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July 8, 2002
Closing the Credibility Gap by Disclosing Corporate Returns
Sheryl Stratton

Full Text Published by Tax AnalystsTM


=============== SUMMARY ===============

In a letter to Treasury Secretary Paul O'Neill and SEC Chair Harvey Pitt, Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, asked them to consider whether disclosing key tax information would help the federal government police corporate practices.

Citing the recent corporate accounting scandals, Grassley has asked the two agencies to respond to the idea within 14 days. He is interested in their analysis of whether the benefits of greater openness would exceed concerns of invading return privacy.

It is not clear whether Grassley's letter was prompted by an editorial that appeared in last week's Wall Street Journal. In the Political Capital column, Alan Murray called for requiring publicly traded companies to make their tax returns public. (See Alan Murray "Companies Should Close Credibility Gap in Books," The Wall Street Journal, July 2, 2002.)

In his column Murray describes a "huge and growing" credibility gap between book income and taxable income. Accounting reform efforts have to address closing the gap from both ends, he suggested.

"I've gotten more uniformly positive reaction to that column, including feedback from two former commissioners of the IRS, and a lot of ordinary people," Murray told Tax Analysts. The vast difference between the numbers from WorldCom's financial statements and tax returns are a clear signal that something has gone awry, he said. That kind of difference can't be explained by congressional intent, he said.

But there are fundamental, justifiable differences between financial and tax accounting rules, counters Tax Executive Institute's Executive Director Timothy J. McCormally. And although Grassley's letter focuses on increasing the core integrity of financial statements, McCormally wonders if that purpose would be served by the disclosure of corporate tax returns.

Without something to explain what the book-tax differences are, instead of enlightening the public, disclosure of corporate tax returns could sow confusion in the shareholder community, he cautioned.


=============== FULL TEXT ===============

Could the top Republican taxwriter in the Senate really be calling for public disclosure of corporate tax returns?

In a July 8 letter to Treasury Secretary Paul O'Neill and Securities and Exchange Commission Chair Harvey Pitt, Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, has asked them to consider whether the disclosure of key tax information would help the federal government police corporate practices and allow shareholders and the public to better monitor corporate transactions.

Citing the recent corporate accounting scandals, Grassley has asked the two agencies to respond to the idea within 14 days. He is interested in their analysis of whether the benefits of greater openness would exceed concerns of invading return privacy.

Corporate returns were publicly disclosed in 1936 and 1937, and before that briefly when the corporate tax was introduced into the code in 1910. There have been no serious attempts to make tax returns public since 1940, according to Tax Analysts' tax historian Joe Thorndike.

It is not clear whether Grassley's letter was prompted by an editorial that appeared in last week's Wall Street Journal. In the Political Capital column, Alan Murray called for requiring publicly traded companies to make their tax returns public. (See Alan Murray "Companies Should Close Credibility Gap in Books," The Wall Street Journal, July 2, 2002.)

In his column Murray describes a "huge and growing" credibility gap between book income and taxable income. Accounting reform efforts have to address closing the gap from both ends, he suggested.

"I've gotten more uniformly positive reaction to that column, including feedback from two former commissioners of the IRS, and a lot of ordinary people," Murray told Tax Analysts. The vast difference between the numbers from WorldCom's financial statements and tax returns are a clear signal that something has gone awry, he said. That kind of difference can't be explained by congressional intent, he said.

But there are fundamental, justifiable differences between financial and tax accounting rules, counters Tax Executive Institute's Executive Director Timothy J. McCormally. And although Grassley's letter focuses on increasing the core integrity of financial statements, McCormally wonders if that purpose would be served by the disclosure of corporate tax returns.

Without something to explain what the book-tax differences are, instead of enlightening the public, disclosure of corporate tax returns could sow confusion in the shareholder community, he cautioned.

Disclosure of corporate tax returns could undermine the self- assessment tax system as tax information is used -- or misused -- for purposes unrelated to the taxpayer's liability, McCormally said. "We should not let a few extraordinary, spectacular accounting failures drive us to a conclusion in the tax world that can have negative consequences," he said.

There should be a policy discussion first, McCormally said.

Akin Gump's Don Alexander was one of the former IRS Commissioners who responded to Alan Murray's column. While his first inclination was to "hang onto corporate privacy," he recalled the time when the primacy of tax return confidentiality was first put into section 6103 of the code. "I wondered whether the privacy of corporate tax returns was all that significant, particularly because we didn't foresee the problems around today that weren't around then." What is so private in the reams of tax returns filed by a corporation that should be answerable to one million shareholders? he asks.

Alexander now questions whether the right of corporate privacy continues to transcend the public's right to know, particularly when the public has been "remarkably misled by evildoers." If they would do evil to shareholders, is it reasonable to believe they would not want to mislead the IRS? he questions. "While I am an optimist, I'm not an incorrigible optimist."

Senator Grassley's letter invites renewed attention to an SEC effort begun more than 25 years ago to require public reconciliation of corporate tax and financial accounts in the so-called "tax footnote" in Forms 10K filed with the SEC, observed Thomas F. Field, publisher of Tax Notes and H&D.

In general that disclosure effort has worked well, Field said. But there remain some nagging issues, such as the proper handling of deferred taxes, that continue to give rise to confusion among analysts and the public, he said. "I hope the SEC will use Senator Grassley's letter as a basis for updating and improving the tax disclosure effort that it undertook nearly a generation ago."

Treasury's Office of Tax Policy is working on providing a response within the requested 14 days, a Treasury spokesperson said July 8.

Document

The full text of the following document is available from Tax Analysts:

  • Grassley Release, Letter on Public Disclosure of Corporate Tax Returns. Doc 2002-16027 (2 original pages)