The Corporate Response to Government Attacks on Tax Shelters

Noel P Brock,Shane R Stinson,Edward J Schnee

doi:10.5430/ijfr.v8n1p126

Noel P Brock, Shane R Stinson + Show 1 more

Open Access

https://doi.org/10.5430/ijfr.v8n1p126

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Abstract

We examine the effectiveness of four federal government actions, all of which were designed to curb the proliferation of corporate tax shelters dating back to the 1990s, at eliciting measurable changes in characteristics commonly associated with tax shelter firms. Our results suggest that the government’s initial attacks on corporate tax shelters in the early 2000s elicited significant declines in book-tax differences, discretionary accruals, and the use of Big N audit firms, which contributed to gradual reductions in the estimated likelihood of tax sheltering for both multinational and purely domestic firms. Conversely, later attempts to discourage corporate tax shelters proved ineffective, likely due in part to the effectiveness of previous government attacks and a faltering economy. This study addresses calls from prior literature for a better understanding of factors determining corporate tax avoidance and offers new evidence of multi-faceted taxpayer reactions to corporate tax reform.

Highlights

Public accounting firms became immersed in the creation and mass marketing of corporate tax shelters, specialty transactions designed to generate tax savings with little other connection to a taxpayer’s ordinary operations, in the 1990s (Novak and Saunders 1998; Treasury 1999)
We investigate whether various attempts by Congress, the U.S Treasury, and the Internal Revenue Service (IRS) to curb the proliferation of tax shelters and/or close loopholes in the Internal Revenue Code (IRC) have had a discernable effect on firms’ estimated likelihood of tax sheltering (Wilson 2009; Lisowsky 2010), which captures a wide assortment of factors associated with sheltering activity that is generally unobservable due to privacy restrictions on tax return data
Having established that multinational and purely domestic firms differ with respect to the traits that comprise our estimated likelihoods of tax sheltering, we address RQ1 with a comparison of group-level changes for Shelter_L, Shelter_W, and their components in response to each of our selected government actions

Summary

Introduction

Public accounting firms became immersed in the creation and mass marketing of corporate tax shelters, specialty transactions designed to generate tax savings with little other connection to a taxpayer’s ordinary operations, in the 1990s (Novak and Saunders 1998; Treasury 1999). The accounting firms behind these elaborate tax planning strategies often provided substantial services to clients under terms of confidentiality and with fee arrangements contingent upon a successful defense from any challenge by the Internal Revenue Service (IRS). We investigate whether various attempts by Congress, the U.S Treasury, and the IRS to curb the proliferation of tax shelters and/or close loopholes in the Internal Revenue Code (IRC) have had a discernable effect on firms’ estimated likelihood of tax sheltering (Wilson 2009; Lisowsky 2010), which captures a wide assortment of factors associated with sheltering activity that is generally unobservable due to privacy restrictions on tax return data

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