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CBIZ & MHM Executive Education Series™

Eye on Washington: Quarterly Tax Update (2nd Quarter) Steve Henley, Bill Smith July 30 and August 4, 5, 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 30 years experience in serving the tax needs of clients in a

variety of industries including retail, distribution and manufacturing,

services, technology and communications. In serving as lead tax

engagement executive, Steve’s focus is identifying and executing value

creating strategies to meet the needs of his 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.

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.

301.951.3636 • 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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Eye on Washington: Quarterly Tax Update (2nd Quarter)

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Legislative Updates

EYE ON WASHINGTON: QUARTERLY TAX UPDATE

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Congress Competes to Cut IRS Budget

• House (June 17) • $838 Million • Sixth Straight Year of Cuts • 7.7% decrease over prior year • $2.8 Billion less than President’s Request

• Senate (July 22) • $470 Million • 4% decrease over prior year

• Both • $2.247 billion to be spent on taxpayer services (increase of $90

million) • Handling of identity theft cases, and • IRS response rates to telephone calls and correspondence

from taxpayers

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Legislative Update: Tax Reform

• Off the agenda: Broad-based tax reform before 2017 • Senate Majority Leader McConnell:

• Cited major disagreements with Obama Administration over revenue neutrality and the distribution of the tax burden

• However, tax committees for both sides continue their work • Senate Finance:

• Tax overhaul working groups expect to release recommendations this summer

• House Ways and Means: • Chairman Ryan expects to put together a plan to address the

international tax system and a fix for the depletion of the highway trust fund by the end of the summer; also, pass-through changes

• Discussions include concept of patent or innovation box to apply lower rates to highly mobile intellectual property income

• Obama: Would eliminate deferrals under current law, and replace with lower rates on profits stockpiled overseas (14%) and for future profits (19%)

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Legislative Update: AICPA Proposal

• AICPA proposal to change pass-through entity and C Corp filing due dates

• Changes included in both House and Senate Highway Bills

• Summary of changes: • Partnerships would be due 3/15 (same as S corporations) • Calendar year-end C corporations would be due 4/15 • Generally effective for 2016 tax year • Special effective date for 6/30 year-end C corporations • Special extension period transition rules

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Legislative Update: Extenders

• House Ways and Means: Chairman Ryan would like to renew the extenders as part of a business overhaul package, but if not possible, will move to an extenders-only bill

• Probably late in the year • Probably one year extension similar to last year • House has passed several bills making certain extenders

permanent, such as the R&D tax credit and 179 expensing

• Senate Finance: strong desire to pass legislation to address extenders (Sen. Cardin (D-Md.))

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Legislative Update: Extenders

• Senate Finance: Sent bill to Markup July 21 • Business tax provisions that expired at end of 2014 and

would be extended through 2016 (two years) include: • Research and experimentation credit; • Work opportunity tax credit; • Increase in expensing to $500,000/$2,000,000 and

expanded definition of §179 property; • Bonus depreciation; • Exceptions under Subpart F for active financing income; • Look-through treatment of payments between controlled

foreign corporations (“CFC ”); • Special rules for qualified small business stock; • Reduction in S corporation recognition period for built-in

gains tax

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Legislative Update: Extenders

• Senate Finance: Sent bill to Markup July 21 • Individual provisions that expired at end of 2014 and were

extended through 2016 (two years) include: • Deduction for state and local income taxes; • Above-the-line deduction for tuition and fees; • $250 above-the-line deduction for teacher classroom expenses; • Exclusion of COD income from discharge of qualified mortgage; • Deduction for qualified mortgage insurance premiums; • Exclusion for employer provided mass transit and parking

benefits; • Tax-free distributions from IRAs for charitable purposes; • Charitable deduction for contributions of real property for

conservation purposes

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Legislative Update: Medical Device Tax

• June 18: House voted to repeal the Affordable Care Act’s tax on medical devices • Vote was 280-140; 46 Democrats voted to repeal • Senate said it won’t act quickly

Hatch wants to keep momentum going and offered to discuss paying

• White House has threatened veto of the bill • Note that the House vote was exactly 2/3 in favor of

repeal, just enough to override a presidential veto, so the Senate vote is extremely important. Only 420 voted; 435 Members of House of Representatives total

• Repeal is estimated to cost $24.4 billion through 2025.

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Small Business Relief For Non-ACA Compliant Payment Plans

• Employers that offer health coverage through arrangements where insurance premiums on individual plans are reimbursed or paid by employer (an “EPP”) violate ACA market reform rules, subjecting employer to $100/day penalty for each employee violation (Notice 2013-54). • Treating payments as taxable offers no protection.

• “Small employers” (not a large employer for ACA shared responsibility payment) will not be penalized for 2014 EPPs or payments through June 30, 2015.

• Reimbursing a 2% S corporation shareholder/employee will not subject corporation to penalty until further guidance is issued.

• Two bills (Sen 1697, HR 2911) in Congress addressing the issue: "to provide an exception from certain group health plan requirements to allow small businesses to use pre-tax dollars to assist employees in the purchase of policies in the individual health insurance market, and for other purposes," both introduced on June 25, 2015

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Eye on Washington: Quarterly Tax Update

Administrative Updates

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National Taxpayer Advocate’s Report

• Identity Theft • 730,000 ID theft cases per year past two years • IRS taking 6 months to pay refunds after false claims • 1.6 million calls on ID theft line • IRS should assign single employee to resolve

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Hello? … Hello?

• IRS dropped 8 million calls during filing season • For those who weren’t disconnected, only 40%

actually got through • Average hold time more than 30 minutes

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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 • 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.

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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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Tangible Property Regulations Update

AICPA calls for increase in safe harbor for repair regs • Current Rules:

• $5,000 de minimis safe harbor for taxpayers for items deductible in accordance with the Company’s Applicable Financial Statements (AFS)

• $500 safe harbor for taxpayers without an AFS • Certain simplified procedures for small business taxpayers:

Taxpayers with either total assets under $10 Million or average gross receipts of $10 Million or less for each separate and distinct trade or business

Can use cut-off method by taking into account only amounts paid or incurred or disposed of with 2014 tax year

No need for Form 3115 filing • Proposal: Increase safe harbor for taxpayers with no AFS to

$2,500; also, include reviewed financial statements as AFS

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Tangible Property Regulations Update

On July 16, IRS released draft of the new Form 3115, Application for Change in Accounting Method • More taxpayers, including many small businesses, could file

accounting method changes in coming years in light of the new tangible property regulations released in 2013, that compiled rules for capitalizing and deducting real property expenses.

• The IRS gave some small taxpayers transitional relief from filing Form 3115 with their tax year 2014 returns in Revenue Procedure 2015-20

• The IRS updated the guidance under Rev. Proc. 2015-13 (granting automatic and non-automatic accounting method changes) in June with Rev. Proc. 2015-33, clarifying a three-month filing window and saying that automatic change procedures don't apply if the taxpayer engages in a corporate liquidation or reorganization to which tax code Section 381(a) applies

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Deferred Compensation – CCA 201518013

• Executive had retention agreement which called for bonus • Vesting terms: Employed until the 3rd anniversary of

agreement • Bonus to be paid in 2 installments: On first 2 anniversary

dates of vesting date; Corp could accelerate payments by making a lump sum payment on 1st anniversary date

• This feature violated deferred comp rules • Corp tried to fix by eliminating acceleration provision in last

year of vesting period • Chief Counsel of IRS concluded violation triggered inclusion

of bonus amount and could not be deferred • Take-away: Be careful in structuring deferred comp

agreements so that all requirements are met; attempt to “fix” the violation in year 3 of vesting period didn’t work even though fix was prior to end of vesting period.

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• The IRS will continue its offshore voluntary disclosure program (OVDP) "for an indefinite period until otherwise announced."

• The IRS first opened the program in 2009 and has maintained it continuously since reopening it in 2012 • 50,000 disclosures • IRS has collected more than $7 billion since the OVDP

opened in 2009

OVDP

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• 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.”

• Planning: may want to accelerate transfers

Valuation Discounts

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Eye on Washington: Quarterly Tax Update

Cases

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Supreme Court rules on ACA: King v. Burwell

Supreme Court Issues Landmark Opinion, June 25, 2015 • Ruling: Premium assistance tax credit available in both

marketplaces, established by the state and by the federal government

• Majority Opinion written by Chief Justice Roberts: • It is was the intent of the law to make the tax credit available

regardless of the state or federal marketplace • Acknowledges that Court’s interpretation was not the “most

natural reading” of ACA • Broader interpretation necessary to avoid “calamitous result

that Congress plainly meant to avoid” • Justice Scalia wrote the dissenting opinion

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• Maryland has state income tax and county income tax • Residents were allowed a credit for taxes paid to other

states against Maryland state tax, but not county tax • Supreme Court upheld Court of Appeals ruling that failure

to do so violated Commerce Clause of the Constitution, resulting in double taxation and discrimination against interstate commerce

• Maryland residents who also file in other states should consider filing amended returns to claim credit against county tax (if any)

• Could impact other states with a local income tax – New York, Pennsylvania, Ohio, Missouri, etc.

Comptroller of Treasury of Maryland vs. Wynne, U.S. Supreme Court 5/18/15

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Webber v. Commr, 144 T.C. 17

• Grantor trusts purchases “private placement” variable life policies

• IRS argued “investor control” doctrine to claim Grantor should be taxable currently

• The money in the separate accounts was used to purchase investments in startup companies with which petitioner was intimately familiar and in which he otherwise invested personally and through funds he managed.

• Petitioner effectively dictated both the companies in which the separate accounts would invest and all actions taken with respect to the investments.

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Isaacs v. Commr, TC Memo 2015-121

• TP donated trilobite fossils to California Academy of Science

• Two years of donations, each valued over $100,000 • Obtained donee letter of acknowledgement

• Silent on whether goods or services received in exchange

• TP failed to establish • Qualified appraisal • Qualified appraiser • No goods or services provided in exchange

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QineticQ US Holdings v. Commr, TC Memo 2015-123

• Founders issued stock in exchange for cash • TP argued that there was a substantial risk of forfeiture

under Section 83 • Employment agreement required sale back to corp at

discount • Risk not eliminated until company sold • Company took $117 million compensation deduction

• Court held shares were treated as issued and vested from inception

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Marvel Entertainment v. Commr, 145 TC No 2

• Consolidated group filed bankruptcy • COD excluded from income, but NOLs required to be

reduced • TP reduced individual member NOLs according to COD,

resulting in $71 million NOL carry forward • IRS claimed CNOL had to be reduced • Court followed prior Supreme Court ruling holding

CNOL must be reduced • Subsequent regulations changed how the NOLs treated

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Stough Case re: Lessee Payments

Stough, 144 TC No. 16 • Lessee made the $1 Million lump sum payment allowed

under the terms of the lease • Lessor contended that the payment was not rental income

but meant to reimburse for leasehold improvements • Court found there were no improvements, but that the

payment was intended to reimburse taxpayer for “project costs”: • Acquisition costs, hard construction costs, soft construction

costs and financing costs • Tax Court ruled that one time, lump sum payment made by

lessee to reduce rent constituted rental income to lessor • Could not be spread ratably over the 10-year life of the

lease

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Stough Case re: Lessee Payments

Reasoning: • General rule applied that Gross Income included Lessee’s

reimbursement of Lessor’s expenses, i.e., project costs • Parties agreed that lease agreement was a “Section 467

Rental Agreement” (had increasing rents in years 6-10 and total rents exceeded $250,000)

• The lease could have allocated fixed rent to specific rental period, but was silent. (Reg. § 1.467-1(c)(2)(ii)(A))

• Absent a specific allocation in the agreement, the court held that the amount of rent payable in 2008 must be allocated to the 2008 rental period.

• Court also ruled that the rental accrual method or proportionate rental accrual method could not be used.

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• 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 Sec. 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.

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

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• 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 Section 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.”

• TP: 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.”

Ellis v Commr, 2015-1 U.S.T.C. ¶50,328 (8th Cir.)

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If You Enjoyed This Webinar…

Upcoming courses: • 8/19 & 9/17: Creative Ways to Structure Bonus Plans and Ensure Current Tax Deduction

• 8/20 & 9/1: How to Make the Most Out of Derivatives and Hedging

• 8/27 & 9/11: PPA Plan Restatement - Emerging Opportunities for Pre-Approved Plans

• 9/8 & 11/11: Revenue Recognition Updates for Manufacturers

Related thought leadership: • Are You Prepared for the ACA Reporting Requirements?

• Supreme Court Decisions Impact ACA, Same-Sex Marriage

• Understanding and Preparing ACA Informational Returns is Challenging

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