100 Federal Taxation--Practice and Procedure 11315 DISCUSSION QUESTIONS 1. PUB Corp. is a publicly held company and for several years its certified audit has been done by Final 4, a nationally known accounting fimm Annabel Aggressive, certified public accountant, a recent graduate of a Master of Taxation program and the self-styled "fireball" of Final 4, has just received a summons from the IRS. Annabel worked on the certified audit of PUB Corp. and prepared the tax accrual workpapers regarding PUB Corp. The summons seeks production of the tax accruai workpapers, a step the agent has resorted to because Annabel refuses to produce them (or anything else if she can get away with it) voluntarily. Annabel knows that you are still a student in the Master of Taxation program and also knows that in your course you are discussing the Section 7525 privilege and the Arthur Young case, 465 U.S. 805 (1984), 84-1 USTC 99305, concerning a privilege for accountant's tax accrual workpapers. (See Chapter 7, IRS position on seeking accrual workpapers). Annabel wants to claim privilege solely to delay the agent in his audit. She wants to know whether her actions are prohibited by Circular 230. C2. You normally prepare the tax return for ABC Manufacturing, ans corporation. The sole shareholder of the corporation submits all of the year-end figures except the closing inventory. The owner tells you that they are still in the process of extending the inventory, but that you should start working on those portions of the return that you can do without the closing inventory. He suggests you use $250,000 as an estimate for the closing inventory. After you have the return sketched out, you call the owner to get the closing inventory figures. The conversation goes as follows: You: I have sketched out your return using the $250,000 estimate for the closing inventory. Do you have any accurate figures for the closing inventory yet? Owner: No, we're just finishing that up right now. Tell me, how does the year look using the estimated figure? You: Well, it looks like you had a pretty good profit. It's hard to say without all the figures, but I would guess your profit could be as high as $145,000 this year. Owner: You say that I could have a $145,000 profit this year? You: That assumes that your inventory will close at $250,000. Owner: What will my profit be if the closing inventory is only $175,000? You: It looks like your profit will only be $70,000. Owner: What if the ending inventory is only $125,000? You: Then your profit will probably be about $20,000. Why do you About an hour later the owner comes in. He says, "just got the figures "I for the closing inventory. We had to do a lot of computing to come up ask? 1315 101 Ethical Responsibilities with an aceurate figure, but I'm pretty sure this is it." He hands you a sheet of paper showing the closing inventory to be $95,000 (A) What does Circular 230 tell you to do in such a situation? (B) As a practical matter, what should you do in this situation? 3. Alex Alert is the in-house Certified Public Accountant for a large manu- facturing firm. President asks Alex to prepare a pro forma schedule to be used by the president's personal tax preparer in the preparation of the president's individual income tax return When Alert receives the figures from the president, he notes that the only income items are the president's already sizable salary and two cash dividends paid to all stockholders during that year. Alert knows that the maintenance staff of the company has rebuilt the president's summer cottage during that year with surplus goods" rerouted from the plant expansion site. Alert has been reviewing some of the cost overruns on the plant expansion, and he estimates that the cost of labor and materials that went into the president's four-bedroom, three-bath "cottage" is approximately $500,000. (A) What, if anything, does Circular 230 require Alert to do in this situation? (B) What should be done as a practical matter? You work for Modmfg as an internal accountant. Modmfg is a very successful sole proprietorship. During the year, Peter Proprietor sells his business, Modmfg, to Newton Owner. Owner asks you to stay on as internal accountant and you agree. At the same time, Proprietor wishes you to continue to prepare his personal tax returns, something you have done for fifteen years. When it comes time to prepare Peter Proprietor's personal return, you review the contract for the sale of the business. You notice for the first time that the contract drafted by Owner's attorney has allocated 100% of the purchase price to the tangible assets of the business, with no amount allocated to goodwill at all. You believe that this is an unreasonable allocation, so in reporting the gain on Proprietor's return, you allocate 50% of the purchase price to goodwill. You are not involved in the preparation of the personal return for Newton Owner, since that task is handled by the outside accountant who worked with Owner's attorney in drafting the contract for the purchase of the business. Approximately a year later, Proprietor receives a notice that he has been called in for an office examination for a review of the sale of the business. Proprietor asks you to represent him before the IRS in connec- tion with this audit. At the same time, your responsibilities at Modmfg have been growing and Newton Owner has just asked you to be its senior representative in dealing with the IRS in connection with a field audit that is about to be conducted of the operations of Modmfg. You realize that Proprietor's and Owner's interests are adverse as to the 1315 Federal Taxation-Practice and Procedure 102 allocation of the purchase price and that you may have a potential conflict of interest in seeking to represent both of them. lutande (A) Under Circular 230, can you represent both of them? (B) What could you do if you wish to represent them both? (C) Can they agree on an allocation of the purchase price between themselves prior to the time that the audits are scheduled? 5. Joseph Argue, an attorney, is approached by Warren Investor. Investor is considering an investment in a business plan, which seems very com- Staplex and which Investor will not invest in unless he is more likely than not to prevail on the desired tax benefits if examined by the IRS. Is the opinion Joe Argue gives with respect to this investment reasonable? esh Why or why not? Now suppose that the technical propriety of the business plan was based 120 on an arm's-length loan from a bank. How would your answer change if the loan came from a bank that Warren Investor owned and the bank has hd been in the news due to alleged fraudulent activity?ctombs 6. Betsy Ross, a U.S. citizen and a loyal patriot of the United States, operates a branch that makes flags in the United Kingdom (the "U.K."). Betsy describes to attorney what the attorney believes to be a very fraudulent scheme to defraud the U.K. tax authority. After your explana- tion, Betsy says "I don't care about those darn Redcoats. I don't get to vote in the U.K. so this is taxation without representation." What obliga- shell tions does Betsy's attorney have under Circular 230? OVODOM 100 Federal Taxation--Practice and Procedure 11315 DISCUSSION QUESTIONS 1. PUB Corp. is a publicly held company and for several years its certified audit has been done by Final 4, a nationally known accounting fimm Annabel Aggressive, certified public accountant, a recent graduate of a Master of Taxation program and the self-styled "fireball" of Final 4, has just received a summons from the IRS. Annabel worked on the certified audit of PUB Corp. and prepared the tax accrual workpapers regarding PUB Corp. The summons seeks production of the tax accruai workpapers, a step the agent has resorted to because Annabel refuses to produce them (or anything else if she can get away with it) voluntarily. Annabel knows that you are still a student in the Master of Taxation program and also knows that in your course you are discussing the Section 7525 privilege and the Arthur Young case, 465 U.S. 805 (1984), 84-1 USTC 99305, concerning a privilege for accountant's tax accrual workpapers. (See Chapter 7, IRS position on seeking accrual workpapers). Annabel wants to claim privilege solely to delay the agent in his audit. She wants to know whether her actions are prohibited by Circular 230. C2. You normally prepare the tax return for ABC Manufacturing, ans corporation. The sole shareholder of the corporation submits all of the year-end figures except the closing inventory. The owner tells you that they are still in the process of extending the inventory, but that you should start working on those portions of the return that you can do without the closing inventory. He suggests you use $250,000 as an estimate for the closing inventory. After you have the return sketched out, you call the owner to get the closing inventory figures. The conversation goes as follows: You: I have sketched out your return using the $250,000 estimate for the closing inventory. Do you have any accurate figures for the closing inventory yet? Owner: No, we're just finishing that up right now. Tell me, how does the year look using the estimated figure? You: Well, it looks like you had a pretty good profit. It's hard to say without all the figures, but I would guess your profit could be as high as $145,000 this year. Owner: You say that I could have a $145,000 profit this year? You: That assumes that your inventory will close at $250,000. Owner: What will my profit be if the closing inventory is only $175,000? You: It looks like your profit will only be $70,000. Owner: What if the ending inventory is only $125,000? You: Then your profit will probably be about $20,000. Why do you About an hour later the owner comes in. He says, "just got the figures "I for the closing inventory. We had to do a lot of computing to come up ask? 1315 101 Ethical Responsibilities with an aceurate figure, but I'm pretty sure this is it." He hands you a sheet of paper showing the closing inventory to be $95,000 (A) What does Circular 230 tell you to do in such a situation? (B) As a practical matter, what should you do in this situation? 3. Alex Alert is the in-house Certified Public Accountant for a large manu- facturing firm. President asks Alex to prepare a pro forma schedule to be used by the president's personal tax preparer in the preparation of the president's individual income tax return When Alert receives the figures from the president, he notes that the only income items are the president's already sizable salary and two cash dividends paid to all stockholders during that year. Alert knows that the maintenance staff of the company has rebuilt the president's summer cottage during that year with surplus goods" rerouted from the plant expansion site. Alert has been reviewing some of the cost overruns on the plant expansion, and he estimates that the cost of labor and materials that went into the president's four-bedroom, three-bath "cottage" is approximately $500,000. (A) What, if anything, does Circular 230 require Alert to do in this situation? (B) What should be done as a practical matter? You work for Modmfg as an internal accountant. Modmfg is a very successful sole proprietorship. During the year, Peter Proprietor sells his business, Modmfg, to Newton Owner. Owner asks you to stay on as internal accountant and you agree. At the same time, Proprietor wishes you to continue to prepare his personal tax returns, something you have done for fifteen years. When it comes time to prepare Peter Proprietor's personal return, you review the contract for the sale of the business. You notice for the first time that the contract drafted by Owner's attorney has allocated 100% of the purchase price to the tangible assets of the business, with no amount allocated to goodwill at all. You believe that this is an unreasonable allocation, so in reporting the gain on Proprietor's return, you allocate 50% of the purchase price to goodwill. You are not involved in the preparation of the personal return for Newton Owner, since that task is handled by the outside accountant who worked with Owner's attorney in drafting the contract for the purchase of the business. Approximately a year later, Proprietor receives a notice that he has been called in for an office examination for a review of the sale of the business. Proprietor asks you to represent him before the IRS in connec- tion with this audit. At the same time, your responsibilities at Modmfg have been growing and Newton Owner has just asked you to be its senior representative in dealing with the IRS in connection with a field audit that is about to be conducted of the operations of Modmfg. You realize that Proprietor's and Owner's interests are adverse as to the 1315 Federal Taxation-Practice and Procedure 102 allocation of the purchase price and that you may have a potential conflict of interest in seeking to represent both of them. lutande (A) Under Circular 230, can you represent both of them? (B) What could you do if you wish to represent them both? (C) Can they agree on an allocation of the purchase price between themselves prior to the time that the audits are scheduled? 5. Joseph Argue, an attorney, is approached by Warren Investor. Investor is considering an investment in a business plan, which seems very com- Staplex and which Investor will not invest in unless he is more likely than not to prevail on the desired tax benefits if examined by the IRS. Is the opinion Joe Argue gives with respect to this investment reasonable? esh Why or why not? Now suppose that the technical propriety of the business plan was based 120 on an arm's-length loan from a bank. How would your answer change if the loan came from a bank that Warren Investor owned and the bank has hd been in the news due to alleged fraudulent activity?ctombs 6. Betsy Ross, a U.S. citizen and a loyal patriot of the United States, operates a branch that makes flags in the United Kingdom (the "U.K."). Betsy describes to attorney what the attorney believes to be a very fraudulent scheme to defraud the U.K. tax authority. After your explana- tion, Betsy says "I don't care about those darn Redcoats. I don't get to vote in the U.K. so this is taxation without representation." What obliga- shell tions does Betsy's attorney have under Circular 230? OVODOM