Massachusetts initiative to require disclosure of corporate tax returns.

On June 26, 1992, Tax Executives Institute filed the following comments with the Massachusetts Taxpayer Foundation on a pending Massachusetts voter initiative that would require the Massachusetts Secretary of State to disclose certain information set forth on corporate tax returns filed with the Massachusetts Department of Revenue. The submission was prompted by a request for the Institute's comments on the policy concerns raised by the disclosure initiative, on which the voters of Massachusetts will vote in November. The submission was prepared under the aegis of the Institute's State and Local Tax Committee, whose chair is Harry F. McKeon., Jr. of the Biltrite Corporation. Also participating in the development of the submission was Robert J. McDonough, Jr. of Prime Computer, Inc., the 1992-1993 president of TEI's New England Chapter.

I am writing in response to your request for Tax Executives Institute's views on the pending Massachusetts initiative entitled "An Act to Require Public Reporting of Corporate Tax Information and Analysis of Certain Tax Expenditures" (which will hereafter be referred to as "the corporate disclosure initiative").

Background

Tax Executives Institute (TEI), which was founded in New York in 1944, is the principal association of corporate tax executives in the United States and Canada. Of the Institute's nearly 4,800 members (who represent more than 2,000 companies in North America), almost 175 belong to the Institute's New England Chapter, which is headquartered in Boston. In addition, many of our non-Massachusetts members work for corporations that, while not headquartered in the Commonwealth, have substantial operations or sales in Massachusetts and therefore have an obligation to file tax returns. The Institute's membership represents a broad cross-section of the business community in Massachusetts and, in fact, in all North America. Because of the diversity of the Institute's membership, TEI dedicates itself to educational endeavors, to promoting the uniform and equitable enforcement of the tax laws, and to minimizing the costs of tax administration and compliance to the common benefit of government and taxpayers. It is from this background and with these goals in mind that the Institute strongly opposes the corporate disclosure initiative.(1)

Description of the Initiative

The corporate disclosure initiative would apply to publicly traded corporations required to file annual reports with the Securities and Exchange Commission. It would require the Secretary of State annually to publish information such as the following:

* the name of the corporation

and address of its principal

office.

* the corporation's net and

gross income and assets, including

(where applicable)

gross profits, Massachusetts

tangible property, taxable

net worth, gross receipts or

sales, net income, total net

taxable income, income subject

to apportionment, income

taxable in Massachusetts;

and for corporations

that are banks and insurance

companies, numerous

other items.

* each deduction, exemption,

credit, offset, adjustment or

credit carryover that reduces

income subject to taxation

(including to a negative level)

or otherwise affects the

corporation's tax liability.

the percentage used, if any,

to establish what portion f

the corporation's total taxable

income is apportioned 

to Massachusetts.-- the total

Massachusetts excise or

tax due, the total Massachusetts

excise or tax paid, and

any excise tax credit or credits

subject to carryover to

future years.

* the corporation's net income

according to its books reported

on its federal tax return.

Discussion

Tax Executives Institute believes the corporate disclosure initiative would serve no legitimate tax policy and, indeed, has the ominous potential to discourage compliance. As you know, sensitive tax information of the type that would be disclosed pursuant to the initiative has traditionally been treated as confidential by both the Internal Revenue Service and state tax agencies. For example, under federal law, the disclosure of tax return information may subject a government employee to civil and criminal liabilities. One reason for the limitations on public disclosure is to encourage both individuals and corporations to file complete and accurate tax returns without fear of the tax return information being misused or abused for non-tax purposes. The confidentiality of tax return information is viewed as essential to maintaining the public's confidence in the integrity and fairness of the tax system. Thus, in federal legislation on this subject Congress concluded that 'the information that the American citizen is compelled by our tax laws to disclose to the Internal Revenue Service is entitled to essentially the same degree of privacy as those private papers maintained in his home."(2) Without question, the policy concerns that impelled the Congress to enact statutory safeguards to the disclosure of tax information apply with equal force in the state arena.

The need to safeguard taxpayer confidentiality cannot be overemphasized, especially since the rationale underlying the disclosure initiative could easily be extended to individual taxpayers.(3) All taxpayers have an understandable and legitimate interest in not having the details of their financial affairs revealed for all the world to see. Hence, just as individual taxpayers do not wish to see the nature and extent of their expenditures for medical care, for housing, or charitable purposes disclosed -- which are all relevant to the determination of their tax liability -- corporate taxpayers have a legitimate interest in preserving the confidentiality of their myriad expenditures and investments. Indeed, since the information set forth on a corporation's tax return is clearly of a proprietary nature, the forced disclosure of the information raises serious competitive concerns as well as privacy issues.

Equally important, TEI can discern no benefit that would accrue to the Department of Revenue from the forced disclosure of tax return information. It would not advance the Department's ability to identify noncompliance or to conduct tax audits. Indeed, the opposite result may well occur if enactment of the corporate disclosure initiative dissuades the federal government and other States from sharing information with the Commonwealth. Thus, although Massachusetts may have the legal right to disclose information set forth on the Massachusetts tax return, such disclosure would clearly run counter to restrictions in the Internal Revenue Code and in the laws of other States. For example, the Internal Revenue Code provides that no disclosure may be made to any State " state official unless the State adopts a law protecting the confidentiality of that information,(4) and most States have similar limitations on the disclosure of information. TEI believes enactment of the initiative could prompt the IRS and States to limit their disclosures to the Department of Revenue under exchange-of-information agreements and consequently could lead to the Commonwealth's securing less, not more, information than is currently the case.

Representatives of the Institute have had occasion to discuss disclosure legislation such as the corporate disclosure initiatives with numerous state tax administrators. For example, the issue has been discussed at meetings between the Institute and the Federation of Tax Administrators (which is an organization of tax officials from all the States, the District of Columbia, and other jurisdictions).

Based on these discussions, TEI is convinced that state officials view the confidentiality of tax return information as a key to encouraging voluntary compliance and, consequently, share TEI's tax policy and administration concerns about forced disclosure of return information. Indeed, we understand that tax administrators in other States have already alerted the Department of Revenue that exchanges of information may be adversely affected by enactment of the initiative.

Finally, TEI is unaware of any legitimate non-tax policy that would be advanced in terms of protecting the investing public or otherwise. Indeed, given the complexity of state allocation and apportionment formulae and corporate tax codes -- in combination with the diverse ways in which businesses can be organized and operated -- the publication of raw tax return information could well lead to public confusion about the nature and extent of a company's business activities or corporate tax burden. More fundamentally, the release of the data may lead to interference with the legitimate functioning of the Department of Revenue. In addition, the enactment of the initiative could impair the business climate in Massachusetts by, among other things, requiring the disclosure of sensitive information to competitors of Massachusetts-based companies. Out-of-state companies, moreover, may be able to limit the broad-scale disclosure of their tax return information by establishing separate subsidiaries to conduct business within the Commonwealth.

Conclusion

We hope that the foregoing discussion of TEI's concerns about the Massachusetts corporation disclosure initiative is responsive to your request.(5) If you should have any questions, please do not hesitate to call Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs, at 202) 638-5601. (1) We have not reviewed the provisions of the initiative relating to the analysis of tax expenditures. (2) Staff of the Joint Committee on Taxation, 94th Cong., 2d Sess., General Explanation of the Tax Reform Act of 1976 at 328 Committee Print 1976). (3) In this regard, TEI is aware that some commentators have challenged the initiative's constitutionality on equal protection grounds since it would not force the disclosure of information relating to individual taxpayers. We agree that this constitutional question is not trivial. (4) Section 6103(p)(4) of the Internal Revenue Code. (5) In addition to our policy objections to the corporate disclosure initiatives, we have identified several technical flaws in the initiative. If you should wish us to elaborate on these issues, please do not hesitate to all us.