CBIZ & MHM Executive Education Series™

Eye on Washington: Quarterly Business Tax Update

October 29, 2014 November 11 and 12, 2014

Presented by: Stephen C. Henley, CPA National Tax Practice Leader, CBIZ MHM, LLC William M. Smith, Esq. Managing Director, CBIZ MHM, LLC National Tax Office

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Before We Get Started…

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Today’s Presenters

Stephen C. Henley , CPA Senior Managing Director, CBIZ MHM 770.858.4443 | shenley@cbiz.com 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.

William M. Smith, Esq. Managing Director, CBIZ National Tax Office 301.951.3636 | billsmith@cbiz.com 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 of business agreements.

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Agenda Year End Tax Planning

Asset Issues Tangible Property Analysis, Protective 3115s, Depreciation Review Cost Segregation Section 179, Bonus Depreciation

Legislative Updates

Extenders Mid-Term Elections on November 4 Wyden/Hatch Stick to Two Year Extender Deal Koskinen’s Warning to Congress

Inversions Schumer & Durbin Legislation (Sept. 11) Senate’s Bring Jobs Home Act (July 24) Sen. Levin and Rep. Levin – Offshore Stock Transfer Threshold

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Agenda Legislative Updates

Inversions – Cont’d Pocan’s Legislation On Earnings Stripping and Financial Statement

Transparency Resistance to Cash Method of Accounting Proposal for Businesses with Revenues

over $10 million ACA Update – Penalties and Non-Compliant Health Plans IRS Limited By House House – ID Theft Taskforce

Administrative Updates

Notice 2014-52 – Pronouncement on Corporate Inversions CCA 201436049 – LLC Income Subject to Self-Employment Tax CCA 201436047 – Additions to What Constitutes “US Property” Under Subpart F

rules C Corporations and the Use of Form 2848 – Potential Cir. 230 Exposures Notice 2014-58 – IRS Clarifies Economic Substance Statute

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Agenda Cases

Adell v. Comm’r (T.C. Memo 2014-155) Cavallaro v. Comm’r (T.C. Memo 2014-189) Ellis v. Comm’r (T.C. Memo 2013-245) Yari v. Comm’r (142 T.C. 7) Langert v. Comm’r (T.C. Memo 2014-210) Pitts v. U.S. (114 AFTR 2d ¶2014-5171) Est. of Elkins v. Comm’r (2014-2 U.S.T.C. ¶60,683) Fresenius Med. Care Holding, Inc. v. U.S. (1st Cir., No. 13-02144) Cooper v. Comm’r, 143 T.C. No. 10

YEAR-END TAX PLANNING

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Tangible Property Regulations Process to ensure compliance Protective 3115 Filings Depreciation review

Cost Segregation Bonus Depreciation and Section 179

Asset Issues

LEGISLATIVE UPDATES

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Business tax provisions that expired 12/31/13 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; 15-year straight line cost recovery for qualified leasehold, restaurant,

and retail improvements

“Tax Extenders” - Expired Tax Provisions

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Senate Finance Committee Chairman Ron Wyden is sticking to the Senate’s negotiated two-year extenders deal as agreed upon with the ranking Republican, Sen. Orrin Hatch of Utah.

Senate’s deal is different from that of the House, which extends some provisions for less than two years with only some extensions being permanent.

Wyden/Hatch – 2 Year Extender Deal

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Koskinen’s Warning To Congress

IRS needs decision on Extenders by the end of November Tax filing season will be delayed Processing of tax refunds “for millions of Americans” will be

delayed

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Inversions – Generally

A transaction in which a U.S. based multinational restructures so that the U.S. parent is replaced by a foreign parent, in order to avoid U.S. taxes.

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Inversions – Schumer & Durbin Legislation

Limits an inverted company’s ability to claim the interest expense deduction by repealing the debt-to-equity safe harbor; this limits the interest expense deduction to all inverters.

Reduces the allowed net interest expense to no more that 25% of a subsidiary’s adjusted taxable income (down from 50%).

Repeals interest expense deduction carryforward and excess limit carryforward

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Inversions – Bring Jobs Home Act

Disallows the deduction for moving expenses for companies relocating overseas.

Provides a 20-percent tax credit to help companies with the cost of bringing jobs back to the U.S.

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Inversions – Stop Corporate Inversions Act

One bill initiated by Sen. Carl Levin and the other initiated by Rep. Sander Levin.

The bills call for at least 50 percent of the stock of the foreign company owning the US entity to be owned by previous shareholders of the inverted US company.

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Earnings Stripping & Financial Statement Transparency

Corporate Fair Share Tax Bill Cracks down on corporate earnings stripping

Putting America First Requires CFCs to pay US Tax on future active income

Corporate Transparency and Accountability Bill Additional financial disclosures on a public website

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Resistance to Cash Method of Accounting Proposal for Businesses with Revenue over $10 million

In February, House Ways and Means Committee Chairman Dave Camp’s (R-Mich) comprehensive tax reform package included a requirement that businesses with average annual gross receipts of more than $10 million would be required to use the accrual method

The proposed change would preclude the use of cash accounting by passthrough entities, professional services firms, family farms and other businesses

223 Representatives and 46 Senators have sent letters opposing the change

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ACA Update

No Penalties under Internal Revenue Code Sections 6721 (information returns) and 6722 (payee statements) will be imposed for 2015 returns and statements filed and furnished in 2016 on reporting entities that can show a good faith effort to comply.

House passed law that would allow employees who offered non-ACA compliant in 2013 to continue to offer those plans through 2018.

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IRS Limited by House

The House passed five bills designed to rein in the Service’s authority over taxpayers – this is a Republican response to the IRS’s mishandling of applications for tax-exempt status by a number of conservative groups. (HR 5420) - Would allow victims to learn the status of federal

investigations into leaks of their personal taxpayer information. (HR 5418) - IRS employees would not be allowed to use personal

email accounts to conduct official business. (HR 5419) - Allows administrative appeals relating to adverse

determinations of tax-exempt status of certain organizations. (HR 5169) – The Senior Executive Service (SES) Accountability Bill

which would give agencies greater authority to take action against SES members who are underperforming or who engage in misconduct.

(HR 5170) - Federal Records Accountability Bill would create an expedited process to fire employees who intentionally destroy federal records.

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House Creates ID Theft Taskforce

The Stopping Tax Offenders and Prosecuting (“STOP”) Identity Theft Bill directs the Justice Department to use a special task force to address tax return identity theft and coordinate efforts to combat the same with state and local authorities.

ADMINISTRATIVE UPDATES

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Inversions – Offshore Stock Transfer Threshold

Notice 2014-52 aims to strengthen the requirement that the former owners of the US entity own less than 80 percent of the new combined entity.

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Inversions – Offshore Stock Transfer Threshold

Notice 2014-52 also aims to prevent “hopscotch” loans, whereby a Controlled Foreign Corporation (“CFC”) of the US entity transfers cash or property to the new parent of the US entity, completely avoiding US tax.

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CCA 201436049

All of the income allocated to the members of an LLC (taxed as a partnership) are subject to self-employment taxes LLC was investment manager for a managed fund All of LLCs gross receipts attributable to fees for services Income is not “of an investment nature” as it is with limited

partners

LLC members should not have been issued W-2s for “wages” Attempt to characterize portion of allocable income as wages or

guaranteed payments does not shield balance from SE tax

LLC Income Subject To Self-Employment Tax

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CCA 201436047

For purposes of IRC §956, interest on the obligation of a US shareholder of a CFC is “US Property” and taxable under IRC §956 to the US Shareholder

Additions to What Constitutes “US Property”

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A Corporation must provide the IRS with a Form 2848 to enable a specific employee to discuss issues with the IRS on behalf of the company.

The employee or officer of the corporation empowered to speak with the IRS under the 2848 is therefore subject to Circular 230 and the potential sanctions.

C Corporations & Form 2848 – Potential Cir. 230 Exposure

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Notice 2014-58

When applying the economic substance doctrine, a “transaction” is a plan that generates tax benefits and involves a series of interconnected steps with a common objective. The steps of the “transaction” are aggregated to include all of the steps together.

“Similar rule of law” rule explained – IRS won’t impose penalty unless it has raised economic substance argument under IRC § 7701(o),

IRS Clarifies Economic Substance Statute

CASES

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Adell v. Comm’r, T.C. Memo 2014-155

The Tax Court uses personal goodwill to determine

valuation of a television station. Concept of personal goodwill Application to related taxpayers in this case

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Cavallaro v. Comm’r, T.C. Memo 2014-189

A merger of a company owned by donors and a company owned by the donors’ sons was not an arm’s-length transaction, was not conducted in the ordinary course of business, and resulted in a taxable gift.

Taxpayers’ reliance on the advice of their counsel provided reasonable cause to abate the failure to file and accuracy-related penalties.

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Ellis v. Comm’r, T.C. Memo 2013-245 Peek & Fleck v. Comm’r, 140 T.C. No. 12

Two cases testing the concept of IRA owned businesses have been appealed. Ellis v. Comm’r – 8th Cir. Compensation constituted prohibited transaction

Peek & Fleck v. Comm’r – 10th Cir. Personal guarantees made by IRA owners of loans

made to a corporation owned by the IRAs constituted prohibited transactions

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The Tax Court ruled that a $100,000 penalty under IRC §6707A (failure to disclose reportable transaction – IRA owned and managed company) should be based on the taxes reported on the original return.

Yari v. Comm’r, 142 T.C. 7

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For individuals to claim a bad debt deduction must be able to show that the individual is in the trade or business of lending money. Insufficient to show that loan is connected to another trade or

business

Taxpayer spent 30 years in different real property activities, including buying, selling, and/or renting, and providing management services for certain rental real property.

Taxpayer made six different loans. Did not advertise himself to be a money lender or Keep a separate office or separate books and records relating to

any of the loans that he had made

Langert v. Comm’r, T.C. Memo. 2014-210

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The IRS properly used administrative collection procedures to collect a partnership’s unpaid payroll taxes from a general partner.

Under state law, a general partner is jointly and severally liable for the partnership’s obligations, including its tax liabilities

Taxpayer argued that, under U.S. v. Galletti (S. Ct. 2004), a general partner is not a “taxpayer” with respect to payroll tax-withholding liabilities of her general partnership under Code Sec. 3403

When IRS seeks to hold a general partner liable via state law for a general partnership's Code Sec. 3403 tax liability, the general partner is liable for a federal-tax obligation, and IRS can collect using normal procedures

Pitts v. U.S., 114 AFTR 2d ¶2014-5171

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Valuation of fractional interests in works of art Valuation discount appropriate Tax Court’s across-the-board 10% discount

inappropriate Appeals Court accepted taxpayer’s experts’ valuations

Est. of Elkins v. Comm’r, 2014-2 U.S.T.C. ¶60,683

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The Appeals Court upheld a $95 million deduction of a $127 million civil penalty settlement under the False Claims Act. $50.4 million tax refund Settlement agreement silent Issue of how much of the civil penalty was intended to

be compensatory IRS relied on Talley (9th Circuit) for proposition that

where settlement agreement unclear, no amount is compensatory

Fresenius Med. Care Holding, Inc. v. U.S., 1st Cir., No 13-02144

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The taxpayer was not entitled to treat royalty income from patents as capital gains under IRC §1235 since the taxpayer failed to show that he transferred all substantial rights in the patent to a corporation in which he maintained minority ownership, but still controlled.

Cooper v. Comm’r, 143 T.C. No. 10

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Questions?

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