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TAX SHELTERS: IS SUNLIGHT A SOLUTION?

January 13, 2005

Professor Maule finds little hope that the government can deal with abusive corporate tax shelters. He discusses three obstacles to the IRS in dealing effectively with shelters, which we'll paraphrase as:

1. Judges are clueless about business.
2. Private lawyers can run rings around government attorneys.
3. The tax law is too complicated.

These problems strike Dr. Maule as intractable, and maybe they are. Still, there might be one more way to bring the distributed might of the private sector to bear on the tax shelter industry: public disclosure.

The tax law strictly prevents the IRS from making taxpayer information public. The restrictions serve a crucial role by allowing taxpayers to be honest with the taxman without undressing financially in front of the world.

DISCLOSE PUBLIC COMPANY RETURNS?

Return confidentiality would seem to be less of a concern for public companies. They already expose their assets to the world with audited financial statements, disclosures to analysts, press releases and the like. Tax returns are about the only aspect of their finances that remains demurely hidden.

The new mandatory e-filing regime that kicks in for corporations next year, combined with the new M-3 disclosure of book-tax differences, will provide information that could be placed on the web in a database similar to the SEC's EDGAR system. Gimlet-eyed competitors could use this information to ferret out tax shelters, helping the IRS by helping themselves.

Maybe this is a bad idea for other reasons. There are probably cases where disclosure would really be counterproductive, or simply ineffective. Any disclosure rules would have to deal with public company partnerships or joint ventures with private companies and non-US companies.

Still, it seems odd that the issue doesn't arise in discussing the tax shelter problem.

UPDATE: Dr. Maule has a response.

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