Brenda Sells sent the tax return that she prepared for the president of Purple Industries, Inc., Harry Kohn, to Vincent Dim, the manager of the tax department at her accounting firm. Dim asked Sells to come to his office at 9 a.m. on Friday, April 12, 2013. Sells had no idea why Dim wanted to speak to her. The only reason she could come up with was the tax return for Kohn. "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. Kohn?" asked Brenda. "That's right," answered Vincent. "Is there a problem?" Brenda asked. "I just spoke with Kohn. 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. Kohn, 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 Kohn's trust.
Our firm now audits his company's books, prepares its annual tax return, prepares Kohn's personal tax return, and provides financial planning services for both. Kohn and Purple Industries together are the largest clients in our office. I can't afford to lose any of the business these clients provide 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 Kohn, 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 shouldn't be reported. But that was against the law. She turned to Vincent and asked: "Are you telling me to forget about the lottery amounts on Mr. Kohn's tax return?" "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 a.m.
Questions
1. Assume that 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?
2. Analyze the alternatives available to Brenda using Kohlberg's six stages of moral development. That is, what would Brenda's position be when she meets with Vincent assuming that her judgment was influenced by relevant factors at each of the six different stages of moral development?
3. Assume that Brenda decides to go along with Vincent and omits the lottery losses and gains. Next year, the same situation arises, but now it's with gambling losses and gains. If you were Brenda, and Vincent asked you to do the same thing you did last year regarding omitting the lottery losses and gains, what would you do this second year? Why?