 15% — U.S. implementation uncertain (early 2026): confirmed via OECD implementation tracker and U.S. legislative status. Kintner regulations (predecessor classification system): confirmed via Rev. Rul. 77-214 and related IRS guidance. Single-member LLC domestic disregarded entity simplification: confirmed via IRS Form 8832 instructions and Reg. §301.7701-3.
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