How a Tax Rule Can Enable Greater Due Diligence Before Fully Consummating a Private Equity Deal

Abstract

Before engaging in a private equity deal, significant time and money are expended in due diligence. However, the most important and informative item to consider is generally overlooked: the corporation’s income tax returns. Yes, tax returns are usually confidential, but Internal Revenue Code § 6103(e)(1)(D)(iii) allows a corporate shareowner who has but 1% ownership to request a copy of the company’s tax return directly from the Internal Revenue Service. Thus, if all the other due diligence checks out, the final step should be to acquire a 1% interest to be able to view the corporation’s tax return. Tax returns are the windows to the souls of corporations. What accounting financial reporting can hide cannot be hidden in a tax return to the federal government. Private equity deals would be safer with this information under wraps. No insider-trading charge should accrue, but the possibility of this claim should be weighed as a cost against this benefit.