Memo G

ACCT 485
Memo # 7
Gray Chemical Company (GCC), a national company that produces pesticides
and related lawn treatments for residential and commercial use, is regarded as
an industry leader and has prided itself on expansive growth over the past
decade. However, GCC’s reputation became sullied in 2001, when the
Environmental Protection Agency (EPA) cited the company for knowingly
manufacturing toxic pesticides. Over the course of several years, the toxic
waste contaminated the air and water surrounding the company’s Phoenix, AZ
plant. Because of their daily exposure to this toxic waste, several GCC
employees suffered toxic poisoning.
In court, the judge found GCC guilty and imposed fines of $15 million. After
hearing the verdict, GCC’s board decided to voluntarily set up a charitable
foundation for addressing environmental concerns; GCC initially funded the
foundation with $8 million. In addition, GCC incurred legal expenses ($200
thousand) in creating this charitable foundation and defending itself in court
($1 million). Subsequently, the court agreed to reduce GCC’s initial fine from
$15 million to $7 million.
Now GCC wants to deduct the $8 million paid to its charitable foundation, as
well as deduct all of the legal expenses it incurred. GCC’s president, Ted
Jones, has contacted your accounting firm, McCormick and Olsen, regarding
the possibilities for deducting the $7 million fine, the $8 million payment to
GCC’s charitable foundation, and the legal fees that GCC incurred.
Marjorie Price, the tax manager at McCormick and Olsen, has asked you to
write a letter to Ted Jones that addresses his concerns. Marjorie has expressed
concern to you that, indeed, Jones and GCC’s payments were, in fact, a fine,
and therefore were in violation of public policy. She has asked that you
include appropriate quotations in your letter to Mr. Jones that relay this
sensitive news, but—and more importantly--substantiate a defensible position
with the IRS. The quotations you provide should be from primary authorities;
these quotations should be accompanied by proper citations. At a minimum,
you are to quote one code section, one regulation, one technical advice
memorandum, and one court case in your response letter to Ted Jones.
Consider the following items to be a partial list of research aids: §162, Reg.
§1.162-21, TAM 200629030.
Finally, please use Ted Jones’s mailing address for GCC corporate
headquarters in your letter:
200 Lincoln Center
Omaha, NE 68182.
The purpose of this assignment is to provide you with experience in reading
and understanding IRC sections and regulations, technical advice
memorandums, and court cases. In addition, this letter allows you to
demonstrate your ability to clearly and accurately discuss the technical
complexities of tax law with respect to a particular situation from private
Ted Jones, Marjorie Price, and the managing partners of McCormick and
McCormick and Olsen LLP
300 Lincoln Center
Omaha, NE 68182
Use the bullet titles on page 2-22 within your letter to present your work in a
clear manner.
Due Date
Monday February 26, 2007
See ACCT 485 Communication Assignment #2 rubric.