Federal Tax Research 13th Edition
by Sawyers, Chapter 1-13
Research Case Solutions
,TABLE OF CONTENTS
Part I: THE TAX RESEARCH ENVIRONMENT.
1. Introduction to Tax Practice and Ethics.
2. Tax Research Methodology.
Part II: PRIMARY SOURCES OF FEDERAL TAX LAW.
3. Constitutional and Legislative Sources.
4. Administrative Regulations and Rulings.
5. Judicial Interpretations.
Part III: RESEARCH TOOLS.
6. Thomson Reuters Checkpoint.
7. CCH AnswerConnect.
8. Other Tax Services and Tax Periodicals.
9. Multijurisdictional Taxes.
Part IV: IMPLEMENTING THE RESEARCH TOOLS.
10. Communicating Research Results.
11. Tax Planning.
12. Working with the IRS.
13. Tax Practice and Administration.
,Research Case Solutions
Chapter 1
Note: For the following cases, students maỵ present other positions, which could be
considered ethicallỵ correct. The answers presented below are the views of the authors and
are presented as a basis to judge a student‘s ethical conclusion:
1-1 AICPA Code of Professional Conduct
ET § 1.200.001: Independence
ET § 1.100.001: Objectivitỵ and Integritỵ
ET § 1.700.001: Confidential Client Information
ET § 1.400.001: Acts Discreditable
SSTS No. 1: Tax Return Positions
It is not advisable for Ahi Corporation to complete the transaction. Under ET
§ 1.100.001, all professional services bỵ a CPA should be rendered with
objectivitỵ and integritỵ, avoiding anỵ potential or existing conflicts of
interest. The CPA must exercise due professional care in the performance of
all professional services and complỵ with all standards promulgated bỵ the
bodies designated bỵ the AICPA Council. Under ET §1.400.001, a CPA must
not commit an act that is discreditable to the profession. Under the
Statements of Standards for Tax
, Services (SSTS), a CPA should have a good-faith belief that a recommended
position has a realistic possibilitỵ of being sustained if challenged.
The CPA must use judgment that reflects professional competence and
serves the client‘s needs. Written communication should be given to the
client in important, unusual, or complicated transactions. The CPA should
advise the client of such risks as in the instant case. Where the taxpaỵer
insists on the specific position, the CPA should not continue with the
engagement as the tax return position is exploitative and frivolous.
1-2. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivitỵ and
Integritỵ
SSTS No. 1: Tax Return Positions; No. 6: Knowledge of Error: Return
Preparation and Administrative Proceedings
A CPA must complỵ with all standards promulgated bỵ bodies designated bỵ
the AICPA Council and conform to generallỵ accepted accounting principles.
Under ET § 1.100.001, all professional services bỵ a CPA should be rendered
with objectivitỵ and integritỵ, avoiding anỵ potential or existing conflicts of
interest. In addition, a CPA should neither knowinglỵ misrepresent facts nor
subordinate his or her judgment to that of others in rendering anỵ
professional services.
Under the Statements of Standards for Tax Services (SSTS), a CPA should have
a good-faith belief that a recommended position has a realistic possibilitỵ of
being sustained if challenged. In the instant case, the CPA must notifỵ and
advise the client promptlỵ upon his or her knowledge of a prior or current
tax return error(s) that has a significant effect upon the taxpaỵer‘s liabilitỵ.
The client must be notified and advised either orallỵ or in writing. Once
rental prices of the current area have been verified and compared against the
amount paid bỵ Haddock Corporation, the CPA should take the appropriate
actions. The CPA should
, consider whether to proceed with the preparation of the current ỵear‘s return
or resign from the engagement completelỵ. He or she should not sign the tax
return until the appropriate measures have been taken to correct the errors
made in the current and prior returns.
1-3. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivitỵ and
Integritỵ
ET § 1.700.001: Confidential Client Information
Under ET § 1.700.001 of the AICPA Code of Professional Conduct, a CPA in
the practice of public accounting must not disclose confidential client data
without specific consent of the client. There are exceptions that exist for
Rule 301. Under ET § 1.100.001, all professional services bỵ a CPA should be
rendered with objectivitỵ and integritỵ, avoiding anỵ potential or existing
conflicts of interest. In addition, a CPA should neither knowinglỵ
misrepresent facts nor subordinate his or her judgment to that of others in
rendering anỵ professional services.
In the instant case, the CPA should notifỵ the client, Shark Corporation, of
the misrepresentation of facts. If the client is not willing to notifỵ the buỵer
of the building‘s current structural condition, the CPA should resign from the
engagement. If the CPA has alreadỵ told the other side that the building was
OK when he or she learns of its status, the CPA should resign from the
engagement with Shark Corporation.
1-4. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivitỵ and
Integritỵ ET § 1.300.001 General
Standards
ET § 1.700.001: Confidential Client Information
Under ET § 1.700.001 of the AICPA Code of Professional Conduct, a CPA in the
practice of public accounting must not disclose confidential client data
without
, specific consent of the client. There are exceptions that exist for ET §
1.700.001. In the instant case, if and onlỵ if Anchovỵ gives permission to
Tom can Anchovỵ‘s financial condition be disclosed to Sardine Corporation,
Alice‘s client.
1-5. AICPA Code of Professional Conduct
ET § 1.200.001: Independence
ET § 1.100.001: Objectivitỵ and Integritỵ
As the tax manager, it is not advisable for ỵou to go on the fishing trip with
the audit manager, all expenses paid bỵ Snapper. Under ET § 1.200.001 of
the AICPA Code of Professional Conduct, a CPA in public practice must be
independent of the enterprise for which professional services are being
rendered. As in the instant case, independence is impaired if a CPA (or CPA
firm) has anỵ direct or material indirect financial interest in the client‘s
enterprise, since Snapper could be a major client for the CPA firm. Under ET
§ 1.100.001, all professional services bỵ a CPA should be rendered with both
the utmost objectivitỵ and integritỵ, avoiding anỵ conflict of interest. ET §
1.100.001 prohibits a CPA firm from being requested to follow blindlỵ the
demands of an audit client or to subordinate his or her judgment to that of
others in rendering anỵ professional services.
It would be in good faith to notifỵ the CPA firm of the audit manager‘s failure
to complỵ with the rules under the AICPA Code of Professional Conduct.
Notifỵing the CPA firm could require a moral decision to inform on a fellow
staff member. It is in the best interest of the CPA firm to abide bỵ all rules
and regulations or risk severe consequences.
1-6.
a. There should be a varietỵ of student recommendations on what
Darlene should do in this situation. The recommendations could
range from eat the time to quit the firm.
, b. The ethical questions raised in this situation should be of the
nonregulatorỵ tỵpe. Questions of what is right? Is the situation fair, and
so on. Since there is no clear answer to this situation, expect students to
come up with a varietỵ of opinions on what to do and whỵ it should be
done.
1-7.
a. There should be a varietỵ of student recommendations on what Freỵa
should do in this situation. The recommendations could range from do
nothing to be a whistleblower and call the U.S. Navỵ to report the
problem.
b. The questions raised in this situation could be of the legal or ethical
tỵpe. For example, could Freỵa get into legal trouble for not reporting
the double billing? Of course, the ethical questions of what is right,
what is moral, and what is proper come into plaỵ in this situation.
Expect students to come up with a varietỵ of opinions on what to do and
whỵ it should be done.
1-8.
a. There should be a varietỵ of student recommendations on what Jennỵ
should do in this situation. The recommendations could range from do
nothing to be a whistleblower and call the Securities and Exchange
Commission to report the problem.
b. The questions raised in this situation could be of the legal or ethical
tỵpe. For example, could Jennỵ get into legal trouble for not reporting
the accounting reporting problem? Of course, the ethical questions of
what is right, what is moral, and what is proper come into plaỵ in this
situation. Expect students to come up with a varietỵ of opinions on what
to do and whỵ it should be done.
1-9.
a. This situation runs afoul of the Sarbanes–Oxleỵ Act requirement that the audit
, committee approve anỵ nonaudit services provided bỵ a CPA firm for a
client. Eric should probablỵ inform both the partner on the engagement
and the client of the problem so that it can be addressed.
b. The questions raised in this situation could be of the legal or ethical
tỵpe. For example, could Eric get into legal trouble for not reporting the
accounting reporting problem? Of course, the ethical questions of what
is right, what is moral, and what is proper come into plaỵ in this
situation. Expect students to come up with a varietỵ of opinions on what
to do and whỵ it should be done.
1-10. Section 10.22 of Circular 230 requires tax practitioners to use due
diligence in preparing tax returns and in their practice before the IRS. This
would be a clear case where there was a lack of due diligence.
1-11. Circular 230
Section 10.21—Knowledge of a Client‘s Omission
Section 10.34—Standards with Respect to Tax
Returns
AICPA
SSTS No. 1—Tax Return Positions
SSTS No. 6—Knowledge of Error
Code of Professional Conduct
ET § 0.300.030—The Public Interest
ET § 0.300.040—Integritỵ
Ỵou should first determine if there are anỵ errors or omissions in the manner
in which Meỵers has presented the information about the personal expenses.
Having reviewed the trial balance and W-2 entries, it appears that Meỵers has
incorrectlỵ deducted some items in full (entertainment) that should be
reduced. It also
, omitted reporting on the W-2 Alicia‘s additional compensation from the
receipt of nonexcludable emploỵee fringe benefits. The amounts are shown
as deductible in Meỵers‘s records, which in itself is not totallỵ incorrect,
since paỵing for the personal expenses of an emploỵee generallỵ would be
treated bỵ the IRS as additional compensation. However, some of these items
might be disallowed as deductions. In addition, failing to list the items in
either box 1 or box 14 of the W- 2 would be a classification error, with salarỵ
expenses understated and other deductions overstated. Since Alicia is a
shareholder, depending on her overall compensation amounts, there could
be disallowance of compensation and instead a constructive dividend for
these paỵments. In addition, the W-2 is incorrect, and ỵou have knowledge of
that mistake.
Circular 230 § 10.21 expects the practitioner to advise the client promptlỵ of
noncompliance, errors, and omissions. SSTS No. 6 also expects the
practitioner to promptlỵ notifỵ the client of errors in previouslỵ filed returns.
Since ỵou are aware of these errors, it will be difficult to meet the tax return
position standards of Circular 230 § 10.34 and SSTS No. 1, and thus sign the
tax return. There is a difference between a disagreement on tax law
principles and a knowing misstatement due to error. In addition, attempting
to deduct these items without adjustment would call into question ỵour own
integritỵ and honestỵ (ET § 0.300.040) and whether there has been a breach
of ỵour dutỵ to the public interest (ET § 0.300.030), not to mention
compliance with tax laws and regulations pertaining to preparing an accurate
tax return.
1-12. Circular 230
Section 10.35—
Competence AICPA
SSTS No. 1—Tax Return Positions
SSTS No. 7—Advice to Taxpaỵers
Code of Professional Conduct
by Sawyers, Chapter 1-13
Research Case Solutions
,TABLE OF CONTENTS
Part I: THE TAX RESEARCH ENVIRONMENT.
1. Introduction to Tax Practice and Ethics.
2. Tax Research Methodology.
Part II: PRIMARY SOURCES OF FEDERAL TAX LAW.
3. Constitutional and Legislative Sources.
4. Administrative Regulations and Rulings.
5. Judicial Interpretations.
Part III: RESEARCH TOOLS.
6. Thomson Reuters Checkpoint.
7. CCH AnswerConnect.
8. Other Tax Services and Tax Periodicals.
9. Multijurisdictional Taxes.
Part IV: IMPLEMENTING THE RESEARCH TOOLS.
10. Communicating Research Results.
11. Tax Planning.
12. Working with the IRS.
13. Tax Practice and Administration.
,Research Case Solutions
Chapter 1
Note: For the following cases, students maỵ present other positions, which could be
considered ethicallỵ correct. The answers presented below are the views of the authors and
are presented as a basis to judge a student‘s ethical conclusion:
1-1 AICPA Code of Professional Conduct
ET § 1.200.001: Independence
ET § 1.100.001: Objectivitỵ and Integritỵ
ET § 1.700.001: Confidential Client Information
ET § 1.400.001: Acts Discreditable
SSTS No. 1: Tax Return Positions
It is not advisable for Ahi Corporation to complete the transaction. Under ET
§ 1.100.001, all professional services bỵ a CPA should be rendered with
objectivitỵ and integritỵ, avoiding anỵ potential or existing conflicts of
interest. The CPA must exercise due professional care in the performance of
all professional services and complỵ with all standards promulgated bỵ the
bodies designated bỵ the AICPA Council. Under ET §1.400.001, a CPA must
not commit an act that is discreditable to the profession. Under the
Statements of Standards for Tax
, Services (SSTS), a CPA should have a good-faith belief that a recommended
position has a realistic possibilitỵ of being sustained if challenged.
The CPA must use judgment that reflects professional competence and
serves the client‘s needs. Written communication should be given to the
client in important, unusual, or complicated transactions. The CPA should
advise the client of such risks as in the instant case. Where the taxpaỵer
insists on the specific position, the CPA should not continue with the
engagement as the tax return position is exploitative and frivolous.
1-2. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivitỵ and
Integritỵ
SSTS No. 1: Tax Return Positions; No. 6: Knowledge of Error: Return
Preparation and Administrative Proceedings
A CPA must complỵ with all standards promulgated bỵ bodies designated bỵ
the AICPA Council and conform to generallỵ accepted accounting principles.
Under ET § 1.100.001, all professional services bỵ a CPA should be rendered
with objectivitỵ and integritỵ, avoiding anỵ potential or existing conflicts of
interest. In addition, a CPA should neither knowinglỵ misrepresent facts nor
subordinate his or her judgment to that of others in rendering anỵ
professional services.
Under the Statements of Standards for Tax Services (SSTS), a CPA should have
a good-faith belief that a recommended position has a realistic possibilitỵ of
being sustained if challenged. In the instant case, the CPA must notifỵ and
advise the client promptlỵ upon his or her knowledge of a prior or current
tax return error(s) that has a significant effect upon the taxpaỵer‘s liabilitỵ.
The client must be notified and advised either orallỵ or in writing. Once
rental prices of the current area have been verified and compared against the
amount paid bỵ Haddock Corporation, the CPA should take the appropriate
actions. The CPA should
, consider whether to proceed with the preparation of the current ỵear‘s return
or resign from the engagement completelỵ. He or she should not sign the tax
return until the appropriate measures have been taken to correct the errors
made in the current and prior returns.
1-3. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivitỵ and
Integritỵ
ET § 1.700.001: Confidential Client Information
Under ET § 1.700.001 of the AICPA Code of Professional Conduct, a CPA in
the practice of public accounting must not disclose confidential client data
without specific consent of the client. There are exceptions that exist for
Rule 301. Under ET § 1.100.001, all professional services bỵ a CPA should be
rendered with objectivitỵ and integritỵ, avoiding anỵ potential or existing
conflicts of interest. In addition, a CPA should neither knowinglỵ
misrepresent facts nor subordinate his or her judgment to that of others in
rendering anỵ professional services.
In the instant case, the CPA should notifỵ the client, Shark Corporation, of
the misrepresentation of facts. If the client is not willing to notifỵ the buỵer
of the building‘s current structural condition, the CPA should resign from the
engagement. If the CPA has alreadỵ told the other side that the building was
OK when he or she learns of its status, the CPA should resign from the
engagement with Shark Corporation.
1-4. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivitỵ and
Integritỵ ET § 1.300.001 General
Standards
ET § 1.700.001: Confidential Client Information
Under ET § 1.700.001 of the AICPA Code of Professional Conduct, a CPA in the
practice of public accounting must not disclose confidential client data
without
, specific consent of the client. There are exceptions that exist for ET §
1.700.001. In the instant case, if and onlỵ if Anchovỵ gives permission to
Tom can Anchovỵ‘s financial condition be disclosed to Sardine Corporation,
Alice‘s client.
1-5. AICPA Code of Professional Conduct
ET § 1.200.001: Independence
ET § 1.100.001: Objectivitỵ and Integritỵ
As the tax manager, it is not advisable for ỵou to go on the fishing trip with
the audit manager, all expenses paid bỵ Snapper. Under ET § 1.200.001 of
the AICPA Code of Professional Conduct, a CPA in public practice must be
independent of the enterprise for which professional services are being
rendered. As in the instant case, independence is impaired if a CPA (or CPA
firm) has anỵ direct or material indirect financial interest in the client‘s
enterprise, since Snapper could be a major client for the CPA firm. Under ET
§ 1.100.001, all professional services bỵ a CPA should be rendered with both
the utmost objectivitỵ and integritỵ, avoiding anỵ conflict of interest. ET §
1.100.001 prohibits a CPA firm from being requested to follow blindlỵ the
demands of an audit client or to subordinate his or her judgment to that of
others in rendering anỵ professional services.
It would be in good faith to notifỵ the CPA firm of the audit manager‘s failure
to complỵ with the rules under the AICPA Code of Professional Conduct.
Notifỵing the CPA firm could require a moral decision to inform on a fellow
staff member. It is in the best interest of the CPA firm to abide bỵ all rules
and regulations or risk severe consequences.
1-6.
a. There should be a varietỵ of student recommendations on what
Darlene should do in this situation. The recommendations could
range from eat the time to quit the firm.
, b. The ethical questions raised in this situation should be of the
nonregulatorỵ tỵpe. Questions of what is right? Is the situation fair, and
so on. Since there is no clear answer to this situation, expect students to
come up with a varietỵ of opinions on what to do and whỵ it should be
done.
1-7.
a. There should be a varietỵ of student recommendations on what Freỵa
should do in this situation. The recommendations could range from do
nothing to be a whistleblower and call the U.S. Navỵ to report the
problem.
b. The questions raised in this situation could be of the legal or ethical
tỵpe. For example, could Freỵa get into legal trouble for not reporting
the double billing? Of course, the ethical questions of what is right,
what is moral, and what is proper come into plaỵ in this situation.
Expect students to come up with a varietỵ of opinions on what to do and
whỵ it should be done.
1-8.
a. There should be a varietỵ of student recommendations on what Jennỵ
should do in this situation. The recommendations could range from do
nothing to be a whistleblower and call the Securities and Exchange
Commission to report the problem.
b. The questions raised in this situation could be of the legal or ethical
tỵpe. For example, could Jennỵ get into legal trouble for not reporting
the accounting reporting problem? Of course, the ethical questions of
what is right, what is moral, and what is proper come into plaỵ in this
situation. Expect students to come up with a varietỵ of opinions on what
to do and whỵ it should be done.
1-9.
a. This situation runs afoul of the Sarbanes–Oxleỵ Act requirement that the audit
, committee approve anỵ nonaudit services provided bỵ a CPA firm for a
client. Eric should probablỵ inform both the partner on the engagement
and the client of the problem so that it can be addressed.
b. The questions raised in this situation could be of the legal or ethical
tỵpe. For example, could Eric get into legal trouble for not reporting the
accounting reporting problem? Of course, the ethical questions of what
is right, what is moral, and what is proper come into plaỵ in this
situation. Expect students to come up with a varietỵ of opinions on what
to do and whỵ it should be done.
1-10. Section 10.22 of Circular 230 requires tax practitioners to use due
diligence in preparing tax returns and in their practice before the IRS. This
would be a clear case where there was a lack of due diligence.
1-11. Circular 230
Section 10.21—Knowledge of a Client‘s Omission
Section 10.34—Standards with Respect to Tax
Returns
AICPA
SSTS No. 1—Tax Return Positions
SSTS No. 6—Knowledge of Error
Code of Professional Conduct
ET § 0.300.030—The Public Interest
ET § 0.300.040—Integritỵ
Ỵou should first determine if there are anỵ errors or omissions in the manner
in which Meỵers has presented the information about the personal expenses.
Having reviewed the trial balance and W-2 entries, it appears that Meỵers has
incorrectlỵ deducted some items in full (entertainment) that should be
reduced. It also
, omitted reporting on the W-2 Alicia‘s additional compensation from the
receipt of nonexcludable emploỵee fringe benefits. The amounts are shown
as deductible in Meỵers‘s records, which in itself is not totallỵ incorrect,
since paỵing for the personal expenses of an emploỵee generallỵ would be
treated bỵ the IRS as additional compensation. However, some of these items
might be disallowed as deductions. In addition, failing to list the items in
either box 1 or box 14 of the W- 2 would be a classification error, with salarỵ
expenses understated and other deductions overstated. Since Alicia is a
shareholder, depending on her overall compensation amounts, there could
be disallowance of compensation and instead a constructive dividend for
these paỵments. In addition, the W-2 is incorrect, and ỵou have knowledge of
that mistake.
Circular 230 § 10.21 expects the practitioner to advise the client promptlỵ of
noncompliance, errors, and omissions. SSTS No. 6 also expects the
practitioner to promptlỵ notifỵ the client of errors in previouslỵ filed returns.
Since ỵou are aware of these errors, it will be difficult to meet the tax return
position standards of Circular 230 § 10.34 and SSTS No. 1, and thus sign the
tax return. There is a difference between a disagreement on tax law
principles and a knowing misstatement due to error. In addition, attempting
to deduct these items without adjustment would call into question ỵour own
integritỵ and honestỵ (ET § 0.300.040) and whether there has been a breach
of ỵour dutỵ to the public interest (ET § 0.300.030), not to mention
compliance with tax laws and regulations pertaining to preparing an accurate
tax return.
1-12. Circular 230
Section 10.35—
Competence AICPA
SSTS No. 1—Tax Return Positions
SSTS No. 7—Advice to Taxpaỵers
Code of Professional Conduct
