Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 2-3 The Tax Return (a GVV case)
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.
“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.”
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?
Vincent is reasoning at stage 3 trying to keep the client happy first and foremost. Brenda
was reasoning at stage 4, following the rules. Brenda should use ethical reasoning, and
consider the force of tax laws and regulations on the situation.
An ethical person acts ethically at all times, not just when it is convenient. This may not
be a one-time request, the next time will be easier to go along and it may be the start of
the slide down the proverbial “ethical slippery slope.” The concept of an ethical slippery
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?
The next morning Brenda was ready for the meeting with Vincent. She has researched the
reporting and deduction of gambling wins and losses.
“Vincent, I know about the gambling winnings because there was a W-2 G in his tax
documents. I researched the requirements for reportable winnings on a W-2G. Reportable
gambling winnings include:
1. The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot
machine,
3. The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker
tournament,
4. The winnings (except winnings from bingo, slot machines, keno, and poker
tournaments) reduced, at the option of the payer by the wager are:
Ethical Obligations and Decision Making in Accounting, 4/e 3
5. The winnings are subject to federal income tax withholding.
“The IRS is also getting a copy of the W-2G. Leaving the amounts off the tax return will
lead to interest and penalties, including tax preparer penalties when it is found,” Brenda
replied.
“But the IRS is understaffed and the missing amounts will not be discovered.”
“I disagree and cannot go along with you. I will not sacrifice my integrity and
commitment to professional excellence to lie for a client.”
Vincent is using reasons and rationalizations based on keeping clients happy and that it is
expected or standard practice; how long would the firm last without clients? The amount
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?
Brenda may be blackmailed by threat of loss of job into going along again and again with
Vincent to keep the client happy. Brenda needs to cut her (ethical) losses and stand up for
what she believes in. She can admit the mistake of going along the first time but she did
