Sam Roberts, CPA, is hired as the director of the Corporate Tax Department of Landry Corp., a publicly traded corporation. During his initial review of the company, he notices that differences between book and tax depreciation on fixed assets result in a sizeable deferred tax liability. Sam also learns that the Landry Corporation has a policy of selling the fixed assets before their tax liability reverses. This policy, in conjunction with increasing fixed asset investments, allows Landry to defer income taxes payable for several years.
Answer the following questions:
- Why would Landry Corp. have a policy of selling assets before the temporary differences reversed?
- What do you see as the ethical issues, if any, associated with this practice?
- If you were Sam, what would you do in this situation?