Chapter 15- Exercise 18: Graywall, CPA, serves as a trustee of the CureCancerNow Foundation, a charitable foundation that is dedicated to cancer research activities. For years, he has been the loyal friend and advisor to Adolpho Rabin. In fact, Adolpho made a fortune as the founder of an apparel manufacturing corporation. After his mother died of cancer, Adolpho Rabin asked Graywall for advice about how he could meaningfully preserve the memory of his mother. Shortly after attending the funeral for Adolpho's mother, Graywall persuaded Adolpho to designate the CureCancerNow Foundation as one of several beneficiaries of his will, along with Adolpho's grown children and two grandchildren. Adolpho's will also provides that the executor may redirect more money to Adolpho's offspring and their offspring if needed to facilitate their medical care, education, or critical life needs. Adolpho also designated Graywall to be the executor of his estate.

• Does Graywall satisfy the Independence Rule to audit the charitable foundation?

Did Graywall have a conflict of interest when he advised Adolpho to designate the CureCancerNow Foundation as one of his estate beneficiaries?

Does Graywall have a conflict of interest in serving as the executor of Adolpho's estate?

Chapter 15- Exercise 19: Your client is the founder of Epsilonia, a highly successful, closely held business. Your client never married or had children, but he did have three sisters, all of whom were active in the company's management and served on the company's Board of Directors. Epsilonia was started over 70 years ago. Prior to 1960, your client was the sole stockholder of Epsilonia. As the company's value grew rapidly, your client became concerned about income taxes and estate taxes. This concern was common in 1960 because the top income tax rate was 91%, and the top estate and gift tax was likewise extremely high. Long-term capital gains tax rates were 25%.

In 1960, your client retained 40% of Epsilonia stock for himself and placed the remaining 60% of the stock into trust for the benefit of his sisters and their children. The trust said, in relevant part: The split-interest trust annually shall distribute trust income to each sister during her life. Upon each sister's death, the principal attributable to her share of the trust shall be distributed in kind to her then-living children. Your client remained the sole trustee of the trust during his lifetime. Upon the recent death of your client, his sisters became cotrustees. Due to the generosity of your client to his sisters during his lifetime, each sister is independently wealthy and self-sufficient financially.

Epsilonia stock historically has paid a dividend distribution rate equal to only .007% on market value. Two of the three sisters do not mind that Epsilonia stock pays such a low dividend because the stock has generated substantial capital appreciation, making each sister's children ridiculously rich. In fact, the Epsilonia stock has appreciated at more than twice the rate of the overall stock market from 1960 to present. However, one of the sisters would like to receive more income for herself and has pleaded with her sisters, as cotrustees, to shift the trust's assets into a High-Income Stock Index Fund that will generate significant dividend income. The other sisters have refused, however. As a result, the aggrieved sister has filed a lawsuit, claiming that, as the income beneficiary of the trust, she is receiving an inadequate amount of money. She contends that:

The cotrustees have breached their fiduciary duty of reasonable care by failing to adequately diversify the trust.

The cotrustees have breached their fiduciary duty of impartiality. This duty requires trustees to establish investment policies that give due regard to the interests of both the income beneficiary and the principal beneficiary in a split interest trust.

Did the three sisters, as cotrustees, unethically gamble with the trust's wealth by maintaining a concentrated investment ownership position only in Epsilonia stock?

In this situation, was it unethical for the cotrustees to keep all the trust's assets invested in a stock that generated such a low dividend that the trust's income beneficiaries barely received any income?

Chapter 14- Exercise 19: You are a licensed CPA who is a member of both the AICPA and the Oregon Society of CPAs. You work in the Tax Compliance Department of a major publicly traded supermarket chain. The company is considering whether to claim a deduction for food donated to various homeless shelters. According to Internal Revenue Code Section 170(b), in the case of a corporation, the total deductions under subsection (a) for any taxable year shall not exceed 10 percent of the taxpayer's taxable income, computed without regard to certain deductions.

Based on your calculations, your employer has already exceeded this limit and cannot claim any deduction for the donated food if it considers the donation to be a charitable contribution. However, this donation earns the company positive news coverage and publicity. As a result, several of your colleagues believe that a full deduction may be claimed under the Tax Code's provisions that allow ordinary and necessary business expenses, such as marketing and advertising, to be claimed.

Your supervisor has asked you to assume that this deduction will save your company $1 million in taxes if it not disallowed by the IRS. You also have been asked to assume that the chance of this item being challenged by the IRS if the company places it on its tax return is 1 in 10, and the probability of the company successfully persuading the IRS about the correctness of its tax position is about 2 in 10. If challenged and your company fails to persuade the IRS that your claimed deduction is allowable, the penalty will be $10 million, on average. Your client is not willing to call attention to this tax position by making any special tax return disclosures.

Are you personally obligated to abide by the AICPA's Statement of Standards for Tax Services, even though you do not work in public practice?

Assume that you are not bound by the AICPA Standards. Would it be a rational economic decision for your client to claim these food donations as fully deductible under the Tax Code's ordinary and necessary rules?

Assume that you are bound by the AICPA Standards. Can you advise your client to claim these food donations as an ordinary and necessary expense?

Could your client claim this deduction if it was willing to make explicit disclosures about this deduction and attach that disclosure to its tax return?

Chapter 14- Exercise 20: Joe Bettalia, a general contractor, has struggled in recent years due to a downturn in the construction market in his region of the country.

During the past two years, Joe has failed to file tax returns. He now has come to your office and asked you to file a tax return for the current year. You have agreed to do so. Joe also made an unusual request. He has asked you to deliberately overstate his income and tax liability on this year's return. When you expressed surprise at his request, he told you that he feels guilty about not having filed with the government in recent years. Also, he told you that his father never has shown him much respect, so he wants to leave a tax return that shows high income around the house, where his father will see it. That way, my Dad will think I'm a success and show me at least some of the respect that I'm owed.

May you intentionally prepare a tax return for Joe that overstates his income and related tax liability?