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Tax Professor Sleuths for Data to Make Compelling Arguments


Stanley Veliotis, Ph.D. (LAW ’89) argues that 10b5-1 plans may be subject to abuses by executives.
Photo by Patrick Verel

April is the month when the taxman cometh. It is also when the government generates mountains of data about how it interacts with Americans and their income.

Public information about tax trends is a basis for research by Stanley Veliotis, Ph.D. (LAW ’89), assistant professor of accounting and taxation in the Gabelli School of Business. His areas of interest include insider trading, earnings management, and the effects of tax law on taxpayer behavior.

The latter is the topic in which Veliotis is especially interested. For example, he co-wrote “Is There a December Effect? Strategic Prepayments of Deductible State Tax Payments” for The Journal of the American Taxation Association in 2010 with Fordham accounting professor John Shon, Ph.D.

The paper explored a tax strategy familiar to many taxpayers. Because the IRS allows taxpayers to deduct charitable donations and state taxes, it behooves taxpayers to make these payments before the end of December, so they can claim the deduction for that year.

Advisers recommend this strategy, but because taxpayers’ records are not publicly available, researchers have little way of knowing to what extent this planning actually is implemented.

Veliotis saw a way forward. “I found monthly tax income on about 35 states’ websites thanks to public disclosure laws that require states to tell taxpayers about their finances,” he said.

“We focused on month-by-month reports on how much came in from quarterly state tax payments. The last quarterly payment is due Jan. 15. But we noticed a big pop in December, which is evidence that people are prepaying—that they are indeed taking tax planning into account.”

In addition, Veliotis has tackled the idea of raising federal taxes during trying budgetary times. In “Proposal: Compulsory Bond Purchase as Compromise to Income Tax Rate Increase,” which he co-wrote with Fordham MBA student Kristen Gray for the DePaul Business & Commercial Law Journal in 2009, he conceded that higher taxes are difficult to implement. The trick, he said, is to make them more palatable.

“Nobody wants to pay taxes, but what if we tell people, ‘OK, you’re going to pay more this April, but you’re not really paying it, because we’re going to give you a bond, and we’ll pay you back later when the budget situation improves?’” he said.

He noted that when President Ronald Reagan dramatically lowered tax rates, taxpayers who paid higher rates earlier did not have the difference rebated to them.

“If a successful executive retired the year Reagan lowered rates and was paying tax at up to 70 percent for his whole career, and all of a sudden he has little income to tax, he doesn’t get the benefit of the lower rate. Our proposal makes taxes smoother over a lifetime, so that people who get hit hard with taxes in high-income years will get it back when budgets improve,” he said. “We’re heavily taxed, but we have to do something to bring in cash flow and this would be a good compromise.”

Veliotis also addresses insider trading. “Rule 10b5-1 Trading Plans and Insiders’ Incentive to Represent,” which was published in the American Business Law Journal in 2010, explains how a corporate executive could abuse a rule designed to clarify when a person could be accused of illegal insider trading, which is defined as acting on information not available to the public.

Approved in 2000 by the Securities and Exchange Commission, Rule 10b5-1 protects people who commit far in advance to sell their stock at a certain time. Without this rule, many insiders were accused of selling at opportune times and thus possibly taking advantage of inside information.

Veliotis noticed that many courts extended this rule beyond its intent.

In securities fraud cases, to hold an executive liable, there must be evidence of fraudulent intent (so- called “scienter”). This frequently has been shown by demonstrating that the executive sold stock at an opportune time related to the alleged fraud. The courts have typically extended the 10b5-1 plans, only applicable to showing an insider did not sell with the benefit of inside information, to also protect in the scienter analysis.

Veliotis points out the flaw in this logic. Just as the seller of a condominium has a financial interest in hiding asbestos from a buyer the day of the closing, so do corporate executives have an interest in making their companies look good—via tools like earnings management—before the pre-planned sales of their own stock take place.

“Maybe an executive had innocent motives when they committed to the sale, but that doesn’t mean they weren’t hiding anything negative about the company as the sale date drew nearer,” he said. “It doesn’t mean that they don’twant to hide the asbestos the day of the closing.”

Veliotis and Shon are pursuing this line of research in a new paper that will corroborate their idea with empirical evidence. When it comes to earnings management, for instance, he notes that there is a trend on Wall Street of companies just barely beating their analyst’s forecasts of their earnings.

“If you barely miss the forecast, they punish you on Wall Street, but if you barely pass it, they reward you. Research has shown a large kink in terms of the patterns of earnings announcements barely beating versus barely missing forecasts, especially where the executives have incentive to beat forecasts,” he said.

He is also moving forward with empirical studies that will further substantiate December effects. For example, is there hard data available that point to a jump in donations in December?

“Basically a lot of research in this area is just trying to be a good sleuth,” he said. “The problem is often not complicated; half the battle is just getting the data.”


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