the answer company THOMSON REUTERS' Note: Solutions to the Research Problems can be prepared by using the Thomson Reuters Checkpoint online tax research database, which accompanies this textbook. Solutions can also be prepared by using research materials found in a typical tax library. Research Problem 1. Gray Chemical Company manufactured pesticides that were Communications 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. 5-56 PART 2 Structure of the Federal Income Tax Gray 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. 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 files, Gray's address is 200 Lincoln Center, Omaha, NE 68182 Partial list of research aids. $$162(a) and (1) Reg. $ 1.162-210b)