In this problem: Gray Chemical Company manufactured pesticides that were toxic. Over the course of several years, the toxic waste contaminated the air and water around the company's plant.
Several employees suffered toxic poisoning, and the Environmental Protection Agency cited the company for violations. In court, the judge found Gray guilty and imposed fines of $15 million. The company voluntarily set up a charitable fund for the purpose of bettering the environment and funded it with $8 million. The company incurred legal expenses in setting up the foundation and defending itself in court.
The court reduced the fine from $15 million to $7 million. Gray Chemical Company deducted the $8 million paid to the foundation and the 1 legal expenses incurred. The IRS disallowed both deductions on the grounds that the payment was, in fact, a fine and in violation of public policy.
Gray's president, Ted Jones, has contacted you regarding the deductibility of the $7 million fine, the $8 million payment to the foundation, and the legal fees. Write a letter to Mr. Jones that contains your advice and prepare a memo for the tax file. Gray's address is 200 Lincoln Center, Omaha, NE 68182. Research aids: IRC §162(a) and (f). Treas. Reg. § 1.162-21(b).
the results to the scenario are:
1.) The fine of $7million is not deductable as its a fine and penalty which is imposed for breaking the law.
2.) $8 million payment to the foundation is also not allowed as a deduction as its in the nature of fine only. had the company not set up a charitable fund for the purpose of bettering the environment and funded it with $8 million the fine would have been $15 million. the reduction in fine from 15 million to 7 million was only beacuse it had agreed to set up a fund and make ammends for the violations it made. hence the $8 million is also in the nature of fine and penalty and thus not deductible
3.) Legal expense is the only expense out of thegiven three which will be allowed as per IRC §162(a) point 3.
MY PROBLEM: I am required to be the client (ted jones) in this scenario and ask 4 questions regarding these results....
1.) what are 4 good tax related questions that I ( ted Jones) can ask the researcher (tax person who found this information) after he has told me this information?