Accounting Chapter 6 Are Tax Shelter Plans The Public Interest

Unlock access to all the studying documents.

View Full Document

P a g e | 97

P a g e | 98

31. Italian Tax Mores (Chapter 6, pages 489–491)

What this case has to offer

The Italian Tax Mores case provides a fascinating glimpse of the pressures facing business to subscribe

to local patterns of conduct, and therefore ethical behavior that differs from established norms in other

parts of the world. The case was copyrighted in the same year the Foreign Corrupt Practices Act (FCPA)

of 1977 was enacted in the U.S., so it offers a chance to discuss the real and potential impact of the Act.

Moreover, the Italian government was a signatory to the Organisation for Economic Co-operation and

This case offers the opportunity to explore the differences between facilitating payments (which are

nominal and are paid to speed up something you are going get anyway) and bribes (which are larger-

than-nominal and are paid to change someone’s mind and/or actions). Using an agent, as is proposed in

the case, is not a perfect solution either, since large payments to the agent are considered to include a

bribe.

The case can also be used to cover the responsibility for

• Considering and making pre-action decisions about the payment of bribes and the reporting of

bribes.

Teaching suggestions

This case lends itself to quasi-role-playing, and after questioning the class on the details of the case, I

often nominate students to the following roles:

1. Italian Bank Branch Manager – a man

I then ask the questions presented at the end of the case – one question at a time in the order set out –

to each of the 4 students in turn. After each has answered question 1, I ask for the class’ reactions and

discuss the issues. We then go on to the next question in the same manner, and so on.

Discussion of ethical issues

1. Should the Italian bank’s general manager hire a commercialista and pay busterella?

The problem at the heart of this case is whether the normal Italian bargain-and-bribery

approach should be taken, instead of the proper financial statement and pay the computed

income tax route. If a commercialista is hired, the busterella (bribe) is sure to follow unless

2. Should the general manager phone the bank’s American CEO in New York and ask for advice?

Here the issues would include:

• the bank’s code of conduct – does it cover this?

P a g e | 100

3. If you were the bank’s American CEO, would you want to receive the phone call for advice?

Here I am looking for an appreciation of whether:

• The CEO is interested in the bribery route, or is on an ethical path,

Useful Articles, Links, and Videos

OECD (2016). OECD Convention on Combating Bribery of Foreign Public Officials in International

“The OECD Anti-Bribery Convention establishes legally binding standards to criminalise bribery

of foreign public officials in international business transactions and provides for a host of related

measures that make this effective. It is the first and only international anti-corruption

instrument focused on the ‘supply side’ of the bribery transaction.”

32. Tax Return Complications (Chapter 6, pages 491-492)

What this case has to offer

This case provides a scenario where a client is attempting to take inappropriate deductions from taxable

income and threatens to tell another client that the service he is getting is poor. At the same time, a

slip-up is discovered in the handling of the second client’s tax affairs. This slip-up can be covered over

with modest risk, but the penalty if it found out could result in the loss of the ability to practice. The

case gives the student a perspective on the application of ethical standards in the area of tax services, in

the following ways:

• involvement with misrepresentations in audited and unaudited data

Teaching suggestions

I would follow the questions asked at the end of the case. The ethical issues for question 1 (Identify the

ethical issues Bill Adams should address) are summarized above, and a suggested solution to question 2

about the specific tax issues (What would you do about these issues if you were Bill?) is set out below.

Personal Expenses

Bill must inform Dr. Rim that the Firm cannot associate itself with tax returns that it knows have not

been properly prepared, i.e., have deviated from the rules. If Dr. Rim refuses to cooperate in ensuring

Late Notice of Objection

Bill has two options:

1. Inform Dan that the deadline was missed and rely on past service and the strong relationships of

members of the Firm with Zentor Inc. to maintain Zentor Inc. as a client.

P a g e | 102

The risks under option #1. are as follows:

• The Firm may lose Zentor Inc. as a client.

The risks under option #2. are as follows:

• Zentor Inc. may notice that they are being asked to sign a back-dated document and realize the

The Firm should not be involved in back-dating documents. Bill should inform the junior of this and

reprimand him for discussing such a thing with the Tax Department.

P a g e | 103

33. Marketing Aggressive Tax Shelters (Chapter 6, pages 492–493)

What this case has to offer

This case allows the students to discuss marketing ethics in the context of tax practitioners who sell tax

shelters. It raises issues concerning:

• What is a reasonable shelter as opposed to an aggressive shelter?

Teaching suggestions

This is a good opportunity to review the ethical theory of justice as fairness.

• Is it fair that sophisticated tax planning schemes are only available to the rich and not to the

poor?

Discussion of ethical issues

1. What differentiates very aggressive tax shelters from reasonable tax shelters?

A reasonable tax shelter is a plan that has a more-likely-than-not probability of success if

2. As a result of the E&Y and KPMG tax fiascos, the large accounting firms have become wary of

marketing very aggressive tax shelters. Now, most shelters are being sold by tax “boutiques” that

operate on a much smaller scale and so are less likely to be investigated by the IRS.

a. Is it right that accountants market aggressive tax shelter plans?

P a g e | 104

Some investors are more aggressive than others. Those who are more aggressive are willing to

assume greater risk in order to reap potentially higher rewards. More conservative investors

b. Are tax shelter plans in the public interest?

Economic theory argues that the buyer is the best judge of what is in the buyer’s best interests.

The expression ‘buyers beware’ puts the onus on purchasers—not on vendors–to know what is

Additional Question

3. Should tax shelters be outlawed?

An Income Tax Act is like a rule book. It defines transactions that are taxable and transactions

that are allowable as a deduction for tax purposes. However, not every transaction can possibly

be covered by the Act. As a result, many transactions are ‘grey’ in that the Act is not clear on

P a g e | 105

Useful Articles, Links, and Videos

Browning, Lynnley (December 1, 2008). “Prosecutors Pass on Chance to Revive Tax Shelter Case.” New

IRS [U.S. Internal Revenue Service] (August 29, 2005). “KPMG to Pay $456 Million for Criminal

P a g e | 106

34. Providing Tax Advice (Chapter 6, pages 493-495)

What this case has to offer

This case allows students to ask some fundamental questions.

• What is the public interest?

I have found that some of the best classroom ethical discussions centre on tax issues. This may be, in

part, because tax is so emotional to so many people.

Teaching suggestions

I begin this case by asking the students why there are taxes. The two normal arguments are:

• So that the government can afford to provide goods and services, and

I then ask the students the following three questions.

• Do you have a legal obligation to pay taxes?

Discussion of important issues

1. Is there a basic conflict of interest between upholding the public interest and providing tax advice

that reduces the amount of money taxpayers pay to the government? Why or why not?

Public Interest and Tax Planning

Professional accountants have an obligation to uphold the public interest. This means that the

activities of the accountant should be for the common good or to promote the general welfare.

P a g e | 107

2. How can professional accountants maintain the support of the public while giving tax advice? Is

providing tax advice that only benefits the wealthy, who can afford to pay for tax advice, in the

public interest? Is this fair? Is providing highly specialized tax advice to naive clients being

paternalistic?

Tax Advice for the Wealthy

The reality is that there are more tax savings strategies available for the wealthy than for the

poor. Single parents can only receive the basic deductions because they normally do not receive

multiple sources of revenue. Wealthy entrepreneurs normally have numerous sources of

P a g e | 108

3. If a tax specialist spends only one hour devising a tax plan that saves a client $1 million, is it ethically

acceptable for the tax specialist to charge that client more than the one-hour billing rate?

Fees for Services

Contingency fees are fees that are collected only in the event of a favorable outcome, which

4. Is it ethically correct for a corporation to pay $350,000 to tax consultants so that the corporation can

save a million in taxes?

Pay $35 to Save $100 in Tax

Different arguments can be provided.

The System is Unfair

The purpose of taxation is to raise money so that the government can provide goods and

services to all citizens. All citizens utilize the infrastructures provided by the government,

The System is Fair

Fairness is not an absolute concept; there is often a range of outcomes that can be

considered more or less fair. In that context, some may argue that it is probable that the

P a g e | 109

The Firm is For-Profit

An alternative argument is that the accountant is not responsible for drafting the income tax

A Single Tax?

Another argument might be that the fairest approach would be to charge no personal

35. Risk Management of Taxes Payable – Is It Ethical? (Chapter 6, page 495)

What this case has to offer

This case is based on real-life data. Students may have different reactions to the case, including:

1. not understanding why this practice could be unethical

The case points out that there is more than one risk to be considered when dealing with tax authorities,

including, at least:

A. The risk that the accounting treatment to be chosen could be considered to be:

Teaching suggestions

I begin this case by asking if there is any ethical problem with the aspect of risk management suggested

in the case. Discussion ensues, and I tease out the positions noted above as #1, #2, and #3. I promote

Discussion of ethical issues

The pressure for profit and for good client relations is very strong, but the temptation for short-term

gain must be considered against the longer-term potential for loss.

Nature of the advice given

Care should be taken not to give misleading advice that would lead the client (and/or the employer

P a g e | 111

Misrepresentations and Illegalities

PAs cannot be involved in either misrepresentations or illegalities, according to their codes. It is

unlikely that the client will keep quiet about your advice if the taxation authorities begin to go hard