John Haddock owns 75 percent of Haddock Corporation. The other 25 percent of the stock is held by John’s wife, Marsha. You are a tax manager assigned to prepare the corporate tax return for Haddock. While working on the return, you note that Haddock Corp. pays rent to John for a building he owns with his son, John, Jr. The rent being paid is at least three times the normal rate for rentals of similar property in that area of town. You report this observation to the partner on the engagement. She tells you that it is all right to deduct the payments because Haddock Corp. has been doing it for several years, and the IRS never has objected. Under your firm’s policy, managers sign the tax return for clients. a. Would you sign this tax return? b. What potential ethics issues do you see in this situation?
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