October 25, 2006
Options Backdating, Tax Shelters, and Corporate Culture
Posted by Victor Fleischer

This Friday, at the University of Minnesota's conference on the "Future of Tax Shelters," I'll be presenting Options Backdating, Tax Shelters, and Corporate Culture.  Here's the abstract:

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, a 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 non-fraudulent transactions.

You can download the paper here.  Comments, suggestions, etc. would be most welcomed.  I argue, among other things, that outside counsel wasn't involved in backdating; if anyone knows of contradictory facts (other than Sonsini's indirect involvement at Novell and elsewhere), let me know.  Please note that I'm already a tad over a 25 page limit, so advice about where to cut would be welcomed as well.

The conference schedule is here.  Pamela Olson (Skadden, formerly at Treasury) is providing the keynote, with papers and comments from Joe Bankman, Kirk Stark, Dan Burk & Brett McDonnell, Philip Curry, David Weisbach, Terry Chorvat, Claire Hill, Michael Knoll, Bob Peroni, Kristin Hickman, Lawrence Solan, Bruce Shnider, Leo Katz, and Dan Shaviro.   Claire's commentary on my Essay is entitled "Tax Lawyers are People Too."  (Contra, Paul Caron, Tax Myopia, Or, Mamas Don't Let Your Babies Grow Up to be Tax Lawyers.)   

Speaking of norms and tax, you may also want to read Alex Raskolnikov's new paper, The Cost of Norms: Tax Effects of Tacit Understandings.  Alex is busy putting on a conference of his own this weekend; he's already published a fascinating paper advancing the ball in our understanding of the mechanics of tax compliance, which you can download here

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