Insider Trading and IRC Section 6103(e)(1)(D)(iii)

Abstract

ABSTRACT Tax returns, including corporate returns, are generally confidential and not disclosed to the public. However, in certain circumstances, Internal Revenue Code (IRC) Section 6103(e)(1)(D)(iii) provides that corporate shareholders who meet a 1 percent ownership criterion can request from the Internal Revenue Service (IRS) a copy of the corporate tax return. In this paper, we discuss the legislative history of IRC Section 6103 as it relates to tax return disclosure in general (for individual and corporate returns) and its precursors that provide for disclosure of corporate tax returns to shareholders who own more than 1 percent of the capital stock. We then provide examples of the valuable proprietary information that is included in corporate tax returns. Next, we provide a history and discussion of the insider trading laws and argue that the information content of a corporate tax return is such that it provides material nonpublic information that is not readily available in annual reports or other public documents filed with the Securities and Exchange Commission (SEC). While 1 percent shareholders do not meet the classical definition of an “insider,” we argue that they are similar to other “outsiders” who have been found liable for violating insider trading rules. We conclude by arguing that the actions of a 1 percent shareholder who requests and receives the corporate return and who subsequently makes purchases and/or sales of corporate stock should constitute illegal insider trading.