Distilling the Reserve for Uncertain Tax Positions: The Revealing Case of Black Liquor
37 Pages Posted: 5 Aug 2011 Last revised: 28 Sep 2013
Date Written: July 18, 2011
We examine the extent to which the reserve for unrecognized tax benefits consistently reflects uncertain tax avoidance. We analyze the financial statement disclosures for 19 paper companies that received a total of $6.4 billion in direct government subsidies structured as refundable excise taxes during 2009. Each of these companies included the refunds in financial income, but 14 of these firms excluded all or part of the refunds from taxable income. Despite the unprecedented nature of the exclusion, we find significant variation in the tax accruals meant to represent uncertain tax positions. Our evidence suggests that additions to the reserve for uncertain tax benefits are an inconsistent empirical measure of uncertain tax avoidance because of the wide latitude allowed managers in making judgments about tax uncertainties. Moreover, we find some evidence that these judgments are related to characteristics generally associated with weak corporate governance.
Keywords: Uncertain tax positions, FIN 48, tax avoidance
JEL Classification: M41, H25
Suggested Citation: Suggested Citation