The Shareholder Response to Corporate Tax Planning Advice Regulation

57 Pages Posted: 12 Mar 2020 Last revised: 18 Jan 2021

See all articles by Michael P. Donohoe

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Brian Gale

University of Washington

Michael Mayberry

University of Florida - Fisher School of Accounting

Date Written: January 15, 2021

Abstract

We examine the shareholder response to heightened regulation of corporate tax planning advice through the covered opinions rules under U.S. Treasury Department Circular No. 230. These rules imposed extensive due diligence obligations and drafting requirements on tax professionals for a broad range of written tax advice. Despite overwhelming criticism from tax professionals, stock returns reveal a positive shareholder response to the promulgation of the rules, equating to a $12.33 billion aggregate increase in shareholder value. Consistent with shareholders believing that the benefits of the rules—deterrence of excessively risky tax planning and increased monitoring—would offset the burdens, we find that the shareholder response was more positive for firms with higher tax risk, weaker monitoring, and higher tax risk coupled with weaker monitoring. Overall, these findings provide new evidence that shareholders perceive regulations aiming to curtail risky tax planning as value enhancing when they target tax professionals rather than taxpayers.

Keywords: Circular 230, covered opinion rules, tax professional, tax planning, tax advice, tax avoidance, tax risk, external monitoring

JEL Classification: G10, H25, H26, M41

Suggested Citation

Donohoe, Michael P. and Gale, Brian and Mayberry, Michael, The Shareholder Response to Corporate Tax Planning Advice Regulation (January 15, 2021). Available at SSRN: https://ssrn.com/abstract=3540996 or http://dx.doi.org/10.2139/ssrn.3540996

Michael P. Donohoe (Contact Author)

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

1206 South Sixth Street
Champaign, IL 61820
United States

Brian Gale

University of Washington ( email )

Box 353200
Seattle, WA 91895
United States

Michael Mayberry

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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