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Tax-related accounts are complex and often the last accounts finalized in the financial reporting process. Accordingly, these accounts can be used as a "last- chance" earnings management tool (Dhaliwal, Gleason, and Mills 2004). We investigate the extent to which an audit firm's industry expertise constrains earnings management through the tax accounts. We find that national industry audit experts constrain earnings management through the tax accounts. We also find that audit firm tax expertise constrains earnings management through the tax accounts when the audit firm is not considered an industry audit expert. Finally, we find evidence that providing both audit and tax services facilitates a nonexpert firm's ability to constrain earnings management through the tax accounts, which suggests that knowledge spillover plays an important role in reducing "last-chance" earnings management. All findings hold among smaller clients and when the extent of earnings management is below quantitative materiality thresholds. [ABSTRACT FROM AUTHOR]

Prior research documents substantial variation in firms' tax avoidance activities and questions why some firms choose not to take advantage of the apparent benefits of tax planning (i.e., the "undersheltering puzzle''). We provide additional insight into the undersheltering puzzle by investigating the decision to invest in a tax shelter from the perspective of a firm's overall investment strategy. We examine whether three factors associated with traditional investment behavior (firms' investment opportunity sets, operating uncertainty, and capital market pressure) are also associated with investments in tax shelter activities. Our results suggest that firms with large investment opportunity sets and higher operating uncertainty are less likely to invest in tax shelters. We also find that firms with greater capital market pressure are more likely to invest in tax sheltering activities. Overall, we find that factors that influence firms' investment behavior help to explain why more firms do not invest in tax shelters. [ABSTRACT FROM AUTHOR]

The article presents abstracts of articles published in the September 2004 issue of 'The Journal of the American Taxation Association.' In the article "Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earnings Management Activities," by John D. Phillips, Morton Pincus, Sonja Olhoft Rego, and Huishan Wan, analysis of the change in net deferred tax liability components separates the competing effects of pre-tax and valuation allowance-related earnings management on a firm's total net deferred tax liability. The paper contributes to accounting and tax research that examines book-tax differences. The article " Germany's Repeal of the Corporate Capital Gains Tax: The Equity Market Response," by Courtney H. Edwards, Mark H. Lang, Edward L. Maydew, and Douglas A. Shackelford, detects a positive association between crossholdings and firms' event period abnormal returns, but only for a limited set of nonstrategic investments. To the extent that these nontax impediments are specific to Germany, the generalizability of these results may be limited.

In this study we investigate the extent to which several corporate characteristics, such as debt level, tax costs, and cash flow, are associated with corporate formation of Master Limited Partnerships. Congress and the popular press suggest that tax savings was the sole motivation for using the MLP form. As a result, Congress's concerns about the demise of the corporate tax base led to new rules that changed MLP taxation from partnership to corporate for most publicly traded MLPs. The results of this study suggest that before 1986, MLPs appear to have been formed solely for tax reasons, but during 1986, both debt level and tax benefits appear to have influenced MLP formation, In 1987, debt level and cash flow are important predictors of MLP formation. The strongest result for all periods appears to be the difference in debt levels between firms that formed MLPs and those that did not. The lower tax costs of MLPs alone will not induce a wholesale defection from the corporate form. [ABSTRACT FROM AUTHOR]

A number of empirical studies have used effective tax rate (ETA) measures calculated from financial statement information to examine the relations between taxes, firm decisions, and firm characteristics. This study investigates two issues relating to the use of ETRs: (1) the potential for defensible alternative measures to provide different results, and (2) the problems associated with using financial statement information to estimate tax and income. Our results indicate that alternative ETR measures and systematic deferred tax reporting differences in the financial statements cause notable shifts in estimated ETRs. The systematic deferred tax differences have a predictable directional effect on estimated ETRs. In addition, this effect is not cancelled when comparisons between deferred tax reporting groups are made. In light of these results, researchers should evaluate the robustness of their results across alternative ETR measures. Our results also suggest that systematic differences in the financial reporting of deferred tax liabilities are related to firm-size. Use of the deferred tax expense amount rather than the change in the long-term deferred tax liability in the ETA measure should alleviate this problem across alternative ETA measures. [ABSTRACT FROM AUTHOR]

Reviews the taxation software "Microsoft Netmeeting," by Microsoft Corp.