In the current year, Dickinson, Inc., reports an effective taxrate of 36%, and Badger, Inc., reports an effective tax rate of21%. Both companies are domes- tic and operate in the sameindustry. Your initial examination of the financial statements ofthe two companies indicates that Badger apparently is doing abetter job with its tax planning, explaining the difference ineffective tax rates. Consequently, all else being equal, you decideto invest in Badger. In a subsequent year, it comes to light thatBadger had used some very aggres- sive tax planning techniques toreduce its reported tax expense. After an examina- tion by the IRS,Badger loses the tax benefits and reports a very large tax expensein that year. Over this multiple-year period, it turns out thatDickinson had the lower effective tax rate after all. Do youbelieve Badger was ethical in not fully disclosing theaggressiveness of its tax positions in its current financialstatements? How does ASC 740-10 (FIN 48) affect Badgerâs disclosurerequirement? Does ASC 740-10 (FIN 48) still leave room for ethi-cal decision making by management in determining how to reportuncertain tax positions? Explain.
In the current year, Dickinson, Inc., reports an effective taxrate of 36%, and Badger, Inc., reports an effective tax rate of21%. Both companies are domes- tic and operate in the sameindustry. Your initial examination of the financial statements ofthe two companies indicates that Badger apparently is doing abetter job with its tax planning, explaining the difference ineffective tax rates. Consequently, all else being equal, you decideto invest in Badger. In a subsequent year, it comes to light thatBadger had used some very aggres- sive tax planning techniques toreduce its reported tax expense. After an examina- tion by the IRS,Badger loses the tax benefits and reports a very large tax expensein that year. Over this multiple-year period, it turns out thatDickinson had the lower effective tax rate after all. Do youbelieve Badger was ethical in not fully disclosing theaggressiveness of its tax positions in its current financialstatements? How does ASC 740-10 (FIN 48) affect Badgerâs disclosurerequirement? Does ASC 740-10 (FIN 48) still leave room for ethi-cal decision making by management in determining how to reportuncertain tax positions? Explain.
