This Essay examines the problem of tax noncompliance through the
prism of the options backdating scandal. The noncompliance of backdating
was obvious, at least to tax lawyers. Backdating wasn't a
sophisticated tax scheme. Rather, the noncompliance was collateral
damage from weak internal controls and, in some cases, the rent-seeking
of executives.
Noncompliance in the face of clear rules is an overlooked problem
in the corporate tax shelter literature, which tends to focus on
disclosure, deterrence, or statutory interpretation. We should also
study what creates the demand for tax shelters. The evidence from
backdating suggests that a fast-and-loose attitude can develop when
innovative companies outgrow their internal controls. When viewed in
institutional context, this subset of corporate tax shelters, although
adorned with more formal attire than backdating, may also be best
understood as a compliance issue rather than a problem of textualism or
inadequate penalties.
The implication for law reform is that process matters. Culture
matters. We may have more success in closing the tax gap if we support
procedural changes in the way companies approach tax compliance rather
than altering the substantive rules in ways that may have unintended
consequences for nonfraudulent transactions.
I. INTRODUCTION
The academic literature on corporate tax noncompliance focuses
mainly on sophisticated tax shelters. Reform proposals either aim to
make shelters more difficult (or costly) to produce by substantively
limiting opportunities for gamesmanship, or they aim to alter the
cost-benefit calculation that taxpayers make when they enter into
shelters by increasing penalties or increasing the risk of detection.
In a recent Columbia Law Review Essay, for example, Professors
Chirelstein and Zelenak aim to limit gamesmanship by following the
lodestar of the at-risk and passive loss limitations. (1) They unveil
one version of the elusive silver bullet that, by disallowing
noneconomic losses, would take out corporate tax shelters once and for
all. (2) Practitioners have noted, however, that their proposal may have
unintended consequences on nonfraudulent transactions.
The Joint Committee on Taxation, taking an incremental approach,
has recommended that Congress codify the economic substance doctrine.
(3) Codifying the economic substance doctrine would make some tax
shelters less likely to find sympathy with textualist judges, and it
would have the added benefit of making shelters a bit more costly to
design and execute. Other proposals jiggle the design of penalties. (4)
Still others focus on interpretive theory. (5)
Many of these ideas have a great deal of merit and deserve serious
consideration. What surprises me is that, for the most part, the
literature stands about where it was in the pre-Enron era. My modest
contribution to this Symposium is the following claim: In pursuing the
goal of lasting, effective tax reform, tax scholars may glean some
insight from the corporate governance scandals of the last decade and
the strengths and weaknesses of the regulation that followed. The lesson
I focus on here is that process-oriented solutions may be quite
effective (too effective?) in establishing a culture of compliance. This
insight will not blow the socks off of many corporate governance
scholars, but it may nudge the tax literature in a new direction. (6)
This Essay examines the problem of tax noncompliance through the
prism of the latest corporate scandal: options backdating. Options
backdating violated the accounting rules and, in many cases, the
securities laws. It also violated the tax law. (7) Unlike some of the
murky issues related to securities disclosure, the tax analysis is
relatively straightforward. Backdating was not a sophisticated tax
scheme. Rather, the noncompliance was collateral damage from weak
internal controls and, in some cases, the rent seeking of executives.
Noncompliance in the face of clear rules is an overlooked problem
in the corporate tax shelter literature. A noncompliance norm--perhaps
better characterized