Tax Case

This principal issue in this case concerns the research work that must be performed either by or for Starlight Typewriters in conjunction with the firm's efforts to secure an export contract with the Peoples Republic of China. Several types of research are mentioned in the case. One of these research typesmarket researchis not considered to be research within the context of federal income tax law (Internal Revenue Service, 1990a; Internal Revenue Service, 1990b). Market research performed in conjunction with the attempt to negotiate an export contract with the Peoples Republic of China would be treated as an ordinary expense of doing business.

Both the research required to determine and assess the technological modifications required to accommodate Starlight typewriters to the Chinese electrical system, and the research required to determine and assess the technological modifications required to make Starlight typewriters compatible with the existing operational Chinese computer system are research within the context of federal income tax regulations (Internal Revenue Service, 1990a; Internal Revenue Service, 1990b; Schmedel, 1991). The facts that (1) the research to determine and assess the technological modifications required to accommodate Starlight typewriters to the Chinese electrical system can be performed by Starlight personnel in Starlight facilities, and (2) the research required to determine and assess the technol

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obable that Bright Light Auto will pressure Earth, Air, Fire, and Water to comply with the request of the Internal Revenue Service. If the company does have something to hide, it will likely suffer in any such court action. With respect to the classification of equipment acquisitions as either purchases or leases, a similar principle is applicable. While it may be possible for the CPA firm of Earth, Air, Fire, and Water to prevail in legal proceedings initiated by the Internal Revenue Service to gain access to the auditor's working papers, the taxpaying firm, Bright Light Auto, cannot avoid, in court or in any other forum, providing the Internal Revenue Service with the documentation and information required to justify the firm's actions in classifying equipment acquisitions as either purchases or leases. Therefore, the Internal Revenue Service should be advised to drop any plan to gain access to the auditor's working papers through court action, and, alternatively, to demand documentary and other justification for the equipment acquisition classifications directly from Bright Light Auto. If, in the face of such a demand by the Internal Revenue Service, either the company or its auditor refuse to comply with the demand, the In

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