Question

n 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. What is the core ethical dilemma caused by Dontall by failing to disclose the aggressive tax positions in 2007?

Answer 1

The ethical dilemma Dental caused was misleading investors by not disclosing its aggressive tax strategies, affecting investment decisions and leading to a loss of trust and financial loss for investors once higher tax liabilities were revealed.

Step-by-step explanation:

The core ethical dilemma caused by Dental by failing to disclose the aggressive tax positions in 2007 involves misleading investors and potential stockholders about the company's financial stability and integrity. When investing, stakeholders rely on the effective tax rates reported by the company for making informed decisions. A lower effective tax rate may signal better management and greater profitability, leading to increased investment not founded on the company's actual financial health if aggressive and potentially illicit tax strategies are employed.

Dental's choice to not fully disclose its tax strategies and the subsequent IRS investigation leading to a higher tax rate than originally reported compromised the trust between the company and its investors. The ethical conflict here is rooted in issues of transparency and honesty. As the investigation unfolds and the true tax liabilities are disclosed, the lowered confidence among investors results in significant financial loss, which was exemplified by the nosedive in Dental's stock price. Such incidents underscore the importance of ethical practices in tax planning and the responsibility companies have to report accurately to stakeholders.