Reconciling Tax Law and Securities Regulation

Omri Y. Marian

University of Florida - Fredric G. Levin College of Law

April 2, 2014

48 University of Michigan Journal of Law Reform, 2014, Forthcoming

Issuers in registered securities offerings are required to disclose, among other tax matters, the expected tax consequences to investors that result from investing in the offered securities (“nonfinancial tax disclosure”). I advance three arguments in this regard. First, nonfinancial tax disclosure practice, as sanctioned by the SEC, does not achieve its intended regulatory purposes. Nonfinancial tax disclosures provide irrelevant information, sometimes fail to provide material information, create unnecessary transactions costs, and divert valuable administrative resources to the enforcement of largely-meaningless requirements. Second, I suggest that the practical reason for this regulatory failure is an unsuccessful attempt by tax practitioners and the SEC to address investors’ heterogeneous tax preferences. Specifically, nonfinancial tax disclosure practice assumes the existence of a “reasonable investor” who is also an “average taxpayer”, and tax disclosures are drafted for the benefit of such average taxpayer. The “average taxpayer”, however, is not a defensible construct. Third, the theoretical reason for the dysfunctionality of the regulatory regime is misapplication of mandatory disclosure theory to tax rules. I argue that given the special nature of tax laws, mandatory disclosure theory — even if accepted at face value — does not support current regulatory framework. To remedy this failure, I describe the types of tax-related disclosures that would be supported by mandatory disclosure theory. Under my suggested regulatory reform, nonfinancial tax disclosure will only include issuer-level tax items, (namely, items at the company level not otherwise disclosed in the financial statements), that affect how “reasonable investors” calculate their own individual tax liabilities. Under such a regime, there is no need to rely on the “average taxpayer” construct.

Number of Pages in PDF File: 61

Keywords: Tax Disclosure; Securities Regulation; Mandatory Disclosure; Efficient Capital Markets Hypothesis

JEL Classification: H20; H24; H25; H71; K34; K22; K23; O16; G29

Accepted Paper Series

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Date posted: April 4, 2014  

Suggested Citation

Marian, Omri Y., Reconciling Tax Law and Securities Regulation (April 2, 2014). 48 University of Michigan Journal of Law Reform, 2014, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2419806

Contact Information

Omri Y. Marian (Contact Author)
University of Florida - Fredric G. Levin College of Law ( email )
P.O. Box 117625
Gainesville, FL 32611-7625
United States
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