Bubba and Rufus
Question 1
September 23, 2013

Question 1: What are the ethical responsibilities of a CPA who performs tax returns?

A CPA who is preparing a tax return has the ethical responsibility to follow Statements on Standards for the Tax Service No.1, as well as Interpretation 1-1.

A CPA must take due care when handling a client engagement and is required to report the return in a way that he/she believes the transactions have been documented properly.

Question 2: Discuss the ethical and professional obligations violated by Bubba with respect to his professional services for Rufus.

In this scenario Rufus has shown poor judgment, not only within his initial services (tax preparation) but also in his newly offered service (common-law trust). These lapses in judgment will not only ruin his reputation professionally but also from an ethical standpoint. He may also face jail time, assuming he can be found.

To be more detailed, Rufus has: 1) Failed to take due care, in both services 2) Appears to have failed to maintain objectivity and independence 3) Appears to have lied to increase personal gains 4) Misappropriated funds by deceiving clients

Pizza Hut Case
Justification of tax position
September 23, 2013

Question: Could I have justified the position taken on the tax return from an ethical standpoint? Explain…

First, the 7th district court asserts that C&F failed to claim why it voluntarily treated some of the money received from IBP as ordinary income if all such claims necessarily net capital gains.

To this I would respond, C&F did make a claim for the treatment. C&F estimated that 2.86 million in revenue was lost due to the damaged (misappropriated) trade secret, thus the treatment of that amount as ordinary income. This means that the remaining balance from the initial lawsuit (IBP) would go beyond the dollar value of revenue that C&F lost, constituting a gain on a capital asset.

It follow then that any funds received for any further suits that were engaged before the conclusion of the IBP case, but in relation to it would be applied in the same manner. So, because the amount of income that was estimated to be lost has already been recovered in the first lawsuit anything received from that point on would also be considered capital gain on a capital asset.

I would also assert that the IRS did not object to the estimate of 2.86 million in revenue for the first suit and that they were seemingly comfortable allowing the remainder of that balance to be considered capital gain.

Secondly, the 7th district court goes on to state that at the date of misappropriation Pizza Hut had begun a transaction to “purchase” the trade secret. This purchase was then completed at the time the court rendered its decision and the money was moved from Pizza Hut to C&F.

The counter to this is that C&F never agreed or even mentioned the idea of selling the trade secret. Not being a position that C&F chose the court is effectively saying that one party can enter into a transaction and represent two parties, without the second party being aware of the transaction.