Local Lawsuit - Black & Decker Corporation - Essay Example

The company’s prosperity has significantly been contributed by acquisitions between the company and smaller manufacturing companies in the same field. The company has also embarked on cutting all its operational costs by shifting its production off the United States. For instance, in 2004 the company announced a plan to move 350 jobs from Tennessee to Mexico.

In 1998, Black & Decker Corporation was involved in a lawsuit with the Internal Revenue Service regarding allegations by the company to be refunded 57 million dollars from its earlier tax payments. The company had purchased 10,000 shares for 561 million dollars and later sold them at the price of 1 million, making a loss of 560 million dollars. The company, therefore, wanted a refund equivalent to the loss incurred. In addition, the company argued that the money should be refunded since the tax shelter it had implemented was valid. Tax shelter in this case is a lawful technique of minimizing the taxable income of a company depending on local and universal tax laws. On the other hand, the Internal Revenue Service argued that the company's strategy of tax sheltering was abusive. Black & Decker Corporation had created a Black & Decker Healthcare Management Inc. and then transferred to it 561 million dollars in exchange for stock shares of 10,000. This, according to Internal Revenue Service, is a sham practice since Black & Decker Healthcare Management Inc. is a part of Black & Decker Corporation (Perry, 2004).

According to Browning (2004), the main risk facing Black & Decker Corporation was health benefits claims by its employees. The company provided both medical and dental insurance to its employees which amount to thousands in number. Although the company had a contingent liability and tax protection, it was difficult to estimate the exact cost of health insurance. This was because of uncertainty on how many employees would be ill at a go. However, there are several risk management strategies Black & Decker Corporation management could have implemented to avoid the lawsuit. The first one is that the company can opt to reinsure since by doing so the company would have transferred the risk to other entities. This will enable it to handle risks beyond its capability. The second one is using technological facilities that can work in place of several employees. Therefore, the company will not have so many employees to insure as well as reduce its operational cost. Finally, the company should execute a cost reduction program that does not involve tax shelter. This will help the company avoid legal conflicts with the federal taxing body as well as the occurrence of lawsuits.

In case a business is involved in transactions that have no economic value, but help reduce or avoid tax on returns, such practice is regarded to be unethical. In this case, Black & Decker Corporation's main aim is to avoid the risk of paying health claims to its current and retired employees. Instead, the company transferred that risk to Black & Decker Healthcare Management Inc. one of its subsidiaries. Black & Decker Corporation also wanted to evade taxation on the 303 million dollars gain it had made by selling some of its businesses by faking a loss (Browning, 2004).

This, therefore, shows that Black & Decker Corporation was motivated by the tax benefits, and the loss was just a strategy to evade taxation. The use of such a discriminative strategy where a business puts its interests above the interests of its employees is referred to as unethical business practice.
There are two main sources of law that management can use to prevent a similar instance in the future. The first one is the internal Revenue Code section 351 part (a) which provides tax exceptions for property transferred from one corporation to another in exchange for stock shares.

The second one is section 357 part (c) which states that in the event of claim payments, the company can deduct the amount paid from the employee’s taxable income (Hasl-Kelchner, 2006). The management may, however, engage in alternative resolutions, in this matter, outside the court in two ways. The first one is by merging with other companies in the production of its product. This will help the company manage risks since the impact will be transferred to more than one entity. The second one is to move its production to another state that does not require the company to insure the employee’s health care.

Thus, this paper gives a clear description of Black & Decker Corporation's involvement in a lawsuit, risk management strategies, ethical issues with the company, and recommendations on how to avoid such a situation in the future. It also illustrates sources of law relevant to taxation and how they can be implemented to prevent lawsuits in the future. Read More