Ten Truths about Tax Shelters

Weisbach, David A.

doi:10.2139/ssrn.268831

Cited by 254 publications

(97 citation statements)

References 77 publications

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“…However, recent tax avoidance strategies produce book-tax differences and enable managers to reduce the firm's tax liability without reducing financial statement net income. Some strategies produce temporary book-tax differences, but shelters that produce permanent book-tax differences are the most sought after (Treasury 1999;Weisbach 2002). Tax shelters that permanently reduce the firm's ETR are a win-win for managers; these strategies simultaneously reduce taxable income and increase after-tax financial statement income.…”

Section: Incentives To Report Aggressivelymentioning

confidence: 99%

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Brown

2011

The Accounting Review

194

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This paper investigates the spread of aggressive corporate tax reporting by modeling a firm's decision to adopt the corporate-owned life insurance (COLI) shelter. I use a sample of known COLI participants to examine whether certain firm characteristics are associated with the decision to adopt a COLI shelter. I find some evidence that firms with higher performancematched discretionary accruals are more likely to adopt a COLI shelter, suggesting a positive relation between aggressive financial reporting and aggressive tax reporting. I also find that firms with greater capital market visibility are less likely to adopt a COLI shelter, consistent with a potential reputational cost for being associated with aggressive tax avoidance activities. Further, my results suggest that COLI adopters are generally R&D intensive firms with low leverage and few foreign operations. In addition to firm specific characteristics, I consider two explanations for the spread of COLI adoption motivated by theory on diffusion of innovations and institutional isomorphism. I investigate whether firms imitate prior COLI adopters and whether COLI adoption spreads through common auditors. My results are not consistent with an imitation vii explanation. Further, my results suggest that having the same auditor as a prior COLI adopter does not increase the likelihood that a firm will adopt COLI.viii Table of PART I 6Chapter The tax shelter industry also distorts allocation of economic resources. Tax shelter activity diverts resources away from the government toward accountants, lawyers and others who develop and promote tax shelters. Moreover, according to theories of corporate tax incidence, engaging in a tax shelter cannot make a corporation, per se, better off. The benefits from reducing the corporation's tax bill will ultimately accrue to its shareholders through higher stock prices, its employees through higher wages, or its customers through lower prices. Exactly how the benefits will be shared is unknown, but Slemrod (2004) Frank et al. 2006). 3 However, ETRs and book-tax differences are noisy measures of aggressive tax reporting. ETRs vary with profitability, industry differences in the reporting of revenue and expenses, and legitimate tax planning opportunities. Consequently, it is difficult to distinguish lower ETRs due to better tax planning from those due to aggressive avoidance or shelter activity. List of TablesTreasury's (1999) report suggests that the growing gap between financial statement income and 2 Many studies rely on Bankman's (2004a) working definition of a tax shelter as a "(1) tax motivated; (2) transaction unrelated to a taxpayer's normal business operations; that (3) under a literal reading of some relevant legal authority; (4) produces a loss for tax purposes in excess of any economic loss; (5) in a manner inconsistent with legislative intent or purpose." See also Bankman (1999).3 Graham and Tucker (2006) identify known tax shelter participants. However, their study focuses on firms' debt policy decisions, no...

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Section: Incentives To Report Aggressivelymentioning

confidence: 99%

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Brown

2011

The Accounting Review

194

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“…Permanent differences occur when income or an expense is recognized under one system but never under the other. An shelter, therefore, reduces the amount of income reported to the fisc, without affecting the amount of income reported to shareholders, and creates a permanent rather than temporary difference (Weisbach, 2002).…”

Section: Book -Tax Differencesmentioning

confidence: 99%

Corporate Tax Avoidance and the Properties of Corporate Earnings

Plesko¹

2004

National Tax Journal

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“…As Justice Scalia suggests, it would raise serious questions about prohibitions on adult incest, prostitution, adultery, fornication, bestiality, and obscenity. 121 (I do not mention his suggestion that the Court has questioned laws forbidding masturbation, 122 for one reason: There are no laws forbidding masturbation!) Now it might be possible, even under the autonomy reading, to justify most or all of those prohibitions on the ground that they counteract concrete harms, sufficient to support the intrusion on a presumptively protected right.…”

Section: B Autonomy Simpliciter or Desuetude-informed Autonomy?mentioning

confidence: 99%

What Did Lawrence Hold? Of Autonomy, Desuetude, Sexuality, and Marriage

Sunstein

2003

The Supreme Court Review

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Ten Truths about Tax Shelters

Cited by 254 publications

References 77 publications

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Corporate Tax Avoidance and the Properties of Corporate Earnings

What Did Lawrence Hold? Of Autonomy, Desuetude, Sexuality, and Marriage

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