Problem: 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, 2016. Sells was not sure 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." "You're missing the basic point that the deduction for losses is only available if you itemize deductions," Vincent said. "Kohn is not doing that. He's using the standard deduction." Brenda realized she had blown it by not knowing that. 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 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. And, I'll tell you, other staff in the same situation have been loyal to the firm. Let's meet again in my office tomorrow at 9 a.m."
Questions
1. Analyze the alternatives available to Brenda using Kohlberg's six stages of moral development. 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. Assume you have decided what your position will be in the meeting with Vincent but are not quite sure how to respond to the reasons and rationalizations provided by him to ignore the lottery losses. How might you counter those arguments? What would be your most powerful and persuasive responses?
3. Assume that Brenda decides to go along with Vincent and omits the lottery losses and gains. Next year a similar situation arises with winnings from a local poker tournament. Kohn now trusts Brenda and shared with her that he won $4,950 from that event. He tells you to not report it because it was below the $5,000 threshold for the payer to issue a form W-2G. 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 and why?