Your CPA firm has a long time client, Acme Manufacturing, who is a leader in their field. You keep your client up to date on the rules for research and experimental (R & E) expenditures. You always advise them on the proper application of expenses and capitalization of these expenditures. During your monthly conference with Acme, they inform you that they have been talking with another local CPA firm who has offered to assist them with their tax returns. The CPA firm's representative has told them that the firm is "certified" to practice before the IRS and has been very successful regarding R & E write offs. The CPA firm has offered to prepare your client's tax return for the current tax year on a contingent basis. The CPA firm has promised they can save your client at least $1 million in tax dollars based on their R & E expertise. The fee will be only 30% of the savings.

Acme Manufacturing is intrigued by this offer and a little upset that you have not mentioned the potential tax savings to the company. Acme wants your firm to make a counteroffer. What are the rules that apply to research and experimental expenses under IRC Code Section 174? What ethical issues do you see in this situation? What would you tell Acme?