AM I ETHICAL?
Carl Contractor constructs homes for sale to buyers. Carl recently built 10 similar homes on a small tract of land and moved into one of the homes. He decorated the home he lived in and displayed it as a model home for several years to entice prospective homebuyers to purchase one of his nearby, newly constructed homes. Fortunately for Carl, all of these houses have appreciated in value.
Carl acknowledges that most of his home sales should be taxed at high ordinary income tax rates as sales of inventory. However, he would like to obtain more favorable tax treatment for the sale of the home he lived in by classifying it as his principal residence, even though he also used it for marketing purposes.
If Carl's tax return is audited, you estimate that there is a 45% chance that the IRS will agree with Carl's asserted tax treatment. As Carl's tax return preparer, can you ethically report this sold house as a principal residence on Carl's tax return?
- Yes, because Carl's assertion has sufficient authoritative support
- Yes, as long as Carl discloses on his tax return that his assertion is a Minority View
- Yes, because your ethical obligation is to serve as Carl's advocate
- No, because the relevant standard for claiming favorable tax treatment is that IRS approval is more likely than not
The SOLUTION is revealed at the end of the chapter.