Problem
I. In August 20X5, a new corporate client retained Paula Preparer as accountant and tax return preparer. In reviewing the prior returns of the client Paula noticed that the client had claimed substantial deductions for travel and entertainment expenses. Paula asked if the corporation hud ever been audited and learned that it had not. Paula knew that the corporation's president spent a great deal of time traveling and promotion the business and, so in setting up their procedures for the corporation, Paula stressed the importance of keeping adequate records for any travel and entertainment expenses. Paula also discussed the sort of record keeping procedures that should be followed by the bookkeeper of the corporation.
The first fiscal year of the corporation for which Paula prepared its return was the fiscal year ending August 20X5. In reviewing the records,Paula noticed that expenses of $9,500 were claimed for travel and entertainment by the president. Because the sales of the corporation were approximately $750,000 for that year, Paula did not think that the 59,500 figure was out of line. Since Paula had spent so much time stressing the Code Sec. 274 record keeping requirements when the corporation initially retained her, she assumed that it had followed through on her insistence of keeping adequate records. Paula did not inquire into the adequacy of the T&E records before she prepared the return in 20X6, the IRS audited the corporation's return. The IRS discovered that of the $9,500, approximately $2,000 constituted personal expenditures of the president and approximately $5,500 constituted expenditures for which adequate substantiation did not exist. The IRS has disallowed $7,500 of the deduction to the corporation and is also proposing to assess a preparer penalty against Paula. Is the proposed penalty assessment justified?
II. Stering Clampett is the president and sole shareholder of Spononful, inc a manufacturer of fine flatware. Sterling has always made it his job to sell the scrap silver that remains after manufacturing the flatware. The problem is that Sterling has been selling the scrap as his own, rather the on behalf of the corporation. During their recent audit of Spoonful Inc, the IRS has also discovered Sterling's personal silver sales. The government has enough evidence to sustain a civil fraud penalty. For the tax year 20X5, Spoonful, Inc.,reported a tax of $125,500. After takins into consideration the adjustments related to the silver sales, the IRS calculated the correct tax 20X5 to be $200,500. Sterling would like to know the maximum amount of penalties that the IRS could assess against the corporation due to 15 understatement of tax in 20X5.
III. Motoco, Inc. manufactures and designs mopeds for sale throughout the world. In valuing its inventory for tax purposes, the corporation is subject to the uniform capitalization rules under Code Sec. 263A. Pursuant to the rules, Motoco must include not only direct costs, but also portion of certain indirect costs in their inventory costs. The president of Motoco argues that the IRS is wrong in expecting the corporation to treat some of the compensation paid to its officers as inventoriable costs. Therefore, she refuses to capitalize such costs. Is the corporation subject to any penalties as a result of the failure to capitalize the indirect costs?
IV. The IRS examines the 20X5 tax return of Sam Short. His return reported tax due in the amount of 560,000. The revenue agent has determined that Sam understated his tax for 20X5 by $22,000 and is proposing to assess the substantial understatement penalty. What arguments might Sam make that the IRS should not assess the penalty?