Question

Accounting Ethics:

Your client has a blood type that is so rare and in demand that she earns $300 each time she provides blood. Last year, she earned a total of $15,000 from giving blood. Your client has substantial capital loss carryforwards from stock sales entered into last year. Your client has asked you if the money she receives from selling blood constitutes the sale of an asset or the provision of a service. From a federal income tax standpoint, would your client prefer to contend that she is selling an asset or providing a service? Under the AICPA Standards, what steps should you take to determine whether your client can claim her income as a capital gain? From a state sales tax standpoint, would your client prefer to contend that she is selling an asset or providing a service? Do the AICPA Standards apply to the preparation of state sales tax returns? Your client has asked you to report her proceeds as the sale of an asset for federal income tax purposes, but as the provision of a service for state sales tax purposes. Is this definitely unethical?

Answer 1

a.         Sales of assets generally are reported as capital gains, and capital gains can be offset by capital losses to reduce a taxpayer’s tax liability. In contrast, services income is reported as ordinary income and is fully taxed at ordinary rates. Because your client has substantial capital loss carry-forwards, she would prefer to report her proceeds as the sale of a capital asset.

b.         You should see if there is meaningful tax authority in support of her position, such as court decisions, IRS pronouncements, the legislative history relating to the enactment of capital asset treatment, or well-reasoned tax articles.

c.         Sales taxes typically are imposed on sales of property, but not on services. Consequently, your client would prefer to report her proceeds as the provision of a service.

d.         Yes. The AICPA Standards apply to all tax filings.

e.         No. The federal income tax may define the sale of an asset differently than a state’s taxing authorities define it for sales tax purposes. Thus, it may be entirely consistent with these different definitions for the sale ethically to be reported one way for federal income tax purposes and another way for state sales tax purposes.