th
Federal Tax Research, 12 Edition Page 1
Research Case Solutions
The solutions to the research cases are valid as of February 2020. It is likely that there will be
changes in the code, regulations, administrative pronouncements, and case law after this manual
is published. Further, it is likely that the services available to the students will not be identical to
those available to the authors of this manual. All possible citations are not provided; only a
sample of the citations most likely provided by students is presented. Consequently, the students‘
responses may vary from those listed for each question.
Chapter 1
Note: For the following cases, students may present other positions, which could be considered
ethically 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: Objectivity and Integrity
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 by a CPA should be rendered with objectivity
and integrity, avoiding any potential or existing conflicts of interest. The CPA
must exercise due professional care in the performance of all professional services
and comply with all standards promulgated by the bodies designated by 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
, th
Federal Tax Research, 12 Edition Page 2
Services (SSTS), a CPA should have a good-faith belief that a recommended
position has a realistic possibility 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 taxpayer 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: 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
, th
Federal Tax Research, 12 Edition Page 3
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.
1-3. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivity and Integrity
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 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.
In the instant case, the CPA should notify the client, Shark Corporation, of the
misrepresentation of facts. If the client is not willing to notify the buyer of the
building‘s current structural condition, the CPA should resign from the
engagement. If the CPA has already 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: 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
, th
Federal Tax Research, 12 Edition Page 4
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.
1-5. AICPA Code of Professional Conduct
ET § 1.200.001: Independence
ET § 1.100.001: Objectivity and Integrity
As the tax manager, it is not advisable for you to go on the fishing trip with the
audit manager, all expenses paid by 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 any
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 by a CPA should be rendered with both the utmost
objectivity and integrity, avoiding any conflict of interest. ET § 1.100.001
prohibits a CPA firm from being requested to follow blindly the demands of an
audit client or to subordinate his or her judgment to that of others in rendering any
professional services.
It would be in good faith to notify the CPA firm of the audit manager‘s failure to
comply with the rules under the AICPA Code of Professional Conduct. Notifying
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 by all rules and regulations or
risk severe consequences.
1-6.
a. There should be a variety of student recommendations on what Darlene
should do in this situation. The recommendations could range from eat the
time to quit the firm.
Federal Tax Research, 12 Edition Page 1
Research Case Solutions
The solutions to the research cases are valid as of February 2020. It is likely that there will be
changes in the code, regulations, administrative pronouncements, and case law after this manual
is published. Further, it is likely that the services available to the students will not be identical to
those available to the authors of this manual. All possible citations are not provided; only a
sample of the citations most likely provided by students is presented. Consequently, the students‘
responses may vary from those listed for each question.
Chapter 1
Note: For the following cases, students may present other positions, which could be considered
ethically 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: Objectivity and Integrity
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 by a CPA should be rendered with objectivity
and integrity, avoiding any potential or existing conflicts of interest. The CPA
must exercise due professional care in the performance of all professional services
and comply with all standards promulgated by the bodies designated by 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
, th
Federal Tax Research, 12 Edition Page 2
Services (SSTS), a CPA should have a good-faith belief that a recommended
position has a realistic possibility 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 taxpayer 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: 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
, th
Federal Tax Research, 12 Edition Page 3
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.
1-3. AICPA Code of Professional Conduct
ET § 1.100.001: Objectivity and Integrity
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 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.
In the instant case, the CPA should notify the client, Shark Corporation, of the
misrepresentation of facts. If the client is not willing to notify the buyer of the
building‘s current structural condition, the CPA should resign from the
engagement. If the CPA has already 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: 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
, th
Federal Tax Research, 12 Edition Page 4
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.
1-5. AICPA Code of Professional Conduct
ET § 1.200.001: Independence
ET § 1.100.001: Objectivity and Integrity
As the tax manager, it is not advisable for you to go on the fishing trip with the
audit manager, all expenses paid by 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 any
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 by a CPA should be rendered with both the utmost
objectivity and integrity, avoiding any conflict of interest. ET § 1.100.001
prohibits a CPA firm from being requested to follow blindly the demands of an
audit client or to subordinate his or her judgment to that of others in rendering any
professional services.
It would be in good faith to notify the CPA firm of the audit manager‘s failure to
comply with the rules under the AICPA Code of Professional Conduct. Notifying
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 by all rules and regulations or
risk severe consequences.
1-6.
a. There should be a variety of student recommendations on what Darlene
should do in this situation. The recommendations could range from eat the
time to quit the firm.
