Teaching Team Roger A. McEowen CALT Director mceowen@iastate.edu - PDF document

8/4/2015 6 Character of Gain • Fargo v. Comr., T.C. Memo. 2015 ‐ 96. – Partnership acquired a leasehold interest in a property with the intent to develop an apartment complex and retail space. The lease originally ran for 20 years, but was extended for another 34 years. The property generated only rental income and no substantial effort to sell the property was made for 13 years. – The property was sold for $14.5 million plus a share of the profits from the homes that would ultimately be developed on the property. The partnership reported $628,222 of capital gain, but IRS took the position that the transaction triggered $7.5 million or ordinary income. The court agreed with the IRS. – The court determined that : • Property initially acquired for developmental purposes • Efforts to obtain financing and continue that development were made • Sale was to an unrelated party with the plan for the petitioner to develop the property • Efforts continued to develop the property up until the purchase date. • While there were some factors that favored the petitioner (only minor improvements made; no prior sales; no advertising or marketing performed), the court held that the factors weighed in the favor of the IRS and the sale was in the ordinary course of business under I.R.C. Sec. 1221(a)(1). 6 ‐ 7 Character of Gain • SI Boo, LLC v. Comr., T.C. Memo. 2015 ‐ 19 – Ordinary income and s.e. tax triggered on sale of properties acquired by tax deeds • Taxpayers regularly did this • Although the taxpayers bought the tax liens primary to profit from redemptions of the liens, the repeated sales of properties forfeited to them as lien holders constituted ordinary income as a dealer in real estate. – Persons employed to act on taxpayer’s behalf in acquiring tax deeds and preparing tracts for sale and maintaining business records • Not reportable on installment method 8 Character of Gain • Allen v. United States (N.D. Cal. May 28, 2014) – Sale of 2.63 acres of undeveloped land triggered ordinary income • Taxpayers admitted they acquired the property for the purpose of development – Held by taxpayer primarily for sale to customers in the ordinary course of business – Didn’t matter that the property was the only one bought for development – Taxpayers active in getting property developed 7

8/4/2015 7 Character of Bonus Payments • Dudek v. Comr., T.C. Memo. 2013 ‐ 272 – Facts: • Petitioner received $883,250 as up ‐ front bonus payment to allow oil and gas company to lock ‐ up property for eventual lease. The payment was not dependent on any extraction or production of oil or gas • Petitioner treated amount as long ‐ term capital gain and argued that sale rather than lease involved. • IRS claimed amount was ordinary income and assessed additional tax of $147,397 and imposed accuracy ‐ related penalty of $29,479 • Petitioner said that if IRS was right, he was entitled to a depletion deduction. – Holding: • Court agreed with IRS and also disallowed a percentage depletion deduction because no production had occurred ‐ no well drilled on property at time payment received; permanent easement not involved • Accuracy ‐ related penalty upheld – Affirmed on appeal. The Dudek Case – Bonus Payment • Tax Court – Noted that U.S. Supremes had long ago ruled that the receipt of a bonus payment by a lessor is ordinary income • Burnett v. Hamel, 287 U.S. 103 (1932) – Lease vs. sale analysis • The key is whether the lessor retains an economic interest in the deposit. If so, it’s a lease and the proceeds are ordinary income – Here, the petitioner was entitled to a royalty of 16 percent of the net profits of any oil or gas extracted. That gave the petitioner an economic interest in the minerals in place The Dudek Case – Lease Bonus • The depletion issue – I.R.C. §613A(d)(5) • A percentage depletion deduction for income from oil and gas wells does not apply to “any lease bonus, advance royalty, or other amount payable without regard to production from the property” – Petitioner’s bonus payment was paid to induce him to enter into the lease agreement and was not related to any extraction or production of oil and gas – Court noted, however, that bonus payments are eligible for cost depletion via Treas. Reg. §1.612 ‐ 3(a)(1), with the amount being dependent on the taxpayer’s basis for depletion, the amount of the bonus payment and the future royalties the taxpayer expects to receive. • Here, petitioner didn’t have any evidence as to the amount of royalties he expected to receive. Thus, cost depletion couldn’t be computed. 8

8/4/2015 Questions from Dudek • How does a lessor establish a separate “basis” for mineral rights when the land and minerals are purchased together in a single transaction? – Many buyers don’t allocate cost basis to mineral rights when they are acquired in the same transaction with the land – This could create a big problem! 9 To Exclude Gain On Sale of Home…Try Living in It • Villegas v. Comr., T.C. Memo. 2015 ‐ 33 – Home used as a group home for disabled persons and taxpayers lived elsewhere – Group home sold for $600,000 and taxpayers used Sec. 121 exclusion • Not available because house not used as a principal residence 9 Parsonage Exclusion Survives • Freedom From Religion Foundation, Inc. v. Lew (7th Cir. Nov. 13, 2014) – Exclusion of Sec. 107(2) is constitutional • Excludes from gross income a minister’s rental allowance paid to the minister as part of compensation for a home that the minister owns – Sec. 107(1) not implicated • Church can provide a minister with a parsonage and exclude from the minister’s income the rental value of the parsonage provided as part of the minister’s compensation 9

8/4/2015 10 Reporting of Installment Gain • Debough v. Comr., 142 T.C. No. 17 (2014) – Facts: • Taxpayer bought personal residence in 1966 along with 80 acres of mixed use land for $25,000. He agreed to sell it in 2006 for $1.4 million with the amount to be paid in installments through 2014. • Gain of $657,796 reported • $505,000 in payments reported on installment method consisting of $56,920 of gain • Buyers defaulted and property reacquired in 2009. • Taxpayer treated reacquisition under I.R.C. §1038 such that he wouldn’t have to report the portion of the gain that was previously excluded under I.R.C. §121 • IRS claimed that taxpayer should recognize long ‐ term capital gain in 2009 when property reacquired I.R.C. §1038 • If the sale of real property triggers indebtedness to the seller with the debt being secured by the property that is sold and the seller reacquires the property in partial or full satisfaction of the debt, generally the reacquisition does not result in gain or loss to the seller and the debt does not become worthless (even partially). – The rule bars a taxpayer from claiming any loss on reacquisition. But, an exception exists where a principal residence is repossessed and resold within one year. Major Exception to I.R.C. §1038 • If the seller has received cash payment, I.R.C. §1038 taxes the seller on the gain attributable to those payments to the extent these amounts have not previously been reported as income. I.R.C. §1038(b)(1). • I.R.C. §1038(e) – With respect to Sec. 121, taxpayers that reacquire the property and sell it within one year can treat the subsequent sale as the original sale for I.R.C. §121 purposes • No application in this case 10

8/4/2015 Debough • Court held that transaction fit squarely under I.R.C. §1038 and that taxpayer must report the gain – I.R.C. §1038 does not contain any provision to allow taxpayers to exclude I.R.C. §121 gain resulting from a sale and subsequent reacquisition of a principal residence because they didn’t re ‐ sell it within one year. Note on Debough • Upon reacquisition of the residence, the taxpayer would still be required to meet the two ‐ out ‐ of ‐ five year ownership and use test. – That could be difficult to satisfy in many reacquisition settings, unless the taxpayer moves back into the residence. If the test isn’t met, the taxpayer might be able to satisfy the requirements for a reduced exclusion. – Also, the reacquisition would cause an increase the basis of the residence to the extent of the gain recognized on repossession which, in turn, would result in less gain on resale. 11 Your Son, the Lawyer, Should Not Be Your Exchange Facilitator • Blangiardo v. Comr., T.C. Memo. 2014 ‐ 10 – Taxpayer bought property for $488,000 and then dumped wife. She gives up all rights for $500,000. – Taxpayer remarries and dumps her. She gives up all rights for $80,000 – Property sold for $2.25 million in a purported Sec. 1031 exchange using his son as the Q.I. in a transaction where he bought a $1.43 million property – Taxpayer gets a $1.512 taxable gain • Amount paid to dumpees did not impact taxpayer’s basis 11

8/4/2015 12 IRS Wins the Down, But Loses the Game • Starke v. Comr., T.C. Sum. Op. 2015 ‐ 40 – “Head Hog” offensive lineman co ‐ founded business and later took over fund ‐ raising • Received base salary and business credit card for expenses which were treated as advances for future wages or business expenses • Co. started withholding from salary for purpose of paying back advances • He resigned when balance due on credit card was $83k – IRS said this was a taxable advance in the year of retirement and not a loan – Court agreed » But, it was taxable in years received – which were out of statute unless a substantial understatement of tax was involved (IRS gets 6 years for that as well as if fraud involved). See T.D. 9466 (9/25/09) • Left off 25% or more of gross income 12 Too Much Control Over Trusts • Webber v. Comr., 144 T.C. No. 171 (2015) – Insurer set up two variable life policies on relatives where there was no fixed premium and no fixed benefit • Taxpayer puts up $700,000 to buy the policies via a grantor trust • Cash invested in hedge funds and privately owned companies (of the taxpayer!) – Not income to taxpayer if he doesn’t direct the investments » He did 16 Charitable Contributions – Do it Right! • Kunkel v. Comr., T.C. Memo. 2015 ‐ 71 – Clothing and household items donated to charities with an attempt to keep the individual gifts at a value under $250 because taxpayer thought he didn’t need a contemporaneous acknowledgement for those – For contributions over $500, no records maintained – No appraisal for gifts over $5,000 – Deduction fully denied and 20 percent penalty imposed 12

8/4/2015 16 Sure Way to Blow A Conservation Easement Deduction • Balsam Mountain Investments (T.C. Memo. 2015 ‐ 43) – Retained right to change property boundary means it’s not a “qualified real property interest” • Belk (4th Cir. Dec. 16, 2014) [page 18] – Right to swap land subject to the easement • Violates perpetuity requirement 22 No Deductions (except COGS) For “Pot” Facility • Olive v. Comr., 9th Cir. Jul. 9, 2015 – Sec. 280E says no deduction for expenses incurred by medical marijuana facility even if operating in a state where such activity is legal • Medicinal marijuana legal in 15 states – Can deduct COGS – Here the only business activity was selling marijuana • Other activities were not conducted with profit intent 23 No Deductions If No Profit Intent • Shah v . Comr., T.C. Memo. 2015 ‐ 31 – Computer consulting services provided to family members without charged • Not engaged in with profit intent, so no deduction for associated expenses 13

8/4/2015 24 ‐ 25 Must Be “Away From Home” To Deduct Traveling Expenses • Jacobs v. Comr., T.C. Sum. Op. 2015 ‐ 3 – Long ‐ haul truck driver paid on a per ‐ mile basis and claimed deductions for meals and lodging while traveling • Nope – never paid any household expenses or used the “home” address for voter registration purposes • Any use of “home” was for taxpayer’s convenience only 27 Counting Travel Days • Van Malssen v. Comr., T.C. Memo. 2014 ‐ 236 – Tax loss on vacation home rental limited because of excess personal use days – Under §280A(c)(5), when a taxpayer rents a dwelling unit to others but also uses it a residence during the same year, the deductions attributable to the rental use cannot exceed gross rental income. Under §280A(d)(1), a dwelling unit is considered a residence if the taxpayer uses it for personal purposes for a number of days exceeding the greater of: • (1) 14 days; or • (2) 10% of the number of days during the year for which the unit is rented at a fair rental value. – Under Code Sec. 280A(d)(2), if a taxpayer uses a dwelling unit for personal purposes for any part of a day, that day is counted as a personal use day. But if the taxpayer is engaged in repair and maintenance of the residence on a substantially full ‐ time basis for any day, that day is not considered a personal use day. Any personal use by a qualifying relative is imputed to the taxpayer. – Even if a taxpayer avoids having a dwelling classified as a residence, Code Sec. 280A(e) requires a taxpayer who uses the dwelling unit for personal purposes for even a single day during the tax year to limit his or her deduction for any rental activity by allocating expenses between personal uses days and rental use days. Days spent performing repairs and maintenance are disregarded when making the allocation. • Issue is what any particular trip was for – If repair and maintenance, first and last day of trip are business days – If combination of business and personal, then what predominates – Relative’s days counted as personal use days – Some of IRS assertions successfully countered. 28 Alleged Business Deductions – Down on the Farm • Meinhardt v. Comr., T.C. Memo. 2013 ‐ 90 – Petitioners occasionally stayed at their Minnesota farmhouse, and let family and friends stay in the place rent ‐ free (or maybe in exchange for services like repairs, but never reported income nor kept records). – They rented out the 140 acres of farmland for cash, and tried to deduct the farmhouse expenses. 14

8/4/2015 Meinhardt • No deductions allowed – The rental of the land is separate from the farmhouse – Petitioners did no farming, and reported the rental income on Schedule E rather than Schedule F – Petitioners couldn’t show any affirmative act whereby they discontinued personal use (including family use) and devoted the farmhouse to use in a trade or business, or for production of income. Thus, no deduction under I.R.C. Sec. 212 • Even if there was never any use of the property as a residence there still must be some affirmative act appropriating the property for the production of income. – No rental real estate business. • No deduction under IRC §162 – On appeal, 8th Cir. affirmed 28 ‐ 29 Zeroing ‐ Out C Corp. Income Via Bonus Didn’t Work • Vanney Associates, Inc. v. Comr., T.C. Memo. 2014 ‐ 184 – Often, the strategy is to have C Corps avoid paying corporation income tax by “zeroing out” the C Corp’s taxable income by issuing a W ‐ 2 bonus to its corporate shareholders who are also employees. • It is not uncommon for the C Corporation to then “book” a loan back to the C Corporation for these shareholders – so that no actual cash changes hands in what is typically structured as a year ‐ end transaction. – Be careful of reasonable comp issues and dividend issues – …and, make sure that year ‐ end bonus check can be honored if presented for payment at a bank » Must have sufficient funds at time bonus paid » Court disallowed entire amount of check as officer compensation even though a large part of it could have been paid. Building Can Be “Placed in Service” Before 33 Store in Building Open For Business • Stine, LLC v. United States (W.D. La. Jan. 27, 2015) – “The building is placed in service when it is substantially complete, meaning in a condition of readiness and availability to perform the function for which it was built.” • “Even though the government adamantly suggests that the buildings were placed in service when they opened their doors for business, the government has failed to cite any authority whatsoever to show that ‘placed in service’ equates to ‘open for business” 15

8/4/2015 37 ‐ 38 IRS Tells Veteran To Work Faster; Court Tells IRS, “Not So Fast” • Lewis v. Comr., T.C. Sum. Op. 2014 ‐ 112 – Taxpayer was a disabled vet who owned a rental property adjoining his home • Losses sustained on rental property that were deducted • IRS denied deduction on basis that taxpayer was not a real estate professional – didn’t meet the 750 hour test – Claimed the only way he got over the 750 hour threshold was because he worked too slow • Court allowed the deduction 38 ‐ 39 Self ‐ Rental Rule Can Work To Avoid Sec. 1411, But It Can Also Work Against the Taxpayer • Schumann v. Comr., T.C. Memo. 2014 ‐ 138 – Taxpayer was the president and majority shareholder of a number of businesses • Did not qualify as a real estate professional for either of two years at issue. – The Court determined that: • The rental income that he received for the use of two properties that he owned by two of his businesses was subject to the self ‐ rental rules (because the taxpayer was materially participating in the business) and therefore considered non ‐ passive income that could not be offset by passive losses stemming from other properties 45 No Deduction For Rental Expense or Loss on Sale • Redisch v. Comr., T.C. Memo. 2015 ‐ 95 – Taxpayers bought land with intent of building seasonal residence. They later converted it to a rental property, but it was never rented. – Property sold at a loss – No deduction for loss because it wasn’t converted to a rental before the sale • Multi ‐ factors 16

8/4/2015 48 Losses on Abandonment of Securities • Pilgrim’s Pride Corp. v. Comr., (5th Cir. Feb. 25, 2015) – Case arose before regulations issued that now treat losses from abandoned securities as worthless securities losses under Sec. 165(g) which makes them capital losses – Importance of court’s decision today? • Partnership interests – Like stock, contain inherent rights in management, profits, and assets and are generally capital assets – Sec. 1234 may not apply (based on the 5th Circuit’s opinion) » Can still claim ordinary loss for abandonment of partnership interests in certain situations, provided there is no relief from partnership liabilities 50 ‐ 52 First Time Homebuyer Credit Cases • Pittman – must actually own the home or at least have some equity in it • Wodack – home purchased in 1993 under installment contract and had equitable interest at that time. • Sullivan – no credit if interest in home acquired as incident to divorce and got a carry ‐ over basis • Oxford – trailer not a principal residence • Leslie – date of purchase is key for existing homes; it’s when occupancy is established for constructed homes • Douglas – spouse still had interest in old home (benefits and burdens) 52 AOTC – Pay Tuition in the Correct Year • Ferm v. Comr., T.C. Sum. Op. 2014 ‐ 115 – Student enrolled in college in fall of 2010 and was billed $2,113.16 for spring semester of 2011. Taxpayer paid the amount on Dec. 28, 2010 – Taxpayer filed 2011 return claiming the AOTC and IRS disallowed the credit for the amounts paid in 2010 • Court agreed – statute says the credit can only be claimed for payments made in same year the academic period begins • Pre ‐ payment statute inapplicable (applied for 2010, but taxpayer claimed AOTC on 2011 return) 17

8/4/2015 54 Small Partnerships – Don’t Be Fooled • If a partnership has 10 or fewer partners, it’s not a partnership for TEFRA purposes – Can possibly escape the penalty for not filing a partnership return – The exception doesn’t mean that the entity is not a partnership for tax purposes. IT IS! • Brumbaugh, et al. v. Comr., T.C. Memo. 2015 ‐ 65 • CCA 201510046 58 ‐ 59 Bank Immediately Liable Upon Notice of IRS Levy • United States v. JPMorgan Chase Bank, NA (C.D. Cal. Aug. 15, 2014) – IRS interest in delinquent taxpayer’s account vests immediately on issuance of levy and property subject to levy must be surrendered. • If not surrendered, bank is personally liable for debtor’s tax bill 64 Form 1099 and Freight Services • Form 1099 is not required for freight services – Applies to farmers that make payments in connection with trucking or hauling of livestock, grain or other farm products • CCM 20151002F 18

8/4/2015 67 No Alimony Deduction for Garnished Wages • Iglicki v. Comr., T.C. Memo. 2015 ‐ 80 – Taxpayer had amounts garnished from paycheck to satisfy separation agreement with ex ‐ wife to pay child support he had defaulted on • Payments not terminated on death of either payor or payee • No alimony deduction 70 Medical Issues Not Enough To Avoid Penalty Tax on IRA Rollover • U.I.L. 201523025 (Mar. 13, 2015) – Distribution from IRA, then a work ‐ related injury which put taxpayer on medical leave • Leave period expired after 60 ‐ day IRA rollover period • Taxpayer also caring for disabled wife – No relief from 60 ‐ day rule – No return of funds for more than 6 months after 60 ‐ day period expired • It was basically a short ‐ term, interest ‐ free loan used to pay personal expenses 74 Investment in Oil and Gas Activity Triggered S.E. Tax • Methvin v. Comr., T.C. Memo. 2015 ‐ 81 – Taxpayer invested in oil and gas interests – Normally, investment income would not be s.e. taxable, but court said that the operating agreement created a partnership and generated partnership income • S.E. tax applied even though the taxpayer took no part in management or operation of the ventures 19

8/4/2015 2014 Farm Bill Chris Hesse 2014 Farm Bill • AGI Limits • Payment Limits • Additional spousal limits • Additional limits from Crop Sharing • Entity Planning – CRP – Farm Programs 4 AGI Limits • Old Farm Bill had three AGI limits – $500,000 non ‐ farm income – $750,000 farm income – $1 million for conservation programs • New Farm Bill replaces with one overall $900,000 limit for all programs • Based on trailing three year average (2014 based on 2010 ‐ 2012 average). • S corporations and LLCs taxed as partnerships do not include Sch. K deductions (179) 20

8/4/2015 AGI Limits (continued) • Short ‐ year calculations – According to FSA, need to recalculate years based on new “year ‐ end” • Example – Assume C corporation changes from October 31 to December 31. In the year that December 31 takes hold, then prior three year average must be on December 31 year ‐ end (even if no tax return of FS was prepared) 6 Worksheet for AGI Limitations Client Name Determination year: 2014 2010 2011 2012 Average AGI Limitations Worksheet Per Tax Per Tax Per Tax Return Return Return Form 1040; AGI equals Form 1040, Line 37 Wages Interest income Dividend income Schedule C Schedule D Other gains, Form 4797 Pensions, annuities Schedule E, page 1 Schedule F K ‐ 1 ordinary Social security Other income NOL HSA 1/2 SE tax Retirement plans SE health insurance IRA DPAD Other adjustments Form 1040, Line 37 ‐ ‐ ‐ Client Name Average AGI Limitations Worksheet 2014 Calculations Section Average Adjusted Gross Income ‐ CCC ‐ 941 Questions If the result of Step A is greater than $900,000, the participant is ineligible for 2014 program payments no 1 Payment Limits • Farm programs now have one $125,000 limit per entity/person – Entity level first, then to owners to four levels – Partnerships and joint ‐ ventures have no limit • CRP retains the old $50,000 limit • EQIP and other conservation programs have various annual/total limits 21

8/4/2015 1 Payment Limitation Illustration 2 Attribution Limitation Illustration Additional Spousal Limits • A spouse with ownership in farm ground, etc. is automatically allowed an additional $125,000 limit – Needs to be signed up with FSA – Has separate AGI calculations – Husband/Wife LL(E) has only one $125,000 limit 22

8/4/2015 Crop Sharing Options • Crop ‐ share landlords are considered producers and can share in payments – Farmer Entity is Tenant Farmer – Farmer (land holdings entity) is landlord – Results in additional limits Crop ‐ Share Limit Planning Illustration Entity Planning • CRP – For married couples, need to maintain joint ownership to maximize $100,000 limit (2 $50,000 limits) • Farm Programs – If operation is fairly small, then about any entity will work – If medium or larger size operation, need to maintain partnership or joint venture structure 23

8/4/2015 Medium/Large Operation Example • Partnership structure for farm operating entity – Each partner may be single member LLC to preserve liability protection – To maximize SE tax savings may have two husband/wife LLCs as partners (creates two more tax returns) • Utilize crop ‐ share arrangement to create additional limit(s) if needed • Be careful of attribution of limits Time For A Break! • Morning Break – 9:45 – 10:05 a.m. 1 Obamacare Employer Requirements Roger A. McEowen and Kristy S. Maitre 24

8/4/2015 1 Market Reforms • The ACA introduced a number of “market reforms” to the health insurance market. • These reforms create federal minimum requirements with respect to access to coverage, premiums, benefits, cost ‐ sharing, and consumer protections. • The reforms do not apply uniformly to all private insurance market segments: non ‐ group, small group, large group, grandfathered. 1 Market Reforms: Non ‐ Grandfathered • All non ‐ grandfathered health plans are subject to the following market reforms: – Nondiscrimination based upon health status. – Dependent coverage through 26 – Prohibition on rescissions – No cost sharing for preventive health services – Coverage of pre ‐ existing health conditions – Cost sharing limits – Prohibition on annual and lifetime dollar limits on essential health benefits 1 ‐ 2 Small Group Market Reforms “Essential Health Benefits” must be offered only by: • Small group market (not self insured) • Individual market • These benefits include: – Ambulatory services – Emergency services – Hospitalization coverage – Maternity and newborn care 25

8/4/2015 2 Cost ‐ Sharing Requirements • All new insurance plans are subject to annual out ‐ of pocket spending limits for in ‐ network coverage of essential health benefits. ($6,350 ‐ self and $12,700 ‐ family). • Small group (not self ‐ insured) and individual market insurance must meet minimum actuarial value calculations. (defined at 60%) • Large group policies provide “minimum value,” which is also defined as 60 percent of actuarial value. • AV Calculator and Minimum Value Calculators are found at: www.cms.gov. Communication Requirements • All employers offering health plans must provide a summary of benefits and coverage (not exceeding four pages in length): – At application time – Prior to time of enrollment or reenrollment – When insurance policy is issued • Notice of material changes • Marketplace notice at time of hire • Notice of choice of physician 3 Grandfathered Plans • Plans in existence when ACA enacted (March 23, 2010) are exempt from certain requirements: – Nondiscrimination based on health status – No cost sharing for preventive Health services – Cost sharing limits 26

8/4/2015 Grandfathered Plans • Grandfathered Plans are still subject to: – Prohibition on lifetime limits – Prohibition on annual limits (group market only) – Summary of benefits and coverage – Coverage of preexisting health conditions – Dependent coverage until 26 years – Prohibitions on arbitrary rescission Grandfathered Plans • Plans lose their status as grandfathered plans is they are changed in ways that “substantially cut benefits or increase costs for consumers.” • The majority of grandfathered plans are no longer in existence (especially in large group market). 3 Transitional Policy (“If you like your plan…”) • Market reforms were effective January 1, 2014. • Centers for Medicare and Medicaid have extended “transitional policy.” – Non ‐ grandfathered policies that would otherwise be cancelled can continue until October 1, 2016. – State insurance commissioners choose whether to enforce compliance with reforms. 27

8/4/2015 3 ‐ 4 Big Penalties • Failure to comply with ACA requirements subjects violators to an “excise tax” • $100 per day per violation per person to whom the failure related. • Employers must “self report” on Form 8928. • Violations corrected within 30 days that were not due to “willful neglect” are exempt. • May still be prudent to report corrected violation. 4 Form 8928 4 Employer Mandate • Called “Pay or Play.” 1. “Applicable Large Employees” 2. Subject to “Shared Responsibility Payments” unless they offer 3. “Adequate and affordable” insurance to their 4. Full ‐ time employees and their dependents. 28

8/4/2015 5 Applicable Large Employer • Includes for ‐ profit, non ‐ profit, and government entities • Employed at least 50 full ‐ time equivalent employees during the preceding calendar year. – If 50 ‐ 99 FTEs, mandate starts in 2016 – If 100 or more FTEs, must offer coverage to at least 70% of full ‐ time employees in 2015 (95% in 2016) • Related entities treated as single employer in accordance with qualified retirement plan aggregation rules. 5 Full ‐ time Equivalent Employees • Average at least 30 hours per week. • Number of FTE employees for any month determined by dividing the aggregate number of service hours of employees who are not full ‐ time for the month by 120. • If employer had more than 50 employees for less than 120 days per year because of “seasonal workers,” not Applicable Large Employer. • Complex rules beyond scope of this presentation. 5 Enforcement Delayed • Employers with 100 or more employees must offer coverage to at least 70% of their eligible employees by 2015 (increases to 95% by 2016). • Enforcement of the mandate for employers with 50 ‐ 99 eligible employees will begin in 2016. 29

8/4/2015 5 Penalty ‐ ”Shared Responsibility Payment” • Shared responsibility payments will be assessed against applicable employers failing to provide coverage for full ‐ time employees when required. The penalty applies when: – At least one employee receives a PTC because insurance is not offered OR – Insurance offered is “unaffordable or inadequate” 6 Penalty A • A $2,000 per employee penalty will be assessed for employers choosing to offer no coverage to their employees. • The penalty is only assessed if one FT employee receives a PTC through an exchange. • For 2015, there is no penalty for the first 80 employees. Example of Penalty A • If Johnson, Inc. offered no coverage for its employees, penalty in 2015 would be (100 employees – 80 employee exemption) = 20 x $2,000 = $40,000. • In 2016, exemption drops to 30 and penalty would be $2,000 x (100 ‐ 30) = $140,000. 30

8/4/2015 6 ‐ 7 Penalty B • If “unaffordable or inadequate” insurance is offered, the penalty is $3,000 per employee, but penalty many not exceed penalty that would have applied if no insurance had been offered. Example of Penalty B • Johnson, Inc. sponsors group plan for 100 FTE employees. Plan is not affordable to 40, who receive PTC through state ‐ exchange. • Shared Responsibility Payment = 40 x (1/12 x 3,000) = $120,000 ( But remember that penalty cannot exceed penalty for not offering insurance at all ). 6 Affordable • Insurance is deemed to be affordable (safe harbor) to any worker for whom the employee’s share of the premium does not exceed: • 9.5 % of Box 1 wages • 9.5% of lowest hourly wage x 130 hours / month, or • 9.5% of federal poverty level 31

8/4/2015 Adequate • Insurance is adequate if it offers minimum value . • Plan’s actuarial value (the share of total allowed costs that the plan is expected to cover) is at least 60% (Bronze plan equivalent). • An actuarial value calculator is available to employers at hhs.gov. • Calculations include employer contributions to HSAs, HRAs offered in conjunction with a HDHP. 7 Reporting and Penalty Process • In 2016, employers with 100 or more employees will have to report their 2015 offer of minimum essential (minimum value) coverage to both the IRS and their employees. • Form 1095 ‐ C must be filed by February 28, 2016, or March 31, 2016, if filed electronically. • Details regarding that penalty assessment process have not been finalized. 8 Single Employer Common Control Test • Related entities may be treated as a single employer for ACA purposes. • A multiple entity farming structure whose companies were established under separate tax IDs is treated as a single employer under the controlled group rules of IRC §414. 32

8/4/2015 Single Employer Common Control Test • If two or more entities are owned by five or fewer persons who own more than 50% of the total combine voting power or more than 50% of the stock value: – An individual is deemed to own the stock of their spouse and minor children. – An individual who owns more than 50% of the voting power or stock value is considered to own the stock of their lineal descendants. – Ownership interests of siblings are not included. 8 Example • Bob owns 65% of FarmCo and 50% or LandCo. Bob’s daughter, Julia, owns 35% of FarmCo and 50% of LandCo. • Because Bob owns more than 50% of FarmCo, Julia’s ownership is attributed to him. • As a result, Bob is deemed to own 100% of FarmCo. • However, because neither Bob nor Julia owns more than 50% or LandCo, there is no attribution for that entity. 8 SMALL EMPLOYERS 33

8/4/2015 8 Small Employer Health Insurance • Employers with < 50 employees are not required to offer health insurance to their employees. • If they do offer coverage, they must abide by applicable market reforms. 8 ‐ 9 Small Business Health Tax Credit • Beginning in 2014, a small employer (< 25 employees) may claim up to a 50% credit for two consecutive years to offset the cost of providing insurance coverage to its employees. • To be eligible, the employer must pay at least 50% of FTE’s premium costs. • To receive the tax credit (as of 2014), the employer must enroll in a plan through the Small Business Health Options Program (SHOP) marketplace (currently only available through a broker). Credit Phase ‐ outs • Credit is subject to two separate Phase ‐ outs, one based on number of employees and one based upon average wages of employees. • Phase ‐ out one (number of FTEs): – Full credit is only available if number of FTE employees does not exceed 10. – Credit is reduced if employer has between 11 and 24 FTEs. – Credit is unavailable once 25 FTEs is reached. 34

8/4/2015 Credit Phase ‐ out Two (Wages) • The full amount of the credit is available if average wages do not exceed $25,000. • A reduced credit is available if average wages fall between $25,000 and $50,000. • The credit is unavailable if the average wages equal or exceed $50,000. Because phase ‐ outs are applied separately to the gross amount of the credit, it is of limited assistance. (Employees can go to https://www.healthcare.gov/small ‐ business ‐ tax ‐ credit ‐ calculator/ to estimate their SHOP tax credit.) 9 Form 8941 Uses a different calculation for FTE than that used for employee mandate. The following persons are not counted for credit purposes: • Seasonal workers (<=120 days worked) • Sole proprietors • Partners • Shareholders owning > 2% of S Corp. • Owner of > 5 % of business • Family members (includes in ‐ laws) Form 8941 Average wages may be calculated under one of three different methods. A different method can be used for each employee (choose most advantageous): • Actual paid hours of service worked (vacation, holidays, etc.) • Days ‐ worked equivalency (8 hours of service for each workday, including vacations and holidays) • Weeks ‐ worked Equivalency (credits 40 hours for each week in which the employee is credited for at least one hour of service). 35

8/4/2015 Interplay Between Self ‐ Insured Deduction and PTC • Self ‐ employed farmers can deduct the cost of health insurance premiums when calculating AGI. • Beginning in 2014, self ‐ employed persons may also be eligible for PTC, based on AGI and family size. • Because self ‐ employed health insurance deduction is allowed in computing AGI and AGI is used in computing PTC, taxpayer must know the allowable self ‐ employed health insurance deduction to calculate PTC and know PTC to calculate deduction. Interplay Between Self ‐ Insured Deduction and PTC, cont. • IRS issued Rev. Proc. 2014 ‐ 41 to provide calculation methods to resolve this circular relationship. • The ruling provides two calculation methods: an alternative and an iterative. • Eligible self ‐ employed individuals can recognize substantial savings from the addition of the PTC. Example • Bob and Sally are married with two children. They earn $75,000 from their farming operation. They enrolled in a Marketplace plan with an annual premium of $14,000. In 2013, they were allowed to deduct the entire premium amount. In 2014, however, they can claim a lower deduction, but also receive a PTC : Year Calculation Tax Savings 2013 $14,000 × 25% $3,500 2014 ($6,000 × 25%) + $7,000 PTC 8,500 36

8/4/2015 Certification for Small Employers Section 4980H Transition Relief • Check this box if either – (1) 2015 Section 4980H Transition Relief for ALEs with Fewer Than 100 Full ‐ Time Employees, Including Full ‐ Time Equivalent Employees (50 ‐ 99 Transition Relief) or – (2) 2015 Transition Relief for Calculation of Assessable Payments Under Section 4980H(a) for ALEs with 100 or More Full ‐ Time Employees, Including Full ‐ Time Equivalent Employees (100 or More Transition Relief) apply • If an employer checks this box, it must also complete Form 1094 ‐ C, Part III, column (e), Section 4980H Transition Relief Indicator, to indicate the type of section 4980H transition relief for which it is eligible. Column (e) Section 4980H Transition Relief Indicator. • If the employer certifies by selecting box D on line 22, that it is eligible for Section 4980H Transition Relief and is eligible for the 50 to 99 Relief, enter code A. • If the employer certifies by selecting box C on line 22, that it is eligible for Section 4980H Transition Relief and is eligible for the 100 or More Relief, enter code B. • An employer will not be eligible for both types of relief. 2015 Section 4980H Transition Relief for ALEs with Fewer Than 100 Full ‐ Time Employees or Full Time Equivalent Employees • The employer is an ALE or is part of an Aggregated ALE Group that had 50 to 99 full ‐ time employees, including full ‐ time equivalent employees, on business days in 2014; • During the period of February 9, 2014, through December 31, 2014, the ALE or the Aggregated ALE Group of which the employer is a member did not reduce the size of its workforce or reduce the overall hours of service of its employees in order to qualify for the transition relief; and • During the period of February 9, 2014, through December 31, 2015, (or, if the employer has a non ‐ calendar ‐ year plan(s)), ending on the last day of the 2015 plan year) the ALE or Aggregated ALE Group of which the employer is a member does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014. 37

8/4/2015 Also Certification for 100 or more • 2015 Transition Relief for Calculation of Assessable Payments Under Section 4980H(a) for ALEs with 100 or More Full ‐ Time Employees, Including Full ‐ Time Equivalent Employees (100 or More Transition Relief) • Form 1095 ‐ C check the instructions Form 1094 ‐ C 13 ‐ 17 HEALTH REIMBURSEMENT PLANS & THE ACA 38

8/4/2015 Employer Health Reimbursement Plans Health Reimbursement Arrangements (HRAs): Authorized by §§105, 106, HRAs are employer ‐ funded plans used to reimburse (tax ‐ free) employee medical expenses, including health insurance premiums. Medical Expense Reimbursement Plans (MERPS): Also allowed under §105, MERPs reimburse employee medical expenses, but unused amounts are not carried over to following years. 11 Other Employer Reimbursement Plans • Healthcare Flexible Spending Accounts (FSAs) (§125): Employers and employees (limited to $2,500) may contribute pre ‐ tax dollars to this plan through cafeteria plan, which will reimburse employee for medical expenses. • Employer Payment Plans (§106) : Employers reimburse employees for substantiated premiums, and payments are excluded from income. IRS Notice 2013 ‐ 54 • In this guidance, the IRS Treasury Department and the Department of Labor clarified the significant impact the ACA has on healthcare reimbursement plans. • These changes went into effect on January 1, 2014. 39

8/4/2015 12 IRS Notice 2013 ‐ 54 • Employer health reimbursement plans are generally considered group health plans. Group health plan is defined as “a plan of, or contributed to by, …an employer…to provide health care (directly or otherwise) to the employees or their families.” IRC §5000(b)(1) • Group health plans (unless exempt) are subject to ACA market reforms , in particular: – No annual dollar limits on essential health benefits. – No cost ‐ sharing for preventive health services IRS Notice 2013 ‐ 54 Bottom Line: Because most standalone (not integrated with another group plan) employer health reimbursement plans impose limits on what they reimburse and because they do not ensure preventive services at no cost, they violate the market reforms (if not exempt). Offering such plans, beginning in 2014, subjects employers to stiff penalties (up to $100 per day per violation per employee ($36,500/year). IRS Q & A (May 2014) 40

8/4/2015 13 Excepted from Market Reforms • The following types of reimbursement plans are specifically excepted from ACA market reforms and are therefore still allowed : – Plans with fewer than two persons who are current employees. – Plans that provide only excepted benefits, including: • Accident ‐ only coverage • Disability income • Certain Long ‐ term care • Certain limited scope dental and vision benefits • Employee Assistance Program benefits 13 HRA Integration Beginning January 1, 2014, an HRA must provide only excepted benefits or be integrated with an ACA ‐ compliant employer sponsored group health plan. HRA’s may not be integrated with a plan purchased on the Marketplace. They may, however, be integrated with an employer group plan purchased via SHOP. New guidance on reimbursement arrangements DOL ACA FAQ XXII, Q&A1 (Nov. 6, 2014) • Employer reimbursement of premiums is not allowed, “without regards to whether the employer treats the money as pre ‐ tax or after ‐ tax to the employee.” A raise is allowed, but there can’t be any employer involvement with the insurance. 41

8/4/2015 New guidance on reimbursement arrangements DOL ACA FAQ XXII, Q&A2 • Employers cannot offer “employees with high claims risk” a cash option in lieu of enrollment in the employer group plan. New guidance on reimbursement arrangements DOL ACA FAQ XXII, Q&A3 “ A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage. Is this permissible? “No. The Departments have been informed that some vendors are marketing such products. However, these arrangements are problematic for several reasons.” New guidance on reimbursement arrangements DOL ACA FAQ XXII, Q&A3 1. The arrangements are considered group plans, making participants ineligible for premium credits. 2. These arrangements are subject to the Market Reforms, and cannot be integrated with individual policies to satisfy them. 42

8/4/2015 New guidance on reimbursement arrangements DOL ACA FAQ XXII, Q&A3 (continued) “The mere fact that the employer does not get involved with an employee's individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan. DOL guidance indicates that the existence of a group health plan is based on many facts and circumstances, including the employer's involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash.” 13 Acceptable Employer Health Reimbursement Plans • Healthcare FSA coupled with an employer group plan where maximum benefit does not exceed the greater of: – 2 x employee’s salary reduction election for the year; or – $500 plus the amount of the participant’s salary reduction election Acceptable Health Reimbursement Plans • HRA integrated with employer group health plan that is ACA ‐ compliant – Two ways to do this… 43

8/4/2015 Integration Method One ‐ 13 No Minimum Value An HRA will be considered integrated if the following conditions are met: • Employer offers group health plan that does not consist of only excepted benefits. • Employee receiving HRA is enrolled in group plan that does not consist of one offering only excepted benefits (could be another plan, such as spouse’s) • HRA is available only to employees also enrolled in the non ‐ HRA group coverage. • HRA is limited to reimbursement of: – Co ‐ payments, Co ‐ insurance – Deductibles, Premiums, Non ‐ essential health benefits 14 Integration Method Two – Minimum Value Required An HRA may also be integrated with another group health plan if: • Employer offers a group health plan that pays at least 60% of the total cost of medical services. • HRA ‐ covered employee is enrolled in group plan providing minimum value (may be another provider). • HRA is only available to employees enrolled in minimum value group coverage. • An employee may permanently opt out of and waive reimbursements annually. Health FSAs • Under the Guidance, Health FSAs provide only excepted benefits if: – The employer offers other group health insurance coverage and the maximum benefit payable to an employee does not exceed the greater of two times the employee’s salary reduction election for the year, or $500, plus the amount of the participant’s salary reduction election. 44

8/4/2015 Health FSAs • The guidance says that Health FSAs are group health plans. If the health FSA is not excepted, it is generally subject to market reforms, including the preventive services without cost ‐ sharing requirements. • If it is not integrated with another group health plan, it will fail to meet this requirement, even if it only reimburses premiums. • A §125 FSA is not subject to the annual dollar limit prohibition because it is subject to a separate annual limitation under §125(i). FSA’s offered outside of §125 are subject to the annual dollar limit prohibition. Impermissible Plans in 2014 Subject to $100/day Fine • Standalone medical reimbursement plans or HRAs. • Employer payment plans under which employee premiums for a non ‐ employer group plan are paid on a pre ‐ tax basis. • Health FSAs and §125 health FSAs that are not excepted. Other Points • An employer can contribute money to an employee’s individual HSA – However, unless the employer sets up the HDHP and an HSA to make the contribution payment, the contributions must be made on a post ‐ tax basis. • Note: – Parts of this limitation applied before the ACA to bar the plan from being subject to complex group rules (comparability, etc.) 45

8/4/2015 What About Sec. 125 Plans? • To not be subject to the ACA “reforms,” a Sec. 125 plan must be offered in conjunction with employer ‐ sponsored group coverage. – Notice 2013 ‐ 54 states: • “Although a health FSA is a group health plan…it may be considered to provide only excepted benefits if other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer, but only if the arrangement is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election)” More on Health FSAs • If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventative services requirements. • Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventative services requirement Present Controversy • Some vendors have taken the position the premium ‐ only plans that only allow the purchase of individual insurance NOT provided on the marketplace or through a state exchange are okay. – We do not feel comfortable with this approach. Our concern is that such reimbursement would be considered a group health plan subject to market reforms • So, unless the Sec. 125 plan provides only excepted benefits such as limited dental and vision, we do not believe Sec. 125 plans are a safe employer offering absent a group health plan 46

8/4/2015 Steps to Compliance • As of late 2014 what were you supposed to do about existing non ‐ compliant plans? – Taxpayers are supposed to self ‐ report any penalties on Form 8928 • No tax due if failure not known on account of reasonable diligence • Reasonable cause and no willful neglect AND failure to pay tax corrected during the 30 ‐ day period beginning on the first date anyone liable for the tax knew or exercising reasonable diligence would have known that failure existed Steps to Compliance • What a practitioner should do: – Document efforts to notify clients of the problem – 30 ‐ day window runs from time of notification – Have recommended solution for client • Immediate termination of any non ‐ qualified plans and notice to affected employees • Any corrective plan must be completed in 30 days Key Question • Should you then report the violation on Form 8928? – If you don’t report, it will be more difficult the claim the exemption if IRS discovers the problem on its own • Will IRS be generous in allowing exemptions in the first year of the problem? – It’s never good to count on IRS generosity! 47

8/4/2015 DOL FAQ (11/6/2014) • Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms? • No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer's payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre ‐ tax or post ‐ tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. .. 17 What About 2% Shareholders? • Can you reimburse S corp 2 percent shareholder ‐ employees’ individual premiums or is that also subject to the market reforms? – No excise tax through 2015 (so, no Form 8928) • But, no application to reimbursement for non ‐ 2% shareholders – Transitional relief through June 30, 2015 applies – Rely on Notice 2008 ‐ 1 until further guidance issued Article on p. 18 IRS Notice 2015 ‐ 17 • Guidance on the Sec. 4980 excise tax for violating the market “reforms” – Reimbursement of individual health care premiums to employees remains an improper employment plan • But, transitional relief for small employers provided – Don’t have to file Form 8928 and won’t have to pay excise tax through June 30, 2015 – Transitional relief applies to both Medicare Part B or Part D premiums and to reimbursements of individual health policy premiums – No transitional relief to small employers who offered stand ‐ alone HRAs or other medical reimbursement plans to their employees 48

8/4/2015 19 Fewer Than 2 Participants Who Are Current Employees – S Corporation • If HRA covers both the 2% shareholder/employees and a non ‐ 2% shareholder/employee, it’s a group plan – Not under the “fewer than two participants who are current employees” exception – Thus, the reimbursement of the non ‐ shareholder/employee is illegal Fewer Than Two Participants Who Are Current Employees – Family Coverage • If an employee is covered under an HRA with a spouse or dependent (who are also employees), this arrangement will be considered to cover only one employee – If the small business has only family members and no other employees, can continue to reimburse for a family plan 19 Integration of Medicare Premiums • Such reimbursement does not constitute an employer payment plan – Method provided for integrating the reimbursement with an employer group plan 49

8/4/2015 21 Notice 2015 ‐ 17 – More Comments • Increasing an employee’s compensation and not conditioning that payment on the purchase of health coverage does not constitute an improper employer payment plan • But, treating premiums paid as taxable compensation is problematic 22 ‐ 37 Grassley Bill • S.1697 – Would allow Sec. 105 plans to be used as they were before Obamacare • Introduced on June 25, 2015 and referred to the Committee on Finance C Corporations • Where a C corporation sole owner and spouse are the only employees of the C corporation, no “group health plan” subject to ACA requirements is established – CALT article of Dec. 31, 2014 – IRS position taken in Notice 2015 ‐ 17 50

8/4/2015 For Small Employers, What Are the Big Issues? • Counting people – Who is a “participant”? – Who is an “employee”? – Do we count partners? – What about S corporation shareholders? – What about sole proprietors? – Who is eligible? – Can I leave some employees out of the plan? – How do the nondiscrimination rules apply to the ACA? Examples • C corporation – A C corporation has 4 qualifying employees and pays the employees’ individual health insurance premiums directly or by reimbursement. Is this still allowed? • No. This reimbursement plan may not continue. – Would an HRA work? – What about a Flexible Spending Account? What is the Remedy? • What do I do with clients in this situation now? – Stop reimbursements and payments. – Pay back taxes on reimbursements/payments. – Under DOL FAQ, violation still occurred. – Consider self ‐ reporting violation on Form 8928 with a penalty of ‐ 0 ‐ . – IRC Section 4980D(3) states: • A failure of a group health plan shall be treated as corrected if— • (A) such failure is retroactively undone to the extent possible, and • (B) the person to whom the failure relates is placed in a financial position which is as good as such person would have been in had such failure not occurred. 51

8/4/2015 C Corporation • A Schedule C corporation has only employee and pays the employee’s individual health insurance premiums directly or by reimbursement. Is this still allowed? – Yes. This meets the “fewer than two participants who are current employees exception .” C Corporation – What if only two employees of C Corporation are the husband and wife and one or both own the business? • They are deemed not to be “employees,” whether or not they received a W ‐ 2. Would fall under exception for “fewer than two participants who are current employees.” 29 CFR § 2510.3 ‐ 3 (1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and S Corporation • An S Corporation has one owner and no other employees. The S Corporation has always reimbursed the owner for the cost of his individual health insurance premiums. – The payment is treated as a guaranteed payment (wages). – Payment is reported on boxes 1 and 14 of W2 – The payment is excluded from FICA under Notice 2008 ‐ 1. – The shareholder can take the 162(l) deduction for the cost of his health insurance premiums. • Can this practice continue? – Yes, there is one participant. 52

8/4/2015 S Corporation • An S Corporation has five more than 2% shareholders and no other employees. The Corporation has always reimbursed the shareholders for the cost of their individual health insurance premiums and the payments were treated as described on the last slide. Can this practice continue? – Most likely not. The only way the 162(l) deduction can be taken under 2008 ‐ 1 is if the plan is a health plan established by the employer. If the employer establishes such a plan, it will likely be subject to ACA market reforms. DOL FAQ specifies that it does not matter if these payments were on a post ‐ tax basis. Safest course: avoid reimbursement until further guidance. – Transitional relief through 2015 S Corporation What if the S Corporation has always reimbursed the one more than 2 % shareholder for her premiums, but has never provided health benefits to the one non ‐ owner employee? ‐ As long as the “plan” legally comprises only one participant, it will not be subject to the ACA market reforms. The discrimination testing rules under 105(h) have not changed for self ‐ insured plans. Partnership • A partnership with three partners has always reimbursed the partners for premiums. Reimbursement is guaranteed payment, treated as wages. Partners take 162(l) deduction. Can this continue? – Most likely not. The only way the 162(l) deduction can be taken is if the plan is a health plan established by the employer. If the employer establishes such a plan, it will likely be subject to market reforms. DOL FAQ specifies that it does not matter if that these payments were on a post ‐ tax basis. Safest course: avoid reimbursement until further guidance. – 26 CFR 54.9831 ‐ 1 (d) (2) states: In the case of a group health plan, the term employer also includes the partnership in relation to any bona fide partner. In addition, the term employee also includes any bona fide partner. Whether or not an individual is a bona fide partner is determined based on all the relevant facts and circumstances, including whether the individual performs services on behalf of the partnership. 53

8/4/2015 S Corp and Partnership Remedy • What do I do with clients in this situation NOW? – Stop reimbursements for health insurance. – Pay FICA for reimbursements (for S Corporations). Do not report on Box 14 of W ‐ 2. Shareholders/partners cannot take 162(l) deduction. – These are mere guaranteed payments that should not subject S Corporation/Partnership to penalties. – Remember, there is transitional relief through 2015 for S corporations Sole Proprietor A sole proprietor has established an HRA for his one full ‐ time employee, but his part ‐ time employee is not eligible for this benefit. Is this arrangement still valid? It should be. Because only the full ‐ time employee is eligible for participating in the HRA under a valid distinction, this plan falls within the “fewer than two participants who are current employees.” Sole Proprietor • Can the sole proprietor still take the 162(l) deduction for cost of his health insurance premiums? Likely yes. Although a sole proprietor is considered a participant in a group health plan if he receives benefits, the sole proprietor is not deemed to be an employee, as is a partner. 54

8/4/2015 38 PCORI Fee • Patient ‐ Centered Outcomes Research Institute (PCORI) fee on employers that sponsor a self ‐ insured health plan. – For plans ending Sept. 30, 2014 and before Oct. 1, 2015, the fee is $2.08 for each life covered. • An exception exists for self ‐ insured HRAs. The employer may count only the employee as covered. – The PCORI fee is calculated and submitted on Form 720 • Fee must be paid by July 31, 2015 • Deductible on Schedule F – For farmers with medical reimbursement plans utilizing a 3d party administrator, the administrator may complete Form 720; farmers that administer their own plan are responsible for filing the form Transitional Reinsurance Fee • Beginning in 2014 and through 2016, there is a reinsurance fee that plans must pay for each employee enrollee in a group health plan. The fee is $63 in 2014, and it will decrease in the two years following. – $44 per enrollee for 2015 – $27 per enrollee for 2016 • The fee is owed by self ‐ insured employers. • Plans with fewer than two active employees are exempt. (See CMS Q & A at https://www.regtap.info/faq_viewe.php?i=596&u=15307& a=9) • Fees collected by HHS – Must submit membership count to HHS and they calculate the fee and invoice you Increased Wages as Alternative to Impermissible Plans Frank operates a grain and cattle farm and employs Harry and several others. During 2013, Harry purchased an individual health insurance policy, and Frank reimbursed Harry for the $350 per month premium on a pre ‐ tax basis. What are Frank’s options in 2014? No continued pre ‐ tax reimbursement May increase wages (subject to FICA and income taxes) Increased income may lower PTC available on Marketplace. Later learned that the increase in wage can’t be tied to employee’s health costs 55

8/4/2015 41 Health Savings Accounts (HSAs) Individuals and their employers may contribute pretax dollars to an HSA in which contributed amounts can grow tax free. To qualify, individual must: • Be covered by a high deductible health plan (HDHP) (equivalent to a Bronze plan – 60% AV) • Have no disqualifying health coverage. • Not be enrolled in Medicare. • Not have VA medical benefits within prior three months. • Not be eligible to be claimed as a dependent on another person’s tax return. 42 Health Savings Accounts Limits 42 Health Savings Account Withdrawals • Withdrawals are tax ‐ free if used to pay for qualified medical expenses incurred on or after the HSA is established. • Qualified expenses include those of spouse and dependents. • Withdrawals not used for qualified medical expenses are subject to penalty tax (20%!) and included in gross income (does not apply to those age 65 and older). – Obamacare increased the penalty tax rate 56

8/4/2015 “Cadillac” Tax • Beginning in 2018, the ACA will impose a 40 percent excise tax on annual premiums associated with Cadillac health care plans. • These plans are employer ‐ sponsored plans costing more than $10,200 per employee (or $27,500 per family), including employer and employee ‐ paid contributions. Considerations for U.S. Agricultural Businesses (and Owners) with International Activities Stephanie Hathaway, CPA, MS, MPA 2200 Rimland Drive, #300 Bellingham, WA 98226 Phone: 360 ‐ 676 ‐ 1920 Fax: 360 ‐ 671 ‐ 5411 E ‐ mail: stephanie.hathaway@mossadams.com 2 Topics we’ll cover • Overview of the U.S. Foreign Disclosure Rules • Who is required to disclose? • What is required to be disclosed? • What happens if disclosures are missed? • What corrective filing strategies are available? 57

8/4/2015 Overview of the U.S. Foreign Disclosure Rules • Intended to prevent U.S. taxpayers from hiding income or assets using offshore entities • The U.S. government has extensive enforcement powers to compel disclosure by U.S. taxpayers regarding offshore activities • Integrates with the U.S. “anti‐deferral” provisions to prevent U.S. taxpayers from using offshore structures for deferral of taxation on certain types of income • IRS requires U.S. persons to submit annual disclosures detailing: – Ownership and/or control of foreign assets and/or entities – Activity of and transactions with certain foreign entities and individuals 3 Overview of the U.S. Foreign Disclosure Rules • IRS has greatly increased the resources focused on this area. The risk of exposure and criminal prosecution has increased dramatically for non‐ filers in recent years • There are significant civil and criminal penalties for failure to accurately and timely disclose – Timely filing is critical – Penalties start at $10K for each incorrect or late disclosure…even when no tax due • Annual compliance can be costly, even for fairly simple offshore structures • Many of these disclosures require extensive details derived from foreign legal documents and financial statements • To control costs and achieve tax efficiency, U.S. taxpayers planning to invest or do business offshore must understand how the foreign disclosure rules and anti ‐ deferral provisions will apply to the proposed structure Who is Required to Disclose? • U.S. citizens • U.S. greencard holders (U.S. permanent residents) • Other individuals who are U.S. income tax residents pursuant to – the “substantial presence test” of § 7701(b)(3) or – who have elected to be treated as U.S. residents (under § 7701(b)(4), § 6013(g) or § 6013(h), etc.) • Individuals who must use the residency article of a bilateral income tax treaty to be treated as non‐residents of the U.S. for income tax purposes • U.S. entities (corporations, trusts, estates, partnerships, LLCs, etc.) 58

8/4/2015 4 What is Required To Be Disclosed? • Acquisition, ownership (direct, indirect or constructive), and/or disposition of an interest in a: – Foreign Corporation (Form 5471, 8621) – Foreign Partnership (Form 8865) – Foreign Disregarded Entity (Form 8858) – Foreign Trust (as U.S. grantor, owner and/or beneficiary) (Forms 3520 and / or Form 3520‐A) – Other foreign entity for which the U.S. classification must first be analyzed in order to determine which disclosure is required • Must evaluate characteristics of the arrangement What is Required to be Disclosed? Determining characterization of a foreign entity (trust vs business entity) for U.S. tax disclosure purposes: • Trust – Trustee holds title to property for investment purpose and/or for protection or conservation of that property for beneficiaries (who are generally passive) • Corporation or Partnership – Has business purpose, associates, free transferability of interest, limited liability, continuity of life, and centralized management • If it’s not a trust, is it a per se corporation (Treas. Reg. §301.7701 ‐ 2) or is it eligible to be treated as a flow ‐ through entity (partnership or disregarded entity)? 5 What is Required to be Disclosed? • Transactions with: – Certain Foreign Corporations, Partnerships or Disregarded Entities in which the U.S. filer has ownership (Forms 5471, 8621, 8865, 8858, 926) • Contributions, Distributions, Loans, Compensation, Dividends, Rents, Royalties, Interest, etc. – Foreign shareholders (and related parties), when the reporting U.S. corporation is owned 25% or more by foreign persons (Form 5472) – Foreign Trusts (Forms 3520, 3520‐A) • Contributions, Distributions, Loans – Foreign Estates • Receipt of bequests >$100K during a calendar year (Form 3520) – Foreign Individuals • Receipt of gifts >100K during a calendar year (Form 3520) 59

8/4/2015 What is Required to be Disclosed? • Foreign bank and financial accounts (Form 114) – In which a U.S. person has a “financial interest” and/or – Over which a U.S. person has “signature authority” – For accounts owned directly and indirectly • Other specified foreign financial assets ‐applicable only to U.S. individuals (Form 8938) – Financial contracts (employment agreements, rental agreements, etc.) with non‐U.S. individuals/entities – Foreign pension arrangements – Beneficial interests in a foreign trust or estate – Loans to non‐U.S. individuals or entities – Foreign life insurance policy 6 Foreign Disclosure Rules (misc. issues ) • Filing thresholds vary • Many foreign disclosures are an integral part of the U.S. filer’s annual income tax return and their filing date is automatically extended with the filer’s income tax extension. – If the foreign disclosures are missing from the return, the return is considered incomplete and the statute of limitations doesn’t start • Form 3520‐A (for a Foreign Trust with a U.S. Owner) requires its own extension (Form 7004) • Form 114 (FBAR) has no extension available Let’s look at an example….. • Form 114 (Report of Foreign Bank and Financial Accounts) – a.k.a. the “FBAR” – Required to be filed by U.S. individuals and entities that have a financial interest in or signature authority over any foreign financial accounts if the aggregate value of the accounts >$10K at any time during the calendar year – Once filing threshold is met, every non ‐ U.S. account is reportable, regardless of size – Individuals are treated as owning/controlling accounts held indirectly through other U.S. and foreign entities – Penalty of $10K per error or late filing 60

8/4/2015 7 FBAR example (cont.) • FBAR must be submitted through the FinCEN (“Financial Crimes Enforcement Network”) BSA (“Bank Secrecy Act”) e ‐ file system – Due June 30 (no extensions available) for prior calendar year – not part of U.S. income tax return – For each foreign financial account, disclose: • Maximum balance during calendar year (in USD) • Type of account (bank, securities, other) • Name and Address of Financial Institution • Account number • Information regarding other account owners • Whether filer has a “financial interest” or “signature authority only" in the account What Happens if Disclosures are Missed? • Significant civil and possibly criminal penalty exposure • Statute of limitation may not run on filed returns that are “incomplete” so if the IRS discovers the omission, tax and penalties can be assessed for many prior years • Penalty assessment ($10K per late disclosure per year) has become automatic for corporate filers • IRS is vigilant about amended returns being filed to add previously missing or understated foreign income or foreign disclosures and will assess the statutory penalties • Fiduciaries of estates can be held liable for penalties if the decedent failed to file all required foreign disclosures 8 What Corrective Filing Strategies are Available? • Offshore Voluntary Disclosure Programs • Streamlined Filing Procedures • Penalty ‐ Free Delinquent Disclosure Procedures 61

8/4/2015 Offshore Voluntary Disclosure Programs – Pros AND Cons Pros: • Protection from criminal prosecution • Penalty regime is clear; may result in lower penalty than statutory regime • Filer becomes compliant with U.S. tax filing responsibilities Cons: • Requires very extensive information disclosure • Higher professional fees to prepare information for submission • Penalty regime is inflexible • Filer must agree to extend statute of limitations on period of time to assess tax and penalties • Not all non ‐ filers are eligible Prior Offshore Voluntary Disclosure 9 Programs • 2009 OVDP (Mar 23, 2009 ‐ Oct 15, 2009) – 20% offshore penalty – 2003 ‐ 2008 • 2011 OVDI (Feb 8, 2011 ‐ Sep 9, 2011) – 25% offshore penalty – 2003 ‐ 2010 • 2012 OVDP (Jun 26, 2012 to Jun 30, 2014) – 27.5% offshore penalty (plus a reduced rate for certain filers) – Most recent 8 years for which due date has passed OVDP ‐ Offshore Penalty Base • The amount on which the “offshore penalty” is assessed • IRS selects the year when the aggregate value in the combined non ‐ U.S. accounts was highest • Penalties assessed on this “high ‐ water mark” even if the value of the investments held in non ‐ U.S. financial accounts later decrease significantly 62

8/4/2015 10 Initial Streamlined Filing Procedure for Non ‐ Residents • Sep 1, 2012 – Jun 30, 2014 • Available for non ‐ resident U.S. persons who were “low risk.” Absent high risk factors, if the filed U.S. returns reflected <$1,500 in U.S. tax due, filer was considered low risk. High risk factors included: – Taxpayer had material economic activity in the U.S. – Taxpayer was a non ‐ filer in his/her country of residence – Taxpayer had non ‐ U.S. financial accounts or other activities outside his/her country of residence – Taxpayer had significant and/or multiple non ‐ U.S. entities Initial Streamlined Filing Procedure for Non ‐ Residents • Intended for U.S. citizens or permanent residents (green card holders) who had been residing outside the U.S. since January 1, 2009 and who had modest income and were “low risk” • Not available for U.S. residents • Streamlined filers were required to submit the following package to the IRS: – U.S. income tax returns for past three years – FBARs for past six years – Completed IRS questionnaire 11 Current Corrective Filing Options 1. 2014 OVDP 2. Expanded Streamlined Filing Compliance Procedures – Only penalty is miscellaneous offshore penalty for U.S. resident filers 3. Penalty Free Procedures – Delinquent FBAR submission procedure – Delinquent international information return Submission procedures 4. “Quiet” Filing – Not recommended – IRS is watching for these 63

8/4/2015 2014 OVDP • Modification of 2012 OVDP, effective July 1, 2014 • Added 50% offshore penalty provision for filers with accounts at specifically identified foreign financial institutions • Replaced FAQ’s #17 and #18 from 2012 OVDP with separate penalty ‐ free procedures for filers who had no unreported income but who had failed to file either the FBAR or one of the other foreign disclosure forms • Accelerated due date for paying offshore penalty to the date of the OVDP submission • Eliminated “reduced penalty” filer category, in consideration of expanded Streamlined Filing Compliance Procedures 12 Expanded Streamlined Filing Compliance Procedures • No protection from criminal prosecution • Not eligible if already under examination or already contacted by the IRS about the late filings • Filer may have failed to file FBARs and information returns and report income from non ‐ U.S. accounts and assets • Must have valid U.S. TIN • Must be able to make reasonable cause argument and certify that failure wasn’t willful, under penalty of perjury Expanded Streamlined Filing Compliance Procedures (Cont.) • What to file: – 6 prior years’ FBARs (filed electronically) – 3 prior years’ amended or delinquent income tax returns – 3 prior years’ missing international information returns (a.k.a. “foreign disclosures”) – Reasonable cause statement – Certification that FBARs have been filed, that failure to file was non ‐ willful and that filer is eligible for streamlined offshore program – Calculation and payment of tax and interest – Calculation and payment of the miscellaneous offshore penalty (for U.S. resident filers) 64

8/4/2015 13 Expanded Streamlined Filing Compliance Procedures (Cont.) • Streamlined Foreign Offshore Procedures – For non ‐ U.S. residents – No offshore penalty – Use IRS Certification Form 14653 • Streamlined Domestic Offshore Procedures – For U.S. residents – 5% offshore penalty on: • additional tax shown on the 3 years of amended returns • highest aggregate end ‐ of ‐ year value for unreported non ‐ U.S. accounts from prior 6 years – Use IRS Certification Form 14654 Delinquent FBAR and International Information Return Submission Procedures • Taxpayers who timely filed their U.S. income tax returns and properly reported all income related to non ‐ U.S. assets, but who did not file certain international information returns or FBARs, are eligible to correct the errors without penalties. • Not eligible if already under examination or already contacted by the IRS about the late filings. • Must be able to establish reasonable cause for the failure to file. Fact pattern is very important. • Even without reasonable cause, the IRS may relieve the penalty for one late ‐ filed year. 14 Delinquent FBAR Submission Procedures • File all missing FBARs via FinCEN BSA e ‐ file system. • Include a statement explaining the reason for late filing. • On the cover page of the electronic form, select a reason for filing late. 65

8/4/2015 Delinquent International Information Return Submission Procedures • File all missing international information returns. • Attach all international information returns (other than Forms 3520 and 3520 ‐ A) to amended income tax returns for the years in question. • Attach a reasonable cause statement to each delinquent form explaining, in detail, the reason for the late filing. – Must certify that any entity for which the information returns are being filed was not engaged in tax evasion. 15 Selecting a Filing Strategy • Current filing options are very favorable for most U.S. filers who have made errors in their U.S. filings and disclosures • Demonstration of reasonable cause and non ‐ willfulness is critical when using any non ‐ OVDP filing strategy • If there is any potential criminal exposure, OVDP provides protection from criminal prosecution MOST IMPORTANTLY: Before deciding on a filing strategy, consult with U.S. international tax and legal advisors who have experience with international non ‐ filer situations Farm Income Averaging Chris Hesse 66

8/4/2015 1 Farm Income Averaging • Eligible: 1040 farm income, including from pass through entities – But not as beneficiary of Form 1041 • Electable farm income – Excludes land (but not building) gains – Excludes wages (except S shareholder) – Written lease for crop share landlord • Example 2: Reducing a non ‐ farm capital gain rate Farm Income Averaging • Averaging is not an adjustment to prior year income • Example 3: Successive use of averaging Example 3 $117K $29K $29K $28K 1 2 3 Curr. 189 (p. 5 ‐ 6) 67

8/4/2015 Example 3 $66K $22K $22K $22K $51K $29K $29K $28K 1 2 3 Curr. 191 (p. 5 ‐ 6) Top Bracket Averaging: 2013 ‐ 2015 • Increased rates in 2013 bring automatic Sch. J savings to top rate taxpayers for ‘13 ‐ ’15 – 39.6% to 35% ordinary – 20% to 15% capital gain • Example 4: Capital gain and ordinary income • Example 5: Amending 2013 to improve 2014 • Example 6: Software not optimizing Schedule J and AMT • AMT calculated before farm income averaging • Example 7: Tentative minimum tax $ 30K Regular tax before averaging (27K) AMT $ 3K Regular tax with Schedule J 20K Total tax $23K Conclusion: Cross it over! 68

8/4/2015 Decreasing AMT through Income Averaging • After phase ‐ out of AMT exemption, adding income generally decreases AMT: – Tentative Minimum Tax/AMT rate: 28% – Regular tax: 35% ‐ 39.6% • Result: AMT diminishes, while regular tax only increases at income averaging rate • Example 8: Add $80,000 income – AMT drops ‐ $ 8,600 (11%) – Sched. J tax + 26,800 34% Net $ 18,200 23% Farm Income Averaging • Change in filing status from base year • Late or amended elections • Using a negative base year – But addback NOL carried to other years Farm Income Averaging Opportunities: • Retiring farmer with carryover grain • Machinery auctions • High grain prices • Spike Schedule F to avoid SE tax 69

8/4/2015 Pursuing the 0% Capital Gain Rate • 0% rate opportunity – Joint TI below $74,900 (2015) – Single TI below $37,450 (2015) • Caution: – P hase ‐ in of taxable Soc. Sec. – State Income Tax Time For Lunch! • Session resumes at 1:00 p.m. Repair Capitalization Regulations Chris Hesse and Roger McEowen 70

8/4/2015 Final Repair Regulations • Final and proposed regulations were issued on Sept. 13, 2013. – Generally finalize the temp. and proposed regs. issued on 12/23/11 – Regs. issued under I.R.C. §168 (GAA and dispositions) again issued as proposed • Generally effective for tax years beginning on or after Jan. 1, 2014 – At the earliest, IRS can’t impose the changes established by the regulations until examining return for 2014 tax year – Taxpayers do have the option to early adopt the regulations for tax years beginning on or after Jan. 1, 2012. – Contain some taxpayer ‐ favorable changes • De minimis safe harbor • Routine maintenance safe harbor New Repair Regulations • What’s the issue? – I.R.C. §162(a) allows deduction for ordinary and necessary expenses paid or incurred during tax year in carrying on trade or business, including amounts paid for incidental repairs – I.R.C. §263(a) denies a deduction for any amount paid for new property or for permanent improvements or betterments that increase value of any property, or amounts spent to restore property Unit of Property • Unit of property (UoP) is base on which to determine whether an improvement exists • All components of property that are functionally interdependent comprise a single UOP – Functionally interdependent if the placing in service of one component is dependent on the placing in service of another 71

8/4/2015 2 Unit of Property Definition • Each building system is a separate UOP: – Building structure is one UOP (roof, walls, windows, floors, ceilings) – Each building system is a separate UOP (HVAC, Plumbing, Electrical, Escalators, Elevators, Fire ‐ protection and alarm, Security, and Gas distribution) 2 Materials and Supplies – Two Types • Incidental – Deduct when purchased – No record of consumption – Expensing does not distort income • Non ‐ incidental – Record of consumption maintained or year ‐ end physical inventories maintained – Deduct when first used or consumed Materials and Supplies • Definition: TPP used/consumed in operations, but not inventory, that is a: – Component to maintain, repair or improve a UOP that itself is not a UOP – Fuel, lubricants, water, similar items – UOP with economic life ≤ 12 months – UOP with cost ≤ $200, or – Other property identified by IRS as materials or supplies • Example 1 on p. 3 72

8/4/2015 Another Example • Alexco provides billing services to its customers. It purchases 50 scanners to be used by its employees. Each scanner costs $150. In the first year, Alexco’s employees begin using 35 of the scanners and stores the remaining scanners for use in a later year – The scanners are materials and supplies under 1.162 ‐ 3(c)(1)(iv) • Alexco may deduct the cost of the 35 scanners used in the first year (if they are non ‐ incidental) • The remaining scanners are deductible in the year first used in Alexco’s trade or business. 1.162 ‐ 3(h), Example 7 – Note: If Alexco had treated all 50 scanners as incidental, then all 50 scanners are deductible at time of purchase 3 ‐ 5 De Minimis Safe Harbor • Elect to deduct assets if have: – An Applicable Financial Statement (AFS) – Written accounting procedures at beginning of year – Treated as expense on AFS, and – Amounts < $5,000 per invoice or per item are deducted, or – Amounts paid for property with economic useful life of 12 months or less • AFS defined as: – SEC statement – Certified audit by independent CPA, or – Required by federal or state agency • Non ‐ audited financial statement for government ‐ backed loans (SBA, Farmer ‐ Mac, etc.) are not AFS De Minimis Safe Harbor • Taxpayers without AFS can also elect the safe harbor – Same requirements except $500 limit per invoice or item – Accounting policy to expense need not be written – IRS is considering increasing the $500 threshold (Rev. Proc. 2015 ‐ 20) 73

8/4/2015 Safe Harbor is Not Limiting • Safe harbor not intended to prevent taxpayers from reaching an agreement with IRS revenue agent to use larger amount • Should elect $500 even if use larger amount Applying the De Minimis Safe Harbor • A taxpayer may attach a safe harbor election statement annually to timely filed tax return – No Form 3115 • Applies to all amounts within the threshold – Amounts deducted under the de minimis rule are not capitalized and are not treated as a material or supply • “Small equipment” • Tracked separately on books and records • Example 2 on page 6 6 Final Repair Regulations • For improvements to tangible property… – Capitalization is required if expenditure is a betterment, restoration or adaptation of the unit of property to a new or different use 74

8/4/2015 Repairs • Taxpayer may deduct amounts paid for repairs and maintenance to tangible property as long as the amounts aren’t required to be capitalized. 1.162 ‐ 4(a) – Examine what needs to be capitalized as an amount paid to improve tangible property in order to determine what can be deducted as a repair Repairs – Routine Maintenance Safe Harbor • Regs. allow a deduction (safe harbor) for routine maintenance on tangible property defined as recurring activities that keep a UofP in ordinary efficient operating condition (inspection, cleaning, testing and replacing of parts (with comparable replacement parts) of a UofP) – Taxpayer expects, at time property placed in service, to perform the activities more than once during property’s class life. Under Rev. Proc. 87 ‐ 56… • Ag Equipment ‐ 10 years • Single Purpose Ag Structure – 15 years – For buildings, the taxpayer must reasonably expect at the time it places the building in service to perform the activities more than once during a 10 ‐ year period beginning from the time the building is placed in service by the taxpayer • “Reasonable Expectation” is the rule, not “actually happens” • This is an accounting method and not an optional annual election Building Safe Harbor for “Small Taxpayer” • Covers certain amounts paid for improvements and repairs to eligible buildings – Taxpayer must have average gross receipts of less than $10 million for the three previous tax years – Eligible building has tax basis, before depreciation, of $1 million or less – Safe harbor allows annual deduction of the lesser of $10,000 or 2% of building’s unadjusted basis for any amounts paid for improvements, repairs, maintenance and similar activities per eligible building property. 1.263(a) ‐ 3(h)(1) – Note: • Taxpayer can have multiple buildings that use the safe harbor, but if amounts paid during tax year exceed the $10k or 2% limit for an eligible building, the safe harbor is not available for that building. 1.263(a) ‐ 2(h)(8) – Annual election by attaching statement to return (include description of building(s)) • No Form 3115 required 75

8/4/2015 “Small Building” Safe Harbor • Example: – Assume that Penny is a qualified taxpayer. She owns a shop and a machine shed. Each building has an unadjusted basis of $100,000. The shop’s overhead door needed replaced and it cost $2,500 to do so. The machine shed needed new lights and minor roof repairs. The lights and roof repairs cost $1,500. • Safe harbor election not available for shop • Safe harbor applies to machine shed expenses • Limitation applied separately to each building – However, if the overhead door was reasonably expected to be replaced within 10 years, then allowed as routine maintenance expense 7 Acquisitions and Improvements • These expenditures must be capitalized (I.R.C. §263(a)) – Any amount for new buildings or for permanent improvements or betterments made to increase the value of any property or real estate, or… – Any amount for restoring property or making good the exhaustion of it for which an allowance is or has been made. 1.263(a) ‐ 1(a). Improvements • Always capitalize amounts paid to acquire or produce tangible property unless… – The property qualifies as materials and supplies or… – The property qualifies under the de minimis safe harbor and the taxpayer makes the safe harbor election 76

8/4/2015 What’s An Improvement? • “Improvements” must be capitalized – Betterment to a UoP – Restoration of a UoP – Adaptation of a UoP to a new or different use • See Worksheet beginning on p. 11 “Betterments” • Expense that improves productivity, strength, quality or output of UoP; • Is a material addition to the asset (physical enlargement or increase in capacity) • Expense that corrects material condition or defect existing before acquisition or that arose during production When is an Expenditure a “Betterment”? • Must compare the condition of the property immediately after the expenditure with the property’s condition immediately before the circumstances necessitating the expenditure – Treas. Reg. 1.263(a) ‐ 3(j)(2)(iv) 77

8/4/2015 Betterment ‐ Example • Bob acquires a new tractor rated at 250 hp. He pays an additional $20,000 to turbo ‐ charge the engine and increase the horsepower to 300. – This is a betterment Betterment ‐ Example • Mike overhauls the diesel engine on his tractor for $22,000. – This is simply maintaining the tractor and keeping it in operating condition – Simply correcting for normal wear and tear – The $22,000 is expensed as a repair 7 Acquisitions • Must capitalize amounts paid to acquire or produce real or personal property • Only exceptions to general rule are: – Materials and supplies, and – De minimis safe harbor 78

8/4/2015 8 Betterments • Corrects a material condition or defect existing prior to acquisition or during production of UOP • Is for a material addition to the UOP (enlargement, expansion, etc.) or a material increase in capacity, or • Is reasonably expected to materially increase productivity, efficiency, strength, quality or output of UOP • Example 3 – Dollar amount of expenditures not determinative! 8 Restorations to UOP are Capitalized • Replaces a component of a UOP and taxpayer recognized gain or loss on old component (disposition) or a casualty loss on old • Restores inoperable property • Rebuilds UOP to like ‐ new condition after end of its class life • Replaces a part or parts that comprise a major component or substantial structural part of UOP • Example 4 • “Substantial”: No bright line test; roughly 30% ‐ 40% IRS Guidance on Threshold for Capitalization or Current Deduction • LB&I ‐ 04 ‐ 0315 ‐ 002, impacting IRM 4.51.2 (Jul. 6, 2015) – 80% threshold for steam or electric generation property • If more than 80% of a component or UoP is replaced, then the expense must be capitalized • Current deduction if less than 80% replaced 79

8/4/2015 Unavailability of Replacement Part Is Not a Betterment ‐ Example • Farmer Jones owns an older computer with a 200 MB hard drive which crashes. The minimum size replacement available now is 750 MB. The upgrade to 750 MB hard drive is not a betterment due to the unavailability of the same size replacement part – Treas. Reg. 1.263(a) ‐ 3(j)(2)(iii) Regulatory Requirement Not A Betterment ‐ Example • Levi owns a meat packing plant that has oil seepage in floors. The USDA requires Levi to add concrete floors and lining on the walls. The floor was functional before the seepage. – The regulatory requirement does not result in a betterment. – Treas. Reg. 1.263(a) ‐ 3(j)(3) Example 12 10 What is an “Adaptation”? • An “adaptation” must be capitalized if… – The amount paid is to adapt a UoP to new or different use if the adaptation is not consistent with the taxpayer’s ordinary use of the UoP at the time the taxpayer placed the property in service – So, the cost of adding a feature to an existing machine to adapt it for a new use is a capitalized cost 80

8/4/2015 Adaptation That is not a New or Different Use • Jenn owns and leases out space in a building consisting of 20 retail spaces. The spaces are designed to be reconfigured. One of the tenants expands its occupancy by leasing two adjoining retail spaces. To facilitate the new lease, Jenn pays to remove the walls between the three retain spaces. The walls between the spaces are part of the building and its structural components. – What’s the outcome? Adaptation Example (cont.) • The amount paid to convert three retail spaces into one larger space for an existing tenant does not adapt Jenn’s building structure to a new or different use because the combination of retail spaces is consistent with Jenn’s intended, ordinary use of the building structure. The removal of the walls is not an improvement to the building – 1.263(a) ‐ 3(l)3), Example 2 10 Adaptations to UOP • Adapts property to a new or different use • Example 5 vs. Example 6 Worksheet: Definitions of improvements 81

8/4/2015 13 Dispositions • Occurs when ownership of an asset is transferred or when an asset is permanently withdrawn from use – Includes sale, retirement, or physical abandonment of asset • An entire disposition requires recognition of gain or loss 244 Partial Disposition Election • Proposed regs. allow taxpayers to elect disposition rule when it disposes of a portion of an asset – Application was mandatory under 2011 regulations for disposals of structural components of a building – Elective regime does away with need to make GAA election for all buildings – Annual election vs. accounting method change 245 13 Final Regs. for Dispositions • Taxpayer may electively recognize gain or loss on partial disposition of an asset – Mandatory if casualty loss, trade or sale – Any reasonable method to determine basis of disposed portion 82

8/4/2015 Disposition • Example – Angela owns an office building with four elevators. She replaces one of the elevators. • Since the elevator is a structural component of the building, it is a separate asset for disposition purposes. • Angela does not make the partial disposition election • The retirement of the replaced elevator is not a disposition. • Angela continues to depreciate it as part of the cost of the building and does not recognize a loss for the retired elevator • 1.168(i) ‐ 8(i), Example 1 – If Angela treated each structural component of the building as a separate asset within the fixed asset system, the office building, including its structural components, is the asset for disposition purposes • Same result as above • 1.168(i) ‐ 8(i), Example 2 247 Removal Costs • Costs of removing an asset or a portion thereof follow the treatment of the asset – If disposal is treated as a disposition, removal cost are part of the disposition – If disposal is not treated as a disposition, removal costs are deducted or capitalized based on whether removal costs directly benefit a capitalized improvement 248 Handling Removal Costs • Example: – Jacob owns a building in which he conducts his retail business. The shingle roof is leaking but the building continues to function in the business. A contractor recommends that Jacob should remove the original shingles and replace them with new shingles. Jacob does not consider the removal of the old shingles as a disposition. • Assuming that the replacement of the shingles is not an improvement to the building structure or systems and does not adapt the building structure or systems to new or different uses, the re ‐ shingling is not an improvement and is incurred by reason of repair and maintenance • 1.263(a) ‐ 3(g)(2)(ii), Example 3 – If Jacob treated the shingle removal as a disposition, he would deduct the adjusted basis of the components as a loss. Thus, the amounts paid for replacement shingles must be capitalized as a restoration • Note: The amounts paid to remove the old shingles are not required to be capitalized as part of the cost of the improvement, regardless of their relation to the improvement – 1.263(a) ‐ 3(g)(2)(ii), Example 4 83

8/4/2015 Election to Capitalize Repairs • Taxpayer may elect to capitalize repairs and maintenance items if same “on books and records” – Annual election, not a method – Another tax preparer tool if income too low Accounting Method Changes • No required mass production of Forms 3115 – Has the individual farmer established a method of accounting with respect to supplies, capitalization? • Two consecutive years – IRS Office of Chief Counsel confirmed last fall that IRS was not expecting mass Forms 3115 for materials and supplies • Taxpayers with no Form 3115 filing not targeted • No need to file Forms 3115 to “affirm” compliance with repair regs • When would Method Code 187 apply? 251 Method Code #187 • It is for changing to deducting incidental materials and supplies. • Can you think of a situation in which a taxpayer could possibly be in a violation of the accounting method for incidental materials and supplies? – An incidental material and supply is one in which the taxpayer doesn’t have a record of consumption or take a physical inventory. – Are there any taxpayers that don’t deduct incidental materials and supplies when paid (cash basis) or incurred (accrual)? • If a farmer deducts ad hoc small tools in some cases and capitalizes in others, there hasn’t been an adoption of an accounting method. – Form 3115 not necessary to adopt an accounting method 84

8/4/2015 Additional Thought on Accounting Method Change • The issue has been way overblown – Why would a taxpayer, who has been following court opinions over the last 20 years in determining capitalization policy, need to file Form 3115 to place them in compliance with the Regs.? The Regs. appear to adopt the outcomes of various court cases. Those taxpayers who have been following the cases in adopting principles of compliance should already be in compliance. • The major exception to this relates to taxpayers who followed the 2008 proposed regulations, which used the entire building as a unit of property. The concept of building systems had not been adopted. If taxpayers have been using the 2008 Proposed Regs. on buildings being the unit of property, a Form 3115 is necessary. Otherwise, in most cases, a Form 3115 is not necessary. – Taxpayers should review prior capitalization and determine compliance, but this doesn’t require a wholesale filing for virtually every business. 13 ‐ 15 Accounting Method Changes: Repair Regs. • Generally effective for tax yrs. beginning in ’14 • Prior transactions may require method change with Sec. 481(a) adjustment • Example 7 • Accounting method changes: – 4 year spread if income – 1 year if deduction • Rev. Proc. 2014 ‐ 16: 10 new automatic consent changes 16 ‐ 20 Small Business Relief: Rev. Proc. 2015 ‐ 20 • Small businesses may use cut ‐ off approach to apply repair regs. beginning in 2014 and after – No IRS audit protection for pre ‐ 2014 methods • Eligible businesses: Under $10M total assets or average annual gross receipts < $10M • No late partial disposition method change for pre ‐ 2014 transaction 85

8/4/2015 Small Business Relief: Rev. Proc. 2015 ‐ 20 • Amended return permitted until Oct. 15, 2015 to revoke any Form 3115 that contradicts adoption of cut ‐ off approach – Opportunity to remove 3115s with no Sec. 481(a) adj. – Removes 5 year wait rule caused by Form 3115 • Attach statement indicating not using Rev. Proc. 2015 ‐ 20 if: – Filing a Form 3115 with 481(a) adjustment (e.g., partial disposition) – Pre ‐ 2014 transactions/methods are compliant 21 ‐ 34 Repair Regulations • IRS website FAQs, Feb. 2015: Final repair regs. “synthesize existing case law and prior administrative rules into a framework . . .” Time For A Quiz • Concentrate on the picture on the next slide and see if you can spot any differences between the two objects in the picture. – You have two minutes to complete the quiz 86

8/4/2015 IRS Audit Issues, Compliance Target Issues and Other Practical Information Kristy S. Maitre, Tax Specialist Center for Agricultural Law and Taxation Pages 1 ‐ 3 State of IRS Service and Enforcement • Internal Statement to Employees – IRS must absorb $346 million during the remaining nine months of the fiscal year, plus an additional $250 million accounting for inflationary and mandated costs – Reduced staffing in enforcement will result in at least 46,000 fewer individual and business audit closures and more than 280,000 fewer Automated Collection System and Field Collection case closures – The reduced enforcement staffing for FY 2015 means the government will lose at least $2 billion in revenue – Taxpayer service diminished further over the phone and in person. IRS anticipates an even lower level of telephone service than before, which raises the real possibility that fewer than half of taxpayers trying to call will actually reach an assistor. The actual percentage is 43%. 87

8/4/2015 Page 4 ‐ 5 National Taxpayer Advocate Key Issues Facing IRS • Health Care Implementation • Access to IRS • Correspondence Examination Page 6 ‐ 7 Requesting an Audit be Transferred • In considering these requests, the Service will take into account the following factors: – (i) The location of the taxpayer’s current residence; – (ii) The location of the taxpayer’s current principal place of business; – (iii) The location at which the taxpayer’s books, records, and source documents are maintained; – (iv) The location at which the Service can perform the examination most efficiently; – (v) The Service resources available at the location to which the taxpayer has requested a transfer; and – (vi) Other factors that indicate that conducting the examination at a particular location could pose undue inconvenience to the taxpayer. Page 7 Circumstances in which the IRS normally will permit transfers • Office examination • Field examinations • Transfer for convenience of taxpayer’s representative • Transfer within thirteen months of expiration of limitations period • Treas. Reg. §301.7605 ‐ 1(e) 88

8/4/2015 Page 8 ‐ 9 Does your client qualify for First Time Penalty Abatement? • The relief is a one ‐ time abatement • The relief applies only to certain penalties • Conditions for relief • FTA does not apply for these issues – Form 706 U.S. Estate Tax Return late filed returns or unpaid tax – Form 709, U.S. Gift (and Generation Skipping Transfer) Tax Return – Form 1120, or Form 1120S if returns were filed and a penalty assessed within the past three years. – The Daily Delinquency Penalty (DDP) IRM 21.7.7.4.23.1 – Information returns that is dependent on another filing – Generally, any portion of a FTD penalty charged for EFTPS avoidance. – Additional situations could apply as the IRM states the list is not all inclusive What to Consider Before Applying for FTA – Reasonable Cause • IRS will consider whether the taxpayer has “reasonable cause” for the late filing, late payment or late deposit • IRS will first look at the client’s compliance history and then check the “reasonable cause” penalty relief criteria • In certain situations, it would be in the client’s best interest to apply for abatement under “reasonable cause” before using the one time First Time Abate • “Reasonable cause” abatements require proof but offer more advantageous relief than FTA • For FTA, you must have a clean record for three years, whereas “reasonable cause” is not limited by the three ‐ year rule • Your client can qualify for “reasonable cause” as often as they meet the criteria, but caution if your client is an habitual non ‐ filer, generally that excuse will only work once. Reasonable Cause • A “Reasonable cause” criterion as stated in the IRM gives IRS broad discretion in granting relief • The issue is generally difficult and you must clearly state the “reasonable cause” and in addition substantiate with documentation the situation • A general letter requesting this relief without specifics in most cases will not be considered. 89

8/4/2015 Pages 9 ‐ 10 Superseded Returns vs. Amended Returns • When would you file a Superseded Return vs. an Amended Return for the MeF Series 1040? • Example: – Example: Your client brings in their tax documents including all Forms W ‐ 2 and 1099. During the interview they state that the employer was the only source of income and no other tax records have been received. You file the Form 1040 electronically on February 3, 20XX, receiving an acknowledgement on February 4, 20XX confirming acceptance. Two weeks later, your client brings in an additional Form W ‐ 2 for a short ‐ term job they forgot about and requests that a correct return be filed to claim the income and withholding. If the return if filed before the due date of April 15, you would file a Form 1040 and at the top note “Superseded Return” in red. The return must be filed on paper and include all required schedules and statements that would have been included with the original return. Page 10 ‐ 11 Business Returns Business Returns – Forms 1120, 1120 ‐ S, or 1120 ‐ F and Form 1065 Superseded or Amended • The MeF system processes both superseding and amended returns for Forms 1120, 1120S, 1120 ‐ F and Form 1065 • If the taxpayer is required to e ‐ file an original return and needs to file an amended or superseding return, they must e ‐ file that return • Any taxpayer who has received an approved waiver from IRS to file their particular return on paper is exempted from this requirement. • Tax years which are no longer available to e ‐ file can be paper filed Business Returns Business Returns – Forms 1120, 1120 ‐ S, or 1120 ‐ F and Form 1065 Superseded or Amended • Corporate amended returns with carryback claims may be e ‐ filed as long as the carryback claim box is checked. • A superseding return must be a complete XML filing of the entire return, with all required forms, schedules and attachments (XML or PDF, if applicable) • A taxpayer filing a superseding return must indicate the return is such by selecting the Superseded Return checkbox (designation) in the software or the return will reject as a duplicate filing. • You will not see a checkbox or selection entitled “Superseding Return” available on the paper forms. 90

8/4/2015 Pages 11 ‐ 12 Power of Attorney Subject to FBAR Reporting • IRS has taken the position in their “FBAR Reference Guide” that “signature authority” includes “the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account.” • In an example, IRS explains that this definition includes agents acting under a power of attorney (POA) Power of Attorney Subject to FBAR Reporting • It is immaterial if the power has ever been exercised • The agent (along with the principal) is subject to the FBAR filing requirements if the POA gives the agent signature authority over a foreign account that exceeds the dollar threshold. Power of Attorney Changes and Information • IRS Form 2848, Power of Attorney and Declaration of Representative has changed to add authorization for the Affordable Care Acts Shared Responsibility Payment • FOIA Request for the CAF Representative/Client Listing – Sample provided 91

8/4/2015 Pages 13 ‐ 17 Audit Issues • Alimony • High Income • Partnerships • Employment Taxes • Cash Business/1099 ‐ K • Quickbooks’ audits • Education Credits • Form 1099 Q • Charitable Contributions Alimony • In tax year 2010, a total of 567,887 taxpayers claimed alimony deduction totaling more than $10 billion • 47 % of returns claimed alimony deductions for which income was not reported on a corresponding recipient’s tax return or • The amount of the alimony did not agree with the amount of the deduction taken IRS Issue • IRS has no way to match amounts with Social Security numbers 92

8/4/2015 Pages 14 ‐ 15 Charitable Contributions • Exempt Organizations Select Check (Pub 78 database) • Quid Pro Quo Contributions Charitable Contributions Amounts Under $250 • A donor cannot claim a tax deduction for any contribution of cash, check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record, such as a cancelled check, or a written communication from the charity such as a receipt or a letter showing the name of the charity, the date of the contribution and the amount of the contribution. Charitable Contributions Amounts Over $250 • A donor claiming a deduction of $250 or more is required to obtain and keep a contemporaneous written acknowledgment for a charitable contribution • To be contemporaneous the donor must generally obtain the written acknowledgment no later than the date the donor files the return for the year the contribution is made. 93

8/4/2015 Page 16 Court Case Villareale v. Commissioner, T.C. Memo 2013 ‐ 74 • The court denied the charitable contribution deduction because the charity failed to provide to the taxpayer a contemporaneous written acknowledgement as required by §170(f)(8)(A) • In addition, the written acknowledgement must state whether goods and services were exchanged for the contribution. Durden v. Comr., T.C. Memo. 2012 ‐ 140 • The petitioners' charitable contribution deduction was denied due to failure to strictly comply with substantiation requirements of §170(f)(8)(A) • The petitioners contributed $22,517 to their church and statement provided by church acknowledged donated amount, but did not state whether petitioners had received any goods or services in return • Upon notice by IRS of problem with church's acknowledgement, petitioners received corrected acknowledgement from church stating that petitioners had not received any goods or services; • Tax Court held that first acknowledgement failed due to lack of required statement, and that second acknowledgement failed because it was not received by petitioners before they filed their tax return for year at issue and was, therefore, not contemporaneous as required by Treas. Reg. §1.170A ‐ 13(f)(2)). 94

8/4/2015 Pages 18 ‐ 19 Form 1023EZ • A new streamlined process for the Form 1023 ‐ EZ will also allow the IRS to concentrate more on compliance for §501(c)(3) organizations • 17% of organization are expected to use Form 1023 ‐ EZ • Certain organizations not eligible • IRS will verify qualification for the 1023EZ via compliance checks or examinations on an after ‐ the ‐ fact basis Page 19 Affirmation Letter • How do you get a new exemption letter if the original is lost • If the organization has changed its name and address how does the organization make that change? Pages 20 ‐ 21 CP 2000/AUR • AUR cases are created from two primary sources – The Individual Master File or IMF that contains the individual tax return information – The Information Returns Master File or IRMF that contains the payer information 95

8/4/2015 CP 2000/AUR • CP 2000 notices deal only with information mismatches or math errors they do not constitute an examination (audit) • Rev Procedure 2005 ‐ 32 – “Taxpayer contacts and other actions that are not examinations • the matching process is defined as a matching information on a tax return with … other records or information items that are already in the Service’s possession” and “considering any records the taxpayer voluntarily provides to the Service … to explain a discrepancy between … a filed tax return …and information from third parties that is or may be used for the matching.” CP 2000 Hints • Respond timely, usually within 30 days and to the most recent notice received on each issue • Include the IRS response page on top of your response. This helps ensure that the response will get where it needs to go • Please address EACH and every issue in the notice and securely attach the documentation behind the response page • Provide telephone numbers where the taxpayer or representative can be reached – Day and Night • Use the envelope provided with your response • If you cannot use the return envelope, be sure to write the complete address (Including P.O. Boxes and Mail Stops) on the envelope you use CP 2000 Hints • If you are filing an amended return, submit it to the office that sent you the notice, not where you usually file amended returns and ensure that the amended return is placed behind the response page • On each page of the response, write the name control (first four letters of the last name), the whole SSN, and the tax year. Reason: This makes it easier for pages of a response that may become separated to be re ‐ associated with the notice response case file • If you agree to the notice, please sign and return. If you don’t agree, please explain why in detail • If you cannot respond timely you may call and ask for additional time. Note that IRS cannot extend the 90 ‐ day period for you to petition tax court • Staple the entire notice response package together – Reason: This prevents parts of the response from being separated while it is being processed. 96

8/4/2015 Tips to Avoid a CP2000 • Do not group income amounts • Each Form 1099 ‐ B Sales of Stock Transactions should be listed individually on Schedule D (including any transactions with a zero gain or loss). This may not always be possible. • Explain when payer data is incorrect • Report income on correct line • When reporting items on a line without a specific income designation i.e., Form 1040, line 21 “Other Income”, clearly identify the source of the reported amount. • Include all back ‐ up schedules Pages 21 ‐ 25 New Direct Pay • IRS’s web based Direct Pay lets taxpayers pay their bills or make estimated tax payments directly from checking or savings accounts without fees or pre ‐ registration • Taxpayer’s receive instant confirmation of the payment and can access the information later via the confirmation number • Bank information and other personal information is not retained in the system Pages 25 ‐ 26 Filing Forms W ‐ 2 and 1042 ‐ S Without Payee TIN’S – 1099 included • Treasury Regulation 301.6109 ‐ 1(C) • If you are required to file electronically but fail to • do so, and you do not have an approved waiver, you may be subject to a penalty of up to $100 per return for failure to file electronically unless you establish reasonable cause • However, you can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically 97

8/4/2015 Filing Forms W ‐ 2 and 1042 ‐ S Without Payee TIN’S – 1099 included • The amount of the penalty is based on when you file the correct information return • The penalty is: – $30 per information return if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $250,000 per year ($75,000 for small businesses – $60 per information return if you correctly file more than 30 days after the due date but by August 1;maximum penalty $500,000 per year ($200,000 for small businesses) Filing Forms W ‐ 2 and 1042 ‐ S Without Payee TIN’S – 1099 included • $100 per information return if you file after August 1 or you do not file required information returns; maximum penalty $1,500,000 per year ($500,000 for small businesses) • If you do not file corrections and you do not meet any of the exceptions the penalty is $100 per information return Filing Forms W ‐ 2 and 1042 ‐ S Without Payee TIN’S – 1099 included • Small businesses—lower maximum penalties • You are a small business if your average annual gross receipts for the 3 most recent tax years (or for the period you were in existence, if shorter) ending before the calendar year in • which the information returns were due are $5 million or less 98

8/4/2015 Page 27 Form 8879 as A Signature Document 3.11.3.14.10 (01 ‐ 01 ‐ 2015) • You can paper file the return with Form 8879 attached with a valid original signature, and there is any indication of rejected electronic filing or prior year • Note: If Form 8879 is not present and there is only a letter or statement present on the return or an attachment or a 5 ‐ digit PIN present in the signature area of the return, correspond for an original signature • It is important to note that unless this procedure is attached to the return, IRS will generally return the tax return for an original signature. Note the IRM section in the attachment. Pages 27 ‐ 37 Offer in Compromise • Doubt as to Collectability • Doubt as to Liability • In the Best Interest of tax administration Fee • There are two exceptions to the $186 fee: • Doubt as to Liability or • The individual qualifies for a low ‐ income exemption which applies if the taxpayer’s monthly income falls below the 250% of the federal poverty level as defined by Health and Human Services Guidelines. To qualify for this exemption, section four of the Form 656 must be filled out. • Payment options available include: • Lump Sum Cash • Selection of this option requires a 20% “down payment” be included with the offer. The remaining payments become due after the date the offer is accepted in five or fewer payments within five or fewer months. • Periodic Payments • An initial payment must accompany the offer and the remaining balance will be due between six and twenty ‐ four months depending on the offer the taxpayer proposed. • Note: When using this option, monthly payments need to be paid as IRS is considering the offer. Failure to pay the monthly payments will result in the offer being refused. All payments will be credit to the year in question. Interest and penalty continued to accrue on the tax liability during the specific time frame. 99

8/4/2015 Payment Options • Lump Sum Cash • Selection of this option requires a 20% “down payment” be included with the offer. The remaining payments become due after the date the offer is accepted in five or fewer payments within five or fewer months. • Periodic Payments – An initial payment must accompany the offer and the remaining balance will be due between six and twenty ‐ four months depending on the offer the taxpayer proposed. – Note: When using this option, monthly payments need to be paid as IRS is considering the offer – Failure to pay the monthly payments will result in the offer being refused. All payments will be credit to the year in question Conditions and Consequences • Staying in compliance with all federal tax liabilities • Making required estimated tax payments • In addition, the taxpayer must stay “clean” and fulfill the above obligation for the next five years or the Offer will be voided Reasonable Collection Potential (RCP) • Measure the taxpayer’s ability to pay the tax debt – Evaluation of taxpayer's assets – Property – Bank accounts and – Other assets liquid or otherwise • Projecting future income potential less amounts allowed for living expenses often using the IRS “Collection Financial Standards” to determine “allowable living expenses” 100