In detail please answer what do you think of the tax director\'s approach to fil
ID: 2469256 • Letter: I
Question
In detail please answer what do you think of the tax director's approach to filing the company's tax return? What would you do if you were in Liz's position? ETHICS Elizabeth (Liz) Young, senior manager in the tax settlement letter from the DOJ, she was told group in the Cleveland office of Tics & Tax, an that the client's legal department considered the international professional services firm, was terms of the letter to be confidential, but that reviewing the workpapers related to the tax the company's reason for deducting the amo return to be filed by her biggest client, General was that the letter did not describe the settle- Inertia. She was intrigued by one of the items ment as a "penalty" and specifically stated that listed under "other deductions "(line 26 of Form "nothing in the agreement characterizes 1120), which was described as a "settlement payments for federal income tax purpo amount" of $100 million. After consulting with the director of taxes at General Inertia, Dee vides the firm with $10 million in audit and tax Ductit, Liz settlement with the Department of Justice pany was willing to take the "risk" in deducting (DOJ) for violatio described the settlement as a "penalty" (her cause words) the firm had to pay to the federal gov the item and the "ta ernment because one of its divisions billed the the settlement ($35 million) would help alleviate Department of Defense (DO was not performed in relation to a contract to pany was having. In fact, the company h provide helicopters to the DOD urt for federal income tax purposes. General Inertia is a long-term client that pro- discovered the amount related to a fees annually. Dee informed Liz that the com- n of the False Claims Act. Dee firm had to pay to the federal gov D) for work that the full amount of the settlement payment be- its IRS auditors were unlikely to question the item and the "tax refund" from deducting some short-term cash flow problems the com- oped to liers that use the "refund" to pay off parts supp f the term "penalty" caused Liz Dee's use o to question whether such a payment was de- over nonpayment. The company also preferred ductible for tax purposes (the company also de- not to provide any further disclosure or descrip- ducted the payment on its financial statements). tion of the deduction in the tax return so as not In particular, she remembered that Code § 1620) t specifically prohibits the deduction of "any fine or similar penalty paid to a government for the proach to filing the company's tax return? What violation of any law."When Liz asked to see the would you do if you were in Liz's position? were threatening to take the company to cour to alert the IRS to a potential tax audit issue What do you think of the tax director's ap-Explanation / Answer
The Tax Director Dee's approach is not at all professional and logical. IRS would under any condition not allow the deduction of penalty paid for Govt Law violation . As the $100 million deducted as pernalty does not qualify as Tax deductible, by all ceratinty the amount will be disallowed and instead of getting refund, General Inertial will need to pay interest for short payment.
As a Tax consultanat , Liz should disallow the penalty claimed as deduction and revise the Tax return accordingly. If any problem occurs from General Inertia , she should inform her superior and take appropriate decisison, but she must raise the flag and point out the wrong claim for deduction.
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