There are three laws ontax behavior, (including reporting and financial statements) they are EconomicSubstance, Business Purpose, and Substance over Form. Theserestrictions apply to a business as a taxpayer, it is important for a business orcompany to abide by these tax laws and reporting.Not only is the business orcompany responsible for upholding of them, executive staff are also responsibleand can face broad consequences including criminal charges for intentionallyunethical behavior. These are among the strictest rules regardingeconomic substance, business purpose and substance form. (Myron S. 2014)Ethically, it also displays a business’ character of their company. TheInternal Revenue Service (IRS) the United States governments regulator of taxlaws and reporting, has powerful laws and doctrines that were “generallyjudicially developed” (Myron S.
2014) It will be the responsibility ofJefferson Industrial Machinery (JIM) to abide by these laws, reports, anddoctrines. Stakeholders, shareholders, and company administration have agenuine interest in upholding these. The ability for a company to remainethical and transparent can be vital to their future growth and continuation ofthe company. Financial auditors, or firms which are independent from acompany have ethical standards and regulations which tell them how they report,and what they report.
The public and others rely on these independent financialreports as a tool to look into the company and its transactions so that thereare no obvious surprises when a potential downfall does occur. Thesestatement provide analysts the tools to view how a company is financialperforming, their financial “health” and other aspects of a company. Recent scandals such as Enron have changed tax laws, reports and doctrines toprotect future stakeholders in any business. When issuing financialreports on a company there are laws that must be adhered to, these can begoverned by boards such as the Financial Accounting Standards Board (FASB),Generally Accepted Accounting Principles (GAAP), and the American Institute ofCertified Public Accountants (AICPA). Independence from a companyprovides financial reports from a third party view, or can be best described asa party not having an interest in the outcome of the reports so that they arepresented in a fair and as accurate as possible manner.Economic Substancedoctrine in a summary is where the law states that a transaction is to have aneconomic purpose separate than a reduction of tax inability in order for it tobe considered a valid transaction. The actual finance senate committee (UnitedStates Government) summarizes the code as providing detailed regulations andrules that specify the computation of the income that is taxable, this includesthe amount of the income, timing that the income is earned or received, sourceof where the income comes from or derives from, and character of items ofincome, gain, loss, and deduction.
(Finance Senate) Economic substance can betranslated as tax deductions claimed and they have no economic purpose orsubstance behind them. Penalties can be assessed, even if they were notintentionally avoiding taxes or claiming deductions.Business PurposeDoctrine purpose it to not allow taxbenefits where the purpose of the transactionsis for tax savings or avoidance of paying taxes. The Internal RevenueService (IRS) has a say in whether or not the business has a valid purpose,this is a situation that is worked out between the business and the InternalRevenue Service. If a situation between the Internal Revenue Service anda business escalates to a level as far as court, regarding transactions thatappears to have no other valid business purpose than to avoid taxes, thebenefits that were allowed or sought after are disallowed and further penaltiesmay be assessed. Avoiding taxes is one of the transactions that courtstry to determine. For example, loaning of funds by one party at apercentage, and then placing a percentage of those interest funds into an interestbearing account, and reporting a higher loan percentage. (Sommers, R 97)The Substance Purposedoctrine is a doctrine of the united states tax law that provides a transactionmust have an economic purpose, other than trying to avoid a taxliability.
This is where the substance of the transaction is weighed morethan the form of the transaction. The form is how 7(the involved partiesdocument the transaction. It is also used to separate a transaction, such asthose between family members and determine its tax substance.There can besituations where family members loan money, but are not received back or a homecan be in the form of a sales transaction and no payments are evermade/received which then moves it to being a gift. (Summers R 1997)References to the EconomicSubstance Doctrine were enacted as subsection (o) of section 7701 of theInternal Revenue Code by section 1409 of the Health Care and EducationReconciliation Act of 2010.  (IRS Guidance for Examiners and Managers onthe Codified Economic Substance Doctrine and Related Penalties 2010)Social benefactors ofthese doctrines is that taxes are fairly assessed and paid.
There arethose individual taxpayers or business owners that would appreciate a higherincome, and lower taxes. They must understand the uses and purposes ofthe taxes that are being assessed and paid by them. Businessowners should not view the taxes as a burden to their business, as there aremany socially beneficial credits that can be benefitted from. Some ofthese credits can be for hiring or doing business with minorities, workopportunity credits, credits for providing health care, and credits forproviding employees a retirement plan to name a few. Jefferson IndustrialMachinery (JIM), would be in the company’s best interest to educate and complywith these three important as well as broad tax payer restrictions in order forthe company to not only hold themselves ethically high, but also to givecurrent and future stakeholders confidence in the company. Recent companyscandals have brought companies under public speculation and also ‘under themicroscope’. Not only is doing the right thing as far as taxes andreporting the ethical thing to do, it is also the legal thing to do andprevents individual’s and company’s out of legal trouble.
Further,Independent Auditors and Auditing Firms have been tasked with updatedrequirements, and ethics in the manner in which they report financially oncompanies.