Tommy Tucker, CPA, is the newly hired director of corporate taxation for Arson Incorporated, which is a publicly-traded corporation. Mr. Tucker's first job with Arson 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 Arson to realize a sizable deferred tax liability on its balance sheet. As a result, Arson paid very little in income taxes at that time.

Tommy also discovered that Arson has an explicit policy of selling off plant assets before they are reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Arson to "defer" all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Tommy checked with the legal department and found the policy to be legal, but he's uncomfortable with the ethics of it.

Instructions

Answer the following questions

a. Why would Arson have an explicit policy of selling plant assets before the temporary differences are reversed in the deferred tax liability account?

b. What are the ethical implications of Arson's "deferral" of income taxes?

c. Who could be harmed by Arson's ability to "defer" income taxes payable for several years, despite positive earnings?

d. In a situation such as this, what are Mr. Tucker's professional responsibilities as a CPA?