CEO Tax Return Certification Proposals

By Keith R. Gercken and Michael Richman

Introduction

Section 1001 of the recently-enacted Public Company Accounting Reform and Investor Protection Act of 2002 (the "Sarbanes-Oxley Act") states that it is the "sense of the Senate" that a corporation’s federal income tax return should be signed by its chief executive officer. As currently provided in § 6062 of the Internal Revenue Code ("IRC"), a corporation’s federal tax return may generally be signed by any authorized corporate officer (including, but not limited to, the president, treasurer, or chief accounting officer). Given that the Sarbanes-Oxley Act did not actually amend IRC § 6062, it appears that this "sense of the Senate" provision was merely intended to encourage chief executives to sign their annual corporate income tax returns without legally mandating such a requirement.

The Sarbanes-Oxley Act’s recommendation that chief executives sign their corporate income tax returns would give way to a mandate that they do so if Senate Bill No. 1971 (the "National Employee Savings and Trusty Equity Guarantee Act") is enacted in its current form. Unlike the Sarbanes-Oxley Act, this bill would amend IRC § 6062 to require that a corporation’s income tax return be signed by its highest ranking officer.

IRC § 6062 provides that a corporation’s federal income tax return must be signed by its president, vice-president, treasurer, assistant treasurer, chief accounting officer, or "any other officer duly authorized so to act." Typically, a large corporation’s income tax return is signed by either its tax director or chief financial officer.

Yes. Since income tax returns must be signed under penalties of perjury, any person who signs such a return is subject to potential criminal liability under the IRC § 7206(1), the perjury and false statement statute. In order to become liable under § 7206(1), the person signing the return must generally be shown to have signed the return knowing that (a) the return was not true and correct as to every material matter, and (b) making the false statement in the return was a willful violation of a legal duty.

The scope of what constitutes a materially false statement has been read very expansively by the courts. "Materiality" has been found – and criminal convictions upheld – in seemingly innocuous situations such as where a taxpayer mislabeled the source of his income on his tax return. There is no requirement that the Internal Revenue Service rely on the false statement in any way, or even that the false statement affect the determination of the taxpayer’s tax liability.

Violation of § 7206(1) is a felony, punishable by imprisonment of up to three years, a fine of up to $100,000, or both.

There are a number of defenses that would potentially be available to a person accused of a violation of § 7206. The ones most likely to be relevant to a chief executive officer having relatively limited expertise in the tax law include (a) the reliance on advice of counsel (or other tax advisor), (b) a shift of responsibility to the person or persons who actually prepared the tax return, and (c) a claim of mistake or ignorance of the law. All of these defenses will tend to negate the requirement under § 7206 that the person signing the return "willfully" make a false statement in violation of a known legal duty. As a practical matter, however, all of these defenses require some measure of good-faith belief on the part of the individual signing the tax return that the information shown on the return is correct and complete – accordingly, a chief executive officer would not be able to avoid potential liability by pursuing a conscious course of deliberate ignorance. As a result, a prudent chief executive who signs the corporate income tax return will likely have a significant personal stake in understanding, at least at some general level, the corporation’s tax affairs (perhaps including a more direct involvement in the corporation’s tax return preparation process itself).

This alert is only a general review of the subjects covered and does not constitute an opinion or legal advice.
© 2002 Pillsbury Winthrop LLP