Search

Our research empirically examines the relationship between tax avoidance and the likelihood of incurring a tax-related restatement, as well as the effects tax restatements have on future tax avoidance behavior. We predict and find that the association between tax avoidance and the likelihood of a tax-related restatement is nonlinear. Specifically, both relatively high levels and relatively low levels of tax avoidance compared to peer firms increase the likelihood of incurring a tax-related restatement. We consider whether the increased likelihood for high avoiders is attributable to obfuscation necessary to escape detection of tax avoidance or weak corporate governance. For high avoiders, we find evidence that both obfuscation and weak corporate governance may contribute to the likelihood of a tax-related restatement. As low avoiders should not need to obfuscate, we focus on corporate governance and find an increased likelihood when governance is weak. In response to a tax-related restatement announcement, we document a decline in tax avoidance for firms that have relatively high tax avoidance prior to the restatement announcement. We attribute this to the increased level of Internal Revenue Service (IRS) monitoring and strengthening of corporate governance that we observe post-restatement announcement. In contrast, we do not find evidence that low avoidance firms alter their tax avoidance after a tax-related restatement announcement, consistent with our finding that corporate governance does not improve post-restatement for low avoiders. [ABSTRACT FROM AUTHOR]

An incentive exists for closely held C corporations to pay owner-employees higher salaries and lower dividends to avoid the double tax on corporate income. For this reason, the Internal Revenue Code and Treasury Regulations limit corporate compensation deductions to "reasonable compensation"; however, primary tax authorities do not provide a standard definition, leaving the courts to determine what is reasonable and what is not. The courts have generally followed two approaches: a multi-factor test and an independent investor test. We provide an in-depth exploration of reasonable compensation case law with a focus on disparity within and across court circuits. We supplement this exploration with an analysis of whether multi-factor determined court outcomes would have changed under the independent investor test. Overall, our findings show disparity in reasonable compensation court determinations within and across circuits and highlight the need for a consistent standard to create tax equity in employee-shareholder compensation practices. [ABSTRACT FROM AUTHOR]

Due to the proprietary nature of tax returns, the tax footnote is the primary source of information for stakeholders about a firm’s tax position. However, studies suggest the tax authority acquires information in tax disclosures, creating a trade-off for managers on whether to provide decision-useful information for stakeholders or conceal information from the tax authority. We investigate this trade-off by examining the readability of tax footnotes. We find a positive association between tax avoidance and tax footnote readability for firms with tax avoidance below the industry-year median, consistent with managers highlighting good performance in the form of tax savings with straightforward disclosures. In contrast, we find a negative association between tax avoidance and tax footnote readability for firms with levels of tax avoidance above the industry-year median, consistent with managers concealing tax avoidance from the tax authority. Reinforcing these results, we find that investors place a premium (discount) on tax avoidance when the tax footnote is straightforward in firms with tax avoidance below (above) the industry-year median. [ABSTRACT FROM AUTHOR]

''The Not So Pokey Hokies'' is a running club comprised of runners based on real people who participate in a wide range of running activities including charitable race participation, not-for-profit running organization management, nationally competitive racing, pacing, competitive team membership, coaching, and collegiate sports. This case requires students to identify tax issues related to the running club members' running activities and address the issues using tax research skills. Each runner in the case is based on a real person and is presented as a separate scenario with some common concepts across the scenarios. Specific concepts included are hobby versus for-profit activity classification, independent contractor versus employee role classification, income recognition, expense deductibility, charitable contribution deductions, and athletic scholarship taxation. The modular nature of the case allows the instructor to assign specific tax issues or entire scenarios, depending on the nature of the class. As the students complete the case, they are required to use critical thinking to identify and build tax research skills to address the issues. In addition, students gain technical knowledge through exposure to a variety of tax concepts and written communication skills through completion of a written analysis of the case. [ABSTRACT FROM AUTHOR]