Brenda Saha sent the tax returns she prepared for Mr. Lee to Vincent Dim, the ma
ID: 2565420 • Letter: B
Question
Brenda Saha sent the tax returns she prepared for Mr. Lee to Vincent Dim, the manager of the tax department at Cello Financial Services, a subsidiary of Cello Communication. Dim asked Brenda to come to his office at 9:00 am on Monday, April 13, 2015. Brenda had no idea why Dim wanted to speak to her. The only reason she could come up with was the tax return for Mr. Lee.
“Brenda, come in,” Vincent said.
“Thank you, Vincent,” Brenda responded.
“Do you know why I asked to see you?”
“I’m not sure. Does it have something to do with the tax return for Mr. Lee?” asked Brenda.
“That’s right,” answered Vincent.
“Is there a problem?” Brenda asked.
“I just spoke with Mr. Lee. I told him that you want to report his winnings from the lottery. He was incensed.”
“Why?” Brenda asked. You and I both know that the tax law is quite clear on this matter. When a taxpayer wins money by playing the lottery, then that amount must be reported as revenue. The taxpayer can offset lottery gains with lottery losses, if those are supportable. Of course, the losses cannot be higher than the amount of the gains. In the case of Mr. Lee, the losses exceed the gains so there is no net tax effect. I don’t see the problem.”
“Let me tell you the problem,” Vincent stated sharply. “It’s taken me years to gain the trust of Mr. Lee. Our firm now audits his company’s books, prepares its annual tax return, prepares Mr. Lee’s personal tax return, and provides financial planning services for both. Mr. Lee and Thomas Industries together is the largest client in our office. I can’t afford to lose any of the business the client provides for our firm. As you know, we are under increasing competition from larger regional firms that are looking for new clients. If we don’t support Mr. Lee, some other firm will step in and do it. Poof, there goes 20 percent of our revenues.”
Brenda didn’t know what to say. Vincent seemed to be telling her the lottery amounts should not be reported. But that was against the law. She turns to Vincent and asks: “Are you telling me to forget about the lottery amounts on Mr. Lee’s tax return?”
“Honey, I want you to go back to your office and think carefully about the situation. Consider that this is a one-time request and we value our staff members who are willing to be flexible in such situations. Let’s meet again in my office tomorrow at 9:00 am.
Required: Assume Brenda has no reason to doubt Vincent’s veracity with respect to the statement that it is “a one-time request.” Should that make a difference in what Brenda decides to do? Why or why not? How would you advise Brenda?
Explanation / Answer
This is a matter of ethics which is troubling Brenda. On one hand she is loyal to her job and government but on the other hand her boss expects her to retain client even if it requires going against law. Mr. Vincent also misuses his power by threating Brenda when he said one time request. This clearly indicates that he meant if Brenda would not follow his instructions, she might have to loose her job. This becomes very critical situation as Brenda is under undue influence to go against law for saving her job.
In this case, I would advise Brenda to first take client into confidence by explaining him the law and a matter of fact that even disclosure of winning by lottery would not bring extra burden of tax on Mr. Lee as he has more losses than income from lottery income. Thereby Mr. Lee would not require to pay additional tax while following proper tax regimen. Once Mr Lee understand, Brenda could approach her manager and discuss with him and bring confidence to him that Mr. Lee is not going to leave us and we need not go against law. Only concern of Mr. Vincent was not loosing his client. When he would be assured of retaining client, he would not expect Brenda to go against law.