Chapter Assignment –
Page 459
Assignment for Chapter 1:
1-2 John Haddock owns 75 percent of Haddock Corporation. The other 25 percent of the stock is held by John’s wife, Marsha. You are a tax manager assigned to prepare the corporate tax return for Haddock. While working on the return, you note that Haddock Corp. pays rent to John for a building he owns with his son, John, Jr. The rent being paid is at least three times the normal rate for rentals of similar property in that area of town. You report this observation to the partner on the engagement. She tells you that it is all right to deduct the payments because Haddock Corp. has been doing it for several years, and the IRS never has objected. Under your firm’s policy, managers sign the tax return for clients.
· Would you sign this tax return?
· What potential ethics issues do you see in this situation?
Answer: 1-2.
AICPA Code of Professional Conduct ET § 1.100.001: Objectivity and Integrity SSTS No. 1: Tax Return Positions; No. 6: Knowledge of Error: Return Preparation and Administrative Proceedings
A CPA must comply with all standards promulgated by bodies designated by the AICPA Council and conform to generally accepted accounting principles. Under ET § 1.100.001, all professional services by a CPA should be rendered with objectivity and integrity, avoiding any potential or existing conflicts of interest. In addition, a CPA should neither knowingly misrepresent facts nor subordinate his or her judgment to that of others in rendering any 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 possibility of being sustained if challenged. In the instant case, the CPA must notify and advise the client promptly upon his or her knowledge of a prior or current tax return error(s) that has a significant effect upon the taxpayer‘s liability. The client must be notified and advised either orally or in writing. Once rental prices of the current area have been verified and compared against the amount paid by Haddock Corporation, the CPA should take the appropriate actions. The CPA should consider whether to proceed with the preparation of the current year‘s return or resign from the engagement completely. 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.
1-4 Big CPA Firm has many partners in one of its local offices. Two of these partners are Tom, a tax partner, and Alice, an audit partner. Because of the size of the office, Tom and Alice do not know each other very well. Tom has a tax client, Anchovy Corporation, that is in severe financial trouble and may have to file for bankruptcy. Anchovy is a customer of Sardine Corporation, one of Alice’s audit clients. Accounts receivable on Sardine’s books from Anchovy are significant. If Anchovy goes bankrupt, it could cause serious problems for Sardine. Alice is unaware of the bad financial condition of Anchovy.
· Can Tom disclose to Alice the problems at Anchovy?
· What if Anchovy goes under and takes Sardine with it?
· What potential ethics issues do you see in this situation?
Answer: 1-4
AICPA Code of Professional Conduct
ET § 1.100.001: Objectivity and Integrity
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 only if Anchovy gives permission to Tom can Anchovy‘s financial condition be disclosed to Sardine Corporation, Alice‘s client.
1-16 Carla and Scott were married some years ago and have six-year-old twin daughters, Jackie and Kara. In 2015, they divorced. Their divorce decree includes a court order indicating that Carla is to have physical custody of the children and Scott may have the children for up to 4 weeks per year. The decree also indicates that Scott may “‘claim the girls’ dependent exemptions on his tax returns until the girls are 18.” Carla comes to your office at the start of the 2020 tax season as a new client. She indicates that she has read in the financial press that the TCJA repealed exemptions. During 2019, the children lived with Carla the entire year except when they stayed with Scott for the month of July. Carla requests that you prepare and file her 2019 income tax return claiming the child tax credit for each of the girls. Can you prepare and file Carla’s return in the manner that she has requested?
Answer: 1-16
IRC § 152(c)
IRC § 152(e)(4)(A)
IRC § 151(d)(5)(A) (2019)
IRC § 152(e)(2019)
IRC § 151(d)(5)(B) (2019)
Treas. Reg. § 1.152-4(e)(1)(ii)
There are no legal issues in preventing an accountant from preparing a tax return in the manner Carla has requested. Because Carla has physical possession of the children for 48 weeks during the year, she meets the requirements to claim the children‘s dependent exemptions and the interlinked child tax credit. In order for the children to be claimed by Scott, Carla, as the parent with dominate physical custody, must explicitly release the children‘s dependent exemptions to Scott in writing on Form 8332. ―A court order may not serve as a written declaration‖ releasing a child‘s exemption to the noncustodial parent. That said, while Carla can claim the exemption and related tax benefits, it may be unwise as it violates the existing family court order. Carla‘s original supposition that exemptions were repealed by the TCJA is incorrect; TCJA instead reduced the dollar value of exemptions to zero. Exemptions remain intact as part of the tax law and are still the gateway to numerous dependent-related tax benefits (child tax credit, American Opportunity Tax Credit, etc.).
