FederalgTaxgResearch,g12thgEditiong g Pageg1g
g
g
ResearchgCasegSolutionsg
g
ThegsolutionsgtogthegresearchgcasesgaregvalidgasgofgFebruaryg2020.gItgisglikelygthatgtheregwillgbeg
changesgingthegcode,gregulations,gadministrativegpronouncements,gandgcaseglawgaftergthisgmanual
g isgpublished.gFurther,gitgisglikelygthatgthegservicesgavailablegtogthegstudentsgwillgnotgbegidenticalg
togthosegavailablegtogthegauthorsgofgthisgmanual.gAllgpossiblegcitationsgaregnotgprovided;gonlygags
amplegofgthegcitationsgmostglikelygprovidedgbygstudentsgisgpresented.gConsequently,gthegstudents
‘gresponsesgmaygvarygfromgthoseglistedgforgeachgquestion.gg
g
Chapterg1g
Note:gForgthegfollowinggcases,gstudentsgmaygpresentgothergpositions,gwhichgcouldgbegconsideredg
ethicallygcorrect.gTheganswersgpresentedgbelowgaregthegviewsgofgthegauthorsgandgaregpresentedga
sgagbasisgtogjudgegagstudent‘sgethicalgconclusion:g
g
1-1g AICPAgCodegofgProfessionalgConductg
ETg§g1.200.001:gIndependenceg
ETg§g1.100.001:gObjectivitygandgIntegrityg
ETg§g1.700.001:gConfidentialgClientgInformationg
ETg§g1.400.001:gActsgDiscreditableg
g
SSTSgNo.g1:gTaxgReturngPositionsgg
g
ItgisgnotgadvisablegforgAhigCorporationgtogcompletegthegtransaction.gUndergETg§g1
.100.001,gallgprofessionalgservicesgbygagCPAgshouldgbegrenderedgwithgobjectivityg
andgintegrity,gavoidingganygpotentialgorgexistinggconflictsgofginterest.gThegCPAgm
ustgexercisegduegprofessionalgcaregingthegperformancegofgallgprofessionalgservicesg
andgcomplygwithgallgstandardsgpromulgatedgbygthegbodiesgdesignatedgbygthegAIC
PAgCouncil.gUndergETg§1.400.001,gagCPAgmustgnotgcommitgangactgthatgisgdiscre
ditablegtogthegprofession.gUndergthegStatementsgofgStandardsgforgTaxgServicesg(S
STS),gagCPAgshouldghavegaggood-
,FederalgTaxgResearch,g12thgEditiong g Pageg2g
g
g
faithgbeliefgthatgagrecommendedgpositionghasgagrealisticgpossibilitygofgbeinggsustai
nedgifgchallenged.gg
g
ThegCPAgmustgusegjudgmentgthatgreflectsgprofessionalgcompetencegandgservesgthe
gclient‘sgneeds.gWrittengcommunicationgshouldgbeggivengtogthegclientgingimportant
,gunusual,gorgcomplicatedgtransactions.gThegCPAgshouldgadvisegthegclientgofgsuchg
risksgasgingtheginstantgcase.gWheregthegtaxpayerginsistsgongthegspecificgposition,gth
egCPAgshouldgnotgcontinuegwithgthegengagementgasgthegtaxgreturngpositiongisgexpl
oitativegandgfrivolous.gg
g
1-2.g AICPAgCodegofgProfessionalgConductg
ETg§g1.100.001:gObjectivitygandgIntegrityg
g
SSTSgNo.g1:gTaxgReturngPositions;gNo.g6:gKnowledgegofgError:gReturngP
reparationgandgAdministrativegProceedingsg
g
AgCPAgmustgcomplygwithgallgstandardsgpromulgatedgbygbodiesgdesignatedgbygthe
gAICPAgCouncilgandgconformgtoggenerallygacceptedgaccountinggprinciples.gUnder
gETg§g1.100.001,gallgprofessionalgservicesgbygagCPAgshouldgbegrenderedgwithgobj
ectivitygandgintegrity,gavoidingganygpotentialgorgexistinggconflictsgofginterest.gInga
ddition,gagCPAgshouldgneithergknowinglygmisrepresentgfactsgnorgsubordinateghisg
orghergjudgmentgtogthatgofgothersgingrenderingganygprofessionalgservices.g
g
UndergthegStatementsgofgStandardsgforgTaxgServicesg(SSTS),gagCPAgshouldghaveg
aggood-
faithgbeliefgthatgagrecommendedgpositionghasgagrealisticgpossibilitygofgbeinggsustai
nedgifgchallenged.gIngtheginstantgcase,gthegCPAgmustgnotifygandgadvisegthegclientg
promptlyguponghisgorghergknowledgegofgagpriorgorgcurrentgtaxgreturngerror(s)gthatg
hasgagsignificantgeffectgupongthegtaxpayer‘sgliability.gThegclientgmustgbegnotifiedg
andgadvisedgeithergorallygorgingwriting.gOncegrentalgpricesgofgthegcurrentgareaghav
egbeengverifiedgandgcomparedgagainstgthegamountgpaidgbygHaddockg
,FederalgTaxgResearch,g12thgEditiong g Pageg3g
g
g
Corporation,gthegCPAgshouldgtakegthegappropriategactions.gThegCPAgshouldg
considergwhethergtogproceedgwithgthegpreparationgofgthegcurrentgyear‘sgreturngorgr
esigngfromgthegengagementgcompletely.gHegorgshegshouldgnotgsigngthegtaxgreturng
untilgthegappropriategmeasuresghavegbeengtakengtogcorrectgthegerrorsgmadegingtheg
currentgandgpriorgreturns.g
g
1-3.g AICPAgCodegofgProfessionalgConductg
ETg§g1.100.001:gObjectivitygandgIntegrityg
ETg§g1.700.001:gConfidentialgClientgInformationg
g
UndergETg§g1.700.001gofgthegAICPAgCodegofgProfessionalgConduct,gagCPAgingth
egpracticegofgpublicgaccountinggmustgnotgdisclosegconfidentialgclientgdatagwithoutg
specificgconsentgofgthegclient.gTheregaregexceptionsgthatgexistgforgRuleg301.gUnder
gETg§g1.100.001,gallgprofessionalgservicesgbygagCPAgshouldgbegrenderedgwithgobj
ectivitygandgintegrity,gavoidingganygpotentialgorgexistinggconflictsgofginterest.gInga
ddition,gagCPAgshouldgneithergknowinglygmisrepresentgfactsgnorgsubordinateghisg
orghergjudgmentgtogthatgofgothersgingrenderingganygprofessionalgservices.gg
g
Ingtheginstantgcase,gthegCPAgshouldgnotifygthegclient,gSharkgCorporation,gofgthegm
isrepresentationgofgfacts.gIfgthegclientgisgnotgwillinggtognotifygthegbuyergofgthegbuil
ding‘sgcurrentgstructuralgcondition,gthegCPAgshouldgresigngfromgthegengagement.g
IfgthegCPAghasgalreadygtoldgthegothergsidegthatgthegbuildinggwasgOKgwhenghegorgs
heglearnsgofgitsgstatus,gthegCPAgshouldgresigngfromgthegengagementgwithgSharkgC
orporation.g
g
1-4.g AICPAgCodegofgProfessionalgConductg
ETg§g1.100.001:gObjectivitygandgIntegrityg
ETg§g1.300.001gGeneralgStandardsg
ETg§g1.700.001:gConfidentialgClientgInformationg
g
UndergETg§g1.700.001gofgthegAICPAgCodegofgProfessionalgConduct,gagCPAgingth
egpracticegofgpublicgaccountinggmustgnotgdisclosegconfidentialgclientgdatagwithoutg
, FederalgTaxgResearch,g12thgEditiong g Pageg4g
g
g
specificgconsentgofgthegclient.gTheregaregexceptionsgthatgexistgforgETg§g1.700.001.
g
Ingtheginstantgcase,gifgandgonlygifgAnchovyggivesgpermissiongtogTomgcang
Anchovy‘sgfinancialgconditiongbegdisclosedgtogSardinegCorporation,gAlice‘sgclient
.g
g
1-5.g AICPAgCodegofgProfessionalgConductg
ETg§g1.200.001:gIndependenceg
ETg§g1.100.001:gObjectivitygandgIntegrityg
g
Asgthegtaxgmanager,gitgisgnotgadvisablegforgyougtoggogongthegfishinggtripgwithgthega
uditgmanager,gallgexpensesgpaidgbygSnapper.gUndergETg§g1.200.001gofgthegAICP
AgCodegofgProfessionalgConduct,gagCPAgingpublicgpracticegmustgbegindependentg
ofgthegenterprisegforgwhichgprofessionalgservicesgaregbeinggrendered.gAsgingthegins
tantgcase,gindependencegisgimpairedgifgagCPAg(orgCPAgfirm)ghasganygdirectgorgma
terialgindirectgfinancialginterestgingthegclient‘sgenterprise,gsincegSnappergcouldgbeg
agmajorgclientgforgthegCPAgfirm.gUndergETg§g1.100.001,gallgprofessionalgservicesg
bygagCPAgshouldgbegrenderedgwithgbothgthegutmostgobjectivitygandgintegrity,gavoi
dingganygconflictgofginterest.gETg§g1.100.001gprohibitsgagCPAgfirmgfromgbeinggre
questedgtogfollowgblindlygthegdemandsgofgangauditgclientgorgtogsubordinateghisgorg
hergjudgmentgtogthatgofgothersgingrenderingganygprofessionalgservices.gg
g
ItgwouldgbeginggoodgfaithgtognotifygthegCPAgfirmgofgthegauditgmanager‘sgfailuregto
gcomplygwithgthegrulesgundergthegAICPAgCodegofgProfessionalgConduct.gNotifyin
ggthegCPAgfirmgcouldgrequiregagmoralgdecisiongtoginformgongagfellowgstaffgmemb
er.gItgisgingthegbestginterestgofgthegCPAgfirmgtogabidegbygallgrulesgandgregulationsg
orgriskgseveregconsequences.g
g
1-6.g
a. TheregshouldgbegagvarietygofgstudentgrecommendationsgongwhatgDarlenegshoul
dgdogingthisgsituation.gThegrecommendationsgcouldgrangegfromgeatgthegtimegtog
quitgthegfirm.gg
g
g
ResearchgCasegSolutionsg
g
ThegsolutionsgtogthegresearchgcasesgaregvalidgasgofgFebruaryg2020.gItgisglikelygthatgtheregwillgbeg
changesgingthegcode,gregulations,gadministrativegpronouncements,gandgcaseglawgaftergthisgmanual
g isgpublished.gFurther,gitgisglikelygthatgthegservicesgavailablegtogthegstudentsgwillgnotgbegidenticalg
togthosegavailablegtogthegauthorsgofgthisgmanual.gAllgpossiblegcitationsgaregnotgprovided;gonlygags
amplegofgthegcitationsgmostglikelygprovidedgbygstudentsgisgpresented.gConsequently,gthegstudents
‘gresponsesgmaygvarygfromgthoseglistedgforgeachgquestion.gg
g
Chapterg1g
Note:gForgthegfollowinggcases,gstudentsgmaygpresentgothergpositions,gwhichgcouldgbegconsideredg
ethicallygcorrect.gTheganswersgpresentedgbelowgaregthegviewsgofgthegauthorsgandgaregpresentedga
sgagbasisgtogjudgegagstudent‘sgethicalgconclusion:g
g
1-1g AICPAgCodegofgProfessionalgConductg
ETg§g1.200.001:gIndependenceg
ETg§g1.100.001:gObjectivitygandgIntegrityg
ETg§g1.700.001:gConfidentialgClientgInformationg
ETg§g1.400.001:gActsgDiscreditableg
g
SSTSgNo.g1:gTaxgReturngPositionsgg
g
ItgisgnotgadvisablegforgAhigCorporationgtogcompletegthegtransaction.gUndergETg§g1
.100.001,gallgprofessionalgservicesgbygagCPAgshouldgbegrenderedgwithgobjectivityg
andgintegrity,gavoidingganygpotentialgorgexistinggconflictsgofginterest.gThegCPAgm
ustgexercisegduegprofessionalgcaregingthegperformancegofgallgprofessionalgservicesg
andgcomplygwithgallgstandardsgpromulgatedgbygthegbodiesgdesignatedgbygthegAIC
PAgCouncil.gUndergETg§1.400.001,gagCPAgmustgnotgcommitgangactgthatgisgdiscre
ditablegtogthegprofession.gUndergthegStatementsgofgStandardsgforgTaxgServicesg(S
STS),gagCPAgshouldghavegaggood-
,FederalgTaxgResearch,g12thgEditiong g Pageg2g
g
g
faithgbeliefgthatgagrecommendedgpositionghasgagrealisticgpossibilitygofgbeinggsustai
nedgifgchallenged.gg
g
ThegCPAgmustgusegjudgmentgthatgreflectsgprofessionalgcompetencegandgservesgthe
gclient‘sgneeds.gWrittengcommunicationgshouldgbeggivengtogthegclientgingimportant
,gunusual,gorgcomplicatedgtransactions.gThegCPAgshouldgadvisegthegclientgofgsuchg
risksgasgingtheginstantgcase.gWheregthegtaxpayerginsistsgongthegspecificgposition,gth
egCPAgshouldgnotgcontinuegwithgthegengagementgasgthegtaxgreturngpositiongisgexpl
oitativegandgfrivolous.gg
g
1-2.g AICPAgCodegofgProfessionalgConductg
ETg§g1.100.001:gObjectivitygandgIntegrityg
g
SSTSgNo.g1:gTaxgReturngPositions;gNo.g6:gKnowledgegofgError:gReturngP
reparationgandgAdministrativegProceedingsg
g
AgCPAgmustgcomplygwithgallgstandardsgpromulgatedgbygbodiesgdesignatedgbygthe
gAICPAgCouncilgandgconformgtoggenerallygacceptedgaccountinggprinciples.gUnder
gETg§g1.100.001,gallgprofessionalgservicesgbygagCPAgshouldgbegrenderedgwithgobj
ectivitygandgintegrity,gavoidingganygpotentialgorgexistinggconflictsgofginterest.gInga
ddition,gagCPAgshouldgneithergknowinglygmisrepresentgfactsgnorgsubordinateghisg
orghergjudgmentgtogthatgofgothersgingrenderingganygprofessionalgservices.g
g
UndergthegStatementsgofgStandardsgforgTaxgServicesg(SSTS),gagCPAgshouldghaveg
aggood-
faithgbeliefgthatgagrecommendedgpositionghasgagrealisticgpossibilitygofgbeinggsustai
nedgifgchallenged.gIngtheginstantgcase,gthegCPAgmustgnotifygandgadvisegthegclientg
promptlyguponghisgorghergknowledgegofgagpriorgorgcurrentgtaxgreturngerror(s)gthatg
hasgagsignificantgeffectgupongthegtaxpayer‘sgliability.gThegclientgmustgbegnotifiedg
andgadvisedgeithergorallygorgingwriting.gOncegrentalgpricesgofgthegcurrentgareaghav
egbeengverifiedgandgcomparedgagainstgthegamountgpaidgbygHaddockg
,FederalgTaxgResearch,g12thgEditiong g Pageg3g
g
g
Corporation,gthegCPAgshouldgtakegthegappropriategactions.gThegCPAgshouldg
considergwhethergtogproceedgwithgthegpreparationgofgthegcurrentgyear‘sgreturngorgr
esigngfromgthegengagementgcompletely.gHegorgshegshouldgnotgsigngthegtaxgreturng
untilgthegappropriategmeasuresghavegbeengtakengtogcorrectgthegerrorsgmadegingtheg
currentgandgpriorgreturns.g
g
1-3.g AICPAgCodegofgProfessionalgConductg
ETg§g1.100.001:gObjectivitygandgIntegrityg
ETg§g1.700.001:gConfidentialgClientgInformationg
g
UndergETg§g1.700.001gofgthegAICPAgCodegofgProfessionalgConduct,gagCPAgingth
egpracticegofgpublicgaccountinggmustgnotgdisclosegconfidentialgclientgdatagwithoutg
specificgconsentgofgthegclient.gTheregaregexceptionsgthatgexistgforgRuleg301.gUnder
gETg§g1.100.001,gallgprofessionalgservicesgbygagCPAgshouldgbegrenderedgwithgobj
ectivitygandgintegrity,gavoidingganygpotentialgorgexistinggconflictsgofginterest.gInga
ddition,gagCPAgshouldgneithergknowinglygmisrepresentgfactsgnorgsubordinateghisg
orghergjudgmentgtogthatgofgothersgingrenderingganygprofessionalgservices.gg
g
Ingtheginstantgcase,gthegCPAgshouldgnotifygthegclient,gSharkgCorporation,gofgthegm
isrepresentationgofgfacts.gIfgthegclientgisgnotgwillinggtognotifygthegbuyergofgthegbuil
ding‘sgcurrentgstructuralgcondition,gthegCPAgshouldgresigngfromgthegengagement.g
IfgthegCPAghasgalreadygtoldgthegothergsidegthatgthegbuildinggwasgOKgwhenghegorgs
heglearnsgofgitsgstatus,gthegCPAgshouldgresigngfromgthegengagementgwithgSharkgC
orporation.g
g
1-4.g AICPAgCodegofgProfessionalgConductg
ETg§g1.100.001:gObjectivitygandgIntegrityg
ETg§g1.300.001gGeneralgStandardsg
ETg§g1.700.001:gConfidentialgClientgInformationg
g
UndergETg§g1.700.001gofgthegAICPAgCodegofgProfessionalgConduct,gagCPAgingth
egpracticegofgpublicgaccountinggmustgnotgdisclosegconfidentialgclientgdatagwithoutg
, FederalgTaxgResearch,g12thgEditiong g Pageg4g
g
g
specificgconsentgofgthegclient.gTheregaregexceptionsgthatgexistgforgETg§g1.700.001.
g
Ingtheginstantgcase,gifgandgonlygifgAnchovyggivesgpermissiongtogTomgcang
Anchovy‘sgfinancialgconditiongbegdisclosedgtogSardinegCorporation,gAlice‘sgclient
.g
g
1-5.g AICPAgCodegofgProfessionalgConductg
ETg§g1.200.001:gIndependenceg
ETg§g1.100.001:gObjectivitygandgIntegrityg
g
Asgthegtaxgmanager,gitgisgnotgadvisablegforgyougtoggogongthegfishinggtripgwithgthega
uditgmanager,gallgexpensesgpaidgbygSnapper.gUndergETg§g1.200.001gofgthegAICP
AgCodegofgProfessionalgConduct,gagCPAgingpublicgpracticegmustgbegindependentg
ofgthegenterprisegforgwhichgprofessionalgservicesgaregbeinggrendered.gAsgingthegins
tantgcase,gindependencegisgimpairedgifgagCPAg(orgCPAgfirm)ghasganygdirectgorgma
terialgindirectgfinancialginterestgingthegclient‘sgenterprise,gsincegSnappergcouldgbeg
agmajorgclientgforgthegCPAgfirm.gUndergETg§g1.100.001,gallgprofessionalgservicesg
bygagCPAgshouldgbegrenderedgwithgbothgthegutmostgobjectivitygandgintegrity,gavoi
dingganygconflictgofginterest.gETg§g1.100.001gprohibitsgagCPAgfirmgfromgbeinggre
questedgtogfollowgblindlygthegdemandsgofgangauditgclientgorgtogsubordinateghisgorg
hergjudgmentgtogthatgofgothersgingrenderingganygprofessionalgservices.gg
g
ItgwouldgbeginggoodgfaithgtognotifygthegCPAgfirmgofgthegauditgmanager‘sgfailuregto
gcomplygwithgthegrulesgundergthegAICPAgCodegofgProfessionalgConduct.gNotifyin
ggthegCPAgfirmgcouldgrequiregagmoralgdecisiongtoginformgongagfellowgstaffgmemb
er.gItgisgingthegbestginterestgofgthegCPAgfirmgtogabidegbygallgrulesgandgregulationsg
orgriskgseveregconsequences.g
g
1-6.g
a. TheregshouldgbegagvarietygofgstudentgrecommendationsgongwhatgDarlenegshoul
dgdogingthisgsituation.gThegrecommendationsgcouldgrangegfromgeatgthegtimegtog
quitgthegfirm.gg
