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Do Publicly Disclosed Tax Reserves Tell Us About Privately Disclosed Tax Shelter Activity?

54 Pages Posted: 4 Oct 2009 Last revised: 20 Nov 2013

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation

Leslie A. Robinson

Tuck School of Business at Dartmouth

Andrew Schmidt

North Carolina State University

Date Written: December 5, 2012

Abstract

We examine whether public disclosures of tax reserves recently made available through Financial Interpretation No. 48 (FIN 48) reflect corporate tax shelter activities. Understanding this relation is important to corporate stakeholders and researchers keen to infer the aggressive nature of a firm’s tax positions from its tax reserve accrual. Our study links public disclosures of tax reserves with mandatory private disclosures of tax shelter participation as made to the Internal Revenue Service’s Office of Tax Shelter Analysis. We find strong, robust evidence that the tax reserve is positively associated with tax shelters, while other commonly used measures of tax avoidance are not. Based on out-of-sample tests, we also show that the reserve is a suitable summary measure for predicting tax shelters. The tax benefits of tax shelters are economically significant, accounting for up to 48 percent of the aggregate FIN 48 tax reserves in our sample.

Keywords: FIN 48, ASC 740-10-25, tax shelter, tax reserve, tax aggressive

JEL Classification: M41, M48, H26

Suggested Citation

Lisowsky, Petro and Robinson, Leslie A. and Schmidt, Andrew, Do Publicly Disclosed Tax Reserves Tell Us About Privately Disclosed Tax Shelter Activity? (December 5, 2012). Journal of Accounting Research, Vol. 51 (3), 583-629, 2013. Available at SSRN: https://ssrn.com/abstract=1481488 or http://dx.doi.org/10.2139/ssrn.1481488

Petro Lisowsky (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Leslie Robinson

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-4018 (Phone)

Andrew P. Schmidt

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States

HOME PAGE: http://https://poole.ncsu.edu/people/apschmid/

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