Western Bank & Trust purchased land and a building for the
lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price tot he building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.
-Explain the tax advantage of allocating too much to the building and too little to the land.
-Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.
-Instructions: Your initial response should be no less than 250 words with at least one scholarly journal reference (dictionary-type websites are excluded). Reply to at least two of your classmates. Replies to classmates should be a minimum of 100 words and include direct questions. In-text citations and references must be in APA format. Refer to the Forum Grading Rubric below for additional guidelines.
RESPONSE 1: Hello,
The tax advantage of allocating too much to the building and too little to the land is that Western Bank & Trust knew that the building will depreciate and they will be able to claim the depreciation of the building each year on taxes for a credit. Land does not depreciate and they would receive credit or tax deductions for the land. Basically, the bank will
see a profit each year and upon selling it if they ever decide to go that route in the future
I wonder how many banks and companies operate under these ethics because I assume there are many and can’t believe this happens. I think although this is considered unethical, it isn’t a crime and one particular person would be found at fault if it was. Again, I think the decision Western Bank & Trust made was unethical. The purchase of the land and building was done in a lump-sum purchase but on false pretenses. The relative-market-value method states that the total cost paid (100%) is divided among the assets according to the relative market values and that a more realistic allocation is 60% to the building and 40% to the land. I personally think that the company should consider the appraisal of each the building and land and if they don’t they could potentially be committing some type of fraud in my opinion. I think taxpayers and the IRS was harmed in this situation and potentially any company or person that purchase the land and building when the bank sells in the future.
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