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CBIZ & MHM Executive Education Series™

Eye on Washington: Quarterly Tax Update (3rd Quarter) Steve Henley, Bill Smith October 30 and November 3 and 4, 2015

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent accounting firms

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Before We Get Started…

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Steve has over 35 years experience in serving the tax needs of clients in

a variety of industries including retail, distribution and manufacturing,

services, technology and communications. Steve’s focus is identifying

and executing value creating strategies to meet the needs of clients in a

variety of technical areas, such as revenue recognition, acceleration of

deductions, research and experimentation credits, state and local tax

minimization, M&A tax structures, international tax planning and tax

implications of compensation programs. Currently, Steve is the National

Tax Practice Leader for CBIZ MHM, and responsible for various tax

practice operational areas, including strategic direction, thought

leadership, deployment of practice tools and processes and practice

leadership.

770.858.4443 • shenley@cbiz.com

STEPHEN C. HENLEY, CPA National Tax Practice Leader

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Bill Smith is a managing director in the CBIZ National Tax Office. Bill

monitors federal tax legislation and consults nationally on a broad range

of foreign and domestic tax services for businesses and individuals,

including mergers and acquisitions, domestic and international

investments or divestitures, and the review, negotiation and drafting of

tax aspects for business agreements.

301.907.2412 • billsmith@cbiz.com

WILLIAM M. SMITH, Esq. Managing Director,

CBIZ National Tax Office

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Agenda

Legislative

02

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03

Administrative

Cases

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Legislative Updates

EYE ON WASHINGTON: QUARTERLY TAX UPDATE

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Republican Candidates’ Tax Plans

• Trump • Tax income of hedge fund partners as ordinary income

• "Hillary and Jeb, in particular, are totally controlled by the hedge fund guys and the Wall Street guys, but hedge funds, in particular.“

• Obama has pushed same proposal at least since American Jobs Act of 2011

• Former House Ways & Means Chairman Dave Camp (R) proposed taxing a portion as ordinary in February 2014 comprehensive proposal

• Fight in Senate Republicans claim it’s Democrats wanting to raise taxes Schumer (D – NY) wants to include real estate activities in the

proposal – generally proposals have been limited to hedge fund managers

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Republican Candidates’ Tax Plans

• Trump Tax Plan September 28 • Simplified tax brackets

• Top individual rate reduced from 39.6% to 25% • Half of lower income families would pay no tax (currently 40%)

No tax for MFJ with income under $50,000 • Four brackets: 0%, 10%, 20% and 25% • Capital gains to stay at 20% for those in 25% bracket (no Net Investment

Income Tax) • No marriage penalty • Top corporate rate reduced from 35% to 15% — no “business income” taxed

at rate higher than 15%

• Greater phase out of deductions, but preserve charitable giving and mortgage deduction

• Repeal AMT

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Republican Candidates’ Tax Plans

• Trump Tax Plan September 28 • Eliminate Estate Tax

• 12,000 estate tax returns filed in 2014, and 10,500 in 2013 • 43.2% were taxable in 2014, and only 27% of estates with $10 million or less

• One time repatriation tax of 10% • No deferral of corporate income earned abroad, but keep FTC (and

business rate already reduced by more than half) • Tax investment build up in life insurance policies • Hedge Fund Managers

• Generally paid 2% of assets (ordinary income up to 39.6% currently), with 20% performance incentive (capital gains up to 23.8% currently)

• All taxed at flat 25% rate under Trump plan, so tax savings of 14.6% on asset-based fee, and increase of only 1.2% on incentive

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Republican Candidates’ Tax Plans

• Bush • Tax income of hedge fund partners as ordinary income?? • Reduce number of individual income tax brackets from the current

seven, ranging from 10% to 39.6%, to three — 10%, 25%, and 28% • Cut the top corporate tax rate to 20%, from 35%, and also change it to a

territorial tax system • Cap the total value of tax deductions (like the mortgage interest or

medical deduction, for example) at 2% of a filer's adjusted gross income • Nearly double the size of the standard deduction • Double the earned income tax credit for childless workers

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Democratic Candidates’ Tax Plans

• Clinton • Capital Gains

• Double the period of time for the 39.6% short term capital gains/ordinary income rate (from up to a year to up to two years)

• Institute a sliding rate scale until assets are held for more than six years.

• Firms that share profits with their employees will get a two-year tax credit equal to 15% of the amount they share -- with a higher credit for small businesses • Shared profits eligible for the credit would be capped at 10% on top of

employees' current wages

• Endorsed a Buffet tax on very-high-income households (minimum rate) • America’s smallest businesses—those with 1–5 employees—simplify tax

filing and provide targeted tax relief

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House Ways and Means

• Current Chairman Paul Ryan (R – Wis.) has agreed to run for Speaker of the House

• Leading candidates to replace Ryan has Chairman of House Ways and Means:

• Kevin Brady (R – Texas) Sponsored permanent extension of Section 179 expensing

deduction • Pat Tiberi (R – Ohio)

Sponsored permanent extension of R&D credit • Devin Nunes (R – Calif.) also interested

Proposed comprehensive tax reform package • Vote October 29 • Senator Orrin Hatch (R – Utah), Chairman of Senate Finance committee, has said

Ryan has assured him that Brady and Tiberi will work with him and “make sure things work out.”

• First priority is passing extenders legislation

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Extenders and Push for Permanency

• House Ways and Means voted to permanently extend 5 expiring provisions on Sept. 18 1. Bonus Depreciation 2. 15 Year Recovery Period for Qualified Leasehold, Retail and Restaurant

Improvements 3. Teachers’ Deductions 4. Subpart F Exemption for Active Financing Income 5. Look-through Rule for CFCs

• Votes exactly on party lines • Democrats want it to be part of comprehensive reform

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Eye on Washington: Quarterly Tax Update

Administrative Updates

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Cadillac Tax

• 40% non-deductible excise tax on high-cost, employer-sponsored health coverage starting in 2018, for health benefits exceeding $10,200 self-only coverage and $27,500 for all others • Self-funded and fully insured • Retiree coverage • Applies to employer and employee premium

contributions • Applies to Flex accounts and HSAs

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Cadillac Tax

• Bipartisan bill would repeal ACA’s "Cadillac plan" tax • Sens. Dean Heller, R-Nev., and Martin Heinrich, D-N.M.,

on September 17 introduced bipartisan legislation to repeal the "Cadillac plan" excise tax

• "My hope is that reasonable members of Congress on both sides of the aisle will join us in this important, bipartisan endeavor to protect middle-class Americans," Heller said in a statement.

• The impact of the excise tax is becoming clearer as businesses, workers and municipalities grapple with benefits planning today in advance of the 2018 deadline, the lawmaker noted.

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Cadillac Tax

• Kevin P. Knopf, senior technical reviewer for the Internal Revenue Service's Office of Chief Counsel, Health and Welfare Branch of the Tax Exempt and Government Entities Division, shut down the idea that HSA contributions will be excluded from calculating the cost of coverage for the tax “for the foreseeable future,” during a conference on October 19 hosted by the ABA.

• Christa Bierma, an attorney-adviser with the Treasury Department's Office of Benefits Tax Counsel, backed up Knopf's assessment, saying that when she has discussed the possibility of excluding HSAs from the cost of coverage to Internal Revenue Service economists, their “heads explode, because they think it would render the statute extremely ineffective.”

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Cadillac Tax

• Recent national survey results: • 91% think Cadillac Tax will influence their ability to

keep offering valuable health plans to employees • 37% have calculated their exposure to the tax; while

34% have not even considered doing so • 38% have tried to estimate when the tax might begin to

apply to them; while 33% have not thought about it • 32% have started reducing benefits; while 36% have

not considered reducing benefits • 27% have moved to offering different tiers of benefits

to eliminate high value options; while 34% have not considered this

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“Gluing a horn on a horse’s head doesn’t make it a unicorn”

• IRS reevaluates whether it will rule on Section 355 spinoffs involving minimal assets in active trade or business

• In January, Yahoo announced spinoff of $35 billion of Alibaba stock into business with $50 million of active trade or business assets ($12 billion of tax at stake) – reduced to $22.6 billion and $9 billion of tax in October

• IRS: Concerned that some corporations are attempting to satisfy the ATB requirement for spinoffs with a minimum amount of business assets, compared to the amount of passive assets held by the controlled corporation involved in the spinoff. IRS is studying the area and that it is possible IRS will decide not to issue rulings on this issue.

• September 8: Yahoo announced in regulatory filing that IRS will not issue favorable ruling

• Rev. Proc. 2015-43 (Sept. 14): No spinoff rulings for REITS and RICs where passive assets large compared to active Trade or Business assets

• October 20 – Yahoo chief Marissa Mayer told investors spinoff to be completed in January with only an opinion of counsel after the IRS declined to issue a ruling – trying to beat issuance of regulations.

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Valuation Discounts

• Current law: Valuation discounts allow taxpayers to transfer minority interests in family entities to family members at a significantly reduced transfer tax cost.

• IRS expected to release new restrictions this summer • Under Section 2704, the IRS may take position that “other

restrictions shall be disregarded in determining the value of a transfer to a family member, if such restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.”

• Catherine V. Hughes, an estate and gift tax attorney-adviser in Treasury's Office of Tax Policy, said Sept. 18 that the government is working hard on the rules, but “cannot estimate when they will be out.”

• Planning: May want to accelerate transfers

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Proposed Regulations Affecting Partnership Distributions

• IRC § 707(a) is an anti-abuse rule relating to payments to partners who are also service providers

• New Regs Proposed: Would treat certain arrangements as disguised payments for services, rather than a P’ship Interest; these payments would be compensation, taxed as OI, rather than a distributive share of p’ship income, which could be CG;

• Proposed Reg. §1.707-2(b) provides that an arrangement will be treated as a disguised payment for services if • a person (service provider), either in a partner capacity or in

anticipation of being a partner, performs services (directly or through its delegate) to or for the benefit of the partnership;

• there is a related direct or indirect allocation and distribution to the service provider; and

• the performance of the services and the allocation and distribution when viewed together, are properly characterized as a transaction occurring between the partnership and a person acting other than in that person's capacity as a partner

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Proposed Regulations Affecting Partnership Distributions

• The regs propose six non-exclusive factors for making this determination, with the first factor, the existence of significant entrepreneurial risk, as decisive

• Secondary factors: • The service provider’s partnership interest is transitory; • The service provider receives an allocation and distribution

in a time frame typical for payments to a nonpartner; • The service provider became a partner to obtain tax

benefits not available to a third party; • The value of the service provider’s interest is small

compared to the allocation and distribution; or • The arrangement provides for different allocations that are

subject to varying levels of entrepreneurial risk

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C Corp Must Recapture LIFO on Conversion to S Corp

IRS Field Attorney Advice 20153001F • A C corp that uses LIFO inventory accounting and then

elects to become an S corp must include a LIFO recapture amount in income for the last year before the S corp election took effect.

• Recapture also applies when a C corp transfers LIFO inventory to an S corp in a nonrecognition transaction.

• Extends LIFO recapture treatment to an C corp that was acquired by an S corp and was the subject of a QSub election.

• C corp cannot use consolidated net operating losses (CNOLs) to reduce the LIFO recapture amount

• Separate return required to report the LIFO recapture amount

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Affordable Care Act: Reporting Obligations

• IRS requires employers to report annually or face significant penalties (penalties are waived for 2015 if good faith effort to comply is demonstrated)

• Form 1094-C. Requests identifying information about “applicable large employer” • Aggregated group, number of 1095-C forms, type of coverage • Requires a month-by-month tally of whether Minimum Essential

Coverage was offered • Form 1095-C. Reports information about each employee

• Determines eligibility for premium tax credits • Provided to each employee included in the report

• Filing Deadlines: • Forms filed with IRS by 2/28 (3/31 if electronically filed) • Employees provided a copy of 1095 by 1/31 • First filings required in 2016 for 2015 calendar-year employers

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Affordable Care Act: Reporting Obligations

• IRS website for ALEs: • http://www.irs.gov/Affordable-Care-

Act/Employers/ACA-Information-Center-for-Applicable-Large-Employers-ALEs • What’s Trending for ALEs • How to Determine if You are an ALE • Resources for Applicable Large Employers; and Outreach

Materials • There are also links to detailed information about tax

provisions, including information reporting requirements for employers; questions and answers; and forms, instructions, publications, health care tax tips, flyers and videos.

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Eye on Washington: Quarterly Tax Update

Cases

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Precision Dose, Inc. v U.S., (N.D. Ill. 2015)

• Section 199 allows a taxpayer a deduction for a portion of its “qualified production activities income.” which is determined from a taxpayer's “domestic production gross receipts.” • any sale of “qualifying production property” (“QPP”) • which was “manufactured, produced, grown, or extracted”

(“MPGE”) by the taxpayer in whole or in significant part within the United States.

• Regulations: If a taxpayer packages, repackages, labels, or performs minor assembly of QPP and the taxpayer engages in no other MPGE activity with respect to the QPP, the taxpayer's packaging, repackaging, labeling, or minor assembly does not qualify as MPGE with respect to that QPP

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Precision Dose, Inc. v U.S., (N.D. Ill. 2015)

• Taxpayer sold “unit doses” of medications. A unit dose is a drug in a non-reusable container intended for administration as a single dose to a patient. The specific unit doses Taxpayer sold are different liquid, oral drugs sealed in various size cups and syringes. Plaintiff buys, in bulk, certain drugs it deems marketable in unit doses and suitable for sale in unit doses.

• Court relied on Dean case (gift baskets) to hold that Taxpayer did more than repackage • market research to determine which drugs to buy • acquires sample drugs and tests them for suitability • prepares specifications and works with vendors to develop cups

and syringes • conducts mixing studies to determine proper suspension • tests plastics to determine compatibility with specific drugs

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Voss v Comm’r, 2015-2 U.S.T.C. ¶50,427 (9th Cir.)

• Under Code Sec. 163, a taxpayer may deduct the interest paid on a mortgage and/or home-equity line of credit for a principal residence and a second home.

• For taxpayers other than married individuals filing a separate return, the deduction is limited to interest paid on $1 million of mortgage debt and $100,000 of home-equity debt.

• Two unmarried co-owners of real property, Bruce Voss and Charles Sophy (domestic partners registered with the State of California), each claimed a home mortgage interest deduction of $1.1 million

• Although the statute is specific with respect to a married taxpayer filing a separate return, the Code does not specify whether, in the case of residence co-owners who are not married, the debt limits apply per residence or per taxpayer

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Voss v Comm’r, 2015-2 U.S.T.C. ¶50,427 (9th Cir.)

• Tax Court: held for IRS, stating that the mortgage interest limitations applied on a per residence basis not a per taxpayer basis relying on language of Code: “Congress used these repeated references (“with respect to any qualified residence”) to emphasize the point that qualified residence interest and the related indebtedness limitations are residence focused rather than taxpayer focused.”

• Relying on the parenthetical that provides for half-sized debt limits “in the case of a married individual filing a separate return,” the Appellate Court determined that – like the first time homebuyer credit that specifically treats unmarried co-owners the same as married individual filing a separate return – the limitation was “per- taxpayer” based.

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Summa Holdings, Inc. v Comm’r, TC Memo 2015-119

• Two Roth IRAs contributed money to fund JC Export and filed election to be treated as an IC-DISC

• A DISC provides a mechanism for deferral of a portion of the Federal income tax on income from exports. The DISC itself is not taxed, but instead the DISC's shareholders are currently taxed on a portion of the DISC's earnings in the form of a deemed distribution.

• The parties stipulated that petitioners' sole reason for entering into the transaction at issue was to transfer money into the Roth IRAs so that income on assets could accumulate and be distributed tax free. Petitioners had no nontax business purpose for the transactions, nor did they receive any economic benefit from the transactions.

• Payments made by Summa Holdings, Inc. to JC Export, Inc. (IC-DISC), during 2008 were not domestic international sales corporation (DISC) commission payments but dividends to Summa's shareholders followed by contributions to Roth individual retirement accounts (Roth IRAs)

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In re: Kellerman, 2015-1 U.S.T.C. ¶50,331 (E.D. Ark.)

• A debtor couple’s self-directed individual retirement account (IRA) was not exempt from their bankruptcy estate, because the IRA lost its tax-exempt status before the debtors filed for bankruptcy when the husband directed the IRA to engage in prohibited transactions.

• The husband and wife owned a limited liability company (LLC) that formed a partnership with the IRA to acquire and develop a parcel of real property. Pursuant to the partnership agreement, the husband directed the IRA to purchase the parcel to be developed and convey it to the partnership. The husband also directed the IRA to make a cash contribution to the partnership.

• Under Code § 4975(c)(1)(D) both the cash and noncash contributions constituted prohibited transactions because they were a transfer of income or assets of the IRA to, or for the use or benefit of a disqualified person.

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Ellis v Comm’r, 2015-1 U.S.T.C. ¶50,328 (8th Cir.)

• TP lost Tax Court Case where purchase of a used car business through a limited liability company by his individual retirement account, and subsequent employment by the business, constituted prohibited transactions under IRC § 4975

• “To compensate him for his services as general manager, CST paid Mr. Ellis a salary of $9,754 in 2005 and $29,263 in 2006.”

• Taxpayer: Company paid me, not IRA. • Court: “By directing CST to pay him wages from funds that the

company received almost exclusively from his IRA, Mr. Ellis engaged in the indirect transfer of the income and assets of the IRA for his own benefit and indirectly dealt with such income and assets for his own interest or his own account.”

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Frontier Custom Builders v Comm’r, 2015-1 U.S.T.C. ¶50,485 (5th Cir.)

• Frontier, a custom home builder, claimed deductions mostly comprised of employee salaries and year-end bonuses, including $1,318,000 in total compensation paid to the company's founder, President, and CEO, Wayne Bopp

• IRS audited Frontier and determined that most of the salaries at issue should have been capitalized, instead of deducted, under IRC § 263A

• Capitalizable production costs include both “direct costs” of production and “indirect costs” of production

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Frontier Custom Builders v Comm’r, 2015-1 U.S.T.C. ¶50,485 (5th Cir.)

• “Indirect costs” include “service costs,” only some of which must be capitalized. • Service costs are costs identified with a particular service department or

function within a business and are broken down into three subcategories: • (1) capitalizable service costs -- costs that “directly benefit or are

incurred by reason of the performance of the [taxpayer's] production … activities.”

• (2) deductible service costs, and • (3) mixed service costs -- costs that are only partially allocable to

production and, to properly account for the proportion benefitting production activities, must be capitalized pursuant to a “reasonable allocation method”.

• Commissioner determined that most of Frontier's deducted amounts, and in particular, Bopp's compensation, were capitalizable mixed service costs

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Frontier Custom Builders v Comm’r, 2015-1 U.S.T.C. ¶50,485 (5th Cir.)

• Although many of Bopp's hours were spent managing the company, the record reflects that a substantial portion of Bopp's activities directly benefitted, or were incurred by reason of, production. Some of his activities included: • designing homes that were later produced; • creating the processes and procedures for building homes; • selecting developers and reviewing subcontractors; • resolving issues that arose at worksites during production; • selecting and installing the home design software; • meeting weekly with project managers to stay apprised of

production timelines; and • evaluating project managers' productivity reports.

• These activities were sufficient to support the Commissioner's capitalization of Bopp's compensation

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If You Enjoyed This Webinar…

Upcoming Courses: • 11/5 & 12/2: Individual Year-End Tax Planning Tips for 2015 and Beyond

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• 11/11: Revenue Recognition Updates for Manufacturers

• 12/1 & 12/15: Recent Tax Developments Impacting the Construction Industry

• 12/8: Lobbying and Political Activity Guidance for 501(c)(3) Organizations

Recent Thought Leadership: • A Chance of Clouds: Sales Tax Considerations of Cloud Computing

• Local Deductibility of Management Services Charges

• Are You Prepared for the ACA Reporting Requirements?

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