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You are a new manager and you brought in a $150,000 individual income tax engagement on a referral from a friend that is the tax director at a major client of your firm. Your quality reviewer seems to have some issues with deducting the charitable contribution of the development rights (qualified conservation contribution) associated with the real estate near a golf course the new client owns. Your client has valued those rights at $39,000,000 and he wants to deduct the full amount from his income in the year you are preparing the return. Due to a repurchase clause in the contribution agreement, your firm's quality reviewer says the client's tax return position has a likelihood of surviving IRS examination of a 1 in 4 chance; rising at best to a 35% chance of surviving a challenge by the IRS. The fact that this new client is contemplating running for President of the United States has further raised the reviewer's anxiety. Running head: Individual Income Tax Management 1 In this case, as a new manager I am bringing in an individual income tax of $150,000 for review from my quality reviewer. However, the quality reviewer seems to be having trouble in deducting the charitable contributions on the development rights which is associated with the real estate near the golf course where client is owning. The client is valuing the rights at $39,000,000 where the quality reviewer wants to remove them all from annual tax returns. Given that there a repurchase clause with the agreement then it means that there a low chance of being accepted by the IRS authority. The new client is also contemplating running for presidency something that would complicate the matter the more. The ethical dilemma that is existing in this case is whether the client has limited knowledge about handling issues that are relating tax returns. For example, the client is not able to provide an interpretation and the treatment on whether the above amounts should be deducted or not. According to AICPA section 1 and IFRC, if the client is not able to provide an interpretation, then he might be received the penalties. Moreover, there is the fact that this client is contemplating running for President of the United States creates a conflict of interest on tax deductions. Internal Revenue Service (IRS) has several firms that they qualify for tax deductions from the contributions that have been made to any charitable organization. Therefore, it is unrealistic for me to provide give an advice that these amount have to be deducted in full. Another ethical issue in this case is the valuation of the rights at a value of $39,000,000. This is not a reality to state this amount without considering many other factors like the market price. This is because the basis for valuing such amount on a rights only cannot be justified. Then it would be imprudent for the client to indicate that this should be deducted from the income. On Individual Income Tax Management 2 the other end, IRS law is clear that you cannot deduct more than 50% of your contribution to a charity organization. This term \"top at the top\" is referring a leadership commitment to the process of openness, level of honesty, integrity, and ethical behavior within their leadership ranks. This is one of the most important elements in any organization. When top leadership in an organization are open to these values, then there is the possibility of success and transparency concerning the business operations in the organization. When an environment for operations that has been set by leadership is poor, then the negative integrity will prevail. From the analysis of this case, there is little commitment that the leadership of the client has provided to indicate that they are open honesty on the valuation of the rights. The fact that it is valuing the rights at $39,000,000 yet having individual income of $150,000. It may be easy for the team from IRS to conclude on the issues that are lack honesty in this case. There is another possibility that our firm's reviewer may have been in some way been influenced by the client. In this case, the best alternative for the firm is to ask client to provide more information about the valuation of the rights. This will enable the firm to determine and establish the basis of preparing the level of individual income. This is the only way that the quality reviewer will determine the credibility of the information that he has presented relating to these rights. Another alternative is contacting a private consultant on how to value the properties rights that have been presented by the client. This is one of the most important ways that would help in getting to understand the correct value for the client's property. Finally, contacting an IRS official or seeking for similar tax cases will also help to determine the treatment of the firm's tax issues. These approaches would prove to be the best remedies in this case. Individual Income Tax Management 3 Carl P. Adams, CPA 5388 Field Pointe Drive Spring Grove, PA 17362 (555) 555-0970 cpacpa@wemanagetaxes.com Memorandum Date: 04/05/2017 Memo to: Copy to: From: Subject: Purpose: (Why are you writing this?) Facts and Circumstances: (What do you know - aka independent variables?) Question: (State what you seek to answer in fairly explicit terms - aka dependent variables) Law or rules: (Are there evaluation criteria, rules, laws or metrics that may apply to the facts and circumstances?) Application/Analysis: (What does the information mean?) Conclusion: (What do you recommend be done? What's the next step?) You need to use the provided memo template You should follow the organization of the template and be sure to include the research you did in your TOA Laws or rules: This is where you explain the laws you have researched. It should be in your own words and you should also cite your sources according to the Harvard Legal (Bluebook) citation method as outlined in the case document. You are not to include any subheadings and you should not start each paragraph with the source. Application: This is where you discuss how the Laws or rules mentioned previously apply to you and your client. Discuss any penalties or fines that may develop. Conclusion: Needs to include multiple alternative actions the client can take. From there you should identify which one you specifically recommend to your client. Additionally, you need to think of a service your firm can further offer the client in order to help with this engagement. You need to cite your sources by inserting footnotes at the end of the last sentence where you discuss a specific source. In the footnote section, you should include the source, section number, and section title Carl P. Adams, CPA Table of Authorities Referenc e Citation 26 U.S. Code IRC 6694(b)-(A) 26 U.S. Code IRC 6694 (a) IRC 6694-2(a)(1) 26 U.S. Code Research/Facts/Observation/Legal Precedent (1)Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph, (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $5,000 or 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. prepares any return or claim of refund with respect to which any part of an understatement of liability is due to a position described in paragraph (2), and knew (or reasonably should have known) of the position, such tax return preparer shall pay a penalty with respect to each such return or claim in an amount equal to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. _IRC 6694-2(a)(1) Except as otherwise provided in this paragraph, a position is described in this paragraph unless there is or was substantial authority for the position. Any person required to make a return under qattachments_54295fe6f906e75c4d4f6af1cacd41300fb032fa.docx Application (What does it mean?) Checke d According to this code if we sign up the return that is understatement, the taxpayer will need to pay either $5000 penalty or 75 percent of the income that we have derived from the case. Because of the unreasonable position, the understatement of the fined more than $1000 relative to the tax refund or ask for a refund of tax income 50% It is about failing to sign a form Page: 1 Carl P. Adams, CPA Table of Authorities Referenc e Citation IRC 6695 (e) IRC 6695 (b) 26 U.S. Code IRC 6695 (f) Research/Facts/Observation/Legal Precedent Application (What does it mean?) section 6060 who fails to comply with the requirements of such section shall pay a penalty of $50 for each failure to file a return as required under such section, and each failure to set forth an item in the return as required under section, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to any return period shall not exceed $25,000. of return, as the law shows a $50 penalty for each of the failed to sign a return or a request for a refund. The maximum penalty is $25000 a year. Any person who is a tax return preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which is issued to a taxpayer (other than the tax return preparer) shall pay a penalty of $500 with respect to each such check. The preceding sentence shall not apply with respect to the deposit by a bank (within the meaning of section 581) of the full amount of the check in the taxpayer's account in such bank for the benefit of the taxpayer. When the check for negotiation Including a $500 fine for approval or review of the tax returns. qattachments_54295fe6f906e75c4d4f6af1cacd41300fb032fa.docx Checke d Page: 2 Carl P. Adams, CPA Table of Authorities Referenc e Citation Pennsylvania Income Tax Act, CPA ASC 740 26 U.S. Code IRC 6662-4(d) AICPA SSTS#1 Research/Facts/Observation/Legal Precedent Application (What does it mean?) a tax position is first evaluated for recognition based on its technical merits. Tax positions that meet a recognition criterion are then measured to determine an amount to recognize in the financial statements. It provides accounting guidance for the effect of individual income tax on individual tax positions that do not meet the accepted threshold to any part of the benefit of the tax status in order to confirm the entity's financial statements. In the case of a financial report, the tax credit is more than a temporary difference in deferred income tax assets Since your reviewer conclude that you have 25%-35% of chance to survive in IRS examination, less than 50 percent but above the reasonable basis standard which quality as substantial authority. Substantial authority standard. The substantial authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts. The substantial authority standard is less stringent than the more likely than not standard (the standard that is met when there is a greater than 50-percent likelihood of the position being upheld), but more stringent than the reasonable basis standard as defined in 1.6662-3(b)(3). The possibility that a return will not be audited or, if audited, that an item will not be raised on audit, is not relevant in determining whether the substantial authority standard (or the reasonable basis standard) is satisfied. Sets forth the applicable standards for members qattachments_54295fe6f906e75c4d4f6af1cacd41300fb032fa.docx Checke d In this case, the punishment of Page: 3 Carl P. Adams, CPA Table of Authorities Referenc e Citation IFRC 6694 IFRC 6695 Research/Facts/Observation/Legal Precedent when recommending tax return positions, or preparing or signing tax returns filed with any taxing authority. This statement also addresses a member's obligation to advise a taxpayer of relevant tax return disclosure responsibilities and potential penalties. qattachments_54295fe6f906e75c4d4f6af1cacd41300fb032fa.docx Application (What does it mean?) Checke d taxpayer. The preparation of tax returns and other tax penalties compared to other tax. Page: 4