Exam 2: The Tax Practice Environment

A letter ruling can only be relied on by the taxpayer for whom it is written.

William purchased 10,000 shares of stock for $10 per share late last month. Due to a proposed hostile takeover of the company, the stock has jumped in price to $16 per share. If he holds the stock for at least a full year, he believes the price will decline to $14 per share but he will be eligible for the 15 percent long-term capital gains rate for his gain. If he sells now, his gain will be subject to his 32 percent marginal tax rate. Should William sell now or wait one year? Use a one-year present value factor of .909 in your evaluation.

What is the minimum penalty for a taxpayer who fails to file his or her return for over 60 days past the due date without reasonable cause?

Circular 230 is issued by the AICPA to provide guidance on tax return preparation by CPAs.

Which of the following is the highest authority for tax research?

Cynthia and John have dependent twins ages 18. Their joint income places them in the 32 percent marginal tax bracket. What are their total tax savings if they can transfer $2,000 of taxable income to each of the children? The children have no other income that is taxable.

The business purpose doctrine requires a transaction to have an economic purpose other than one based solely on tax avoidance.

When may a CPA use estimates in the preparation of a client's tax return?

Copp Co. can invest in a project that costs $200,000. It is expected to provide a lump sum after-tax return of $300,000. If Copp uses an 8 percent discount rate for evaluation, in what year must it recover the $300,000 to produce a positive net cash flow?

A memo to file for a client should be more detailed than the client letter.

Charley Careless had not read much about the preparer penalties that could be assessed for failure to have substantial authority for certain tax positions taken on his client's returns. He prepared a return for one of his clients with an issue that was clearly a problem. If he was paid $4,000 for the tax return preparation, how much would his potential fine be under the following circumstances: