Although there is no substantial agreement about how the income from close corporations should be taxed, there appears to be virtual unanimity with respect to the defects of the present system. The basic weakness of the method adopted by the federal income tax for taxing corporate income is that it is predicated upon a legal fiction which ignores economic realities. In the case of a partnership, the partnership is disregarded and the partners are taxed directly upon their distributive shares of the partnership income.1 In the case of a corporation, however, the law gives full credence to the corporate fiction. Although in substance a close corporation represents an incorporated partnership, or perhaps an incorporated sole proprietorship, the corporate entity is treated as an independent taxable entity, and the income of the undertaking is taxed to the legal convention, rather than to the real owners of the enterprise. The recognition of the corporation as a distinct taxable entity has several unhappy corollaries. Even in the case of the publicly owned corporation, it results in a complete disregard of the ability to pay principle, which is supposed to be one of the cardinal desiderata of an income tax. Although there is considerable speculation about the actual incidence of the corporate income tax,2 and whether the burden of the tax is shifted to the consumer in the form of higher prices, or to the corporate employees in the form of lower wages, or to the stockholders in the form of diminished dividends, it is clear that the actual burden of the tax is not imposed upon the corporation, which is a legal fiction. The corporate tax, which in recent years has been graduated according to the size of the corporate income, obviously bears no relation to the wealth or the ability to pay of the person who actually pays the tax, whoever he may be. In the case of close corporations there are more fundamental objections to the current system of taxing corporate income. Some taxes are unjust because they bear