THE FINANCIAL REPORTING AND TAX AGGRESSIVENESS IMPLICATIONS OF SCHEDULE UTP ...

129 Pages·2015·2.29 MB·English

by  Steve Davenport

THE FINANCIAL REPORTING AND TAX AGGRESSIVENESS
IMPLICATIONS OF SCHEDULE UTP

by
STEPHAN ARTHUR DAVENPORT
MARY S. STONE, COMMITTEE CHAIR
EDWARD J. SCHNEE
THOMAS J. LOPEZ
AUSTIN L. REITENGA
JOHN MITTENTHAL
ERIC S. WILLIAMS

A DISSERTATION

Submitted in partial fulfillment of the requirements
for the degree of Doctor of Philosophy
in the School of Accountancy
in the Graduate School of
The University of Alabama

TUSCALOOSA, ALABAMA

2015
Copyright Stephan Arthur Davenport 2015
ALL RIGHTS RESERVED
ABSTRACT

In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose
uncertain tax positions (UTPs) on a new schedule (Schedule UTP) to be filed with federal
corporate income tax returns. Schedule UTP requires companies to report line-item detail to the
IRS of the aggregate disclosure requirement of uncertain tax benefits (UTBs) established by FIN
48 (KPMG 2010a). I examine firms’ change in reporting UTBs subsequent to the announcement
of Schedule UTP. Overall, the results indicate firms reduce not only the levels of reported UTB,
but they also significantly reduced the year to year changes in reported UTBs. Consistent with
my predictions, firms which are required to file Schedule UTP earlier have an incrementally
more significant reduction in reported UTBs. Results provide mixed evidence for financially
conservative firms. Contrary to expectations, the decrease in reported UTBs is not incrementally
more significant for firms in the upper quartile of tax aggressiveness. Additionally, I examine
whether the announcement of Schedule UTP impacts other proxies for tax aggressive behavior.
Results indicate that book-tax differences decrease subsequent to Schedule UTP. However,
neither measure of tax aggressiveness based on effective tax rates provides statistically
significant results. This finding suggests the decrease in reported UTBs is merely a change in
reporting behavior and not a change in aggressive tax behavior.

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DEDICATION

This dissertation is dedicated to my family and friends, particularly my patient wife, who
encouraged me throughout this process. Without their support this research would not have been
possible.
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LIST OF ABBREVIATIONS AND SYMBOLS

IRS Internal Revenue Service

FASB Financial Accounting Standards Board

FIN 48 Financial Accounting Standards Board Interpretation No. 48

ICW Internal control weakness

p Probability associated with the occurrence under the null hypothesis of a value as
extreme as or more extreme than the observed value

SOX The Sarbanes-Oxley Act of 2002

t-stat Computed value of t test
UTB Unrecognized Tax Benefit reported in the financial statements
UTP Uncertain Tax Position taken on a tax return

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ACKNOWLEDGMENTS

I gratefully acknowledge the guidance of Mary Stone, my dissertation chair, in the
development of this paper. I sincerely thank her for her encouragement, support, and thought-
provoking questions throughout my tenure as a doctoral student. I would also like to thank each
of my committee members: Ed Schnee, Tom Lopez, Austin Reitinga, Eric Williams, and John
Mittenthal. This paper benefited from the helpful comments and suggestions of Rick Hatfield,
Tracey Riley, and the workshop participants at the American Accounting Association 2014
Annual Meeting, Suffolk University and Baylor University.
I would like to thank Mary Hill, Sarah Garven and Bradley Bennett for their
encouragement and support throughout our time together in the doctoral program. I also thank
Kelsey Brasel, Megan Cosgrove and the other doctoral students at the University of Alabama.
Finally, I would like to acknowledge my family for their incredible willingness to support
and encourage me for nearly a decade as I decided to pursue and complete this degree. Lesley,
my wife, willingly uprooted to Alabama and has patiently listened to many discussions about tax
research that few would endure. Our three girls – Jessica, Joanna, and Elinor – have provided
quiet when necessary, and understanding for the limitations on my time. I also thank my parents,
Roy and Rachel Davenport, for instilling in me a lifelong love for learning at an early age.

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CONTENTS

ABSTRACT ............................................................................................................ ii
DEDICATION ....................................................................................................... iii
LIST OF ABBREVIATIONS AND SYMBOLS .................................................. iv
ACKNOWLEDGMENTS .......................................................................................v
LIST OF TABLES ............................................................................................... viii
LIST OF FIGURES .................................................................................................x
1. INTRODUCTION ...............................................................................................1
2. BACKGROUND .................................................................................................9
3. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT .............…16
3.1 Reduction in Reported UTBs ...........................................................................16
3.2 Financial Reporting Conservatism…………….……………… ............…......20
3.3 Tax Aggressiveness……………………………………… ...........…………..21
3.4 Changes in Financial Reporting vs. Changes in Tax Aggressiveness .............22
4. SAMPLE SELECTION AND RESEARCH DESIGN ......................................25
4.1 Sample Selection…………………………… ............………………………..25
4.2 Research Design Overview………………… ............………………………..25
4.3 Impact on UTB Levels……………………… ............……………………….26
4.4 Impact on UTB Changes…………………… ............………………………..29
4.5 Impact on Tax Aggressiveness……………… ...........……………………….30
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4.5.1 Book-Tax Differences…………………… ............………………………...30
4.5.2 Effective Tax Rates……………………… ............………………………...31
5. EMPIRICAL RESULTS - ANNUAL ...............................................................33
5.1 Primary Test Results………………………… ...........……………………….33
5.1.1 Descriptive Statistics…………………… ............………………………….33
5.1.2 Impact on UTB Levels…………………… ............………………………..35
5.1.3 Impact on UTB Changes………………… ............………………………...44
5.1.4 Impact on Tax Aggressiveness…………… ..........………………………...54
5.2 Supplemental Tests………………………… ...........………………………...58
5.2.1 Components of Total UTBs………… ...........……………………………...58
5.2.2 Time-Series Analysis………………… ..........……………………………..61
5.2.3 Structural Break Analysis……………… ..........…………………………...70
6. EMPIRICAL RESULTS – QUARTERLY… ............………………………...77
6.1 Primary Test Results……………………… ...........………………………….77
6.1.1 Descriptive Statistics……………………… ............……………………….77
6.1.2 Impact on UTB Levels……………………… ............……………………..80
6.2 Supplemental Tests………………………… ...........………………………...94
6.2.1 Structural Break Analysis……………… ...........…………………………..94
6.2.2 Logistic Regression……………………… ...........………………………....96
7. SUMMARY AND CONCLUSIONS……… ...........………………………...100
REFERENCES ....................................................................................................105
APPENDICES .....................................................................................................111
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LIST OF TABLES

1 Descriptive Statistics for Annual Panel Data Sample ..............................................................34
2 OLS Test for Decrease in UTB Levels - Annual .....................................................................36
3 Panel Data with Fixed Effects Test for Decrease in UTB Levels - Annual ............................37
4 OLS Test for Incremental Decrease in UTB Levels Based on Implementation Date, Financial
Conservatism, and Tax Aggressiveness - Annual....................................................................38

5 Panel Data with Fixed Effects Test for Incremental Decrease in UTB Levels Based on
Implementation Date, Financial Conservatism, and Tax Aggressiveness - Annual ................42

6 OLS Test for Incremental Decrease in UTB Changes Based on Implementation Date,
Financial Conservatism, and Tax Aggressiveness - 2010 .......................................................45

7 Panel Data with Fixed Effects Test for Incremental Decrease in UTB Changes Based on
Implementation Date, Financial Conservatism, and Tax Aggressiveness - 2010 ....................47

8 OLS Test for Incremental Decrease in UTB Changes Based on Implementation Date,
Financial Conservatism, and Tax Aggressiveness - Annual ....................................................50

9 Panel Data with Fixed Effects Test for Incremental Decrease in UTB Changes Based on
Implementation Date, Financial Conservatism, and Tax Aggressiveness - Annual ................52

10 OLS Test for Tax Aggressiveness Decrease ............................................................................55
11 Panel Data with Fixed Effects Test for Tax Aggressiveness Decrease ...................................57
12 OLS Test for Decrease in UTB Components ..........................................................................60
13 OLS Time Series by Size .........................................................................................................63
14 OLS Test for Incremental Decrease in UTB Changes Based on Implementation Date,
Financial Conservatism, and Tax Aggressiveness – Time Control .........................................66

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15 Panel Data with Fixed Effects Test for Incremental Decrease in UTB Changes Based on
Implementation Date, Financial Conservatism, and Tax Aggressiveness – Time Control .....68

16 OLS Structural Break Analysis - Annual.................................................................................72
17 Panel Data with Fixed Effects Structural Break Analysis - Annual ........................................75
18 Descriptive Statistics for Quarterly Panel Data Sample ..........................................................79
19 OLS Test for Decrease in UTB Levels - Quarterly .................................................................82
20 Panel Data with Fixed Effects Test for Decrease in UTB Levels - Quarterly .........................83
21 OLS Test for Incremental Decrease in UTB Levels Based on Implementation Date, Financial
Conservatism, and Tax Aggressiveness – Quarterly, No Foreign Firms .................................85

22 OLS Test for Incremental Decrease in UTB Levels Based on Implementation Date, Financial
Conservatism, and Tax Aggressiveness – Quarterly, Firms Reporting UTB in 10-Q .............88

23 Panel Data with Fixed Effects Test for Incremental Decrease in UTB Levels Based on
Implementation Date, Financial Conservatism, and Tax Aggressiveness – Quarterly, No
Foreign Firms ...........................................................................................................................90

24 Panel Data with Fixed Effects Test for Incremental Decrease in UTB Levels Based on
Implementation Date, Financial Conservatism, and Tax Aggressiveness – Quarterly, Firms
Reporting UTB in 10-Q ...........................................................................................................92

25 Quandt Statistic - Quarterly .....................................................................................................95
26 Quarterly UTB Reporting ........................................................................................................96
27 Logistic Regression – Quarterly, Full Sample .........................................................................98
28 Logistic Regression – Quarterly, 2009-2010 ...........................................................................99

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