The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter

Abstract

This paper investigates the spread of aggressive corporate tax reporting by modeling a firm's decision to adopt the corporate-owned life insurance (COLI) shelter. I use a sample of known COLI participants to examine whether certain firm characteristics are associated with the decision to adopt a COLI shelter. I find some evidence that firms with higher performancematched discretionary accruals are more likely to adopt a COLI shelter, suggesting a positive relation between aggressive financial reporting and aggressive tax reporting. I also find that firms with greater capital market visibility are less likely to adopt a COLI shelter, consistent with a potential reputational cost for being associated with aggressive tax avoidance activities. Further, my results suggest that COLI adopters are generally R&D intensive firms with low leverage and few foreign operations. In addition to firm specific characteristics, I consider two explanations for the spread of COLI adoption motivated by theory on diffusion of innovations and institutional isomorphism. I investigate whether firms imitate prior COLI adopters and whether COLI adoption spreads through common auditors. My results are not consistent with an imitation vii explanation. Further, my results suggest that having the same auditor as a prior COLI adopter does not increase the likelihood that a firm will adopt COLI.viii Table of PART I 6Chapter The tax shelter industry also distorts allocation of economic resources. Tax shelter activity diverts resources away from the government toward accountants, lawyers and others who develop and promote tax shelters. Moreover, according to theories of corporate tax incidence, engaging in a tax shelter cannot make a corporation, per se, better off. The benefits from reducing the corporation's tax bill will ultimately accrue to its shareholders through higher stock prices, its employees through higher wages, or its customers through lower prices. Exactly how the benefits will be shared is unknown, but Slemrod (2004) Frank et al. 2006). 3 However, ETRs and book-tax differences are noisy measures of aggressive tax reporting. ETRs vary with profitability, industry differences in the reporting of revenue and expenses, and legitimate tax planning opportunities. Consequently, it is difficult to distinguish lower ETRs due to better tax planning from those due to aggressive avoidance or shelter activity. List of TablesTreasury's (1999) report suggests that the growing gap between financial statement income and 2 Many studies rely on Bankman's (2004a) working definition of a tax shelter as a "(1) tax motivated; (2) transaction unrelated to a taxpayer's normal business operations; that (3) under a literal reading of some relevant legal authority; (4) produces a loss for tax purposes in excess of any economic loss; (5) in a manner inconsistent with legislative intent or purpose." See also Bankman (1999).3 Graham and Tucker (2006) identify known tax shelter participants. However, their study focuses on firms' debt policy decisions, no...

Audit Committee Member Contextual Experiences and Financial Reporting Outcomes

“…Srinivasan (2005) finds that audit committee association with a restating firm leads to audit committee member turnover not only at the restating firm, but also on other audit committees. another firm that engaged in tax shelters, via the board of directors (Brown 2011). Chiu et al (2010) address whether "financial reporting behaviors are propagated through interlocking boards" and find that board of director interlocks with a restating firm are associated with lower earnings quality at the focal firm, and that in the absence of a board interlock with a restating firm, the number of board interlocks is positively associated with accrual quality.…”

A look at the actual cost of capital of US firms

“…TXT is total income taxes and PI is pretax income. Following Gupta and Newberry (1997) and Brown (2011), is set to zero if TXT∕ PI < 0 and one if TXT∕ PI > 1 R debt Before-tax cost of debt XINT∕( DLTT + DLC). XINT is the interest and related expense for the year Cost of equity…”

“…where the tax rate computation follows the effective tax rate computation of Brown (2011) and Frank and Shen (2016): …”

Agressividade Tributária: Um Survey da Literatura

“…Muitos artigos surgiram desenvolvendo medidas, na sua maioria centrada nos tributos explícitos e independente se o resultado tributário estava ao abrigo de imposto juridicamente questionável ou muito agressivos (Brown, 2011;Hanlon & Heitzman, 2010;Lisowsky, 2010;Wilson, 2009).…”