sign the return with this tax position included or not? If you can sign the return incorporating that tax position, are there any
corollary actions you should take? If you decide you can’t, what should you advise your client/friend is an appropriate course of
action?
2. Here your background information: You are a new manager and you brought in a $150,000 tax engagement on a referral from a
friend that is the tax director of the client. Transfer pricing is the issue that seems to be a stumbling block for your staff working on
the return. Remember transfer pricing refers to the prices that one affiliate/subsidiary charges to another affiliate within the same
controlled group of companies. In general, transfer prices need to be set at an “arm’s length” standard – the price two unrelated
parties might charge each other in a free market for the goods or services. The IRC Section 482 regulations require
contemporaneous documentation of evidence that your transfer prices are in fact “arm’s length”.
Your client’s transfer pricing policy has the effect of shifting a good bit of income out of the United States companies and into the
Cayman Islands subsidiary that has a low or no income tax rate by paying royalties for the use of intellectual property held by the
Cayman Islands subsidiary. Your firm’s transfer pricing expert says the client’s internal company documentation 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. You know a
transfer pricing study must be contemporaneous to have a significant chance of survival. For our purposes, the term
“contemporaneous” means by the time the return is filed.
3. Additional guidance to consider for your memorandum: Your memorandum must be in good form (Use IRAC template as a
format.) that identifies what the issues are and how you should address those issue(s) for your client: Using the facts and
circumstances noted above, your memorandum should address (at a minimum)
a. A recitation of your facts and circumstances and the question(s) as you have clarified them. Additionally, you must cite the
relevant authorities using Bluebook citation method. You should analyze those authorities for the purpose of applying those
authorities to answer your question(s), and conclude with a clear statement of what professional standards require you to do. You
conclusions should also provide your client with a recommended course of action.
b. Edit your memo using the “PA Writing Assessment Domains Scoring Guide”. When you are satisfied you have “4” levels of
writing in each domain, submit your memorandum and table of authorities to the drop box. Save your file using this nomenclature:
yourlastname405ethicsmemoSP16.docx
c. You must complete a table of authorities (“TOA”) (see the template under “Student Resources”) as a means to document and
analyze the authorities you research. You are expected to document your thinking in the TOA in such a fashion that drafting your
memorandum is largely a cut and paste job from your TOA. Remember how to use the TOA:
i. Complete the heading information; especially the keywords you plan to use to search the BNA, CCH Intelliconnect, RIA
Checkpoint Data Base or other sources. Consider keywords like “substantial and authority”, more likely than not” or “substantial
understatement”.
ii. Put the information necessary to prepare a complete citation using Harvard Legal (Bluebook) citation methods (See the PS
Library system web page for help.) in the “Citation” column.
iii. Citable material is documented in the “Research/Facts/Observation/Legal Precedent” column,
iv. Your thinking and analysis (What does it mean to your research question?) is documented in the “Application” column, and
v. Your instructor will be your reviewer for this assignment and he or she will check your citations and thinking in the TOA as they
think appropriate.
vi. This project is not long enough to require a detailed outline so do not worry about putting outline references in the “Reference”
column.
1/25/2016 Order 230212833
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d. At a minimum your research and analysis should include a review and consideration of:
i. IRC Section 6662 and specifically Treasury Regulation 1.66624(
d) (What penalties may be assessed against your client.)
ii. IRC Sections 6694 and 6695 (What penalties might be assessed against you or your firm.)
iii. AICPA SSTS #1
iv. Since you are located in Pennsylvania, the PA CPA Act.
v. While ASC 740 applies to your client, you can assume the financial statements are already finished and issued. You therefore
do not need to address the financial reporting issues.
4. Your submissions will be graded using the published rubric.
Keep in mind the CPA firm leveraging of expertise and keep your memorandum to a minimum. A partner does not have time to
read superfluous information at their rate per hour and your clients will not want to pay your rate per hour for time you waste doing
anything other than just getting the answer to the questio