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Reuven S. Avi-Yonah, Just Say No: Corporate Taxation and Corporate Social Responsibility __ NYU J. Law & Bus. __ (forthcoming), available at SSRN.

The recent wave of corporate inversion transactions, in which domestic companies essentially move their headquarters abroad to lower their U.S. tax bill, is just the latest in a decades-long trend of aggressive tax avoidance behavior by corporations. From the government’s perspective, inversions and other tax avoidance strategies erode the U.S. tax base and impose a costly enforcement challenge on Treasury and the IRS. But from the perspective of corporate managers, aggressive tax planning may simply be part of the corporation’s duty to maximize shareholder value. Reuven Avi-Yonah questions this latter proposition in Just Say No: Corporate Taxation and Corporation Social Responsibility. He offers a compelling argument that corporate managerial duties are not hopelessly at odds with the goal of promoting better corporate tax compliance.

Avi-Yonah frames the issue of corporate tax avoidance as one of corporate social responsibility (CSR). If it is legitimate for corporations to engage in activities that do not directly benefit shareholders—for example, involvement in philanthropic causes—then it should be legitimate for corporations to act as good tax citizens. On the other hand, if CSR is outside of the scope of legitimate corporate functions, then presumably corporations should seek to minimize their tax liability as much as possible.

Avi-Yonah argues that the legitimacy of CSR depends on our legal theory of the corporation. Under a “real entity” view of the corporation, under which a corporation has rights and duties similar to those of an individual, CSR is not required but is praiseworthy and should be encouraged. Under an “artificial entity” theory, which views the corporation as a creature of the state, CSR may fulfill the corporation’s obligations to the state and is required in at least some cases. However, the dominant view of the corporation in the United States is the “aggregate” theory, under which the corporation functions as an aggregate of its shareholders. To the extent that CSR involves activities that do not maximize shareholders profits in the long run, it is illegitimate under an aggregate theory.

The question, then, becomes how to square the theory that corporations exist to maximize shareholder profits with the goals of the U.S. tax system. One fascinating aspect of the article is the historical perspective that Avi-Yonah offers with respect to this question. Although, he notes, “the goal of shareholder profit maximization can naturally lead to corporations trying to minimize taxes and thus enhance earnings per share,” Avi-Yonah argues that this was not always a guiding principle among corporate managers. Rather, he asserts, this view has evolved over the past few decades due to several factors. First, the increasing use of equity-based compensation for managers (stock options, for example) has created more focus on earnings per share than in the past. Second, big accounting firms changed the landscape of corporate taxes in the early 1990s when they began marketing and selling tax shelters to corporate clients. Third, lower effective tax rates and increased earnings per share among some corporations has pressured others to adopt aggressive tax strategies in an effort to stay competitive.

Despite the proliferation of the modern view that aggressive tax avoidance is an inherent part of shareholder profit maximization, Avi-Yonah offers several reasons to be skeptical. First, from a theoretical standpoint, he argues that corporations have an affirmative duty to pay taxes, even under an aggregate view of the corporation. If CSR is not a legitimate corporate function, then social problems must instead be addressed by the government. However, if corporations are relieved of the obligation to pay taxes, then the government cannot collect adequate revenue. And without revenue, the government cannot resolve the social issues for which it is responsible. The result, Avi-Yonah argues, would be a theory under which neither the government nor corporations can adequately deal with social problems, which is an unacceptable outcome. Thus, aggregate theory must require corporations to pay taxes to enable the government to carry out the social functions that corporations themselves cannot legitimately perform.

Avi-Yonah moves beyond the theoretical and also offers some practical reasons to question the premise that shareholder profit maximization requires aggressive tax avoidance. For example, he points out that, historically, corporations were able to compete and maintain attractive share prices without resorting to abusive tax strategies. Further, he argues, there is not clear empirical evidence establishing a link between lower effective tax rates and higher share prices.

Accepting that corporations are not obligated to engage in aggressive tax behavior still leaves open the question of how to distinguish between legitimate tax planning and the abusive avoidance strategies that policymakers want to discourage. But while it may be difficult for the IRS and courts to make this distinction, corporate managers are usually well aware of whether a particular transaction is motivated by genuine business considerations or by tax avoidance. Thus, Avi-Yonah argues, “a corporation can be legitimately expected to police its own behavior in this regard, without worrying too much about where the line should be drawn.”

Avi-Yonah’s article doesn’t attempt to address how we might encourage corporate managers to police themselves with respect to aggressive tax planning. But he offers an important and unique perspective on how policymakers might address corporate tax avoidance more generally. Perhaps, as Avi-Yonah suggests, the lines between acceptable and unacceptable tax planning should be drawn by those armed with the relevant information—the corporate managers themselves. What’s still unclear, however, is how to make the leap from saying that paying more corporate tax is legally acceptable to convincing managers that paying more corporate tax is desirable. Avi-Yonah’s article raises the possibility that difficult questions such as this one may be better addressed by corporate law rather than by the tax law.

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Cite as: Kathleen DeLaney Thomas, Do Corporate Managers Have a Duty to Avoid Taxes?, JOTWELL (April 29, 2015) (reviewing Reuven S. Avi-Yonah, Just Say No: Corporate Taxation and Corporate Social Responsibility __ NYU J. Law & Bus. __ (forthcoming), available at SSRN),