Academic

Thanks to authors, commentators and readers who chimed in this week on our great papers by Brian Broughman and Ethan Leib.  Both of these papers were very thought-provoking and prompted good discussion.  Many thanks to all our commentators:  Gordon Smith, Bill Carney, Larry Ribstein, Tom Ulen, Doug Moll, Curtis Bridgeman, Brett McDonnell and Eric Goldman.

Next week should be just as engaging, with papers on Monday, August 4, and Wednesday, August 6.  Abstracts for next week's papers are below.  See you on Monday!

Heather Field, Checking in on Check-the-Box

Eleven years ago, new regulations dramatically changed the manner in which the federal income tax system determines how business entities are taxed. These new explicitly elective "check-the-box" regulations for entity classification replaced a multi-factored corporate resemblance test and drew wide praise for their potential to increase simplicity and certainty, reduce costs, and enhance efficiency and equity. Now, with the benefit of hindsight and with data regarding entity classification elections made since 1997, this Article revisits the "check-the-box" regulations. This Article analyzes the application of the "check-the-box" regulations over the last eleven years and concludes that, while the "check-the-box" regulations represent an improvement over the prior entity classification rules, they fall short of their promise. This Article also examines the scope of the explicit "check-the-box" election itself and argues that the election lacks a coherent set of limitations, which undermines the provision of the explicit entity classification election at all. Ultimately, this Article concludes that the policy weaknesses revealed by a close examination of the "check-the-box" regulations stem fundamentally from the existence of a multi-regime system for taxing businesses, and hence, the "check-the-box" regulations expose a problem with the choices themselves, thus adding to the literature in favor of reforming the federal income tax's treatment of businesses.

James Park, Assessing Materiality of Financial Misstatements

While markets rely on accurate financial reports in valuing companies, it can be difficult to interpret vague accounting rules. Federal securities law thus makes liability for financial misstatements contingent on a showing of materiality. There are two competing approaches to assessing the materiality of a financial misstatement. First, there is a quantitative approach, where a misstatement can only be material if it is above a bright-line threshold - often 5 percent of net income. Second, there is a qualitative approach, where a misstatement under the 5 percent threshold can still be material if it allows a company to meet its earnings forecasts or results in management bonuses.