TaxProf Blog

Friday, April 23, 2004

Mihir Desai (Harvard) & Dhammika Dharmapala (Connecticut) have posted Corporate Tax Avoidance and High Powered Incentives on SSRN. Here is the abstract:

This paper analyzes the links between corporate tax avoidance, the growth of high-powered incentives for managers, and the structure of corporate governance. We develop and test a simple model that highlights the role of complementarities between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. The model generates the testable hypothesis that firm governance characteristics determine how incentive compensation changes sheltering decisions. In order to test the model, we construct an empirical measure of corporate tax avoidance – the component of the book-tax gap not attributable to accounting accruals – and investigate the link between this measure of tax avoidance and incentive compensation. We find that, for the full sample of firms, increases in incentive compensation tend to reduce the level of tax sheltering, suggesting a complementary relationship between diversion and sheltering. As predicted by the model, the relationship between incentive compensation and tax sheltering is a function of a firm’s corporate governance. Our results may help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the “undersheltering puzzle,” and why large book-tax gaps are associated with subsequent negative abnormal returns.

Thursday, April 22, 2004

David Weisbach (Chicago) & Jacob Nussim (Chicago) have published The Integration of Tax And Spending Programs, 113 Yale L.J. 955 (2004). They posted an earlier draft of the paper on SSRN. Here is the abstract:

This paper provides a theory for deciding when a spending program should be implemented through the tax system. The decision is traditionally thought to be based on considerations of tax policy. The most common theories are the comprehensive tax base theory and the tax expenditures theory, both of which rely on tax policy to make the determination. We argue instead that the decision should be based solely on consideration of organizational design. Activities should be grouped together in a way that achieves the best performance, much like a corporation decides how to divide its business into divisions. Tax policy is entirely irrelevant to the decision. This paper begins the process of applying organizational design theory to the tax and spending problem, considering theories of hierarchies based on the needs for specialization in and coordination of activities. The paper then analyzes whether food stamps and the earned income credit should be implemented in through the tax system based on this analysis.

Thursday, April 22, 2004

Fred Brown (Baltimore) has posted Whither FIPTA? on SSRN. Here is the abstract:

It is commonly understood that the tax law is composed of a complicated and interrelated set of statutory provisions. This raises the possibility that changes to one area of the law may necessitate revisions to other areas. While statutory change sometimes means that other provisions need to be added or amended, there is also the possibility that the enactment of a new provision allows for the repeal of another rule because it is either deadwood or simply no longer sensible in light of the rule’s intended purpose as well as fundamental tax policies.

A simplification study released by the Joint Committee on Taxation in 2001 indicates the prevalence of this deadwood (and the like) phenomenon. This study recommends the repeal of 105 provisions identified as pure deadwood. The study also proposes the elimination of other provisions that no longer serve sound policy objectives as a result of tax law changes since their enactment. Given the tax law’s interrelated statutory scheme and frequent changes, the extent of the deadwood phenomenon should come as no surprise.

An area that is ripe for such a deadwood analysis is the Foreign Investment in Real Property Tax Act (“FIRPTA”), and in particular section 897. Indeed, FIRPTA has been ripe for such an analysis since the changes effected by the Tax Reform Act of 1986. This Article suggests that the repeal of portions of FIRPTA may be in order and sets forth an analysis of the various considerations in arriving at this conclusion.

Wednesday, April 21, 2004

Non-TaxProfer Gordon Smith (Wisconsin) blogs How Much Tax Do Large Corporations Pay? Estimating the Effective Tax Rates of the Fortune 500, 89 Va. L. Rev. 1793 (2003), by George Yin (on leave at Virginia while serving as Chief of Staff, U.S. Joint Committee on Taxation). Here is the abstract:

Three recent phenomena – the corporate governance scandals, continuing concern about corporate tax shelters, and the Bush Administration’s proposal to exempt dividends from income – have generated renewed interest in the amount of taxes paid by public corporations on the profits they report to their investors. This paper estimates the effective tax rates (ETRs) from 1995 to 2000 of the corporations included in the S&P 500 based on a comparison of their worldwide current income tax expense to their worldwide pre-tax book income. It finds that after controlling for the disparate tax and accounting treatment of stock options, the ETR of the sampled corporations declined slightly, from 30.11% in 1995 to 27.98% in 2000. Potentially more revealing is the fact that there is an important reduction in the 1999 ETR relative to the 1995-98 period (during which the ETR was virtually unchanged), and the 2000 ETR remains below the 1995-98 average. The paper is unable to relate these remaining changes in ETR to trends in foreign investment of the companies involved.

The paper also estimates that the six-year ETRs (after stock option conformity) of ten industry groups varied from a low for the energy sector (25.72%) and industrials (25.84%) to a high for the information technology sector (32.48%) and utilities (32.43%). Both the level of taxation (compared to the statutory tax rate of 35 percent) and relative uniformity of tax treatment of the industries is to be contrasted with the much greater variations experienced by industries during the early 1980’s.

Wednesday, April 21, 2004

Paul Asofsky (Weil Gotshal & Manges) has posted A Guide to Common Tax Issues Incident to Filing Business Bankruptcy on SSRN. Here is the abstract:

Any company considering bankruptcy should be aware of certain routine tax procedural items, and this article addresses a number of those issues. The bankruptcy claims resolution process and the requirements of return filing are discussed. Additionally, the effects of bankruptcy on tax audits are touched on.

There is a distinction between liabilities that arise prior to the filing of the bankruptcy petition and those that come forward after the filing of the petition. This distinction of whether a tax liability is pre-petition or post-petition as well as the payment and refund consequences of each is discussed in length.

The most controversial issue within this area deals with the status of tax liabilities for the taxable year in which the bankruptcy petition is filed. Tax authorities adhere to the position that such a liability is a post-petition liability because the tax must not be paid until the last day of the taxable year which is a date following the filing of the bankruptcy petition. However, debtors take the opposing position that the liability should be considered pre-petition, and three Courts of Appeals have adopted their argument and instituted a bifurcation rule in their jurisdictions. The effects of these decisions as well as the determination and payment of pre-petition liabilities are addressed, and a discussion of post-petition interest on tax claims concludes the article.