Question

In 2007, two domestic corporations operating in the same industry report the following effective tax rates: Rally and More, Inc., 35%, and Dontall and Less, Inc., 20%. You believe Dontall is doing a better job with their tax planning due to the lower effective tax rates and, therefore, decide to invest $100,000 in Dontall. After a couple of years, you find out from a public announcement that Dontall has been under investigation by the IRS for using some aggressive tax planning strategies. You contact the CEO of Dontall who tells you it is nothing to worry about and that the CPAs (Anderson and Company CPAs) have this all under control. One year later, the stock takes a nosedive on a Wednesday morning after the press prints an article stating that the IRS has adjusted the taxable income of Dontall upward after an auditor found that some of the reported tax benefits and expenses were falsely reported. Even before the penalties, the newly assessed tax rate of Dontall is now greater than the 35% reported by Rally and More.

For discussion: What is the core ethical dilemma caused by Dontall by failing to disclose the aggressive tax positions in 2007?

Answer 1

The company has failed to disclose its aggressive tax planning strategies on which investors base their decisions to invest in the company or not. Also, the issue here is with evasion of taxes which have long term legal and financial consequences on the company's operations. The board and the top management is responsible for retaining confidence and trust in the investors and disclose any information that may influence decision making. The ethical dilemma here is that the company can adopt tax saving strategies but not to an extent that it will end paying more taxes than the original estimation prior to planning of saving taxes. The company should not have resorted to aggressive tax planning and looked beyond their own self interests.