[This study examines several potential explanations for managers' choice between comprehensive and partial income tax allocation related to the indefinite deferral of income taxes allowed for Domestic International Sales Corporations (DISCs). Results from a sample of 320 firms with DISCs operational in 1972-74 are consistent with managers acting opportunistically to avoid debt covenant violations, political scrutiny, or to mask poor performance, even after controlling for firms' economic expectations and investment opportunity sets. In addition, a strong association is observed between external auditors' stated positions on the tax allocation issue and their client firms' method choice, a relatively new result in the literature.]

Abstract Examines potential explanations for managers' choice between comprehensive and partial income tax allocation related to the indefinite deferral of income taxes allowed for Domestic International Sales Corporations (DISCs). Association between external auditors' stated positions on the tax allocation issue and their firms method of choice; Institutional background of DISCs.

We investigate how firms use differences in state income tax regimes to lower their state tax burdens. We develop a model that predicts that firms’ state effective tax rates first decrease then increase as a function of the number of states in which they file returns. Using firm-level data, we find evidence consistent with the model's predictions and we estimate that such rates are minimized at 24 states. Consistent with predictions from prior literature, our evidence also suggests that firms use sales factor apportionment to reduce state tax burdens.

Abstract We examine whether firms decrease tax reserves to meet analysts’ quarterly earnings forecasts in the period prior to FIN 48, and whether that behavior changed following FIN 48. We use analysts’ forecasts of pretax and after‐tax income to impute premanaged earnings, or earnings before any tax manipulation. Pre‐ FIN 48, we observe that firms reduce their tax reserves (i.e., increase income) when premanaged earnings are below analysts’ forecasts. Specifically, 78 percent of firm‐quarters that would have missed the analyst forecast if not for the tax reserve decrease, meet that target when the decrease is included. Furthermore, we find a significant positive association between the decrease in tax reserves and the deviation of premanaged earnings from analysts’ forecasts. In contrast, post‐ FIN 48, we find no evidence that firms use changes in tax reserves to manage earnings to meet analysts’ forecasts. Thus, our results suggest that FIN 48 has, at least initially, curtailed firms’ use of tax reserves to manage earnings.

ABSTRACT: We investigate the use, determinants, and earnings effects of special purpose vehicles (SPVs). Based on a proxy of SPV activity that can be applied to a broad cross-section of firms over time, we find a two-and-a-half fold monotonic increase in the percentage of firms using at least one SPV during the eight-year period from 1997 through 2004. Tobit regressions of the determinants of SPV use show that SPV activity increases with financial reporting incentives and economic and tax motivations, but strong corporate governance tends to mitigate their use. In addition, the evidence is consistent with SPVs arranged for financial reporting purposes being associated with earnings management, whereas the same does not appear to be the case for SPVs set up mainly for economic, tax, and other reasons.