Advances in Taxation: Volume 18

Internal Revenue Code section 162(m) limits tax deductibility of executive compensation to $1 million per covered executive, with an exception for performance-based compensation. Both stock options and annual bonuses can qualify as performance-based, but they vary in the difficulty of qualification and the degree of additional compensation risk that qualification imposes on the executive. Most stock-option grants easily qualify with little change in risk, but qualification increases the risk associated with annual bonus compensation relative to what it was prior. The results of this study show that the propensity to issue stock options has increased for affected executives as a percentage of total compensation. Additional analysis suggests that this increase in stock-option compensation is substituting for lower increases in salary for affected executives, but not for annual cash bonuses. In fact, the results suggest that bonus compensation is also increasing as a percentage of total compensation. In summary, the results indicate that firms and their executives are acting in a way consistent with the incentives provided by section 162(m).

This study investigates whether corporations consider shareholder-level taxes when setting corporate distribution policy. I investigate the relation between the tax-rate differential on dividend and capital gains income and its effect on firms’ distribution policies. I find that firms consider shareholder-level taxes and that this association varies with the percentage of the firm owned by individual shareholders. Hence, firms increase share repurchases and decrease the percentage of total corporate payout in the form of a dividend as the tax-rate differential increases. Thus, an increased substitution effect occurs as capital gains become relatively more tax-advantaged compared to dividends. Furthermore, I find a positive association between the percentage of the firm owned by individual investors and the percentage of total corporate payout distributed as a repurchase. These findings are consistent with personal income taxes influencing managerial decisions regarding the payout of excess corporate funds.

We analyze cumulative abnormal returns (CARs) around key events leading up to the passage of JGTRRA to determine whether a reduction in the individual tax rate on dividend income affects stock prices, and if so, whether that effect differs for different groups of firms. In general, we find that dividend yield is positive and significantly related to CARs around both the December and January announcements that legislation might be enacted to reduce or eliminate the dividend tax. Consistent with this observation, when Congress subsequently passed the final Senate vote to reduce but not eliminate dividend taxes, we observe positive and statistically significant returns for high-yield dividend firms, but not for other firms. Additionally, we analyze the role of institutional ownership in the relation between firm yield and price reaction. The incentive to buy dividend-paying stocks should not be influenced by the degree to which a firm's stock is held by institutional investors but rather by the firm's dividend yield. Our results suggest that this distinction is important – institutional ownership appears to be significant for tax changes that induce seller-initiated market reactions, but not for changes that increase buyer-initiated reactions.

The use of corporate aircraft has increased as businesses place more value on ease of mobility. The bonus depreciation incentives of 2002 and 2003 provided growth opportunities for the general aviation market by allowing accelerated depreciation deductions for the purchase of new corporate aircraft. These incentives allowed more than twice the traditional MACRS allowance for depreciation for the first year of operation of an asset, but the present value of the tax savings after the full depreciable life of the corporate aircraft only generated a 3.25 percent reduction in the after-tax-cost. This study documents that the bonus depreciation incentives did not generate significant growth in the general aviation aircraft market via increased production of aircraft. These incentives may have simply slowed the recession that might have taken place in this industry otherwise. However, the incentives in this study did play a significant role in determining which type of aircraft to purchase, piston or turbine.

The impact of paid tax return preparers on the horizontal equity (HE) of the federal tax system has significance for regulatory and tax policy reasons. Using multiple analytical techniques to consider data from the Statistics of Income Division's 2000 Individual Model File (IMF), this study shows that the HE measure is generally greater (implying less HE) for the paid-preparer returns than for the self-prepared returns, even after controlling for complexity and other variables that may differ systematically by tax preparation mode.

Accounting programs and tax course offerings have been evolving in recent years, and one concern is the coverage of international tax topics. Although international tax is of prime importance to multinational corporations and Congress, little research has addressed the extent to which accounting programs cover international tax topics and whether demand for such coverage exists. This chapter presents the results of surveys about how students desiring a career in international tax services (ITS) can obtain international tax knowledge and what topical areas are most important. Many graduate accounting and taxation programs offer stand-alone international tax courses. Recruiters and professors characterize foreign tax credits, transfer pricing and treaties as the most important areas to emphasize in these courses. Though not essential to a career in ITS, taking an international tax course while in school exposes the student to this career opportunity, and a significant percentage of new hires come from programs offering such a course. Our results provide accounting educators with information to evaluate their coverage of international tax topics, and to make changes if needed.