In 2009, Sarah inherited 3 parcels of land, which were appraised at $15,750. This value was lower than what she had estimated. On challenging the valuation, she was informed that zoning on the land would only allow one residence for every 2 acres. Therefore, the resale value of the land is significantly diminished. In 2010, she appealed the decision to the Texas County Board of Supervisors challenging the County’s zoning law. However, the authorities took two years to adopt the new zoning law. By the end of the entire legal process, she had incurred $11,000 as attorney’s fees and other legal costs.
Issues
There are two main issues emanating from the case study as illustrated by being following questions.
Is the attorney fee incurred in the process of challenging the appraisal of the land tax deductible?
What is the appropriate tax treatment on the $11,000 incurred as attorney fees?
The legal costs incurred in the process of acquiring or improving a capital asset such as land are treated as capital expenditures under Section 24 (a) (2).
Conclusion
The cost incurred in the process of requesting a change on land zoning or rezoning is not tax-deductible. Capital expenses refer to the cost incurred in the process of acquiring or improving capital assets. The land is categorized as a capital asset. Moreover, land rezoning costs are not amortizable as they are undeterminable and indefinite with regard to the period within which they may be subject to tax consequences. The decision to categorise the legal fees incurred in the process of acquiring or improving land arises from the fact that the owner will recover the capital expenditure if the asset is sold in the future. However, the taxpayer may be rewarded a loss deduction if the land rezoning efforts do not succeed.
Authorities and Reasoning
Sec. 263 (a) and Sec. 1.263 (a) of the Income Tax Regulation postulates that there should be no deductions on any cost that is paid in the process of acquiring a new building or any other activities aimed at improving the value of an estate or property. Moreover, Section 1.263 (a)-2 (a) categorises a number of costs such as cost of property acquisition, cost of machinery and other equipments, building cost and furniture, and fixtures as capital expenditure. Section §1.263 A-2 (a) (3) (i) postulates that capital expenditure should be capitalized irrespective of whether the expense was incurred prior to, during or after acquisition of the property.
Relevant court case
One of the most notable cases relevant to the aforementioned issue relates to Von-Lusk v. Commissioner, US Tax Court. In this case, Von-Lusk filed a complaint for tax returns for the period ranging between 1988 and 1990. However, the judge argued that Von-Lusk intended to improve the property by constructing a new residential building. In accordance with §1.263 A-1 (f), the taxpayer was required to pay the impact fee. The decision arose from the fact that Von-Lusk intended to improve its property. Moreover, the impact fees were to be capitalized as indirect costs as stipulated under §1.263 A. Therefore, in line with the tax requirement under Section 263A AND §§ 263(a), the property owner was not refunded the tax returns that were being claimed.
There are some recommendations, which could have played a crucial role in the earlier discovery of the case; they are as discussed below. First, the fact that Adelphia remained a family-run business, even though it was a publicly-traded company, was enough to raise some eyebrows (Jennings, 2012). The conduct of John Rigas was also questionable; he seldom turned a person down. He gave corporate jets to fly patients to hospitals for treatments and even sent checks to certain individuals he felt required help. This could have helped in discovering malpractices (Adelphia Communications, 2013).
The payment of taxes for both Rigas and Adelphia with one Adelphia check and the outrageous spending of the company could also be used as a recommendation for the discovery of the case. For example, the extravagant and large homes, the lavish classical corporate head office building, and the family apartments were an indication of fraud. The centrality in making decisions in the firm gave the Rigas family a chance to make vital decisions. Hence, this gave them unnecessary control over the whole firm and at the same time protected them in case of a bankruptcy of any subsidiary (Adelphia Communications, 2013).
The consequent drop in Adelphia’s stock and the inquisitiveness of a bond analyst, Merrill Lynch concerning the Rigases vast stock were just an addition to many circumstances, which indicated that something had gone wrong with the Adelphia and that the collapse was imminent.
Another recommendation for earlier discovery could have been based on the evaluation of the accounting system. According to investigations, the accounting system of Adelphia was found to have some defects. The accounting system overstated the subscribers, earnings, as well as indicated deficiency of internal controls. As a result, small firms owned by Rigas could show huge profits, yet the expenditure had to be shared with shareholders at Adelphia.
Moreover, the accounting system enabled the Rigases to manipulate financial records and add fictitious transactions such as boosting the total number of cable subscribers (Knapp, 2011).
The other recommendation for earlier discovery includes evaluation of additional borrowing made by the Rigases apart from what was known publicly before. This borrowing had to be spent on the purchase of Adelphia stock and buying expensive apartments in New York, which became the residence for the Rigas family. It was also used to buy holiday homes, pay for a trip to Africa for the Rigas family members, pay a $7000 memberships at a club, purchase three jets, and finance the family’s stake at Buffalo, which was considerably large. There was no longer a line separating family funds and corporate funds (Jennings, 2012).
A self-dealing pattern carried out by firms controlled by Adelphia also came to be known. For example, Adelphia bought its costly office furniture through Eleni Interiors that was owned by the Rigas and managed by the wife of John Rigas. The continued self-dealing did not end with the office furniture; Adelphia contracted for snow plowing and landscaping and leased cars through Rigas-controlled companies (Kranacher & Wells, 2011).
These findings are just a confirmation of what was happening in reality at Adelphia Communications. Investors should have been wary of the extravagances of the Rigases. The tax authority ought to have been suspicious when Adelphia paid tax on Rigas property. The investors should have questioned the number of the Rigases in the Board. These practices began with the birth of the company and had someone pointed out that something was off, the problems would have been identified and resolved in time (Mintz & Morris, 2011).
This proposal introduces the plan of a research project devoted to the association between a company’s adherence to corporate sustainability reporting (CSR) and tax avoidance trends. CSR plays a role of increasing importance in today’s business environment, as it aligns with the values of corporate social responsibility, as well. The latter is a topical concept that derives from the growing realization of the corporate entity’s responsibility in terms of “giving back” to the community that has helped them generate profits and thrive. CSR implies the introduction of a comprehensive mechanism that prompts firms to report their progress in achieving positive social and environmental effects within their framework of operation.
The necessity of such progress is generally acknowledged by the international community as an integral component of the 21st century business that is expected to be honest and transparent. In other words, the pursuit of financial return should not be executed at the expense of dire social and environmental consequences. Tax avoidance is a vivid example of socially harmful behavior as it directly reduces the company’s contribution to society below due levels. Therefore, it appears relevant to investigate the exact relationship between CSR and tax avoidance in the contemporary business landscape. This topic appears interesting, as it addresses a certain inconsistency within the contemporary domain of business. More specifically, as much as corporate social responsibility and sustainability are discussed, financially dishonest behavior persists. Thus, it is possible that modern companies misinterpret the notion of corporate sustainability as an environmentally-centered one, either deliberately or by ignorance. However, the financial component of corporate sustainability is currently under-reviewed within the body of business and academic literature, making it viable to research the subject matter for this perspective.
Aims and Objectives of the Research
The proposed research aims to identify and describe the relationship between corporate sustainability reporting and tax avoidance tendencies in modern business. For this purpose, the research process implies the completion of a sequence of specific objectives:
Define the concept of corporate social responsibility.
Define and research the concept of corporate sustainability reporting within the framework of corporate social responsibility.
Research the current state of knowledge and best practices with regards to corporate sustainability reporting.
Investigate modern trends in terms of tax avoidance by prominent companies.
Analyze the relationship between a company’s corporate sustainability reporting and tax avoidance tendencies.
Research Questions
In light of the working topic and specified research objectives, it is possible to formulate the central research question as follows: “What is the association between the various worldviews on corporate sustainability reporting and tax avoidance?”. In this regard, the central question can be complemented by additional ones:
What does the concept of corporate social responsibility imply for modern companies?
Why is corporate social responsibility important?
How do business managers perceive corporate social responsibility?
How does corporate sustainability reporting fit into corporate social responsibility?
What measures are implied by the principles of corporate sustainability reporting?
What are the current trends and statistics in terms of corporate tax avoidance?
Simultaneously, the research process is to be driven by its central hypotheses. They represent a synthesis of the key data obtained from an examination of relevant literature. Per this knowledge, corporate sustainability reporting is in line with the tenets of corporate social responsibility, which relies on three pillars: social, environmental, and economic policies (Sharma, 2019). Tax avoidance is directly related to the third aspect, as it implies a voluntary decision to contribute less to community in order to maximize the company’s own profits. This behavior does not align with the fundamental ideas of corporate social responsibility. If anything, socially responsible companies will not seek any solutions that would help them avoid this responsibility. Objectively, sustainability reporting is the most reliable means of acquiring the information regarding a company’s compliance with these principles. Furthermore, Landrum and Ohsowski (2018) identify that reported sustainability may vary from weak to strong levels. In this case, strong corporate sustainability implies that the company acknowledges the three pillars of sustainability without exception. Thus, the key hypothesis is formulated as follows:
On the other hand, it is possible that research will not yield such findings. In this case, there are two possible outcomes that explain the correlation between strong sustainability reporting and tax avoiding intentions. These outcomes are accounted for as hypotheses Ho and H2 that are formulated as follows:
H1 – Stronger corporate sustainability reporting does not correlate with tax avoidance intentions.
Preliminary Review of the Literature
The specified objectives and aims of the proposed research require a rigorous investigation of the contemporary body of literature with regards to the subject matter. It is assumed that a deductive approach to data collection is the optimal way of obtaining relevant information in this case, starting with more general concepts and proceeding with the specialized investigation of the central topic. As far as CSR is concerned, it is necessary to consider it as an element of a greater concept that is corporate social responsibility. This notion is actively discussed within the contemporary informational space as one of the key aspects of the 21st-century business (Zaman et al., 2020). More specifically, it suggests that the companies that benefit from a certain community are expected to return the favor by making substantial contributions to social, economic, and environmental initiatives of said communities (Sharma, 2019). While the term itself is not a recent invention, it has acquired a special degree of importance within the past years (Latapi Agudelo et al., 2019). By its original design, corporate social responsibility stems from a perception, per which certain organizations exploit the resources of society and the planet for the sake of their own profits.
Such a situation is deemed hazardous, since it risks causing massive consequences in economic, social, and environmental terms. In other words, socially irresponsible corporate practices risk depleting the resources of humanity, rendering it less resilient in the face of emerging challenges (Wickert & Risi, 2019). In light of these hazards, modern firms lay additional emphasis on the principles of socially responsible business, integrating such practices into their strategic development plans. This process is embedded into most aspects of a company, including its decision-making patterns, resource distribution, and organizational structure (Yuan et al., 2020). Meaningful efforts in this area generate positive publicity around the business entity, shortly translating into direct financial returns, as noted by Ali et al. (2020). This way, corporate social responsibility becomes a bilaterally beneficial initiative. This is illustrated by the recent COVID-19 pandemic, which exhibited the advantages of a strong bond between corporate entities and their stakeholders (He and Harris, 2020). Throughout this challenging period, corporate social responsibility guided both parties toward joint efforts that helped them overcome the unprecedented impact of the crisis.
Accordingly, there are tangible implications of responsible corporate behavior. Furthermore, these practices are aimed at ensuring the sustainable development of society, which aligns with the sustainable development goals approved by most nations (Tsalis et al., 2020). While these goals may pose immediate challenges to the firms, a greater emphasis on sustainable practices is likely to yield positive long-term results. In this regard, sustainability reporting has become an increasingly pivotal component of the contemporary business activity. Jadoon et al. (2021) state that it has transcended from a limited initiative to a major descriptor of a business entity’s performance that is valued by investors and stakeholders. While its environmental dimension lacks financial materiality, the social component of sustainability in the form of stakeholder perceptions is sufficiently important. In addition, Oncioiu et al. (2020) suggest that corporate sustainability is measurable aspect. Stakeholders and investors can detect its application merely for the sake of reporting the presence of such policies. In an optimal form, corporate sustainability pursuit should be pro-active, effectively transforming the industry rather than reacting to the observed challenges.
However, companies require a strong impetus that would prompt them to engage in a pro-active sustainability pursuit. This role is partially fulfilled by corporate sustainability reporting, which is a mechanism that allows entities to release public reports with regards to their actual sustainable initiatives (Şahin & Çankaya, 2019). Within this framework, corporate green performance becomes one of the key performance indicators that fall under public scrutiny (Abbas, 2020). In turn, continuous and transparent sustainability reporting is found to have a direct positive impact on the economic performance of a firm (Traxler et al., 2020). As explained in a variety of literary works reviewed, these returns are generated through stronger stakeholder connections, resulting from a better public perception of the company’s work. Most firms have been quick to notice the positive potential of sustainability reporting as an element of corporate social responsibility and in terms of its long-term prospects (Al-Shaer & Hussainey, 2022). This way, it has become an integral component of most business activities across different industries.
However, the majority of corporate sustainability-centered discussions associate the subject matter with environmental issues. Yet, as essential as green initiatives are, the concept of sustainability is not limited to the mitigation of the environmental impact. In its generally adopted understanding, sustainability relies on three pillars, of which the environment is only one with the two remaining ones being society and economy (Landrum & Ohsowski, 2017). Excellence in the green component, combined with major flaws in the social and economic aspects, is insufficiently sustainable or responsible from a corporate point of view. Therefore, tax avoidance is a financial behavior that does not align with the principles of sustainable development (Jarboui et al., 2020). While most of sustainability education programs focus on the environmental component of the agenda, Landrum and Ohsowski (2018) associate financial transparency as a descriptor of higher levels of true sustainability. In other words, there is an opposition between strong and weak sustainability observed by Landrum (2017). In this context, it is possible to hypothesize that the absence of tax avoidance is characteristic of strong, higher levels.
Therefore, if the hypothesis is correct, signs of strong corporate sustainability reporting are expected to correlate negatively with tax avoidance tendencies. As implied by Landrum’s (2017) framework, strong sustainability implies a pro-active position taken by company with regards to the matter at hand. In this case, tax avoidance is not present within a company in the first place. Nevertheless, instances of this financial behavior are still observed today, causing serious damage to the community and impeding the effects of corporate social responsibility (Alsaadi, 2020). Even when firms rely on fairly legitimate avenues of tax burden relief, society is still devoid of the due financial contribution to its sustainable development (Wang et al., 2019). Strong sustainability worldview is expected to prevent such occurrences. Furthermore, even when tax avoidance happens, strong sustainability reporting is found to mitigate the negative perception of the public and stakeholders (Rudyanto & Pirzada, 2021). Similar effects are observed by Gulzar et al. (2018) who confirm the hypothesized association through an empirical study. Overall, the complexity of the reviewed relationship requires additional elaboration within the framework of the proposed study.
Proposed Methodology
In light of the objectives of the study and the current state of the body of research, the proposed project will rely on a qualitative model of methodology. It is an optimal choice for the investigation of emerging phenomena that lack a comprehensive theoretical reference, upon which the specified trends can be viewed through the lens of numerical data. The project will be completed as a systematic review of extant literature, through which the required comprehensive framework will be synthesized, consolidating scarce evidence present within the current body of knowledge.
Furthermore, it will incorporate an integrated case study, in which the specific examples of modern companies will be investigated, analyzed, and compared in terms of the two key variables. The first variable is the level of corporate sustainability that will be analyzed across the strong-weak spectrum. The second variable is the presence of tax avoidance within the operational framework of the firms in question. They will be compared to distinguish and describe the relationship between the two parameters. In order to ensure a comprehensive perspective on the subject matter, the scope of the review is expected to comprise 65 pieces of academic literature and 8 original case studies. With this approach, the research problem will be addressed with due objectivity, ensuring the validity and novelty of the project.
Sample
The proposed project is to utilize a sample of 65 relevant pieces of research published within the past 5 years in the English language. All sources included in the final literature review will be academically appropriate, peer-reviewed, and pertinent to the subject matter. Simultaneously, the case study element of the research will rely on the practical examples of 10 multinational companies from the Fortune 500. This selection is justified by the availability of data and the importance of these companies’ contribution to global sustainability.
Independent Variable
Within the framework of the proposed research project, the independent variable will be the worldview embedded in a company’s corporate sustainability reporting. More specifically, it will be identified on the scale from weak to (very) strong proposed by Landrum and Ohsowski (2018). All data will be obtained and analyzed on the basis of publicly available sustainability reports released by the selected Fortune 500 companies.
Dependent Variable
As per the study proposal, it is planned to explore the relationship between the worldview of corporate sustainability reporting and a company’s tax avoidance intentions. Since the first parameter is to serve as the independent variable in this relationship, the depended variable will be formulated as “tax avoidance intentions”, measured per the organization’s actual tax load as compared to the theoretically due one. This data will be retrieved from the companies’ official financial statements and open legal sources.
Al-Shaer, H., & Hussainey, K. (2022). Sustainability reporting beyond the business case and its impact on sustainability performance: UK evidence. Journal of Environmental Management, 311, 114883.
International Financial Reporting Standards (IFRS) can be explained as a combination of standards of accounting created by an independent accounting entity that reports on financials information in domestic public and private entities. The adoption of these set standards has had effects on tax planning strategy in the United States. The move will require the government to analyze tax implications and determine whether making the tax approach conforms to the method allowed by the standards. The current tax regime is a more complex task, which makes accounting finance demanding process hence need for adapting the IFRS tax evaluation approach. Therefore, apart from allowing United States a chance to compete globally, IFRS will increase tax avoidance as well as increase tax burden to the tax payers.
There are many reasons as to why the IFRS will have a huge impact on accounting standards. The impacts on adopting IFRS on corporate taxes, tax policy and tax planning is a critical debate which requires deep knowledge of the standards of accounting (Hu & Shevlin, 2021). The method allows the companies in United States to have great financial statements comparability than non-US companies. According to Braga (2017) IFRS aim is to ensure there is more information to its users. Therefore, IFRS will influence these firms in ensuring they raise their standards. IFRS have resulted to a higher range of financial accounting techniques, which shifts with its conversion.
For instance, in the United States, it is allowed for every state to follow federal approach. Every state has a tax jurisdiction which allow the tax regime to follow the federal approach of IFRS in the US (Silva et al., 2020). Taxpayers who reside in states that do not adopt shifts to federal tax accounting system may be obliged to keep specific legacy accounting methods. These methods systems will grant access to data required to proceed filing tax returns accordingly as per the past tax accounting ways. Adopting IFRS, is thought to influence not only the taxes of the state income but also corporate taxes and other domestic taxes within the US.
The IFRS model will affect the current tax planning strategy, both in short term and long term. Changes to federal taxable income- federal taxable income will shift unless the IFRS method is used to relief of some burden to the taxpayers which in turn will affect the taxable income (Silva et al., 2020). The biggest challenge is that the states might not allow federal state relief measures (Moore, 2019). During the past few years, there has been massive budget deficits and states have decoupled from certain federal governments provisions.
Tax avoidance will be on the rise due to the reported earnings. Thus, an Increase in reported earnings might as well lead to an increase in avoidance of the tax (Herath & Melvin, 2017). The metrics of avoiding tax are because of effective tax rate which takes pre-tax earnings. Thus, the adoption of IFRS as the only standard system by various states, widens the set of businesses that can be set as a factor reference thus enabling companies to select suitable support pricing (Moore, 2019). This will largely influence the tax base of the country and largely have an impact on the economy.
It can also be argued that IFRS will affect the rate of tax avoidance either negatively or positively. The adoption of IFRS can as well affect the rate of entities avoidance of tax due to several factors may it be negatively or positively (Hu & Shevlin, 2021). Subsidiary companies across the US are involved mostly in profit making for tax purposes since the IFRS was adopted. IFRS adoption also has been related with high levels of tax avoidance in the public companies (Moore, 2019). Thus, the reason why there is need to understand all the implications of adopting IFRS.
Re-evaluation model of assets which is as a due to the adoption of IFRS model will increase capital tax. It needs all the assets to be carried at fair market value less the accumulated depreciation with evaluations carried out in regular times to ensure that the carrying amount of a particular asset is consistent with the market price (Herath & Melvin, 2017). For large corporations that will use the re-evaluation model under IFRS, capital tax will be expected to increase (Hassan, 2020). Taxpayers net worth or capital-related tax liabilities is directly impacted by the model re-evaluation which will increase the tax burden.
In conclusion, IFRS has the most sustainable change to the tax system and regime across every state of United States. There will be formidable change for all the companies including government agencies and accounting practitioners to adopt the IFSR approach in tax planning systems. However, the system will generate more engagement and fee opportunities for practitioners and reduce financial frameworks with which companies will comply. IFRS, which aims to create a common financial independence among countries is rapidly growing, and companies are accepting it use when the US accounting profession. Once IFRS adoption is complete, there will be need to keep reviewing accounts in future. Therefore, this will be a great opportunity to reassess ongoing trainings requirements, how competitors are reporting and what additional savings will give out to the economy.
References
Braga, R. N. (2017). Effects of IFRS adoption on tax avoidance. Revista Contabilidade & Finanças, 28(75), 407–424. doi:10.1590/1808-057×201704680
Hassan, E. A. (2020). The Economic Consequence of International Financial Reporting Standards Adoption: Evidence from Corporate Tax Avoidance in Gulf States. Accounting & Taxation, 12(1), 45-65.
Herath, S. K., & Melvin, A. (2017). The impact of IFRS adoption on corporate income taxation: A review of literature. International Journal of Business Management and Commerce, 2(9).
Hu, J., Li, S., & Shevlin, T. (2021). How does the market for corporate control impact tax avoidance?
Moore, A. B. (2019). Disclosing tax consequences of a LIFO repeal: considerations toward an ethical decision-making model based on potential convergence of IFRS & US GAAP: Evidence from international M&A laws. The Journal of Theoretical Accounting Research, 14(2), 29-45.
Silva, A. P., Fontes, A., Ribeiro, H., & Alves, S. R. (2020). The Role of Enforcement Mechanisms on IFRS Implementation: Perceptions from Tax Officials. Economic and Social Development: Book of Proceedings, 304-309.