Jones Chemical Company manufactured pesticides that were toxic. Over the course of several years, the toxic waste contaminated the air and water around the companys plant. Several employees suffered toxic poisoning, and the Environmental Protection Agency cited the company for violations and imposed fines of $18 million. The company voluntarily set up a charitable fund for the purpose of bettering the environment and funded it with $7 million. The company incurred legal expenses in setting up the foundation and defending itself in court. The court reduced the fine from $18 million to $10 million. Jones deducted the $8 million paid to the foundation and the 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. Jones president, Michael Wang, has contacted you regarding the deductibility of the $10 million fine, the $7 million payment to the foundation, and the legal fees.

Write a letter to Mr. Wang that contains your advice and prepare a memo for the tax files. Wangs address is 200 Lincoln Center, Omaha, NE 68182.

A partial list of research aids: 162(a) and (f). Reg. 1.16221(b).

Instructions: Write a letter to Mr. Wang that contains your advice and prepare a memo for the tax files. Wang's address is 200 Lincoln Center, Omaha, NE 68182.