American Taxation Association

JATA abstracts - Fall 2004

JATA - Fall 2004

Volume 26, No. 2

The Effect of Seller Income Taxes on Acquisition Price: Evidence from Purchases of Taxable and Tax-Exempt Hospitals
Dan S. Dhaliwal, Merle M. Erickson and Shane Heitzman

Tax Decision Making under the New Burden of Proof Rules
Anne M. Magro and Beth Stetson

Do Holding Period Tax Incentives Affect Earnings Release Period Selling Activity of Individual Investors?
David N. Hurtt and Jim A. Seida


The Effect of Seller Income Taxes on Acquisition Price: Evidence from Purchases of Taxable and Tax-Exempt Hospitals

Dan S. Dhaliwal, Merle M. Erickson and Shane Heitzman

Abstract

This paper investigates the impact of the seller's tax liability on the price paid in hospital acquisitions. Lock-in theory predicts that for a given asset, asset holders with larger tax liabilities demand a higher price to compensate for income tax liabilities generated on the sale. We apply this theory to a sample of hospital acquisitions by for-profit firms where the primary difference among target hospitals is the seller's tax status—either taxable or tax-exempt. Consistent with the predicted lock-in effect, the evidence indicates that purchase prices are higher when the seller is taxable than when the seller is tax-exempt. Thus, our findings suggest that seller tax liabilities are positively related to purchase prices.  Top


Tax Decision Making under the New Burden of Proof Rules

Anne M. Magro and Beth Stetson

Abstract

In the late 1990s, controversy over alleged Internal Revenue Service abuses and concern about the extent of the agency's power over taxpayers led to the passage of new rules governing relations between the IRS and taxpayers. An important element of this new set of rules was I.R.C. § 7491, which purported to shift the burden of proof in civil tax cases from the taxpayer to the IRS. Commentators generally agreed that the shift would have little effect on the outcome of cases, but the popular press touted the new provision as an important step to level the playing field between the parties. We conduct an experiment in which we manipulate the applicability of I.R.C. § 7491 and measure role in the tax system (taxpayer versus tax professional). As predicted, we find that taxpayers assess a higher likelihood of success in litigation when the anticipated burden of proof rests with the IRS than when the anticipated burden of proof rests with the taxpayer. Taxpayers who believe that the IRS bears the burden of proof also assess a higher likelihood of success than do tax professionals, regardless of the applicability of I.R.C. § 7491. This increased perceived likelihood of success in litigation translates to an increased willingness on the part of taxpayers to engage in an unsound tax-motivated transaction.  Top


Do Holding Period Tax Incentives Affect Earnings Release Period Selling Activity of Individual Investors?

David N. Hurtt and Jim A. Seida

Abstract

This study examines the effect of tax-rate-based holding period incentives on individual investors' earnings release period selling decisions using selling activity proxies computed from intra-day transaction data. We find evidence that earnings release period selling activity, for a given level of past stock price appreciation (depreciation), is lower (higher) when the magnitude of the tax-rate incentive to hold long term is larger. The results are, however, sensitive to the time period used to compute the past stock price change variable. Although we report results consistent with income tax considerations influencing individual investors' selling decisions, the results cannot be definitively attributed to holding period incentives.  Top

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