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Ethical issues of software programs in European Unions

Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union. Sewell intended to sell individual franchises for the major language groups of Western Europe?German, French, English, Spanish, and Italian. Naturally, investors considering buying a franchise from Sewell asked to see the financial statements of his business.

Believing the value of the franchise to be $500,000, Sewell sought to capitalize his own franchise at $500,000. The law firm of St. Charles & LaDue helped Sewell form a corporation chartered to issue 500,000 shares of common stock with par value of $1 per share. Attorneys suggested the following chain of transactions:

a. Sewell's cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell.
b. Sewell pays the corporation $500,000 to acquire all its stock.
c. The corporation buys the franchise from Cousin Bob.
d. Cousin Bob repays the $500,000 loan to the bank.

In the final analysis, Cousin Bob is debt-free and out of the picture. Sewell owns all the corporation's stock, and the corporation owns the franchise. The corporation's balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is Sewell's most valuable marketing tool.

1. What is unethical about this situation?
2. Who can be harmed? How can they be harmed? What role does accounting play?

Solution Preview

First, let's discuss the rules Sewell didn't violate with this series of transactions:

1. A cousin is not a related party under Sec 267(c).
2. There is no loss involved that wouldn't be allowable between related parties.
3. Corporations that are directly or indirectly controlled by the same individuals are related parties, but that is not the case here as there is only one corporation.
4. We must assume that Sewell reported a $450,000 gain on sale of the franchise to Cousin Bob, but if he ...

Solution Summary

The ethical issues of software programs in European Unions is determined.