Stephen Delancey, CPA, is the newly hired director of corporate taxation for Acme Corporation, which is a publicly traded corporation. Mr. Delancey’s first job with Acme was the review of the company’s accounting practices on deferred income taxes. In doing his review, he noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time.
Delancey also discovered that Acme has an explicit policy of selling plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to “defer” all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delancey checked with the legal department and found the policy to be legal, but he’s uncomfortable with the ethics of it.
a) Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?
b) What are the ethical implications of Acme’s “deferral” of income taxes?
c) Who could be harmed by Acme’s ability to “defer” income taxes for several years, despite positive earnings?
d) In a situation such as this, what are Mr. Delancey’s professional responsibilities as a CPA?