JATA - Spring 1985

Volume 6, No. 2

Salience of Tax Evasion Penalties Versus Detection Risk

Betty R. Jackson and Sally M. Jones

Abstract

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.


Incorporating Probability Analysis In Taxpayer Appeal Decisions

Judy L. Porcano and Thomas M. Porcano

Abstract

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 decision-making ability.


The Security Market Reaction to Tax Legislation as Reflected in Bond Price Adjustments

Allen W. Bathke, Jr., Richard L. Rogers, and Jerrold J. Stern

Abstract

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

Abstract

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

Abstract

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

Abstract

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.

Letter from the President

To ATA Members and Visitors,

The American Taxation Association (ATA) is home to a broad group of members with interests in tax research, policy, practice, and education. We are in a time of transition that includes the ongoing pandemic; both AAA’s and ATA’s Diversity, Equity, and Inclusion initiatives; and the CPA Evolution. I thank our members Kirsten Cook, Diana Falsetta, and Annette Nellen for their service in these endeavors. I also thank Tim Rupert for his service as AAA Director focusing on Segments.

Our last mid-year meeting was virtual and could not have happened without our excellent ATA leadership. Thank you to Jeri Seidman, Mollie Adams, Bridget Stromberg, and their respective committees for their flexibility and tenacity in organizing their portions of the conference...

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Anna Catherine Fowler

In Memoriam,
Anna Catherine Fowler received her BS in accounting from the University of Alabama, after which she practiced for several years as a CPA. After moving to Texas with her husband Jim, she earned her MBA and PhD from the University of Texas at Austin.

She joined the faculty of the business school of the University of Texas in 1977 as the first female tenure track professor hired by the accounting department. She remained at UT until she retired in 2004 as the John Arch White Emeritus Professor in Business.

During Anna’s distinguished academic career, her research and teaching interests focused on estate and gift taxation. She was an active member of the AICPA’s Tax Division and the American Taxation Association, for which she served as 1993-94 president.

In 2002, Anna received the American Taxation Association’s highest honor, the Ray M. Sommerfeld Outstanding Tax Educator Award. She also received the Texas Society of CPA’s Outstanding Educator Award.

Anna and Jim made the most of their retirement years, delighting in travel all over the world. They finally settled in a retirement community in Chapel Hill, North Carolina. Even after Jim’s death in 2019, Anna continued to travel with friends, root for her beloved Alabama football team, and live her life to the fullest. She passed away peacefully on October 19, 2021.

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