Salience of Tax Evasion Penalties
Versus Detection Risk
Betty R. Jackson and Sally M. Jones
The sanction structure of the income tax system
of the United States involves two primary elements: risk of detection
and magnitude of penalty. Either element may be varied to alter
the expected cost of tax evasion. The government has changed both
elements with little explicit recognition of the behavioral implications
of such changes. This paper develops a hypothesis based on Kahneman
and Tversky's prospect theory with respect to the sensitivity
of individuals toward risk of detection versus magnitude of penalty.
The results of a laboratory experiment designed to test the hypothesis
are reported. The experiment provides evidence that the magnitude
of a penalty should be more closely examined as a component in
the tax evasion sanction structure. The implications of these
findings on the structure of future research also are discussed.
Analysis In Taxpayer Appeal Decisions
Judy L. Porcano and Thomas M. Porcano
The decision to appeal an IRS determination in the
courts is well-suited for formal quantitative analysis techniques.
Specifically, conditional probability analysis and net present
value models can be combined to provide the taxpayer with a framework
to analyze the appeals decision and compare expected results with
other alternative uses of the funds necessary to appeal the issue.
In addition, the framework can be quite useful in performing sensitivity
analysis to determine the magnitude of changes in expected final
settlements due to changes in certain variables. This article
presents the development of decision models based upon this analysis
and a specific application of the models to display their usefulness
in helping to reduce the uncertainty associated with the appeal
decision. Overall, the application of this framework to the taxpayer
appeal decision appears to be very fruitful and enhances the taxpayer's
The Security Market Reaction
to Tax Legislation as Reflected in Bond Price Adjustments
Allen W. Bathke, Jr., Richard L. Rogers, and Jerrold
This study analyzes the impact of four tax acts
on flower bond prices using a capital markets methodology. While
the four tax law changes were not intended specifically to affect
the desirability of flower bonds, the estate planning value of
the bonds was affected. Moreover, financial institutions investing
in these bonds experienced shifts in wealth as a result of the
tax law changes. This research focuses on the timing and the extent
to which the complex tax law information was impounded into the
prices of these specialized securities. The results indicate that
security prices did react to the tax law changes as hypothesized,
but that the period of the price adjustment process was lengthy.
The results are mixed with respect to whether the market reaction
commenced on a timely basis.
Alternate Indexing Schemes
for Nonbusiness Income Taxation: Distributional and Revenue Effects
Barbara A. Ostrowski
Nineteen eight-five will mark the advent of an indexed
tax system in the United States. This indexation will affect only
bracket (including the zero bracket) and exemption amounts. Tax
policy analysts have suggested indexing other inflation-affected
items such as capital asset transactions. In this research study,
various indexation models are developed and their distributional
and revenue effects are compared for four groups of taxpayers.
The least revenue was derived for the ERTA Model (named for the
corresponding legislation), the simplest of the indexation models.
Obtaining and Preserving Tax-Exempt
Status under Section 501(c)(3): Judicially Developed Factors for
Detecting the Presence of Substantial Nonexempt Activities
Paul J. Steer
In order to obtain and maintain tax-exempt status
under Code Section 501(c)(3), an organization must not engage
in any nonexempt activity in a substantial way. Since no definitive
legislative or administrative guidelines have been delineated
to determine if this constraint has been violated, the courts
have been forced to arbitrate on this matter. The objective of
this research is to extract and evaluate the criteria used by
the courts to gauge the presence of substantial nonexempt activities.
An analytical review of the leading cases in this area was conducted.
A total of nine separate factors were found to have been applied
consistently by the judiciary. These factors may be utilized as
a device to forewarn an exempt entity of the presence of substantial
nonexempt activities. Additionally, the model can serve as a tool
in identifying and evaluating the issues that the courts will
examine if litigation becomes necessary.
Profile of Tax Dissertations
in Accounting: 1967-1984
Gerald D. Brighton and Robert H. Michaelsen
The purpose of this paper is to provide classification
information on tax dissertations in accounting. In order to accomplish
this purpose, the abstracts of 224 tax dissertations in accounting
that were completed during the 18 years form 1967-1984 were analyzed.
These dissertations were classified in terms of subject matter
and data collection methodologies. The subject of 148 (66 percent)
of the dissertations was tax policy, leaving 76 (34 percent) in
other areas. The historical approach was the dominant data collection
methodology used (i.e., data retrieval from library materials,
tax records, data banks, etc.). This approach accounted for 135
(60 percent) of the dissertations. Data creation by experimental
methods accounted for 46 dissertations (21 percent). Of these,
40 were by simulation, all in the last 13 years. The remaining
43 (19 percent) used a field approach, of which 28 were questionnaires.
Most tax accounting dissertations are inter-disciplinary, drawing
on accounting, law, economics, psychology, and political science
for subject matter or methodologies.