PrimeGlobal36th Annual Tax Conference

January 11, 2016

2015 Federal Tax UpdateMark Cobetto, CPAShareholder, Tax Advisory ServicesSchneider Downs & Co., Inc.41 South High Street, Suite 2100Columbus, Ohio 43215Phone: (614) 586-7136Fax: (614) 621-4062Email: mcobetto@schneiderdowns.comwww.schneiderdowns.com

Federal Tax Update Agenda

I. Tax Extenders – PATH Act of 2015

II. CorporationsIII. PartnershipsIV. Accounting Methods V. International VI. Miscellaneous – Income,

Deductions, etc.VII. IRS Procedure & AdministrationVIII.Tax Planning

2

PATH Act of 2015

Permanently Extended Business Provisions

– Section 179 expensing - $500,000 ($2M investment limitation)

– 15 year recovery for leasehold/retail improvements and restaurant property

– 5-year recognition period for S-corp built-in gains

– S-corps charitable contributions of property

– Research tax credit

3

PATH Act of 2015

Permanently Extended Individual Tax Provisions

– IRA distributions to charity

– 100% exclusion of gain on small business stock

– State and local sales tax deduction

– Teachers’ classroom expense deduction

– Enhanced child tax credit

– Enhanced American Opportunity Tax Credit

4

PATH Act of 2015

Non-Permanent Extenders

– Bonus Depreciation– 50% through 2017– 40% for 2018– 30% for 2019

– Extended through 2016– Exclusion of COD income on principal residence– Deduction for mortgage insurance premiums– Deduction for qualified tuition expenses– Alternative fuel credit

– Extended through 2019– Work opportunity tax credit

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6

CORPORATIONS

Regs Address Transactions with Corporate Partners

(Temporary Regs)Background

– Corp enters into P-ship by contributing appreciated property

– P-ship acquires Corporate partner’s stock and makes liquidating distribution of the stock back to the Corp partner

– No gain recognized by Corporate partner under §731(a)

TD 9722– New temporary regs amend the original 1992 proposed

regs • 1) Distribution rule (removed)• 2) Deemed redemption rule (retained with some changes)

– Corp partner must recognize gain on the appreciated property to the extent that the series of transactions have the same economic effect as an exchange of an interest in appreciated property for it’s stock.

7

LIFO Recapture for C Corp Converting to Qsub(Field Attorney Advice)

Background– C corp (taxpayer) and its subsidiaries merged into a C-

Corp owned by an S-corp on Date 1– S corp made QSub election for taxpayer and all subs on

Date 2– Final consolidated C-corp return was filed for the short

period– Taxpayer used LIFO inventory accounting

FAA 20153001F– LIFO recapture applies to a QSub election as well as an S

corp election– A taxpayer reporting a LIFO recapture amount cannot file

a return as part of a consolidated group• Can’t use consolidated NOLs to offset the recapture amount

– A single-transaction return was necessary to report the LIFO recapture amount

8

IRS Provides Guidance on Successive 351 Transfers(Rev. Rul. 2015-10)

Background– No gain or loss shall be recognized if property is

transferred to a corporation by one or more persons solely in exchange for corporate stock and immediately after the person(s) are in control (as defined in section 368(c)) of the corporation

Rev. Rul. 2015-10– Transfers of property may be respected under

Code Sec. 351 even though it is followed by subsequent transfers of the same property under a prearranged plan

– Some transfers may not qualify as a Code Sec. 351 transfers if the substance of the transaction calls for a different treatment

9

IRS Provides Guidance on Successive 351 Transfers(Rev. Rul. 2015-10)

Example– P owns a chain of subsidiaries: S1, S2 and S3.– P transfers LLC/corp to S1.– S1 transfers LLC/corp to S2– S2 transfers LLC/corp to S3– LLC/corp elects to be treated as a disregarded entity

• IRS rules that the successive transfers to S1 and S2 qualify as Section 351 transfers

• However, the transfer from S2 to S3 followed by the conversion to a disregarded entity will be treated as a D reorganization (per Rev. Rul. 67-274)

10

IRS Rulings on Code Sec. 355 Spinoffs(Chief Council Announcement)

Overview

– Tax-free transaction that allows a parent corporation owning a controlling interest in a subsidiary corporation to distribute the stock of the subsidiary to its shareholders

• Active trade or business (ATB) requirement must be satisfied• In prior years taxpayers would request a PLR if there were

concerns regarding the taxpayer meeting the ATB requirement for a specific transaction

Chief Counsel Announcement– IRS concerned with spinoffs having minimal trade or

business assets• IRS deciding whether or not to issue PLRs relative to the ATB

requirement where the spun-off Corp has minimal trade or business assets

• Practitioners should call the Office before submitting a PLR involving the ATB requirement

11

Reporting Income/Deductions with Changes in Consolidated Groups

(Proposed Regs)

Overview– IRS believes current regs give taxpayers too much

flexibility on when to report tax items that accrue on the day that a corporation joins or leaves a consolidated group

NPRM Reg -100400-14– End of the Day Rule

• Tax items that accrue on the date of the change in status are included in the tax return for the tax year that ended due to the change. This includes “extraordinary items” that are dependent on a successful closing (e.g., success fees)

– Next Day Rule Exception• “Extraordinary items” occurring on the day of sale, but after the

event triggering the change would be taken into account on the tax return beginning on the next day (e.g., sale of unwanted assets)

– S Corp Exception• Special rules for S-corps joining a consolidated group

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13

PARTNERSHIPS

Disguised Payments for Services(Proposed Regs)

Background

– Proposed regs would treat disguised payments for services as compensation

– Governed by 1984 anti-abuse rule under §707(a)(2)(A)

– Proposed regs apply to a service provider who purports to be a partner

– Disguised payment occurs when a partner performs services, but the payment for services is treated as an allocation or distribution of partnership income or gain

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Disguised Payments for ServicesNPRM Reg -115452-14

Six Non-Exclusive Factors1) Primary factor – lack of significant entrepreneurial

risk;• Ex 1: Allocation that is primarily fixed in amount and that is

assured to be available• Ex 2: Service provider waives its right to payment for future

services in a nonbinding manner or fails to notify the p-ship of waiver

2) The service provider’s p-ship interest is transitory;3) The service provider receives an allocation and

distribution in a time frame typical for payments to a non-partner;

4) The service provider became a partner to obtain tax benefits not available to a third party;

5) The value of the service provider’s interest is small compared to the allocation and distribution; or

6) The arrangement provides for different allocations subject to varying levels of entrepreneurial risk

15

Partner’s Share When Interests Change during Year

(Final Regs)Overview – Final Regs under §706(d) (TD 9728)

– Address how to allocate p-ship items when interest changes

– Expands scope of varying interest rule – allows greater flexibility

Varying Interest Rule– 2009 proposed regs permitted using one of two methods

• Interim-closing method – p-ship divides the year into segments based on dates partners dispose/acquire interests and allocate items realized during those segments to partners based on their p-ship interest %s

• Proration method – p-ship divides the tax year into proration periods and pro rates full-year tax items base on those periods

– Final regs permit the p-ship to use both methods and alternate between the two

– Absent agreement of the partners to use the proration method, the p-ship must use the interim-closing method

16

Partner’s Share When Interests Change during Year

(Final Regs)Extraordinary Items under Regs §1.706-4(e)

– Must be allocated based on partners’ interest in the p-ship when the extraordinary item arises

– Proposed regs had nine extraordinary items, final regs add two more:

• P-ship can treat an item as extraordinary for a tax year if partners agree to consistently treat the item as such

• IRS may designate additional items as extraordinary in published guidance

Small Item Exception– Not considered extraordinary if total items in

class are < 5% of p-ship gross income or gross expenses

– Aggregate amount of p-ship’s qualifying small items must be less than or equal to $10M

17

Proposed Regs Add More Changes

Overview - NPRM Reg -115452-14– Issued in tandem with final regs– Based on suggestions from 2009 proposed regs

Proposals– Allocable cash basis items of income or deduction –

must be allocated to avoid significant misstatement of partner’s income

• Rebates, refunds, insurance premiums, prepayments, etc.

– Tiered partnerships – upper tier partnership must look through to lower tier in applying the varying interest rules

– Performance of services - extraordinary item – comp deduction occurs immediately before the transfer

– Publicly-traded partnerships - extraordinary item treatment for FDAP payments if partners agree as to consistency

18

COD Income in Partnership Bankruptcy(Estate of Martinez v. Comr.)

Background– Partnership borrowed $21M from bank– Each partner personally guaranteed the debt– Bankruptcy court released all partners from

personal liability– Tax court allowed exclusion of COD income under

§108(a)(1)(A) since the discharge occurred in a Title 11 case

AOD 2015-1– IRS disagrees with Tax Court ruling – Bankruptcy case initiated by the partnership, not

the partner– Partner not in bankruptcy in his individual capacity

19

COD Income or Amount Realized on Sale?

(Chief Counsel Advice)

Background– Homebuilder P-ship had debt secured by a

second deed on the property and all partners guaranteed the debt

– Notes did not state whether they were recourse or nonrecourse

– P-ship cancelled notes in foreclosure, lenders received no proceeds

– P-ship treated the notes as recourse and reported COD income since the debt was guaranteed

• Insolvent partners excluded the income

– IRS questioned whether debt was non-recourse and cancellation should be treated as proceeds from sale of the property

20

COD Income or Amount Realized on Sale?

(Chief Counsel Advice)§1001

– Loan is recourse if the borrower (the partnership) is personally liable, otherwise it is nonrecourse

§752– Loan is recourse if any partner bears the economic

risk of loss– Regs recognize a partner guarantee as a payment

obligationCCA 201525010

– For purposes of analyzing the tax treatment of the foreclosure, §1001 is controlling

– Opens the possibility that the debt is non-recourse under §1001 and should be treated as proceeds from the disposition of the property

– The status of the debt depends on the loan documents and state law

21

Real Estate Partnership – Intent to Develop(Fargo and King v. Commissioner)

Background– P-ship taxpayer in the business of developing

mixed-use real estate – Taxpayer suspended development of a specific

project when the local real estate market slowed– Property held for 10 years before selling– Taxpayers argued their intent for the land was

investment, not development; producing capital gain on sale

Tax Court Held– Sale produced ordinary income– Taxpayer never abandoned intent to develop,

which was evidenced by continuing improvement costs

22

Changes to Partnership Audit Rules(Bipartisan Budget Act of 2015)

• Act repeals the current system (3 regimes) for auditing partnerships

– TEFRA– Electing Large Partnerships– Small Partnerships

• New streamlined set of rules for auditing partnerships in new Code Sections 6221 through 6241

• Default rule is that the partnership (not the partners) is required to pay federal tax deficiency unless an alternative is elected

• Partners in the “adjustment year” will bear the cost of the partnership adjustment from a prior year (“the reviewed year”)

23

Changes to Partnership Audit Rules(Bipartisan Budget Act of 2015)

• NOPA - partnership tax deficiency will be calculated at the highest marginal tax rate without considering partner-level tax attributes

• Re-allocations of partnership income from one partner to another could result in a deficiency

• Partnership has 270 days to provide information regarding partner-level attributes that would reduce the liability:

– Partners subject to lower favorable tax rates– Partners filed amended return for the reviewed

year

• Election for Audit Adjustments to be Paid at Partner Level

– Results in adjustments being passed through to the partners

– Must be made by the partnership within 45 days of NFPAA

24

Changes to Partnership Audit Rules(Bipartisan Budget Act of 2015)

• Small Partnership Exception– Can elect out of the new audit rules on an annual

basis– Small partnership = fewer than 100 K-1s– Not available for tiered partnerships

• New rules apply to partnership tax years beginning on or after January 1, 2018

• Planning for the new rules– Many details not known – guidance will be

forthcoming– Partnership agreements will need to be reviewed

and revised:• Designation of partnership representative• Mechanisms to collect information from partners• Requirement for the partnership to make the pass-

through election• Indemnification in case partner doesn’t pay tax

– Purchasers of partnership interests may want to seek indemnities for partnership-level tax adjustments relating to prior years

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26

ACCOUNTING METHODS

Background– The new principal “roadmap” for all accounting method

changes– Supersedes Rev. Proc. 2011-14 (automatic consent

changes) & Rev. Proc. 97-27 (advance consent changes)– Rev. Proc. 2015-33 modifies Rev. Proc. 2015-13

Rev. Proc. 2015-13 & 2015-33– Clarify that a sale/exchange of 50% or more of a p-ship

interest constitutes a cessation of the p-ship trade or business

– Clarify that an issue is under consideration as of the date of written notice

– Clarify that an item ceases to be an issue after an examination ends, unless written notification made

27

Rules on Automatic/Non-Automatic Accounting Method Changes (Rev. Procs. 2015-13, 2015-

14, 2015-33)

Rev. Proc. 2015-13 & 2015-33 Continued– Modify rules for treatment of §481(a) adjustment

regarding a §381(a) transaction in a consolidated group

– Modify rules for when a taxpayer under exam filing a 3115 may receive audit protection

Rev. Proc. 2015-14– Revised automatic change comprehensive list– Over 25 “Significant Changes” including tangible

property regs, unicap methods, cash to accrual changes, research & experimental expenditures, computing ending inventory, etc.

Effective Dates:– Effective immediately for tax years ending on or after May 31,

2014

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Rules on Automatic/Non-Automatic Accounting Method Changes (Rev. Procs. 2015-13, 2015-

14, 2015-33)

Economic Performance Safe Harbor for Routine Service Contracts

(Rev. Proc. 2015-39)

Background– A liability is incurred in the taxable year in which all

events have occurred, the amount of the liability can be determined with reasonable accuracy and economic performance has occurred

Rev. Proc. 2015-39– Accrual-basis taxpayers may treat economic

performance as occurring on a ratable basis for “Ratable Service Contracts”

– Contract must provide for similar services to be provided on daily/weekly/monthly basis

– Each service occurrence provides independent value (i.e., not a follow up to a prior service)

– The term of the contract does not exceed 12 months

29

Economic Performance Safe Harbor for Routine Service Contracts

(Rev. Proc. 2015-39)

Examples• 12-month service contracts that will meet the

definition of a ratable service contract:– A contract for the provision of monthly landscaping

maintenance services– A contract for the provision of daily janitorial services– A contract for ongoing IT support and maintenance services 

• Examples of services that do not meet the ratable service contract definition:

– A contract for an environmental impact study for the taxpayer– A contract to create an updated human resources software

application for the taxpayer

– IRS is considering expanding this safe harbor and has requested comments

30

Repair Regs - Relief for Small Businesses

(Rev. Proc. 2015-20)

Overview– Allows small businesses to change accounting

methods automatically, without filing Form 3115 or applying §481(a)

– Small business defined:– Total assets under $10M; OR – Average gross receipts of $10M or less for

prior three years– Taxpayer may apply repair regs prospectively

(cut-off method) without adjusting prior years– Effective for tax years beginning on/after Jan. 1,

2014

31

Repair Regs - Relief for Small Businesses

(Rev. Proc. 2015-20)

Consequences of Applying Rev. Proc. 2015-20– No audit protection for tax years prior to 2014– No ability to claim missed repair deductions– No late partial disposition election for tax years

prior to 2014– No automatic change within the scope of the

Rev. Proc. can be made for the next 5 years, and then user fees would apply and no 481 adjustment for pre-2014 assets

Alternatives– Attach a statement to elect out of Rev, Proc.

2015-20– File a protective 3115 with a zero 481

adjustment– 9100 relief was available by filing amended

return prior to extended due date for the 2014 returns

32

Repair Regs – Retail & Restaurant Safe Harbor

(Rev. Proc. 2015-56)• Safe harbor allows taxpayers to deduct 75%

and capitalize 25% of the costs for remodeling and refreshment of restaurant and retail properties

• “Qualified taxpayers” in the retail and restaurant business

– References NAICS codes– Excludes auto dealers and gas stations – Must have an applicable financial statement (AFS)

• “Qualified remodel/refresh costs” for “qualified buildings”

– Must not be an “excluded cost” (long list of exclusions)

– Buildings owned or leased and used in the rest. or retail business

• Rev. Proc. is effective immediately– Automatic consent procedures to change to safe-

harbor method

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34

Background– De minimis safe harbor election allows taxpayer to

deduct amounts paid to acquire or produce an item that costs $5,000 or less (by item or invoice)

– With Applicable Financial Statements (AFS) - $5,000– Without AFS - $500– Written procedure must be in place

Response to AICPA Recommended Changes– Notice increases threshold from $500 to $2,500 for

taxpayer’s without an AFS– Applies to tax years beginning on or after January 1,

2016– IRS will not raise the issue for periods prior to 2016

Increase in De Minimis Safe Harbor(IRS Notice 2015-82)

IRS Releases New Draft of Form 3115

Overview– Current Form 3115 was issued in 2009– Taxpayers may continue to use current Form 3115 for

2014 tax year– Final version will be released December 2015What’s New on draft Form 3115?– Ability to list multiple change numbers on line 1– New line 3 requiring taxpayer to verify that all required

info and statements have been included– New line 7expands on restrictions while under IRS

audit– New line 16 applies to taxpayers filing under the

advance or automatic consent procedures to attach a full explanation of the legal basis supporting method change

– New line 27 reflects $50k limit for election to include entire 481(a) adjustment in income in one year

– New line 7h, Sch. E, relating to changes in depreciation method – designates whether single, multiple, or general asset accounts35

36

INTERNATIONAL

Offshore Voluntary Disclosure Program (OVDP)

Overview– Taxpayers required to report worldwide income– Disclose foreign accounts > $10,000 on FBARs

and Form 8938– IRS aggressively conducting audits involving

foreign income

IR-2015-9―OVDP will remain open indefinitely until

otherwise announced―Taxpayers can voluntarily disclose their

accounts to the IRS and pay taxes, interest and a 27.5% penalty

―Taxpayer avoids criminal prosecution

37

IRS Issues Delinquent FBAR Submission Procedures

Overview

– Applies to taxpayers who do not need to use the OVDP or Streamlined Filing Compliance Procedures, but who:• Have not filed a required FBAR• Are not under civil or criminal examination• Have not been previously contacted by the IRS

regarding delinquent FBARs• No income has been omitted form the tax returns

– Taxpayer should file delinquent FBAR in accordance with instructions (need to be e-filed)

– No penalties will be assessed

38

U.S. Resident Not Protected Under OVDP

(Moore v. U.S.)

Background– Individual owned more than 50% of the stock of

a corporation that owned a foreign bank account– Individual did not file FBARs for 2005 – 2008– Began filing FBARs in 2009 – Filed 6 years of amended returns under the

OVDP to report income from the accountsIRS’ Arguments

– IRS recommended maximum penalty ($10,000) per year for non-willful failure to file the FBAR

– Individual failed to follow instructions on Form 1040 Schedule B regarding his interest in foreign accounts

39

U.S. Resident Not Protected Under OVDP(Moore v. U.S.)

Court’s Held– Taxpayer did not demonstrate reasonable

cause because:• Taxpayer ignored the question on Form 1040

Schedule B when preparing own return• Evidence showed the taxpayer answered “no”

when a paid preparer asked about foreign accounts (within organizer)

• Taxpayer understood that he owned more than 50% of a corporation, which owned a foreign bank account

– Therefore, the taxpayer actually committed a willful failure to file

40

DISCs and Roth IRA Contribution Limits

(Summa Holdings v. Comr.)Background

– Roth IRAs purchased stock of a Domestic International Sales Corporation (DISC) and transferred the shares to a holding company

– Later, the DISC received payments from another corporation, which it transferred to the holding company as a dividend

– The holding company transferred the payments to the Roth IRAs

TC Memo. 2015-119– Tax Court held that the payments to the DISC were in

substance dividends to the corporation’s shareholders followed by contributions to the IRAs

– Net effect: these transactions were held to have been made solely to circumvent the statutory Roth IRA contribution limits

41

42

INCOME, DEDUCTIONS, ETC.

Research Credit for Internal Use Software

(Proposed Regs)Background

– Research expenditures for developing internal use software (IUS) typically have not been eligible for the research credit

– Existing regulations allow a credit for innovative research– Software must be innovative, not commercially available and

taxpayer must incur significant economic risk during development

NPRM REG-153656-03– Regs attempt to clarify this “middle category” of

software development– Software not developed for commercial sale, lease, or license– Software not developed entirely for internal administration

– Focus on software developed for third-party interaction

– Online software which allows third parties to initiate functions, enter or review data, or communicate with taxpayer

– I.e.. Banking portals, bill pay features, cloud services, ticket reservation software, etc.

– Software related to third party interaction (previously categorized as IUS) can now qualify for the research credit

43

Ordinary Loss on Abandoned Securities

(Pilgrim’s Pride Corp, CA-5)

Background– Taxpayer claimed $98.6M ordinary loss on

abandonment of securities– Tax Court ruled that §1234A applied and

that it was a capital loss, not ordinaryFifth Circuit Court of Appeals

– Tax court decision overturned– Taxpayer allowed to claim ordinary loss– §1234A does not apply to the

abandonment of a capital asset itself– Only applies to the termination of “rights or

obligations with respect to capital assets” (i.e., derivative or contractual rights)

44

Bonus Depreciation Allowed Prior to Store Opening

(Stine, LLC v. US)

Background– Taxpayer built two retail stores in 2008 and took

50% bonus depreciation – Stores were considered “substantially complete”,

but not open for business before December 31– Taxpayer received $2.1M tax benefit

IRS’ Arguments– “Placed in service” = “open for business”

Tax Court Held– Bonus depreciation allowed– Buildings were placed in service when substantially

complete and ready to perform the function they were built to do

– Taxpayer received certificate of occupancy

45

Unreimbursed Travel Expenses Without a Tax Home

(Howard v. Comr.)Background

– Long-distance trucker spent 358 days on the road– Deducted $19k for travel expenses while away from

home, including $7k for truck stop electrification (TSE) expenses

– Truck stop electrification keeps the appliances and air conditioning running inside the truck without having to idle engine

– Listed mother’s residence as own, but did not pay to maintain the home while on the road

IRS’ Arguments– None of the expenses are deductible as travel

expenses, because taxpayer did not have a tax home– TSE expenses are equivalent to hotel expenses and are

also nondeductible – Therefore, no expenses incurred while away from home

46

Unreimbursed Travel Expenses Without a Tax Home

(Howard v. Comr.)

Tax Court Held– Taxpayer did not have a tax home– Travel expenses are not deductible– TSE expenses are deductible

– TSE expenses are equivalent to diesel fuel expense that would have been incurred to keep truck running idle and power living quarters

– Truck drivers must rest 10 hours for every 14 hours driven, and must power the truck during that time

– TSE expenses allowed as unreimbursed business expense subject to the 2% floor on Sch. A

47

Loss on Sale of Secondary Residence Disallowed

(Redisch v. Comr.)Background

– Taxpayer purchased a seasonal home in 2004 but later decided to rent it out

– Talked to a real estate agent about renting but never found a tenant

– Rental expenses deducted during interim– Upon sale of property in 2010, taxpayer deducted an

ordinary lossIRS’ Arguments

– Property had never been converted to a property held for the production of income

– Taxpayer’s primary purpose for acquiring residence was to use it as a seasonal home

Tax Court Held– No loss allowed as property never converted to a

“rental”– Rental expenses claimed were also disallowed and

penalties imposed48

Payment Under Consent Decree Can be Deducted

(Field Attorney Advice)

Background– The FDA caught a drug company selling adulterated

drugs when it inspected the company’s plant and filed a lawsuit.

– The parties settled the case and the company agreed to pay a large amount of damages

– The settlement agreement did not state that the damages were a fine or penalty and, on the contrary, stated “the parties acknowledge that the payment(s) under this Decree are not a fine, penalty, forfeiture, or payment in lieu thereof.”

FAA 20152103F– IRS determined that the damages paid to the FDA

were not fines or penalties under §162(f)– Deductible as a business expense

49

Asset Sale to New Corp Recharacterized(Bell v. Commissioner)

Background– Real estate broker incorporated his sole

proprietorship– Sold his contracts, trade names & other

intangibles to the corporation for cash– Reported capital gains from the sale; corporation

took amortization deductionsTax Court Ruling

– The asset transfer was in substance a capital contribution in exchange for stock

– 11 factors considered– The payments from the corporation to the

taxpayer were dividends– Court disallowed the corporation’s amortization

deductions

50

Interest in Oil & Gas Partnership Subject to SE Tax (Methvin v. Comr.)

Background– Individual held small minority working interests in oil & gas

venture– Operating agreement excluded parties from the application of

Subchapter K; no partnership return; joint venture– Taxpayer received 1099-Misc reporting working interest income as

nonemployee comp– Taxpayer reported income not subject to SE tax

Taxpayer Arguments– Not active member or involved in management– Merely investment that did not rise to a level of trade or business– Election out of Subchapter K

Tax Court Held– Taxpayer subject to SE tax– Income was distributive share of partnership income– Neither lack of control nor election out of Subchapter K affect the

partnership treatment

51

Charitable Contribution Deductions Disallowed (Kunkel v. Comr.)

Background– Taxpayers claimed $37k in noncash donations– Contended each contributed batch of items was worth less than

$250, eliminating the need for receipt– Provided blank, generic forms/doorknob hangers with no

donated items listed– Estimated the value of their donated property

IRS’ Arguments– Implausible that the taxpayer made donations on nearly 100+

distinct occasions– No evidence provided on the donated item’s condition– Taxpayers had no recollection of which items donated to which

charityTax Court Rules

– Noncash contributions disallowed; accuracy penalty upheld– Taxpayer had not satisfied statutory and regulatory

substantiation requirements– No recollection or written acknowledgments received

– Court noted photos of the items would be one form of evidence

52

Proposed Regs on Substantiation of Charitable Contributions over $250

Background– Taxpayer claiming a charitable donation of $250 or

more must obtain a contemporaneous written acknowledgement (CWA)

– CWA must contain:– Cash amount or description of property donated– Whether any goods or services were received in exchange– A good faith estimate of the value of the goods/services

received in exchangeNPRM Reg-138344-13

– Provides an exception to the CWA requirement for donations of $250 or more

– IRS will develop a new information return that the donee org can file to provide the information

– Form 990 will not be used for this purpose– Charitable orgs will not be required to use the

new form, however, if they do, they will need to file with the IRS and the donor by February 28 of the year following the donation

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IRS PROCEDURE & ADMINISTRATION

2014 Bonus Depreciation & Fiscal-Year Taxpayers (Rev. Proc. 2015-48)

Overview– The Tax Increase Prevention Act of 2014 (passed

December 14, 2014) retroactively extended bonus depreciation

– Consequently, 2013/2014 fiscal-year filers did not claim bonus depreciation on property placed in service in 2014

Rev. Proc. 2015-48– Allows taxpayer’s to file an amended income tax return

before filing the return for its 2014/2015 fiscal year return, OR

– File an accounting method change on Form 3115 for the first or second succeeding tax year

– If taxpayer elected not to claim bonus, consent is granted to revoke the election on an amended return by the later of December 4, 2015, or before filing the 2014/2015 return

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Attaching Sec. 83(b) Election to the Tax Return(PLR 201438006)

IRS Letter Ruling 201438006– Requirements to make a valid section 83(b)

election were fulfilled (election filed with the IRS within 30 days)

– Failure to submit a copy of the election with the tax return did NOT affect the validity of the election

– Forward a copy of the statement to the IRS office where the return was filed

Proposed Regulations– Taxpayers no longer need to attach a copy of the

election to their tax return – makes electronic filing easier

– May rely on proposed regs for transfers on or after 1/1/15

Privileged Communications(Eaton Corp v. Comr.)

Background– Eaton Corp (taxpayer) is a multinational power

management company founded in the US and based in Ireland

– In 2011 the IRS notified the corp it intended to retroactively revoke two advance pricing agreements citing “material deficiencies in compliance”

– Expecting an audit, Eaton sought tax and legal advice from its lawyers and accountants

– In 2012, Eaton filed a petition with the Tax Court contesting up to $370 million in proposed IRS audit adjustments and penalties

– In defense against penalties, the company claimed reasonable cause and that it had acted in good faith

Tax Court Held– By raising the issue of its intent, Eaton waived its

privileges and protections and had to provide the IRS all communications with advisors

57

Tax Filing Deadline Changes(Highway Funding Bill)

Partnerships– For tax years beginning after 2015, Partnership deadline will

be 2 ½ months after year end, March 15 for calendar-year firms.

– A six-month extension request will be allowed

C Corporations– For tax years beginning after 2015, C Corp deadline will be

pushed back to 3 ½ months after year end, except for firms with June 30 year end

– A five-month extension request will be allowed

Foreign Accounts– Beginning in tax year 2016, owners of foreign accounts with

more than $10,000 in assets must e-file FinCEN Form 114 by April 15 instead of June 30

– A six-month extension request will now be allowed

58

IRS Budget Cuts & Enforcement Down

Budget Cuts– IRS funding reduced by $350M from FY 2014 to FY 2015

– Funding reduced by $525M the year prior– The IRS has now experienced budget reductions in each of

the past five fiscal years– IRS must also absorb $250M to cover pay raises and benefits

Overall Business Audit Coverage– Audit coverage rate for all types of businesses

decreased from 0.61% in FY 2013 to 0.57% in FY 2014.

– Large corporation audit coverage decreased by 22.8%– S corporation audit coverage decreased by 14.3%– Partnership audit coverage actually increased in FY 2014 by

2.4%– Although audit rates are down, they were

significantly lower in the early 2000’s

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IRS on Social Media

Smart Phone App – Version 5 update

– Check refund status– Connect to IRS videos– Receive tax tips & more.

Twitter– @IRSnews

– Tax-related announcements– Daily Tax Tips

– @IRStaxpros– News and guidance for tax professionals

IRS Website– Helpful videos on a number of tax topics– Explore it!

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TAX PLANNING

Plan for Capital Gains and Dividends

– Avoid spikes in cap gains & dividends• Increases could push you into higher cap

gain and dividend brackets• Brackets: 0% 15% 18.8% 23.8%

– Spread cap gains between 2015 and 2016

– Consider installment sales or like-kind exchanges

– Rebalance portfolios for tax-exempt investments

– Gift appreciated assets

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Plan For Your Capital Gains

Wages 500,000 -

Pension - 40,000

LTCG 50,000 50,000

AGI 550,000 90,000

Standard deduction (12,400) (12,600) Exemptions (8,000)

Taxable income 537,600 69,400

Regular tax 142,093 1,988

Cap gain tax @ 23.8% 11,900 -

Total tax 153,993 1,988

Notes:

Taxpayers in 10% or 15% tax bracket have 0% capital gains tax rate

In 2015 MFJ 15% bracket is up to $74,900 in taxable income

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General Tax Planning

• Review Accounting methods―Overall method - Cash vs. accrual

method―Bad debt write-offs―Inventory methods - LIFO, FIFO, etc.―Deduction of accrued and prepaid items―Revenue recognition methods―Cost segregation studies

• Review choice of entity - pass-through entity vs. C corporation

– Policy trend is toward higher individual tax rates and lower corporate rates

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S-Corp or C-Corp?

Ohio S-Corp Ohio C-Corp

Taxable income $ 1,000,000 $ 1,000,000

Federal tax rate - 34.0%

Corporate tax - 340,000

Individual - Federal tax (@ 40.8%) 408,000 -

Individual - Ohio tax (net of fed @ 3.2%) 32,000 -

Total current tax $ 440,000 $ 340,000

Tax on corporate distribution

Funds available for distribution 560,000 660,000

Individual - Federal tax (@ 20.0%) - 132,000

Individual - Ohio tax (net of fed @ 3.2%) - 21,120

Total deferred tax $ - $ 153,120

Total tax $ 440,000 $ 493,120

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We Are Committed To Your SuccessFor more information, visit us at www.schneiderdowns.com