Gold, Inc., is an accrual basis taxpayer. In 2011, an employee accidentally spil

Question

Gold, Inc., is an accrual basis taxpayer. In 2011, an employee accidentally spilled hazardous chemicals on leased property. The chemicals destroyed trees on neighboring property, resulting in $30,000 of damages. In 2011, the owner of the property sued Gold, Inc., for the $30,000. Gold's attorney feels that it is liable and the only issue is whether the neighbor will also seek punitive damages that could be as much as three times the actual damages. In addition, as a result of the spill, Gold was in violation of its lease and was therefore required to pay the landlord $15,000. However, the amount due for the lease violation is not payable until the termination of the lease in 2014. None of these costs were covered by insurance. Jeff Stuart, the president of Gold, Inc., is generally familiar with the accrual basis tax accounting rules and is concerned about when the company will be allowed to deduct the amounts the company is required to pay as a result of this environmental disaster. Write Mr. Stuart a letter explaining these issues. Gold's address is 200 Elm Avenue, San Jose, CA 95192.

Explanation / Answer

Dear Jeff Stuart, As you might already know an incident has happened. An employee accidentally spilled hazardous chemicals on leased property, which also destroyed trees on neighboring property, resulting in $30,000 worth of damages to the adjacent owner of the company. The owner of the property is suing us for $30,000, and their attorney also feels that the neighbor will also seek punitive damages that could be as much as three times the actual amount of damages done. We are also in violation of our lease and need to pay the landlord $15,000. Unfortunately at the current time we cannot reimburse the landlord until the termination of the lease in 2014. Please follow up on your reply as soon as possible. Regards, Name Hope this helped, good luck

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