Forum on Public Disclosure of Corporate Tax Returns Public Disclosure of Corporate Tax Return Information: , Economics, and Legal Perspectives

Abstract - This paper offers an overview of the issues raised by disclosure of corporate tax return information by providing cur- rent and historical perspectives from the fields of accounting, eco- nomics, and law. It reaches a number of conclusions. First, we are concerned that disclosure of the entire corporate tax return could cause companies to dilute the information content of these returns, hampering tax enforcement, and might, even in diluted form, re- veal proprietary information that could provide a competitive ad- vantage to those companies that are not required to make such a disclosure. For this reason we do not support full disclosure. The case for considering limited public disclosure of corporate tax return information—revealing a small number of bottom–line items or an expanded reconciliation between tax and book concepts of income—rests on the fact that it would contribute to the trans- parency of the tax system by clarifying the tax payments of corpora- tions in and of themselves, relative to other corporations, and rela- tive to the income they report on their financial statements. The greater transparency could have several beneficial effects. First, it could put pressure on legislators to improve the tax system. Second, it could induce corporations to resist aggressive tax reduction strat- egies if they fear that disclosure of their low tax payments would trigger a negative consumer response; whether it would provoke negative investor response is less clear, as more transparency could conceivably induce a race to the bottom of low tax liability. Finally, it could contribute to better functioning of financial markets if it sheds new light on the information presented in financial statements. We find the case for limited disclosure to be compelling enough that we look forward to the next step of considering the best form of David Lenter & disclosure and the details of its implementation. Joel Slemrod University of Michigan, Ann Arbor, MI 48109 INTRODUCTION Douglas Shackelford n July 8, 2002, while attention was still focused on alleged corporate misdeeds of Enron, WorldCom, and University of North O other major U.S. corporations, Senator Charles Grassley (R– Carolina, Chapel Hill, IA), then the ranking member and currently the chairman of NC 27599 the Senate Finance Committee, wrote a letter to the Securi- ties and Exchange Commission (SEC) and Treasury Depart- National Tax Journal ment raising the question of whether government regulators Vol. LVI, No. 4 and the public might benefit if corporate tax returns were December 2003 made public. Specifically, Grassley asked whether corporate 803 NATIONAL TAX JOURNAL governance would be improved if corpo- tioning of financial markets, deter aggres- rations’ tax returns were available to the sive tax planning and, more generally, SEC and whether shareholders and em- encourage tax compliance. By shedding ployees would benefit if tax returns were light on the details of corporate tax pay- publicly available. Ultimately, both the SEC ments, it could also promote sensible tax and Treasury responded to Grassley’s let- reform. We evaluate these arguments, as ter largely by rejecting the idea of broad well as arguments against disclosure. public disclosure of full corporate tax re- However, we first give insight into the turns. Many of the key issues surrounding background of this debate by describing this public disclosure debate are examined the political and economic context for in detail in the other papers prepared for Grassley’s letter and the reactions it re- this conference. This paper offers an over- ceived and by summarizing the history of view of the issues by providing current and tax return disclosure. historical perspectives from the fields of ac- During our evaluation of the claims counting, economics, and law.1 made by those on both sides of the dis- Grassley’s suggestion of making corpo- closure debate, we consider the possibil- rate tax returns public, coupled with the ity of making corporate tax returns pub- negative response by the SEC and the lic in their entirety, but primarily focus on Treasury Department, prompted much other forms of disclosure. One such form discussion among scholars, tax practitio- of disclosure is to make public only cer- ners, government policymakers, and the tain portions of corporate tax returns or, media. For example, Rep. Lloyd Doggett alternatively, to disclose only the bottom (D–TX) introduced a bill in April, 2003, line tax liability of each corporation. In his that would provide for public disclosure letter to the SEC, Grassley allowed for this of certain corporate tax return information possibility by suggesting that “a summary (U.S. Congress, 2003). Specifically it would version” of returns be made available to require every corporation to electronically government regulators and the public. A file, along with its tax return, a report that related alternative is to make public the the IRS would make publicly available as Schedule M–1 (or a summary version), the a searchable database. The report would tax return schedule that reconciles taxable detail the amount of corporate taxable in- income with the accounting earnings that come and income tax shown on the return, are computed for financial reporting pur- the amount of federal income tax poses. Grassley himself raised this possi- on the company’s , the bility in a second letter to the SEC and company’s adjusted book income, and Treasury Department, and some legal and certain items causing the discrepancy be- academic commentators have also sug- tween tax and book income.2 gested that an expanded version of the Supporters of disclosure of corporate current Schedule M–1 be made a public tax return information argue that it could document (Kleinbard and Canellos, 2002; aid government regulators in policing Mills and Plesko, 2003). A third alterna- corporations, generally improve the func- tive, mentioned by then–Treasury Secre-

1 The text of Grassley’s letter can be found in Tax Notes Today (2002a). Grassley’s letter of October 7, discussed below, can be found in Worldwide Tax Daily (2002b). Many of the issues we discuss were raised in a state income tax context in the lively interchange between Pomp (1994, 1995) and Strauss (1993, 1995), reacting to the Massachusetts deliberations on disclosure discussed in Tannenwald (1993). 2 The bill also calls for the Treasury Department, Joint Committee on Taxation, House Ways and Means Com- mittee, and Senate Finance Committee to conduct a study of corporate tax shelter activity and to publish a report including recommendations (if any) for requiring additional information on the reconciliation of book and tax income and for publicly disclosing additional corporate tax return information. 804 Forum on Public Disclosure of Corporate Tax Returns tary Paul O’Neill in his reply to Grassley, required top management to certify their is to improve the tax reporting on a firms’ financial statements and internal company’s financial statements, either controls, set forth long prison sentences through by firms or for executives convicted of fraud, and through mandate by the Financial Ac- gave new protections to corporate counting Standards Board (FASB) or the whistleblowers. Although the administra- SEC. Finally, a broader policy response to tion had initially opposed the legislation, the concern over opaque financial and tax amid much fanfare Bush signed into law reporting would be to make taxable in- the Sarbanes–Oxley bill on July 31, 2002. come more closely conform to accounting Although the corporate wrongdoing income. Which, if any, of these alternatives that received publicity mostly involved constitutes good policy depends in part business and accounting issues, tax mat- on the goals of increased disclosure, an ters did arise. In the collapse of Enron, for issue that this paper will address. example, it was revealed that the company had set up hundreds of Cayman Islands POLITICAL AND ECONOMIC CONTEXT subsidiaries, in part for tax purposes. While it was not known whether Enron Grassley wrote his letter during a time had actually engaged in illegal tax behav- of widespread concern over corporate ior, the Senate Finance Committee and business and accounting practices. His later, at the Finance Committee’s request, letter specifically mentioned WorldCom the Joint Committee on Taxation, investi- which, news stories had just revealed, in- gated the methods Enron used to cut its flated its flow by $3.9 billion for 2001 U.S. tax bill. At about the same time, news and the first quarter of 2002 by recording stories revealed that other energy compa- ordinary as capital expenditures nies such as Halliburton and Baker (estimates that would increase later that Hughes themselves were organized in tax summer). WorldCom was not the only havens or planned to move to a tax ha- company making news for accounting ven. The reporting of these planned problems. Other big news stories at the moves was part of an intense focus on an time of Grassley’s letter were that Xerox increasingly common transaction known had improperly reported $6.4 billion in as an inversion, a tax–motivated transac- over the past five years and that tion in which a U.S. company first sets up Andersen, WorldCom’s auditor, as part of a tax haven entity and then becomes a sub- an ultimately unsuccessful effort to save sidiary of that entity. Stanley Works, a its own existence, claimed WorldCom of- Connecticut–based tool company, can- ficials failed to disclose information nec- celed its planned inversion after being the essary for Andersen to have noticed its target of much ire from Congress, unions, improper books. the media, and the Connecticut attorney The Bush administration initially re- general. Congress has considered various sisted efforts to support broad legislation bills intended to stop the practice of in- targeted at corporate abuses. Congress, versions, but no legislation has been en- however, passed legislation aimed at curb- acted to date.3 ing and punishing corporate fraud. The One underlying concern was that at the bill established a regulatory board ap- same time companies were overstating pointed by the SEC to oversee the - their for ing industry, created new legal standards purposes, they were understating their for prosecuting corporate wrongdoing, income for tax purposes. Although the

3 See McKinnon (2002), Desai and Hines (2002) and Cloyd, Mills, and Weaver (2003). 805 NATIONAL TAX JOURNAL accounting for stock options explains part The SEC’s and Treasury Department’s of the widening spread between aggregate responses to Grassley’s letter were largely book and taxable income in recent years,4 negative.5 Then–SEC chairman Harvey at least two other concerns have been Pitt wrote that any benefits from making raised. First, the government and many corporate tax returns available to the SEC practitioners and academics have argued would be “marginal at best.” According that corporate tax shelters may have been to Pitt, the SEC’s enforcement staff can al- one of the causes of a large and growing ready obtain tax returns directly from erosion of the corporate tax base (Desai, companies, and such tax return informa- 2002). Bankman (1999, p. 1776) argued tion helps in regulation only in a “limited that it was “virtually certain” that annual number of circumstances.” Moreover, Pitt investments in corporate tax shelters to- wrote, the tax disclosure in companies’ fi- taled tens of billions of dollars. The U.S. nancial statements is more beneficial in Treasury Department (1999) agreed with helping investors understand a private estimates that corporate tax shel- company’s tax situation than would be ters might the U.S. government $10 providing public access to tax returns. billion each year in lost revenues and pro- Then–Treasury Secretary O’Neill re- vided extensive evidence that corporate sponded to Grassley by asserting that tax shelters were proliferating. In the back- “there is a potential for great harm to both ground is the fact that corporate tax rev- corporations and federal tax administra- enues as a percentage of gross domestic tion if corporate tax returns or portions product (GDP) have been flat over the thereof are made publicly available.” The short run—even as corporate profits on SEC would not benefit from having access the books were increasing rapidly—and to corporate tax returns, according to declining over the long run. In each year O’Neill, because much information in from 1995 through 2000, corporate tax rev- the returns is irrelevant to the SEC. Nei- enues amounted to 2.0 to 2.2 percent of ther would the public benefit if corporate GDP. These figures represented a decline tax returns were public, because their from 2.8 percent in 1973 and 1977, 4.2 per- complexity would cause confusion and cent as late as 1967, and 6.1 percent in 1952, subject corporations to “misinformed, in- the highest percentage since World War expert analysis.” O’Neill did allow, II (see Office of Management and however, that other alternatives might website). Undoubtedly other factors, such improve tax and financial reporting: as legislated changes in the tax rate and the Schedule M–1, which is filed with base, have contributed to this long–run corporate tax returns and reconciles tax decline, but there is also a widespread and accounting income, could be im- perception that more aggressive tax avoid- proved, the tax disclosure in financial ance behavior is a contributing factor. statements could be changed, and some

4 Recently a number of companies have chosen to expense their stock options, but historically stock options produced no expense for book purposes, while they created a corporate deduction at exercise for the differ- ence between market price and strike price. This accounting difference widens the spread between book and taxable income during periods of rising stock prices, such as seen in the late 1990s. For further discussion, see Graham, Lang, and Shackelford (2003). 5 Interestingly, although Bush administration officials opposed disclosure of corporate tax return information, the Bush administration’s exclusion proposal in early 2003 might have revealed information about the amount of tax a corporation had paid. The proposal made excludable from corporate income only to the extent the dividends were paid from income on which corporate tax had been paid. Every corpo- ration paying dividends was therefore required to keep an account showing its “excludable dividend amount.” Because this account would have been based on the amount of corporate taxes paid, under some circum- stances an interested party might have been able to work back from the excludable dividend amount to determine the amount of a corporation’s tax liability. 806 Forum on Public Disclosure of Corporate Tax Returns of the differences between book and tax were minimal, this act never truly took accounting could be eliminated. effect. The 1862 act permitted the public In response to the SEC’s and Treasury’s to examine the names of taxpayers and the letters, Senator Grassley on October 7, amounts of their tax liabilities. Notices 2002 wrote a letter to President Bush ask- and newspaper advertisements informed ing that the Bush administration “consider the public about its right to access this tax- whether more aggressive action is war- payer information. Tax assessors were re- ranted to require improved disclosure of quired to determine what was to be taxed the differences in and to compile assessment lists. These lists (book) income and the tax return income were posted in public places, and adver- reported by publicly traded corpora- tisements were used to tell the public tions.” We address this question below about them. Pomp (1993, p. 380) argues and begin by providing some historical that the purpose of these publicity features background relevant to the debate sur- of the 1862 act was chiefly to notify tax- rounding the public disclosure of tax re- payers that they owed taxes because the turns. federal tax administration remained small.6 HISTORY OF PUBLIC DISCLOSURE Publicity became more widespread OF TAX RETURNS with the Revenue Act of 1864. Like the 1862 act, the 1864 statute provided that tax At several times since the Civil War, tax lists were to be public. Now newspapers information has been available to the pub- started to publish lists of taxpayers, their lic. Moreover, it was not until 1976 that reported incomes, and the amounts of the IRS was barred as a general matter taxes they paid. In 1870, however, a new from disclosing tax returns to other gov- commissioner of the Bureau of Internal ernment regulators. In this section we dis- Revenue barred assessors from providing cuss the history of public disclosure of tax lists for publication and a statute from returns and describe current Internal Rev- Congress prohibited the publication of all enue Code rules governing the confiden- or any part of an income tax return. The tiality of returns. public, however, was still permitted to inspect returns. In 1871, the income tax The Civil War Income Tax was allowed to expire by its terms, in part, according to Pomp (1993), because of pri- Before the Civil War, the United States vacy concerns. In 1894, when a new in- relied chiefly on land sales and tariffs for come tax was passed, but never put into federal revenues. Amid concern that these practice, Congress specifically barred gov- revenue sources would prove inadequate ernment officials from making public any for financing the war, Congress enacted part of any income tax return.7 the country’s first federal income tax by passing the Revenue Act of 1861 and in- The 1909 Corporate Excise Tax creasing the tax rate in 1862 and 1864. The Civil War revenue acts included public- Publicity of corporate tax returns first ity features. The wording of the 1861 act became a major issue during the debates suggested that tax assessment information over the precursor to the current corpora- was public, but because collection efforts tion income tax, the Corporate Excise Tax

6 Our discussion of the Civil War disclosure provisions draws heavily on Pomp (1993). 7 As we discuss below, the Supreme Court in Pollock v. Farmers Loan & Trust Co. concluded that the 1894 income tax was unconstitutional. 807 NATIONAL TAX JOURNAL of 1909, which imposed a one–percent tax ing sum of $25,000 for classifying, index- on the of corporations.8 Al- ing, and exhibiting tax returns, but pro- though proponents of the tax advocated vided that “returns shall be open to in- passage because they sought to raise rev- spection only upon order of the President enue, many viewed the statute as a tool under rules and regulations to be pre- of corporate regulation. President Taft, in scribed by the Secretary of the Treasury particular, supported the tax as a way to and approved by the President.” Under further his agenda of regulating corpora- an executive order of President Taft, the tions. Taft believed that by taxing corpo- Treasury Department issued regulations rations and making returns public, the providing access to corporate tax returns government would enable regulators and in two ways. First, shareholders of a com- the public to learn details about the busi- pany could apply for permission to in- ness transactions and profits of corpora- spect the tax returns of the company by tions. This knowledge would, according describing the rationale for inspection, to Taft, constitute “a long step toward that which would be granted at the discretion supervisory control of corporations which of the Treasury. Second, all persons were may prevent a further abuse of power” permitted to inspect a corporation’s re- (quoted in Kornhauser (1990), p. 113). Taft turns if the corporation’s stock was listed and other proponents of publicity held on a public exchange or was advertised these views in part because public report- in the press or offered for public sale by ing of any sort of corporate information the corporation, but individuals could was inconsistent and limited; disclosure only inspect returns at the office of the of corporate tax return information, ac- Commissioner of Internal Revenue. cording to one commentator, “promised to be the most consistent and comprehen- Public Disclosure in the 1920s sive source of corporate information” (Thorndike, 2002, p. 324). After much de- The Revenue Act of June 2, 1924 made bate, the corporate excise tax in its final public disclosure the rule for both indi- form provided that tax returns under the vidual and corporate taxpayers. Advo- statute were to be filed with the Commis- cates of disclosure argued that publicity sioner of Internal Revenue and constituted would discourage evasion and improper public records.9 business conduct. Robert Howell, Repub- The statute’s enactment did not, how- lican senator from Nebraska, argued ever, end the publicity debate: opponents that “secrecy is of the greatest aid to of publicity engaged in a campaign to corruption” and contended, “[T]oday weaken the publicity feature. In 1910, the the price of liberty is not only eternal Commissioner of Internal Revenue ruled vigilance [sic] but also publicity” (quoted that because Congress had not specifically in Leff, (1984), p. 67). That statute made appropriated money for public inspection public not the tax returns themselves, of tax returns, the returns would be treated but rather the names and addresses of as confidential. Congress responded to individuals and corporations filing re- this ruling by appropriating the stagger- turns along with their respective tax pay-

8 Act of Aug. 5, 1909, ch. 6, § 38, 36 Stat. 11, 116. The U.S. Supreme Court had held in Pollock v. Farmers Loan & Trust Co., 157 U.S. 429, reh’g. granted, 158 U.S. 601 (1895), that the 1894 federal income tax was unconstitu- tional, and as of 1909 no constitutional amendment had been enacted to permit an income tax. Proponents of the 1909 tax argued that it was constitutional because it was not an income tax, but rather a tax on the privi- lege of doing business in corporate form. The Supreme Court validated this view in 1911 in Flint v. Stone Tracy Co., 220 U.S. 107, 161 (1911), when it concluded that the 1909 tax was constitutional. 9 Act of Aug. 5, 1909, ch. 6 § 38(3), 36 Stat. 11, 116. 808 Forum on Public Disclosure of Corporate Tax Returns ments.10 Before the 1924 elections, news- pink slip contained the taxpayer’s name, papers across the country published the address, gross income, amount of deduc- names and tax payments of large compa- tions, net income, and tax liability. nies, celebrities, and local residents. The The pink slip generated in- New York Times filled pages with lists tense controversy. Proponents of public- showing the amounts of tax paid by thou- ity made a range of arguments: making sands of people, and ran stories listing the tax information public would help Con- names of prominent New Yorkers who gress close loopholes that permitted tax had paid no income tax. avoidance; publicity would help keep tax President Coolidge and his Treasury administration honest by preventing offi- secretary, Andrew Mellon, vigorously cials from favoring high–income taxpay- opposed making tax return information ers; publicity was necessary if the tax rules public. They and other opponents of pub- were to be seen as fair; and if wealthy tax- licity argued that disclosure gave huck- payers knew tax information was public, sters access to names of wealthy taxpay- they would not engage in transactions that ers to target for scams, compromised busi- would reduce their tax liability.12 Oppo- ness secrecy, and proved useless, and per- nents argued that publicity was an inva- haps harmful, to tax administration and sion of privacy and, in the case of compa- collection efforts. With the passage of the nies, would give competitors valuable Act of Feb. 26, 1926, the law was changed proprietary information.13 This argument so that only the names and addresses of generally focused on small businesses taxpayers, and not their tax liabilities, rather than large corporations, perhaps were public.11 because opponents aimed to have their appeals seen as populist. The campaign Revenue Act of May 10, 1934 to repeal the pink slip provision began in earnest in February 1935, one month be- A 1934 Senate Committee on Banking fore income tax returns were due, when and Currency investigation of financial Raymond Pitcairn, an heir of the Pitts- institutions motivated by the 1929 stock burgh Plate Glass Company and chairman market crash revealed that many owners of a conservative group called the Senti- of those institutions had paid no income nels of the Republic, organized the distri- tax in the years since the crash. This rev- bution of hundreds of thousands of cop- elation led to a move in Congress to have ies of the pink slip and of green protest a publicity provision inserted in the 1934 stickers. The campaign urged people— Revenue Act. The act did not make entire many of whom were not affected by the tax returns public, but it did require indi- pink slip provision—to send these mock viduals and corporations to attach to their pink slips to their representatives in Con- returns a form, dubbed the “pink slip,” gress and to send letters and telegrams that would become a public record. This opposing disclosure. Congress passed a

10 Revenue Act of June 2, 1924, ch. 234, § 257(b), 43 Stat. 293 (1924). 11 Act of Feb. 26, 1926, ch. 27, § 257(e), 44 Stat. 9, 52. Permitting names and addresses to be disclosed, instead of simply abolishing publicity entirely, was intended to placate supporters of disclosure. (Pomp, 1993, pp. 396– 7). 12 On this last point, Robert LaFollette, Jr. argued that if a person “knows that his return is a matter of public record, he will hesitate a long time before he will resort to any device designed to relieve him of his fair share of the tax” (Leff, 1984). 13 Senator Louis Murphy (D–IA) argued: “We are so insensate to the finer feelings of people, so wantonly ruth- less, that we have taken the curtains and shades from the homes of our taxpayers and pulled out the walls of the bathroom to assure that the Peeping Toms shall have full and unobstructed opportunity to feast their eyes on the ‘pink slip.’” Leff (1984, pp. 70–1) 809 NATIONAL TAX JOURNAL statute that repealed the pink slip provi- public disclosure of state income tax in- sions, and President Roosevelt signed the formation. Wisconsin first provided for bill into law before the publicity provi- public disclosure of corporate income tax sions requiring disclosure came into ef- returns in 1923, while Massachusetts, West fect.14 No similar disclosure provision has Virginia, and Arkansas enacted public dis- been implemented since at the federal closure rules in the early 1990s. Under the level. Massachusetts law, which was enacted in 1993, certain banks, insurance companies, Disclosure at the State and Local Level and publicly traded companies doing business in Massachusetts are required to At various times many state govern- file annual reports that generally includes ments have made tax returns public docu- its name, the address of its principal of- ments open for review. In Flint v. Stone fice, Massachusetts taxable income, total Tracy Co.,15 the case in which the U.S. Su- Massachusetts excise tax due, non–income preme Court concluded that the 1909 Cor- excise tax due, gross receipts or sales, ei- porate Excise Tax was constitutional, the ther gross profit or credit carryovers to court cited the policies of several states as future years, income subject to apportion- support for its holding that the publicity ment, and the amount of each credit taken feature of the 1909 statute did not violate against the excise tax due.17 The Secretary the Fourth or Fifth Amendment. The court of State is required to maintain those re- described the rules of Connecticut, New ports and to make them available for pub- York, Maryland, Pennsylvania, and New lic inspection on request, but only after Hampshire that generally required prop- expunging the names and addresses of the erty tax lists to be available for inspection companies.18 at the offices of town clerks or at other The West Virginia, Arkansas, North public places.16 Property tax information, Carolina, and Wisconsin laws are more lim- of course, typically remains public today, ited in scope than the Massachusetts rules. and many municipalities allow access to The West Virginia and Arkansas laws au- that information on the Internet. thorize the disclosure of the names of tax- At least five states—Arkansas, Massa- payers who receive certain tax credits or chusetts, North Carolina, West Virginia, rebates and the amounts of those credits, and Wisconsin—provide some form of but do not authorize the disclosure of total

14 This episode is described in Kornhauser (2002) and Leff (1984). 15 220 U.S. 107 (1911). 16 Flint v. Stone Tracy Co., 220 U.S. at 176. 17 A.L.M. G.L. ch. 62C, § 83(c) (2002). 18 Massachusetts General Laws chapter 62C, § 83(n). As originally enacted, the law did not provide that the Secretary of State would expunge from the public reports the names and addresses of taxpayers, but an amend- ment to the law that was made before the law took effect kept taxpayers’ names and addresses confidential (Pomp, 1993, p. 417) Before the Massachusetts law was enacted, the Massachusetts legislature commissioned a study of the issue of business tax disclosure. A paper prepared for the Massachusetts Special Commission on Business Tax Policy by Robert Tannenwald, who was research director of the commission, considers the arguments for and against disclosure of tax return information. Proponents of public disclosure, according to the paper, argued among other things that disclosure would promote fairness in the tax rules, encourage informed debate about business tax policy, and increase taxpayer compliance. Opponents argued that public disclosure would force businesses to divulge sensitive information, discourage voluntary compliance by vio- lating confidentiality, and confuse rather than clarify public debate about tax policy. As will be seen, these arguments overlap with the claims that have been made in response to current disclosure proposals. Interest- ingly, although this report concludes that the Massachusetts disclosure rules might increase the perception that the state was unfriendly to business, it also argues that public disclosure of tax return information would not necessarily give companies access to sensitive information about their competitors that they did not al- ready have. See Tannenwald (1993). 810 Forum on Public Disclosure of Corporate Tax Returns tax liability.19 The North Carolina law re- able income is made publicly accessible. quires the Department of Revenue to pub- In contrast, Finland provides public access lish, among other related items of informa- to a database that contains information tion, the names of taxpayers who claim cer- about ordinary taxable income, capital in- tain job development and research and de- come, and total taxes payable, among velopment credits as well as the amounts other items. Reconciliations between tax of credits they claim.20 The Wisconsin law and book numbers are also made public requires the state’s Department of Revenue for Finnish corporations. to furnish to a person who requests the in- In certain countries, there is public dis- formation the amount of state income tax, closure of information about tax evaders. franchise tax, or gift tax reported by an in- For example, under Greek law the presen- dividual or corporation if the request sat- tation of a new budget is accompanied by isfies the following conditions: the indi- the names of tax evaders in the previous vidual seeking the information must be a year compiled by the finance ministry. In Wisconsin resident, must pay a four–dol- New Zealand the Commissioner of Inland lar fee per return from which information Revenue regularly releases a document is sought, and must prove his identity and entitled “Tax Evaders Gazette” that lists sign a statement disclosing his address and those taxpayers who have been pros- the reason for making the request.21 ecuted or had penal tax imposed for evad- ing their taxation obligations; as of April The Experience in Other Countries 1997 the Commissioner is able to also pub- lish the names of those taxpayers involved Among OECD countries, we found that with “abusive tax avoidance.” The Cana- only Japan, Norway, Sweden, and Finland dian Customs and Revenue agency com- permit some form of public access to the pliance strategy includes publicizing court information in the corporate tax return. In convictions for tax fraud. In Ireland, a list Japan, the amount of taxable income is of tax defaulters was formerly published publicly released if the corporation reports on an annual basis in the Revenue more than 40 million yen (approximately Commissioner’s Annual Report, but re- $332,000) in taxable income. In 2000, ap- cently the lists are published on a quar- proximately 70,000 corporations reported terly basis in Iris Oifigiuil (the official sufficient taxable income to require dis- newspaper of record in Ireland in which closure. None of the components of tax- several legal notices, including insolvency able income (revenues, , notices, are required by law to be pub- interest, etc.) is made publicly accessible. lished) and are reported in the national Taxable income is released publicly for and local newspapers. According to the all Swedish companies, and both taxable tax agency, this measure “aims to raise the income and the tax liability are publicly profile of compliance and provide a con- available in Norway.22 However, if a com- tinuous deterrent to other potential tax pany reports a tax loss, the amount of the evaders. Frequently, taxpayers make a full loss is not reported. Instead, the tax au- disclosure of irregularities to auditors at thorities disclose a zero taxable income the commencement of an to avoid amount. None of the components of tax- the possibility of being published for tax

19 W. Va. Code § 11–10–5s(b)(1) (2003); A.C.A. § 26–18–303(b)(11) (2002). The West Virginia rules require disclo- sure of a dollar range for the amount of a tax credit received (e.g., $250,001 to $500,000, rather than the exact amount). 20 N.C. Gen. Stat. § 105–129.6(b) (2003). 21 Wisconsin Statutes § 71.78 (2002). 22 In Norway the information is accessible on the Internet for both corporations and individuals. 811 NATIONAL TAX JOURNAL offences.” Moreover, the well–publicized quired to make publicly available their quarterly list is “more likely to be spotted three most recent Form 990s. Page format by suppliers, customers, business associ- and computer–readable IRS 990 data are ates and friends.” Although such practices now available from the National Center for are not now generally permitted for the Charitable Statistics (NCCS).25 U.S. income tax, in July 2002, the IRS filed Although Form 990 is primarily a finan- suit against accounting firms KPMG and cial reporting tool, rather than an income BDO Seidman claiming the firms with- tax return, it does contain two pieces of held documents, including the names of information related to a nonprofit’s tax- participants, relating to tax shelters the able activities. Part VI on page 5, item 78b IRS is investigating. Referring to the docu- asks whether a 990–T was filed. Part VII ments already submitted by KPMG, the on page 6, item 104b reports the amount IRS made public a list of prominent inves- of taxable revenues nonprofits earn. Both tors that are under examination. While the of these items are included in the public– IRS has occasionally in the past made pub- use sample of 990s. Badertscher and lic the names of tax offenders, none of the Yetman (2003) report that many named tax shelter participants had been nonprofits report less taxable revenues on accused of any wrongdoing. the publicly available 990 than they report on confidential 990–T. Disclosure of U.S. Tax Returns in Property and casualty insurers are re- Special Contexts23 quired to file publicly available “annual statements” with the insurance depart- Tax–exempt organizations are often in- ment in the state in which they are li- volved in both exempt activities and tax- censed to sell insurance. State regulators able activities (i.e., for–profit activities un- use the annual statements to assess the related to the organization’s exempt pur- insurer’s solvency. The statement is pre- pose). Form 990–T, the nonprofit’s income pared in accordance with statutory ac- tax return (for income from unrelated, for– counting practices (as opposed to gener- profit activities), is not publicly available.24 ally accepted accounting principles However, Form 990, an annual information (GAAP)). These statutory accounting return that must be filed by all tax–exempt practices have developed over time organizations, except federal agencies, re- through insurance laws, regulations and ligious bodies, organizations with gross administrative rulings. Although the tax receipts less than $25,000, and private foun- returns for property–casualty insurers are dations (who file a 990–PF), is publicly not publicly available, the federal compu- available. Form 990 contains financial data tation of taxable income begins with net (an and a ) income reported in the annual statement. which aggregates both the taxable and tax– Aside from a few adjustments (e.g., mu- exempt activities of the not–for–profit. nicipal bond interest is included in income Since 1999, tax–exempts have been re- for regulatory purposes, but not for tax

23 We describe below public access to the annual information returns of tax–exempt organizations and the an- nual statements of insurers. One other area of tax return disclosure merits brief mention. Since the 1970s, U.S. presidents have voluntarily made their income tax returns public. The nonprofit organization, Tax Analysts, has posted PDF versions of these tax returns (and the returns of President Franklin D. Roosevelt) on the web site of its Tax History project (http://taxhistory.tax.org/Presidential/default.htm). 24 A 2000 Joint Committee on Taxation study, however, concluded that the 990–T should be made publicly available, although no such action has been undertaken. (Joint Tax Committee, 2000) 25 The NCCS web page, www.nccs.urban.org, contains information on obtaining data. Computer readable data is available for the period 1982–1998 at no cost to researchers. 812 Forum on Public Disclosure of Corporate Tax Returns purposes), taxable income closely approxi- fication also meant that from 1917 until mates net income per the annual state- 1966, the IRS maintained lists of all indi- ment.26 This contrasts with the often–wide- viduals who filed tax returns; these lists spread differences that we observe be- were open to public inspection. From 1966 tween taxable income and GAAP net until 1976, the law permitted the IRS to income. Consequently, although the tax re- respond to inquiries about a taxpayer by turns filed by property–casualty insurers stating whether the taxpayer had filed a are not publicly available, public access to return for a particular period. the annual statement effectively means The shift in 1976 to making tax returns that property–casualty taxable income can confidential came in response to allega- be estimated with considerable precision. tions that the Nixon administration had improperly used tax return information Internal Revenue Code Confidentiality against its political opponents. The Tax Rules Reform Act of 1976 consequently elimi- nated executive branch control over tax As we have described, specific public- return disclosure.27 Thus, confidentiality ity rules enacted in 1862, 1864, 1909, 1924, as a general rule is a relatively recent phe- and 1934 provided for disclosure of one nomenon. sort or another. More generally, from the Since 1976 the principal rules govern- enactment of the Revenue Act of 1913, the ing confidentiality and disclosure have first tax statute enacted after a federal in- been in section 6103 of the Internal Rev- come tax was made constitutional by the enue Code.28 Under these rules, IRS offi- ratification of the Sixteenth Amendment cials, other federal government employ- until 1976, income tax returns were clas- ees, state government employees, and cer- sified as public records. What precisely tain others who have access to returns and this public classification meant in practice return information are forbidden from varied over time with changes in the rules disclosing the information except under governing publicity. Over the entire pe- the limited circumstances set forth in sec- riod, the President, through executive or- tion 6103. Individuals who unlawfully der and Treasury regulations, controlled disclose returns or return information face access to tax returns. Generally, people civil and criminal penalties. who could access tax returns included in- Section 6103 contains many exceptions dividuals with a material interest in the to the general rule of confidentiality. First, returns, the heads of government depart- shareholders of a corporation who own ments upon written request, and officials one percent or more of the outstanding involved in legal proceedings on behalf stock of the corporation may inspect the of the U.S. government. The public classi- corporation’s return by making a written

26 Other primary differences involve discounting loss reserves, increases in unearned premiums, and inclusion of anticipated salvage and subrogation. 27 Joint Committee on Taxation, 2000, pp. 246, 249–56. 28 The Freedom of Information Act and the Privacy Act may also be relevant in some circumstances in determin- ing whether disclosure of tax returns is permitted (or required). The Freedom of Information Act provides a statutory right to access government information, but courts have concluded that tax returns or return infor- mation that is confidential under section 6103 cannot be disclosed under the Freedom of Information Act. Nonetheless, individuals seeking to access non–return information arguably made confidential under section 6103—documents such as IRS rulings and guidance—have used the Freedom of Information Act to compel disclosure. The Privacy Act regulates the collection, use, dissemination, and maintenance of personal infor- mation about individuals by federal agencies. The act generally prohibits the disclosure of an individual’s records without the individual’s consent unless the disclosure is for a routine use. Disclosure under section 6103 is generally considered a routine use (Joint Committee on Taxation, 2000, pp. 3–5). 813 NATIONAL TAX JOURNAL request to the IRS. However, it is a felony tions to access taxpayers’ returns.29 The for one–percent shareholders to disclose Justice Department in fact regularly re- to other persons tax return information quests and obtains tax returns for non–tax they obtain from the IRS. Second, returns purposes. In 1975, eighteen federal agen- and return information may be disclosed cies by individual request obtained 29,385 to certain government employees for tax tax returns for non–tax purposes, and administration purposes. Returns and re- more than 97 percent of these returns went turn information may be disclosed to state to the Justice Department for law enforce- tax officials for the purpose of adminis- ment purposes unrelated to tax adminis- tering state tax laws (and likewise from tration (Darby, 1998, p. 580). Although the the states to federal administrators). Offi- SEC lacks the ability to obtain taxpayers’ cials in the Departments of Justice and returns from the IRS, the SEC does request Treasury may gain access to tax returns tax return information directly from tax- and return information in matters involv- payers when the information is relevant ing tax administration. Justice Depart- to a civil investigation (McLucas, 1997, ment officials are permitted this access p. 94). The fact that government regula- only in the context of grand jury investi- tors already can obtain tax return infor- gations and federal or state judicial or mation in both tax and non–tax situations administrative proceedings. The rules may make the argument for disclosure of governing access by Treasury and Justice corporate tax returns within the govern- officials generally permit return disclosure ment less compelling. only when information on the return is specifically at issue in the work of the of- WHY SHOULD CORPORATE TAX ficials accessing the information. Conse- RETURNS (OR RETURN quently, although confidentiality of return INFORMATION) BE PUBLIC? information is the general rule, govern- ment officials outside the IRS can obtain Proponents of public disclosure of cor- tax return information while performing porate tax return information argue that tax enforcement, collection, and other ad- disclosure will aid government regulators, ministrative functions. improve the functioning of the financial Third, disclosure is permitted in non– markets, promote increased tax compli- tax criminal investigations. To obtain tax- ance, and increase political pressure payer return information in these crimi- for a good tax system. We now critically nal investigations, a government attorney address these arguments and follow must submit an application to a federal this discussion by considering the judge or magistrate. Federal agencies can counterarguments. obtain tax information about a taxpayer that was filed by a third party such as the Aid Government Regulators taxpayer’s bank or employer without get- ting a court order by submitting a written One rationale for making corporate tax request to the IRS. The rules permitting returns public is to improve government disclosure of tax return information in the regulation of corporations. Senator course of non–tax criminal investigations Grassley raised this point in his July 8 let- enable Justice Department officials con- ter to the SEC and Treasury, asking ducting criminal securities law investiga- whether making corporate tax returns

29 The Justice Department, not the SEC, has the authority to prosecute criminal cases. Accordingly, the SEC handles civil cases itself and refers possible instances of criminal securities law violations to the Justice De- partment. (McLucas, 1997, p. 94; SEC Internet home page) 814 Forum on Public Disclosure of Corporate Tax Returns available to the SEC would help govern- not a well–targeted solution to the prob- ment efforts to police corporate gover- lem of facilitating SEC regulating activi- nance and to ensure that companies file ties.30 In their words, accurate financial reports. Two ideas un- If the current exceptions in [Internal Rev- derpin this argument. The first idea is that enue Code] section 6103 are not broad corporations need to be better policed. enough to permit the SEC to enforce the Although there is controversy about how country’s securities regulations or other- best to respond to the many recent ex- wise inhibits investigation of corporate amples of corporate wrongdoing, it is reporting practices, the proper course hard to deny that at some level corporate would be to consider an additional lim- governance performed poorly in some ited exception to section 6103 authorizing cases. The second key idea is that the in- the SEC’s expedient access to a company’s formation now available to government tax returns (or portions thereof, includ- regulators, both those officials engaged in ing, for example, Schedule M–1 of the administering the tax laws and officials at Form 1120) (2002). the SEC, is inadequate, and corporate tax returns could serve as a useful tool to gov- Recall that supporters of the original ernment officials in their efforts to regu- Corporate Excise Tax of 1909 viewed the late companies. statute, and in particular its publicity pro- We do not find this argument to be com- vision, as a tool for regulating companies. pelling. In administering the tax laws, of- But at the time the tax was enacted, the ficials at not only the IRS and Treasury federal government, state government, Department but also at the Justice Depart- and public had little information about ment already can, as was explained ear- large corporations other than quasi–pub- lier, access corporate tax returns. In non– lic companies such as railroads and finan- tax regulatory work as well, government cial institutions. Some large publicly– employees can access tax returns; as was traded corporations often went for years described above, SEC officials can and do without publishing financial reports or obtain corporate tax returns from compa- holding annual meetings, and some states nies subject to civil investigations, and did not require publicly–traded compa- Justice Department lawyers obtain tax re- nies to submit financial reports to officials turns from the IRS in criminal securities or stockholders. The modern federal re- law cases. Furthermore, administering the gime of securities regulation did not get securities laws demands a different sub- started until 1933. In this earlier context, stantive focus from administering the tax it is understandable that even the limited laws and so it is not clear that studying information provided by sparse corporate corporate tax returns typically is useful in tax returns could be seen as a useful regu- securities regulation. We share the view latory device. expressed by the Tax Executives Institute In the current context, by contrast, the (TEI), an organization of business execu- argument that corporate tax returns tives who are responsible for tax matters, should be made public so that govern- that disclosure of corporate tax returns is ment officials outside the IRS can better

30 Another policy is to mandate improvements in financial reporting. In particular, the tax footnote in financial statements, which is intended to provide a better understanding of a company’s tax accounting and to explain the difference between a company’s actual tax expense and the expense that would be incurred at the statu- tory tax rate, could be improved. Harvey Pitt conceded that the tax footnote is “selective.” (2002) And O’Neill wrote that “changes may . . . be appropriate to the tax footnote in the information provided to the SEC. . .” (2002) Although a thorough discussion of this option is outside the purview of this paper, another paper in this conference, Hanlon (2003), addresses this issue in some detail. 815 NATIONAL TAX JOURNAL perform corporate governance is not per- gument goes, could more easily catch in- suasive. It ignores the fact that non–tax accuracies in financial reporting. In sum, officials already have access to ample in- the additional information provided in formation, including in many circum- the calculation of income tax could help stances corporate tax returns, and fails to in assessing the financial health of the recognize that securities and financial company. regulation involve different substantive To be sure, comparing financial state- considerations from tax administration. If ments with tax returns would be, in the improved non–tax regulation by govern- words of TEI,“ a time consuming and ment officials is the objective, other solu- complex challenge” (2002) because corpo- tions hold more promise, such as autho- rate tax returns are long, complicated rizing limited disclosure of returns by the documents and because tax reporting and IRS to the SEC in the context of civil secu- financial accounting have different sets of rities law investigations. rules and objectives. One important way in which tax reporting and financial re- Improve the Functioning of the Financial porting differ is in their Markets principles; tax rules generally require 80 percent common ownership for consoli- A second argument for disclosing cor- dation, while the accounting rules gener- porate tax return information is that it ally demand only 50 percent, and account- would help the financial markets to func- ing rules require consolidation of foreign– tion more efficiently by improving the controlled entities, while tax rules do not quality of financial reporting. This ratio- permit consolidation. For these reasons, nale is, in a sense, a generalization of the TEI asserts that public disclosure of cor- argument that it will aid the SEC in its porate tax returns “poses great potential objective of protecting investors by polic- for confusing rather than enlightening ing the integrity of the securities markets. investors” (2002). Arguably, public disclosure of corporate It is indisputable that many corporate tax returns could help the financial mar- tax returns are lengthy and complex, and kets even if it did not aid the SEC. that tax and financial reporting differ from Consider for the sake of discussion that one another in their governing rules and some companies now undertake mis- goals. But given sufficient time and re- leading financial reporting in part be- sources and the incentive to invest those cause the public, not just the SEC, has resources, we believe that experts could little outside information against which compare tax return information with fi- to judge financial statements. If corporate nancial statements to gain insight into the tax returns were public, interested indi- company’s situation that could not be gar- viduals could compare the contents of the nered from financial statements by them- returns with the information reported in selves.31 Moreover, if companies know the financial statements and, so the ar- that investors and other interested indi-

31 For example, one area where tax return disclosure could lead to better understanding of the financial reports involves the accounting for income taxes. In the computation of tax expense for the books, firms establish a allowance if they anticipate net operating losses (or other tax benefits) expiring unutilized. Several studies (e.g., Miller and Skinner (1998) and Schrand and Wong (2003)) have investigated whether firms ma- nipulate the valuation allowance to manage earnings by increasing the allowance when earnings are strong and decreasing it when earnings are weak. The conclusions have been mixed. Access to the corporate tax returns could enable investors to know the actual current and past tax payments and independently access whether the valuation allowance, and thus book income, is managed.

816 Forum on Public Disclosure of Corporate Tax Returns viduals and organizations will scrutinize ever, if Schedule M–1 were expanded so tax return information alongside their fi- that interested parties could use the sched- nancial statements, they may be encour- ule to understand in detail the sources of aged to provide fuller financial informa- variation between tax and book income, tion than they now do. this expansion might achieve the objective Thus, we are not convinced that disclo- of improving the flow of information. sure of tax return information would Kleinbard and Canellos (2002) and Mills prove useless or, even worse, “confusing.” and Plesko (2003) have recently proposed More to the point is whether the objective comprehensive schemes of book–tax rec- of improving the flow of information onciliation. Under the Kleinbard and could be achieved short of making entire Canellos proposal, a publicly–held corporate tax returns public. The problem corporation’s Schedules M and L and its with disclosing entire corporate tax re- financial statement income tax disclosure turns is, as Kleinbard and Canellos (2002) are conformed into a single public finan- have written, that “corporate tax returns cial statement–tax reconciliation schedule can run into the thousands of pages, and that is filed with the corporation’s tax re- on their face will show wildly different turn in lieu of the current Schedule M and numbers than the GAAP financial state- also included in the corporation’s finan- ment, simply as a result of differences in cial statements.33 The single financial state- consolidation principles.” Much of this ment–tax reconciliation schedule would information likely would not be useful “follow a detailed set of rules as to how and, as we discuss later, may provide pro- reconciliation entries are presented, begin- prietary information to competitors. A ning with consolidation adjustments, and possible compromise would be to disclose then moving to items of revenue, expense, only a portion of the tax return, such as and so on, down to actual cash tax the first four pages of Form 1120. payables to taxing authorities” (Kleinbard Another intriguing alternative to mak- and Canellos, 2002, p. 1000). Mills and ing public entire corporate tax returns is Plesko’s (2003) proposed Schedule M–1 to expand the Schedule M–1 to the corpo- requires that companies filing consoli- rate tax return and make this a public dated tax returns provide the information document. Recall that the Schedule M–1 needed to link those returns to the finan- reconciles book income for financial re- cial reports of the related consolidated fi- porting purposes with income for tax pur- nancial reporting entities. poses. The existing Schedule M–1 is a Enhanced public disclosure through an short document that groups together the improved book–tax reconciliation sched- effects of various transactions and report- ule is not the only way to improve the in- ing items and therefore does not permit formation content of financial reports. As an understanding of book–tax differences mentioned earlier, another approach is to at any meaningful level of detail.32 How- make book accounting correspond more

32 The only accounts specifically detailed on the Schedule M–1 are net income (loss) per books, federal income tax per books, excess of capital losses over capital gains, , charitable contributions, travel and entertainment, and tax–exempt interest (see Mills and Plesko, (2003)). 33 Schedule M in this context refers to the Schedule M–1. There are actually two schedules on the U.S. corporate tax return with the letter M—Schedule M–1 and Schedule M–2. The Schedule M–1 is, as we have described, the book–tax reconciliation. Schedule M–2 provides a breakdown of unappropriated retained earnings shown on a company’s financial statements. The Schedule L mentioned by Kleinbard and Canellos (2002) provides balance sheet information from a company’s books. The Schedule M–1 (M–2) focuses on the income state- ment (statement of retained earnings).

817 NATIONAL TAX JOURNAL closely with tax accounting. Others have duce profits and the associated ac- advocated reducing or eliminating differ- count to estimated net realizable value. If ences between book income and taxable firms were required to wait until debts income definitions.34 actually became uncollectible to reduce One advantage of reducing the differ- profits and (as required under cur- ences between the definitions of book in- rent tax law), then profits and assets come and taxable income is that tax com- would be overstated in the period of sales. pliance is facilitated when the tax base is In addition, one of the associated already constructed for non–tax reasons. with generating profits (bad debt expense) Capital markets, consumers, government would not be properly “matched” to the regulators, employees, suppliers, and oth- associated revenue, so the period of sale ers value reliable measures of profitabil- would appear unusually profitable while ity. Compliance with the income tax sys- subsequent periods would bear the brunt tem is facilitated when taxable income is of the expenses. In addition, this method tightly linked to the private information would skew managerial incentives be- of accounting earnings that taxpayers al- cause an easy way to artificially boost this ready have an incentive to compile.35 year’s profit and asset values would be to However, a difficulty with moving toward sell large quantities of product to buyers book–tax conformity is determining with poor credit prospects, leaving the which method should be changed. Differ- bad debt expense to appear in a subse- ent accounting for book and tax arose quent period. Under GAAP, that strategy naturally because users of financial state- is mitigated because auditors perform ments and the government’s taxing au- careful assessments of receivables to en- thority need different information about sure sufficient allowances are provided so a company. GAAP accounting is designed that asset values are not overstated. to provide a fair and accurate assessment Similarly, consider depreciation sched- of a firm’s financial condition. Tax ac- ules. Suppose that the government wishes counting is designed to produce a verifi- to encourage corporate investment by ac- able tax base and, in some cases, to pro- celerating depreciation. If financial ac- vide incentives to firms for undertaking counting were linked to tax accounting, particular activities (e.g., Accelerated Cost corporations with substantial new invest- Recovery System (ACRS) depreciation). ment would suddenly appear less profit- To illustrate the difficulty of imposing able, not because of any changes in eco- conformity, suppose the financial state- nomics but simply because of a govern- ments were prepared in accordance with mental move to encourage investment. the tax code. Many that accoun- Similarly, this approach would eliminate tants make to reflect current economic re- any insights that the managers and audi- ality better would be eliminated. For ex- tors might have about the deterioration ample, consider bad debt expense. Under of property, plant and equipment in a par- GAAP accounting, firms are required to ticular firm’s context. For example, take estimate the proportion of sales that will airlines. Most wear and tear on a plane is ultimately become uncollectible and re- caused by takeoffs and landings, so planes

34 See, e.g., Engler (2001) and Yin (2001). For an alternative perspective, Hanlon, Kelly, and Shevlin (2003) con- tend that having both book income and taxable income maximizes the information content for capital market participants. Furthermore, they find that their measure of imputed taxable income, though informative to capital market participants, is less informative than the current GAAP mandated disclosures. 35 We thank Eugene Steuerle for making this point in his discussion of our paper at the conference. This concern becomes less germane to the extent that the tax system moves away from an income base toward a consump- tion base. 818 Forum on Public Disclosure of Corporate Tax Returns used in short–haul routes have shorter rently linked. As a consequence, many expected useful lives and are depreciated firms use LIFO for financial reporting.37 more quickly under GAAP. If financial This choice significantly understates their accounting were tied to tax accounting, on the balance sheet and re- those differences would be ignored and, duces profits in periods of rising prices. presumably, the capital markets and other As a consequence, financial statements users of financial statements would suf- must carry a footnote that discloses the fer a loss in the quality of information.36 effect of the first–in, first–out (FIFO) value Alternatively, suppose firms were taxed of inventories. It is up to the user to use on book income. GAAP accounting relies that footnote to restate the reported bal- heavily on judgments to produce the best ance sheet and income statement to a FIFO assessment of a firm’s financial condition. basis to capture economic reality better For example, GAAP accounting requires and allow comparison to other firms. an assessment of numerous factors in de- One rebuttal to this argument could be termining a company’s annual pension that book and tax accounting do conform expense. These factors are subject to con- (or have historically) in many countries, siderable discretion, and reasonable people typically non–Anglo nations, such as Ger- can disagree. Conversely, tax accounting many. However, the reason is that for provides a deduction when cash is contrib- many continental European countries, uted to a pension. The advantage of tax where conformity exists, diffuse accounting in the pension area for comput- has not traditionally been an important ing the tax base is that the deduction can source of capital, so it was not deemed be independently verified and is subject to cost–effective to require that firms keep no judgment in amount or timing. In short, two sets of books.38 In the United States using GAAP accounting to compute tax- and the United Kingdom, which have a able income would create an administra- long tradition of diffuse equity ownership, tive nightmare and greatly increase firms’ separation of ownership and control in- ability to manipulate their tax payments. crease agency problems, which have led A good example of the effects of link- to increased demand for high quality ac- ing tax and financial accounting is the counting information. A long series of last–in, first–out (LIFO) conformity rule, papers in financial accounting (e.g., Hung which requires a firm to use LIFO for fi- (2000)) has examined cross–country dif- nancial accounting if it uses LIFO for tax ferences in accounting information, and and represents one of very few cases in has consistently concluded that the use- which tax and financial reporting are cur- fulness of accounting information is nega-

36 In fact, very small, privately–held businesses occasionally do use tax accounting rules to construct their finan- cial statements to avoid these additional costs. However, the GAAP–based financial statements maintained for publicly–traded firms and universally used by sizable privately–held firms have developed over decades in response to users’ need for information. 37 Ball (1972), Hand (1993), Dhaliwal, Frankel and Trezevant (1994) and Hunt, Moyer and Shevlin (1996), among many others, find that some companies behave as though the benefit of lower taxes and, therefore, increased from LIFO (during times of rising prices) dominates the cost of reduced reported earnings, while other companies forgo the opportunity to lower taxes if it comes at the expense of lower reported net income. Forgoing some reported accounting earnings to mitigate taxes or willingly paying additional taxes to gain higher earnings is a phenomenon that is not restricted to the LIFO conformity rule. Matsunaga, Shevlin and Shores (1992) find the same trade–offs with incentive stock options; Engel, Erickson, and Maydew (1999) with hybrid securities; Collins, Shackelford and Wahlen (1995) in the banking industry; and Erickson, Hanlon, and Maydew (2003) in recent SEC fraud cases. For a more thorough review of this literature, see Shackelford and Shevlin (2001). 38 The implicit assumption was that providers of capital like banks, large stockholders and governments would have more direct access to the company’s finances and would not rely on public disclosure for information. 819 NATIONAL TAX JOURNAL tively related to the extent of tax–book ashamed at being officers of companies conformity. Not surprisingly, as countries revealed to be less than good corporate like Germany increase their reliance on citizens. More importantly, they might equity markets, we observe a de–linking fear an adverse impact on the company’s of book and tax accounting. bottom line because their business relies From 1987 to 1989, the United States ex- on their customers’ trust that they are perimented with linking taxable income good public citizens. and book income. For firms subject to the To be sure, many corporations do care alternative minimum tax (AMT), book in- about their public image. One indication come was a component of taxable income. of this concern is the $9.05 billion of cor- Several studies (Gramlich, 1991; Dhaliwal porate charitable giving in 2001, as esti- and Wang, 1992; Manzon, 1992; Choi, mated by the American Association of Gramlich, and Thomas, 2000) attempted to Fundraising Counsel; presumably one determine the impact of this linkage on the motivation for corporate charitable giving quality of accounting earnings. That is, did is to bolster consumer loyalty and ulti- firms adjust their accounting earnings mately sales.40 Often companies explicitly downward or shift them to non–linkage and publicly link sales to their charitable years to reduce taxes? In their review of this gifts. Moreover, there is abundant anec- literature, Shackelford and Shevlin (2001) dotal evidence that some consumers will concluded that there is little evidence to boycott products of companies they per- support AMT–driven income shifting. ceive to be behaving unethically, as in the Nike sweatshop controversy, and that Promote Tax Compliance these companies will change their policies in part to forestall such boycotts. Accord- A third argument for disclosure of cor- ing to a survey of 2,594 adult Americans porate tax return information is that it done by Hill and Knowlton (2001) in the could increase tax compliance, either by spring of 2001, 79 percent of Americans discouraging outright evasion or because said they consider good corporate citizen- companies might become less inclined to ship when deciding whether to buy a take aggressive tax positions such as tax company’s product, and 71 percent con- shelters that are arguably within the sider citizenship in deciding whether to rules.39 Disclosure of corporate income tax buy a particular company’s stock. There is, return information might reduce outright however, no conclusive evidence linking evasion and aggressive tax avoidance for company performance to these consumer two reasons. The first reason is that cor- perceptions. Nor is it at all clear how in- porate officials might be concerned that if formation from corporate tax returns it were revealed that the company’s tax- would affect public perceptions about able income was suspiciously low, the dis- those aspects of corporate citizenship that covery could yield an adverse public re- consumers care about.41 Companies might action. Some company officials might feel also fear that a hostile public response

39 Supporters of the pink–slip provision of the 1934 Revenue Act made a similar argument: if taxpayers knew their tax returns were public, advocates argued, they would not engage in transactions that reduced their tax liabilities even if those transactions were legal (Kornhauser, 2002, p. 746). 40 Presumably this motivation applies most heavily to companies that sell to consumers rather than other busi- nesses. 41 For example, there is some indication that consumers prefer local causes to national ones, prefer disaster relief or curing diseases to other causes, and that they respond more positively when the tactics used prompt attri- butions of genuine altruism on the part of the firm (Ellen, Mohr, and Webb, 2000). The dutiful payment of federal taxes does not obviously fit these characteristics. 820 Forum on Public Disclosure of Corporate Tax Returns might be accompanied by a harsh govern- ested parties, such as the business press ment response; government contracts or academics. These reconciliations could could be threatened, or punitive legislation aid the IRS in detecting corporate tax eva- might be enacted.42 This last fear would be sion. As a result, companies might be more rooted in recent history; the Homeland hesitant to engage in aggressive tax plan- Security Act of 2002 included a provision ning. For example, an expanded book–tax banning the new Department of Homeland reconciliation might highlight a tax shel- Security from entering into contracts with ter transaction; whereas under current companies that have engaged in inversion policy, the transaction likely would not be transactions that are largely motivated by separately disclosed in the tax footnote of the tax savings they generate.43 the financial statements nor detailed in the However, it is conceivable that public- Schedule M–1. ity could increase pressure on corporate One empirical study is relevant to this tax managers to reduce their companies’ issue. Rice (1992) examined data from the tax bills.44 The increased pressure would special 1980 Taxpayer Compliance Mea- come from the fact that making corporate surement Program study of corporations tax returns public will allow the share- with assets between $1 and $10 million, holders, and CEOs acting in their inter- and found that compliance was positively est, to benchmark their company’s actual related to being publicly traded and in a tax rate against the actual tax rates of the highly regulated industry, suggesting that company’s competitors and possibly also characteristics that assure public disclosure to determine in detail the reasons for any of information also tend to encourage bet- divergence in these rates.45 This ter tax compliance. Tannenwald (1993) dis- benchmarking would facilitate the draft- putes this conclusion, though, asserting ing of more precise employment contracts that a publicly–traded company might be for corporate tax managers, and could ex- more likely to comply because it is more acerbate a corporate “race to the bottom” likely to have managers who are indepen- of tax rates. dent of its owners, and are therefore less Disclosure of corporate tax return infor- fearful of commingling the owners’ per- mation might encourage increased com- sonal affairs with those of the corporation. pliance for a second, less direct, reason. Disclosure might facilitate the reconcilia- Increase Political Pressure for Good tion of major differences between book Tax Policy and tax, either because these reconcilia- tions are provided by the company itself A fourth argument for public disclosure or because they are computed by inter- of corporate tax returns is that disclosure

42 This argument is made in Slemrod (2002). 43 Section 835, Public Law 107–296, 107th Congress, 2nd Session. The provision was seriously weakened by a requirement that the secretary of the department waive the ban if the waiver is required in the interest of homeland security, or to preserve American jobs, or to prevent the government from incurring additional costs. 44 The possibility for lower tax payments resulting from disclosure is similar to Harris and Livingstone’s (2002) finding that, following 1993 legislation that disallowed a deduction for executive compensation in excess of $1 million, firms with lower levels of compensation increased executive pay up to the $1 million limit. In other words, in the same way that the $1 million limit clarified the standard for executive pay, disclosure of tax returns may inform firms of opportunities or expectations that are currently more difficult to verify. 45 See Crocker and Slemrod (2003) for a model of corporate tax evasion and enforcement in the context of a principal–agent model in which there are penalties for detected tax evasion to both the corporation and the chief tax officer, and the tax officer has private information about the availability of legal tax avoidance possi- bilities. 821 NATIONAL TAX JOURNAL would help increase political pressure for course, these arguments could be reversed good tax policy. As Hanlon (2003) dis- if disclosure eroded public confidence in cusses, the information presented on fi- the fairness of the tax system or in whether nancial statements is generally not suffi- it preserved taxpayers’ privacy. cient to pin down a corporation’s annual tax liability or payments. Disclosure ARGUMENTS AGAINST PUBLIC would ensure that a verifiable and, to DISCLOSURE some extent, comparable number is in the public domain. If the company believes Opponents of making corporate tax re- that the disclosed number is misleading turns public argue that public disclosure about its true tax situation, it would have violates the established norms of confi- the opportunity of releasing further ex- dentiality and privacy and that it would planatory information. create confusion and misinformation According to this argument, if, for ex- about corporate activities. We address ample, certain corporations’ tax liabilities both of these arguments below and also were seen as too low relative to some discuss three other potential objections to norm, if certain corporations were viewed disclosure: one legal, one based on con- as engaging in improper tax–motivated cerns over government power, and one behavior, or if tax rules were seen as un- possible unintended consequence. reasonably favoring certain corporations, politicians might feel pressure to make Disclosure Violates Confidentiality changes in tax rules or administration. The tax system, under this view, might be Opponents of public disclosure contend more responsive to public concerns. There that it would violate a central feature of is some historical support for this view. the tax laws: the confidentiality of tax re- Pomp (1995) notes that, according to Rep. turn information. According to this view, Dan Rostenkowski (D–IL), the former breaching confidentiality would be un- chair of the House Ways and Means Com- wise for two reasons. The first reason, mittee, the public outcry that resulted which is more related to compliance than from disclosure by Citizens for Tax Jus- confidentiality, is that disclosure will tice of nominal federal income taxes paid cause companies to say less and therefore by some of the largest corporations in the pay less. TEI made this argument in its country was one of the keys to the pas- comments to the Treasury Department sage of the Tax Reform Act of 1986. and SEC and thereby turned upside down Tannenwald (1993) argues that a report by the argument for disclosure based on in- the Wisconsin Action Coalition based on creased compliance. It wrote, “[T]he scope disclosure of the state income tax liabili- of information required by the Internal ties of the 40 largest corporations sparked Revenue Code is at once daunting and a debate about whether Wisconsin should extraordinarily sensitive, and the willing- adopt a minimum corporate tax. ness of taxpayers to disclose confidential If this responsiveness increases a pub- information is strengthened by assurances lic perception that the tax system is fair, that their privacy interests will be safe- there could be at least two potential ben- guarded by the government” (2002). If a efits. First, in a democracy, respect for company’s tax managers know that the rules and administration is a good in and information they include in the of itself since governmental legitimacy company’s tax returns will be made pub- depends on this respect. Second, a public lic, this arguments goes, the managers will perception of fairness might increase vol- withhold sensitive information. The untary compliance with the tax laws. Of company’s tax compliance will therefore 822 Forum on Public Disclosure of Corporate Tax Returns decrease either directly—through simple nature of that information. Moreover, we understatements on the tax return—or do not observe companies voluntarily re- indirectly as a result of the IRS’s inability leasing their tax returns. So it is reason- to correctly assess tax liability due to a lack able to assume that firms judge any ben- of necessary information reporting. efits of disclosing their tax returns as less Another argument is that public disclo- than the loss of proprietary information sure would reveal valuable and otherwise contained in the tax returns. private business information to firms’ Although it is undeniable that public competitors. In its comments to the Trea- disclosure of corporate tax returns would sury Department and SEC, TEI (2002) sets entail a loss of some business secrecy, the forth several examples of business items extent to which companies would be dis- that are required to be disclosed on tax re- advantaged by the disclosure of propri- turns and that, according to TEI, will be etary information is uncertain and would of great use to a company’s competitors. vary from business to business and indus- Those items include the nature, sources, try to industry. Also, one could raise the and character of a company’s revenues objection that tax return disclosure would and expenses, details about a company’s compromise business secrets about any legal structures, sales, licensing, and leas- form of disclosure, including the existing ing revenues by legal entity and jurisdic- regime of extensive financial reporting. tion, advertising and other selling ex- Whether this incremental loss of confiden- penses, and the nature and location of a tiality from full corporate tax return dis- company’s manufacturing costs by func- closure outweighs the possible benefits of tional type. disclosure is impossible to quantify. To the extent that the increased disclo- Undoubtedly full disclosure of corporate sure is universal, it could place a competi- tax returns would substantially change tive disadvantage on those firms that have what is revealed in the document, but how relatively more valuable proprietary infor- much this disclosure would compromise mation. To the extent that the disclosure IRS enforcement efforts is unknown, as is is not universal (e.g., only for U.S.–resi- the extent of competitive disadvantage dent public corporations above a certain caused by non–uniform coverage or im- size), it could offer an advantage to those pact of the disclosure requirements. We do, companies that are not subject to the dis- however, take these objections seriously closure requirements. In any event, it and are persuaded that full disclosure of would reduce the incentive to invest in corporate tax returns is not advisable. Yet activities whose return depends in part on these arguments are not persuasive when their proprietary nature.46 applied to more limited disclosure of ei- In fact, the loss of proprietary informa- ther a few bottom–line items from the tax tion was a primary objection in the 1930s return, as in the legislation of the 1920s and to the original mandated financial disclo- 1930s, or to some form of expanded book– sures for publicly–traded companies, and tax reconciliation. is raised in recent times for almost every new financial statement disclosure. This Disclosure Could Create Confusion objection is undoubtedly true. There is no ability to disclose information about a Opponents of public disclosure of cor- company without losing the proprietary porate tax return information also argue

46 It is not completely clear that it is bad policy to reduce investment in activities whose return depends on secrecy, given that information is a public good. Moreover, some proprietary information, such as the details of tax shelter arrangements, might reside with outside lawyers and , and not with the taxpayers. Reducing the return to investing in this sort of information could very well be good public policy. 823 NATIONAL TAX JOURNAL that because returns are so lengthy and fects. Apparently the demand for informa- complicated, disclosure might generate tion provides sufficient compensation for confusion about corporate activities and financial experts to overcome the confu- accounting and tax practices. TEI (2002) sion and garner insights from the finan- writes, “Given the scope and degree of dif- cial statements. Surely tax experts would ferences in tax and financial accounting be able in many cases to overcome the requirements, public disclosure of corpo- complexity and translate the tax return rate tax returns poses great potential for data into usable information for a broader confusing rather than enlightening inves- audience. Finally, this argument applies tors.” In his reply to Grassley, Paul O’Neill with much less force to the limited dis- stated that, closure proposals that we believe, on other grounds, have the most merit. We have serious concerns that public dis- closure of large corporate returns would cause considerable confusion among the Legal Arguments public and would subject corporations to Is public disclosure of corporate tax re- misinformed, inexpert analysis of their turn information unconstitutional? One finances and operating practices. Such could argue that this policy would violate confusion and misanalysis could lead to Fourth Amendment protections against unfounded loss of faith in a corporation, unreasonable searches and seizures. The which could significantly (and inappro- Supreme Court, however, dismissed this priately) damage that corporation’s claim in Flint v. Stone Tracy Co., the case in standing among investors (2002). which it concluded that the 1909 Corpo- Several arguments can be made against rate Excise Tax was constitutional. We this objection. First, “misinformed, inex- know of no subsequent federal case in pert analysis” of corporations’ finances which a taxpayer successfully argued and activities is already widespread, and against disclosure of tax return informa- it is not all clear whether the release of tion based on the Fourth Amendment. corporate tax returns would add to exist- In later cases, courts have considered ing confusion. Second, the fact that the whether the disclosure of tax return infor- disclosure of tax returns would result in mation, not to the public at large, but to confusion and poor analysis is not neces- the government itself or in judicial pro- sarily an argument against disclosure. If ceedings, violates taxpayers’ constitu- the confusion is rooted in complex tax tional rights. The Supreme Court has ad- rules and myriad book–tax differences, dressed two related Fifth Amendment is- the proper response might be not to resist sues: first, whether the Fifth Amendment increased disclosure, but rather to address privilege against self–incrimination bars the problems of complexity. More broadly, the government from requiring a taxpayer transparency and full information can to file a return that shows income from cause problems but are essential elements illegal activities and second, whether the of a well–functioning economy. This ar- government violates a defendant’s Fifth gument against corporate tax return in- Amendment rights in a non–tax criminal formation disclosure based on the worry prosecution by introducing the over misinformed analysis can quickly defendant’s tax returns as evidence of the turn into an argument against all sorts of defendant’s unlawful conduct. On the first disclosure, but restrictions on disclosure issue, the Supreme Court in U.S. v. would at some point have pernicious ef- Sullivan47 concluded that a taxpayer could

47 274 U.S. 259 (1927). 824 Forum on Public Disclosure of Corporate Tax Returns not refuse to file a tax return on the ground length hypothetical constitutional claims that his tax return would reveal income against corporate tax publicity. from illicit liquor sales (during Prohibi- If public disclosure of corporate tax re- tion) and thereby subject him to criminal turns is not unconstitutional, any legal prosecution. On the second issue, the Su- arguments against disclosure must be le- preme Court nearly fifty years later in gal policy arguments about why disclo- Garner v. United States48 concluded that the sure is unwise. One policy argument government did not violate a criminal might be the following: making corporate defendant’s Fifth Amendment rights by tax returns public would overturn more introducing into evidence the defendant’s than twenty–five years of accumulated tax return to show that the defendant had jurisprudence and legal practice under engaged in illegal gambling activities. The Internal Revenue Code section 6103. This court argued that the taxpayer could have argument by itself lacks force. That is to invoked the Fifth Amendment’s privilege say that in order to be persuasive, the ar- against self–incrimination and not re- gument must spell out an independent vealed on his tax return the source of his reason why overturning established legal income. The taxpayer then, of course, rules is a problem. Ultimately, then, any might have faced IRS proceedings for fail- satisfactory argument against public dis- ing to file a complete return. closure of corporate tax returns will be Although the decisions in Garner and made only on non–legal grounds. Sullivan do not specifically address whether the public disclosure of tax re- Too Much Ammunition to the Federal turns raises constitutional concerns, the Government decisions reflect a balancing of interests in which the government’s need to admin- Another argument against corporate ister the tax laws (or to prosecute non–tax tax return disclosure—not to the public crimes) has trumped individuals’ privacy generally, but to the SEC and other agen- desires. More broadly, this balancing of cies—is that making returns available to interests can be seen in the historical and government officials outside the IRS will current legislative approach to tax return give an already powerful federal bureau- publicity. As we described earlier, from cracy an excessive amount of information 1913 until 1976 income tax returns were to use against taxpayers. The problem treated as public records, and the execu- with this argument is that the incremen- tive branch controlled access to tax re- tal information is probably not substan- turns. Since 1976, income tax returns have tial. The SEC collects regular and detailed been classified as confidential, but this financial reports from public companies, confidentiality may be breached in certain the Justice Department can access tax re- circumstances. Based on the Supreme turns from the IRS by obtaining a judicial Court’s decisions involving tax return dis- order, and the SEC can obtain tax returns closure and on the fact that the directly from companies the Commission longstanding legislative policy of permit- is investigating. Moreover, large corpora- ting limited disclosure has not been over- tions now have significant resources that turned, we believe that it would be diffi- they can deploy against the increased cult to make a successful constitutional power of government. As we described argument against the public disclosure of above in the context of business confiden- corporate tax returns. It is, though, out- tiality, concerns about privacy and gov- side the scope of this paper to consider at ernment interference traditionally have

48 424 U.S. 648 (1976). 825 NATIONAL TAX JOURNAL been raised against disclosure of indi- Another possible unintended conse- vidual, not corporate, information. This quence of disclosure could be a decline in focus was certainly the case in 1934. The the quality of accounting earnings. This privacy concerns raised by disclosure of consequence could occur because compa- individual tax information become less nies might respond to disclosure by reduc- resonant when corporate disclosure is at ing the cushion allowance that they in- issue. clude in the tax expense account for their financial statements. The cushion allow- Possible Unintended Behavioral ance is the added tax provision that com- Responses to Disclosure panies book to ensure adequate reserves in the event that their tax liability increases A final argument against corporate tax in subsequent years following an audit by return disclosure is that it raises the cost the taxing authorities. For example, a com- of doing business in a form that is subject pany could file a tax return showing a to disclosure. Suppose, for example, that $100 tax liability. However, because it is disclosure is restricted to companies that aware that some of the positions that it are subject to SEC regulatory oversight, has taken are subject to alternative inter- i.e., companies that are traded on public pretations, it may book a tax expense of exchanges. Since no publicly–traded com- $125. Then, in future years, if the IRS au- panies currently disclose their tax returns dits the return and the tax liability in- or significant tax return information, we creases, the company has up to $25 of re- can assume that managers believe that the serves to offset the adjustment, reducing costs of such disclosure outweigh the ben- the likelihood that prior earnings require efits. If disclosure were mandated for pub- restatement. In other words, the financial lic companies, some of them might choose statements recognize the full expected cost to withdraw from the public capital mar- of taxes in the year that the financial state- kets, rather than release their tax informa- ments are filed, even though cash pay- tion. This withdrawal could consequently ments may be deferred into the future. increase the cost of obtaining capital. With disclosure, it might be possible to Similarly, if disclosure were limited to tax determine a company’s cushion. If the returns for C corporations (both public and company believed that knowledge of a private), this regulation could lead to liq- large cushion would signal to the IRS that uidation and reformation of businesses as an aggressive position has been taken, partnerships or other flow–through enti- managers might respond by decreasing ties that would not be subject to disclosure. the cushion. If so, earnings could become Likewise, if disclosure were mandated for more volatile as adjustments are needed all U.S.–domiciled businesses, then the cost in future years to cover inadequate tax of locating in the United States would in- provisions in the past. Of course, the ac- crease compared with other countries. This tual expected future tax liability that an relative increase could provide a competi- accurate cushion would reflect would fall tive advantage to foreign companies and to the extent that companies respond by result in companies relocating outside the reducing aggressive tax avoidance strate- United States. In short, it is impossible to gies. mandate full tax return disclosure for all businesses in the world. If disclosure is CONCLUSIONS costly, then some business will respond to disclosure by operating in alternative, pre- Twice in the history of the modern U.S. sumably suboptimal forms, in order to income tax, Congress passed legislation avoid the disclosure requirement. requiring disclosure of information from 826 Forum on Public Disclosure of Corporate Tax Returns the tax returns of corporations (and indi- forms to the tax system that citizens of the viduals). In one case, the law was repealed United States want to have. Second, it before it took effect, but disclosure of a could induce corporations to resist aggres- limited number of items was the law dur- sive tax reduction strategies if they fear ing the tax years 1923 and 1924. In the that disclosure of their low tax payments wake of concern about corporate account- would trigger negative consumer re- ing abuses and aggressive tax avoidance, sponse; whether it would provoke nega- the issue of disclosure has recently been tive investor response is less clear, as more revived by a prominent senator and transparency could conceivably induce a others. race to the bottom of low tax liability. Fi- Our review of the accounting, eco- nally, it could contribute to better func- nomic, and legal issues has led us to a tioning of financial markets if it sheds new number of tentative conclusions. First, we light on the information presented in fi- are concerned that disclosure of the en- nancial statements. tire corporate tax return could cause com- By definition, increasing disclosure panies to dilute the information content means that some information that is now of these returns, hampering tax enforce- private becomes public. We believe there ment, and might, even in diluted form, is no constitutional obstacle to forgoing reveal proprietary information that could the privacy of this information, and so the provide a competitive advantage to those case must be made on the basis of whether companies that are not required to make there are overriding societal benefits. We such a disclosure. For this reason we do find this case to be compelling enough not support full disclosure. However, this that we look forward to the next step of argument applies neither to proposals for considering the best form of disclosure disclosure of total tax liability alone, or and the details of its implementation. along with a small number of bottom–line items, nor to an expanded, public recon- Acknowledgments ciliation between tax and book concepts of income. We are persuaded that propos- We appreciate the contributions of als of this sort would not compromise pro- Rosanne Altshuler, Jennifer Blouin, prietary information, unduly add to the Allison Evans, Knut–Terje Fagerland, Bill information available to government Gentry, Jeff Gramlich, Michelle Hanlon, regulatory agencies, or sow confusion James Hines, Mark Lang, Ed Maydew, about the financial status of the affected Lillian Mills, Kathy Petroni, George companies. Plesko, Richard Sansing, Eugene Steuerle, The case for considering limited public and Robert Yetman. disclosure of corporate tax return infor- mation rests on the fact that it would con- REFERENCES tribute to the transparency of the tax sys- tem by clarifying the tax payments of cor- Badertscher, Brad, and Robert Yetman. porations in and of themselves, relative “An Analysis of Publicly Available Non- to other corporations, and relative to the profit Taxable Activity Data: A Comparison income they report on their financial state- of IRS 990s and 990–Ts.” University of Iowa ments. Tax information on financial state- Working Paper. Iowa City, IA: University of ments does not currently reveal tax liabil- Iowa, 2003. ity in most cases. The greater transparency Ball, Ray. could have several beneficial effects. First, “Changes in Accounting Techniques and it could put pressure on legislators to Stock Prices.” Journal of . change the tax system so that it better con- 10 (Supplement, 1972): 1–38. 827 NATIONAL TAX JOURNAL

Bankman, Joseph. Dhaliwal, Dan, and Shiing–wu Wang. “The New Market in Corporate Tax Shel- “The Effect of Book Income Adjustment in ters.” Tax Notes 83 (June 21, 1999): 1775– the 1986 Alternative Minimum Tax on Cor- 94. porate Financial Reporting.” Journal of Ac- Choi, Won W., Jeffrey D. Gramlich, and counting and Economics 15 No. 1 (March, Jacob K. Thomas. 1992): 7–26. “Potential Errors in Detection of Earnings Ellen, Pam Scholder, Lois A. Mohr, and Management: Reexamining the Studies of the Deborah J. Webb. AMT of 1986.” Columbia University Working “Charitable Programs and the Retailer: Do Paper. New York: Columbia University, 2000. They Mix?” Journal of Retailing 76 No. 3 (Fall, Cloyd, C. Bryan , Lillian F. Mills, and 2000): 393–406. Constance D. Weaver. Engel, Ellen, Merle Erickson, and Edward “Firm Valuation Effects of the Expatriation Maydew. of U.S. Corporations to Tax Haven Coun- “Debt–equity Hybrid Securities.” Journal of tries.” Journal of the American Taxation Asso- Accounting Research 37 No. 2 (Autumn, ciation (forthcoming, 2003). 1999): 249–74. Collins, Julie H., James M. Wahlen, and Engler, Mitchell L. Douglas A. Shackelford. “Corporate Tax Shelters and Narrowing the “Bank Differences in the Coordination of Book/Tax ‘GAAP.’” Columbia Business Law Regulatory Capital, Earnings, and Taxes.” Review (2001): 539–600. Journal of Accounting Research 33 No. 2 (Au- Erickson, Merle, Michelle Hanlon, and tumn, 1995): 263–91. Edward Maydew. Crocker, Keith, and Joel Slemrod. “How Much Will Firms Pay for Earnings that “Corporate Tax Evasion with Agency Do Not Exist? Evidence of Taxes Paid on Al- Costs.” University of Michigan Business legedly Fraudulent Earnings.” University of School. Mimeo, February 2003. Chicago, University of Michigan, and Uni- Darby, Joseph J. versity of North Carolina Working Paper. “Confidentiality and the Law of Taxation.” Chicago, Ann Arbor, Chapel Hill: Univer- American Journal of Comparative Law 46 sity of Chicago, University of Michigan and (Supplement, 1998): 577–88. University of North Carolina, 2003. Desai, Mihir. Graham, John, Mark Lang, and Douglas “The Corporate Profit Base, Tax Sheltering Shackelford. Activity, and the Changing Nature of Em- “Employee Stock Options, Corporate Taxes ployee Compensation.” Harvard University. and Debt Policy.” Journal of Finance (forth- Mimeo, 2002. coming, 2003). Desai, Mihir, and James R. Hines Jr. Gramlich, Jeffrey D. “Expectations and Expatriations: Tracing the “The Effect of the Alternative Minimum Tax Causes and Consequences of Corporate In- Book Income Adjustment on Deci- versions.” Harvard University and Office of sions.” Journal of the American Taxation Asso- Tax Policy Research Working Paper No. ciation 13 No. 1 (Spring, 1991): 36–56. 2002–4. Cambridge, MA and Ann Arbor, MI: Grassley, Sen. Charles E. Harvard University and University of “Grassley Release, Letter on Public Disclo- Michigan, 2002. sure of Corporate Tax Returns.” Tax Notes Dhaliwal, Dan, Richard M. Frankel, and Today 131 (July 9, 2002a): 16. Robert Trezevant. Grassley, Sen. Charles E. “The Taxable and Book Income Motivations “U.S. Senator Grassley Calls for Review of for a LIFO Layer Liquidation.” Journal of Ac- Corporate Return Disclosure Require- counting Research 32 No. 2 (Autumn, 1994): ments.” Worldwide Tax Daily 198 (October 11, 278–89. 2002b): 30. 828 Forum on Public Disclosure of Corporate Tax Returns

Hand, John. Kornhauser, Marjorie E. “Resolving LIFO Uncertainty: A Theoretical “More Historical Perspective on Publication and Empirical Reexamination of 1974–75 of Corporate Returns.” Tax Notes 96 (July 29, LIFO Adoptions and Nonadoptions.” Jour- 2002): 745–7. nal of Accounting Research 31 No. 1 (Spring, Leff, Mark H. 1993): 21–49. The Limits of Symbolic Reform: The New Deal Hanlon, Michelle. and Taxation, 1933–1939. Cambridge: Cam- “What Can We Infer about a Firm’s Taxable bridge University Press, 1984. Income from its Financial Statements?” Na- McKinnon, John D. tional Tax Journal 56 No. 4 (December, 2003): “Senate Panel Acts to Crack Down on Tax 831–64. Shelters for Corporations.” Wall Street Jour- Hanlon, Michelle, Stacie Kelley, and nal (June 19, 2002): A4. Terry Shevlin. McLucas, William R., J. Lynn Taylor, and “Evidence on the Possible Information Loss Susan A. Matthews. of Conforming Book Income and Taxable “A Practitioner’s Guide to the SEC’s Inves- Income.” University of Michigan and Uni- tigative and Enforcement Process.” Temple versity of Washington Working Paper. Ann Law Review 70 (Spring, 1997): 53–116. Arbor, MI and Seattle, WA: University of Manzon, Gil. Michigan and University of Washington, “ of Firms Subject to 2003. the Alternative Minimum Tax.” Journal of the Harris, David G., and Jane R. Livingstone. American Taxation Association 14 No. 2 (Fall, “Federal Tax Legislation as an Implicit Con- 1992): 88–111. tracting Cost Benchmark: The Definition of Matsunaga, Steve, Terry Shevlin, and Dee Shores. Excessive Executive Compensation.” Ac- “Disqualifying Dispositions of Incentive counting Review 77 No. 4 (October, 2002): Stock Options: Tax Benefits versus Financial 997–1018. Reporting Costs.” Journal of Accounting Re- Hill & Knowlton. search 30 (Supplement, 1992): 37–76. 2001 Corporate Citizen Watch Survey. http:// Miller, Gregory S., and Douglas J. Skinner. www.hillandknowlton.com/common/ “Determinants of the Valuation Allowance file.php/pg/dodo/hnk_global/binaries/ for Assets Under SFAS No. 7/HK%202001%20Corp%20Citizen%20 109.” Accounting Review 73 No. 2 (April, Watch.pdf. July 17, 2001. 1998): 213–33. Hung, Mingyi. Mills, Lillian F., and George A. Plesko. “Accounting Standards and Value Relevance “Bridging the Reporting Chasm: A More In- of Financial Statements: An International formative Reconciliation of Book and Tax Analysis.” Journal of Accounting and Econom- Income.” University of Arizona and Sloan ics 30 No. 3 (December, 2000): 401–20. School. Mimeo, 2003. Hunt, Alister, Susan Moyer, and Terry Shevlin. Office of Management and Budget. “Managing Interacting Accounting Mea- Budget of the United States Government, Fiscal sures to Meet Multiple Objectives: A Study Year 2004. Washington, D.C.: GPO, 2003. of LIFO Firms.” Journal of Accounting and http://w3.access.gpo.gov/usbudget/ Economics 21 No. 3 (June, 1996): 339–74. fy2004/pdf/hist.pdf. Kleinbard, Edward D., and Peter C. Canellos. O’Neill, Paul H. “Disclosing Book–Tax Differences.” Tax “O’Neill Letter to Grassley on Public Dis- Notes 96 (August 12, 2002): 999–1001. closure of Corporate Tax Returns.” Tax Notes Kornhauser, Marjorie E. Today 196 (October 9, 2002): 18. “Corporate Regulation and the Origin of the Pitt, Harvey L. Corporate Income Tax.” Indiana Law Journal “SEC Letter to Grassley on ‘Marginal’ 66 (Winter, 1990): 53–136. Benefit of Public Access to Corporate Re- 829 NATIONAL TAX JOURNAL

turns.” Tax Notes Today 196 (October 9, 2002): Strauss, Robert. 17. “The Political Economy of Business Tax Re- Pomp, Richard D. turn Policy.” State Tax Notes 8 (February 27, “The Disclosure of State Corporate Income 1995): 40. Tax Data: Turning the Clock Back to the Fu- Tannenwald, Robert. ture.” Capital University Law Review 22 “Corporate Tax Disclosure: Good or Bad for (1993): 373–464. the Commonwealth?” Paper prepared for Pomp, Richard D. the Massachusetts Special Commission “Corporate Tax Policy and the Right to Know: on Business Tax Policy, Boston, May, 28, Enhancing Legislative and Public Access.” 1993. State Tax Notes 6 (March 7, 1994): 603–40. Tax Executives Institute. Pomp, Richard D. “Tax Executives Institute Letter to Treasury, “The Political Economy of Tax Return Pri- SEC on Corporate Disclosure.” Tax Notes vacy—Revisited.” State Tax Notes 8 (June 12, Today 143 (July 25, 2002): 22. 1995): 114–35. Thorndike, Joe. Rice, Eric. “Tax History: Honesty by Releasing Corpo- “The Corporate Tax Gap: Evidence on Tax rate Tax Returns.” Tax Notes 96 (July 15, Compliance by Small Corporations.” In 2002): 324–25. Why People Pay Taxes, edited by Joel Slemrod, U.S. Congress. House. 125–61. Ann Arbor: University of Michigan Corporate Accountability Tax Gap Act of 2003. Press, 1992. 108th Cong., 1st sess., 2003. H.R. 1556. Schrand, Catherine, and M.H. Franco Wong. U.S. Congress, Joint Committee on Taxation. “Earnings Management and Its Pricing Impli- Study of Present–Law Taxpayer Confidentiality cations: Evidence from Banks’ Adjustments and Disclosure Provisions as Required by Sec- to the Valuation Allowance for Deferred Tax tion 3802 of the Internal Revenue Service Re- Assets under SFAS 109.” Wharton School of structuring and Reform Act of 1998. 106th the University of Pennsylvania. Mimeo, 2003. Cong., 2d sess., 2000. Joint Committee Print Shackelford, Douglas A., and Terry Shevlin. JCS–1–00. “Empirical Tax Research in Accounting.” U.S. Department of the Treasury. Journal of Accounting and Economics 31 No. The Problem of Corporate Tax Shelters: Discus- 1–3 (September, 2001): 321–87. sion, Analysis and Legislative Proposals. Wash- Slemrod, Joel. ington, D.C., July 1999. “Tax Minimization and Corporate Respon- Yin, George K. sibility.” Tax Notes 96 (September 9, 2002): “Business Purpose, Economic Substance, 1523. and Corporate Tax Shelters: Getting Serious Strauss, Robert. About Corporate Tax Shelters: Taking a “State Disclosure of Tax Return Information; Lesson from History.” Southern Methodist Taxpayer Privacy versus the Public’s Right University Law Review 54 (Winter, 2001): 209– to Know.” State Tax Notes 5 (July 5, 1993): 129. 38.

830