ACCT 485 Memo # 7 Background 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. Assignment Goal 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. Purpose Audience Address 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 industry. Ted Jones, Marjorie Price, and the managing partners of McCormick and Olsen McCormick and Olsen LLP 300 Lincoln Center Omaha, NE 68182 Hint 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 Evaluation Criteria See ACCT 485 Communication Assignment #2 rubric.