Public Practice - Association with Tax Returns

Prepared by W. Morley Lemon

You are the tax partner on the audit of Marshall Corp., a Canadian public company. Marshall Corp. has been an audit client of your firm for a number of years and you have enjoyed good relations with Marshall. Joan McCutcheon, CEO, has generally enjoyed very cordial relations both with the audit partner in charge of her audit and with you as the tax partner managing the tax affairs of Marshall Corp.

As part of your service for Marshall Corp. over the last 15 years, you have prepared Joan McCutcheon’s personal tax return. In the course of preparing the tax return this year, you are reviewing her calculations of capital gains on certain stocks that she sold during the year. You come to the conclusion that she has incorrectly calculated the cost basis for several of the stocks that have been sold. You notice that she has used specific identification in calculating the gain. You point out to her that the Income Tax Act requires that she use average cost for securities acquired over a series of transactions rather than specific identification that she has used.

You raise the issue with Joan and she indicates that she wants to prepare the tax return using the information she has provided to you. She will not accept your opinion that the cost basis that she has used is incorrect.

What are the issues facing you in this particular situation? How would you determine what to do?

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