American Taxation Association

JATA abstracts - Fall 2000

JATA - Fall 2000

Volume 22, No. 2

The Effects of Imputation Systems on Multinational Investment, Financing, and Income Shifting Strategies
Jennifer Babcock

Tax Clienteles and Debt Maturity
Elaine Harwood and Gil B. Manzon, Jr.

Capital Investment Effects of Dividend Imputation
Ervin L. Black, Joseph Legoria, and Keith F. Sellers

Confirmation Bias in Tax Information Search: A Comparison of Law Students and Accounting Students
C. Bryan Cloyd and Brian C. Spilker

Using Technology to Examine the Entity Choice Decision
Nancy B. Nichols and Stephanie M. Bryant


The Effects of Imputation Systems on Multinational Investment, Financing, and Income Shifting Strategies

Jennifer Babcock

Abstract

The United States is one of a few remaining countries to tax distributed corporate earnings twice -- once at the corporate level, and again at the individual level. In contrast, many other countries have adopted imputation systems that refund domestic corporate taxes through dividend tax credits. Consequently, foreign-source income, which is often relieved from domestic corporate taxation, is generally ineligible for dividend tax credits.

The paper develops a model to derive the investment, financing and cross-jurisdictional income shifting incentives of imputation-based multinationals. The model indicates that imputation systems encourage firms to restrict their equity stakes in new foreign investments, and ultimately, to expand their domestic investments. The results also reveal that imputation systems create incentives for firms to highly lever their foreign operations, use internal debt over equity finance, shift foreign-taxable income into home jurisdictions, and to merge with or acquire purely-domestic or non-resident owned firms. Top


Tax Clienteles and Debt Maturity

Elaine Harwood and Gil B. Manzon, Jr.

Abstract

We examine the proposition that the expected value of future interest tax shields affects firmsí preferences for long-term versus short-term debt. We extend prior work that has focused on incremental debt issuances (Newberry and Novack 1999, Guedes and Opler 1996) by examining the maturity structure reflected in the portfolio of firmsí outstanding debt at year end. Thus, our study tests a wider range of capital structure activities and includes a much larger sample of firms than examined in prior studies. Our results indicate that firms with high marginal tax rates use more long-term debt than firms with low marginal tax rates. These findings are consistent with the existence of tax clienteles for financing with debt of different maturities. Top


Capital Investment Effects of Dividend Imputation

Ervin L. Black, Joseph Legoria, and Keith F. Sellers

Abstract

We examine the effects of dividend imputation on corporate capital investment in New Zealand and Australia. The empirical findings indicate that: (1) dividend imputation stimulated corporate capital investment in both countries, (2) the positive impact of dividend imputation on capital investment overshadowed any negative effects arising from the new capital gains tax imposed in Australia, and (3) the dividend imputation effects on capital investment are most pronounced for high-dividend paying firms. In summary, we demonstrate the positive impact of dividend imputation on corporate capital investment. Our findings support the conclusions of the U.S. Treasury that the "traditional" double tax on corporate distributions increases the cost of equity capital to the corporate sector and creates a bias against investment by the corporate sector. Top


Confirmation Bias in Tax Information Search: A Comparison of Law Students and Accounting Students

C. Bryan Cloyd and Brian C. Spilker

Abstract

Tax professionals frequently perform research to evaluate the strength of client favorable tax positions. Prior research suggests that when performing research, tax professionals tend to focus their attention on precedents with conclusions consistent with their clientís preferred outcome and attend less to precedents with conclusions inconsistent with this outcome. This confirmation bias causes professionals to be overly optimistic about the strength of the authoritative support for client-preferred positions. Despite the potential problems that may arise with confirmation bias, research has yet to consider factors that may mitigate this behavior. Using an experiment that compares the information search behaviors of law students and accounting students, this study provides evidence that the nature of academic training influences the extent to which tax researchers are subject to confirmation bias. Specifically, we find that when conducting research to resolve an ambiguous tax issue, law students are less prone to the bias in certain situations than are Masters of Accounting students. The finding that training may mitigate confirmation bias in tax research has implications for tax professional education and tax practice. Top


Using Technology to Examine the Entity Choice Decision

Nancy B. Nichols and Stephanie M. Bryant

Abstract

The AICPA Model Tax Curriculum (AICPA 1996a) stresses the importance of entity taxation throughout the first two undergraduate tax courses and a Masters of Accounting program. This paper provides instructors with a case that uses a simplified example of the Boston Celtics, a publicly traded partnership, to highlight the tax and non-tax considerations that must be evaluated when making a choice of entity decision. The case also incorporates technological tools including CD-ROM or Internet-based tax research, Excel spreadsheets for preparing tax and cash flow projections, word processing software and an optional PowerPoint presentation. The case is designed to be completed in stages throughout the semester. Top

 

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