1) The Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. This means that same-sex couples who are legally married must now be treated the same as opposite-sex married couples for federal tax purposes. 2) The IRS delayed the employer mandate provision of the Affordable Care Act until 2015. However, other ACA provisions such as mandatory employee notices remain in effect. 3) The Senate Finance Committee plans to start tax reform discussions with a "blank slate" - a tax code without any deductions or credits. Senators will then propose which provisions should be added back.

1. Eye on Washington: Quarterly
Business Tax Update
Presented by
Stephen C. Henley, CPA
National Tax Practice Leader, CBIZ MHM, LLC
William M. Smith, Esq.
Managing Director, CBIZ MHM, LLC National Tax Office
1

2. Circular 230 Notice
Any tax advice contained in this program is not intended to
be used and cannot be used for the purposes of avoiding
any penalties that may be imposed by the Internal Revenue
Code.
2

3. Agenda
• Tax Reform Update
• Proposals to Reform Taxation of Small Businesses and
Passthrough Entities
• Affordable Care Act Update
• Cases
• Regulatory Pronouncements
3

4. Tax Reform Update
4

5. • House
– Of 232 House Republicans, 219 are from districts won by Romney
• Greater risk a challenger will emerge in primary than general election
– Most sitting House members have little fear of losing seats
• 85% of 2012 House races had a margin of victory > 10%
• 65% of 2012 House races had a margin of victory > 20%
– 145 Democratic winners; 140 Republican winners
• Senate
– Since 2008, more than 40 new Senators have been elected
• Result
– Bi-partisanship required to accomplish anything significant
Political Dynamics in Congress
5

6. • Ranking Senate Finance Committee (SFC) members Max
Baucus (D-MT) and Orrin Hatch (R-UT) sent letter to
fellow Senators asking them which tax deductions should
survive tax reform
• SFC’s approach will be to start with a “blank slate” – a tax
code without any tax breaks – and then add back in
worthy expenditures
• The blank slate is just a starting point, not the end product
• Baucus and Hatch asked for proposals by July 26
Senate Looks to Start with “Blank Slate”
6

7. • Tax deductions and credits will be restored only if they:
– Help the economy grow,
– Make the tax code fairer, or
– Effectively promote other important policy objectives
• Exercise puts all special tax provisions in play, including:
– Mortgage interest deduction
– Charitable contribution deduction
– Industry incentives (e.g., oil and gas, “green” industries)
• Goals of this process:
– Clearly illustrate the effect of each tax expenditure
– Determine which expenditures have broadest support
– Give all Senators an opportunity to contribute to process
Senate Looks to Start with “Blank Slate”, cont’d.
7

8. Tax Expenditure
Lowest
Quintile
Second
Quintile
Third
Quintile
Fourth
Quintile
Highest
Quintile
Employer provided health
care exclusion 8% 14% 19% 26% 34%
Retirement plan exclusions 2% 5% 9% 18% 66%
Basis step-up at death 0% 3% 15% 17% 65%
Social Security benefits
exclusion 3% 15% 36% 33% 13%
Mortgage interest deduction 0% 2% 6% 18% 73%
Charitable contribution
deduction 0% 1% 4% 11% 84%
Who Benefits from Individual Tax Expenditures?
Note: Income categories based on pre-tax income
Source: Congressional Budget Office
8

9. Proposals to Reform Taxation of Small
Businesses and Passthrough Entities
9

10. • Make $250,000 Section 179 limit permanent
• Expand cash method to all businesses with gross receipts
less than $10 million
– Increases 263A exemption to $10 million in gross receipts
• Due date changes:
– Partnerships – 2 ½ months after year end
– S corporations – 3 months after year end
– C corporations – 3 ½ months after year end
• Unify deduction for start up and organizational expenses
– Deduct up to $10,000
– Phase out beginning at $60,000
– Excess amortizable over 15 years
Core Components
10

11. • S Corporations
– Permanently reduce built-in gains recognition period to 5 years
– Increase allowable passive income from 25% to 60%
– Permit nonresident aliens to be shareholders through an ESBT
• Withholding required
– Allow ESBT to deduct charitable contributions made by S corp
subject to limits applicable to individual donors
– Make permanent rule reducing stock basis by adjusted basis of
charitable contribution vs. fair market value
– Allow S election to be made on timely filed tax return
Passthrough Option 1: Revise Sub S and K
11

12. • Partnerships
– Mandate basis adjustments under §734 or §743 when property is
distributed to a partner or a partner sells his interest
– Basis adjustments in lower tier partnership interest require
corresponding adjustment in basis of lower tier’s property
– Repeal 7 year time limit for recognizing pre-contribution gain on
distributions to other partners
– Repeal guaranteed payments rules so all payments a distribution
of income or capital (or payment in capacity as non-partner)
– Apply §704(d) loss limitations to partner’s distributive share of
charitable contributions and foreign taxes
– Treat all distributions of inventory as a sale regardless of whether
inventory is substantially appreciated
Passthrough Option 1: Revise Sub S and K
12

13. • Repeals current Sub K and S and replaces with simplified, uniform
regime
– Allow contributions on tax-free basis
– Allow for pass-through of income, losses, etc.
– Permit only ordinary income, capital gains and tax credits to be
specifically allocated
– Limit deductions for losses to owner’s basis with carryforwards
– Limit tax-free distributions to owner’s basis
– Require entity level withholding on pass-through income
– Require pass-through businesses to recognize gain on distributions of
appreciated property
– Require owners to take carryover basis in distributions of loss property
– Allow owners basis for entity level debt (recourse and nonrecourse)
Passthrough Option 2: Unified Rules
13

14. • Employment taxes
• Transition rules
• Foreign partners and partnerships
• Mergers, divisions, reorganizations
• Conforming changes in option 2 to integrate into related
tax rules
• Effect of proposed changes to cash method on other
provisions not directly related to accounting methods
Unaddressed Issues
14

15. Affordable Care Act (ACA) Update
15

16. • Mandate for large employers to provide qualifying health
coverage to full-time employees originally was effective in
2014
• Nondeductible excise tax assessed on large employers
who do not provide to their full-time employees (i.e., work
30+ hours/week)
– minimal essential coverage, and
– affordable coverage
• “Large Employers” generally employers with at least 50
full-time employees or equivalents
Employer Mandate Postponed Until 2015
16

17. • ACA imposes new information reporting requirements on
employers and insurers beginning in 2014
• The Obama Administration had yet to issue proposed
rules implementing those requirements or test reporting
systems to compile that information
• The Administration acknowledged that both the
Government and employers needed more time to
implement the reporting requirements and thus delayed
those requirements until 2015
• With the reporting requirements delayed until 2015, the
Administration had no choice but to delay imposition of
the excise tax as well
Employer Mandate Postponed Until 2015, cont’d.
17

18. • Employers cannot ignore other ACA provisions as a result
of this delay; they are still in effect
• Examples include (not all inclusive):
– Mandatory employee notice regarding health exchanges
– Mandatory provision of Summary of Benefits and Coverage to
group plan participants
– Form W-2 reporting of group health benefits
– 0.9% Medicare tax withholding on high wage earners
– Health flexible spending account limits
– Medical device tax
• This delay does not impact the individual mandate also
scheduled for 2014
All Other ACA Provisions Remain in Effect
18

19. • ACA created the Patient-Centered Outcomes Research
Institute (PCORI) to compare the effectiveness of different
health care services
• The PCORI is funded by fees imposed on health insurance
providers and employers with self-funded health plans
• Self-funded plans are plans that provide for health
coverage if any portion of the coverage is provided other
than through an insurance policy
– Self-funded plans could include health reimbursement arrangements
(HRAs) and flexible spending accounts (FSAs)
• A plan could be subject to the fee even if the employer did
not have a Form 5500 filing requirement
PCORI Fee on Self-funded Plans Due July 31
19

20. • The fee is imposed for plan years ending on or after
October 1, 2012, and before October 1, 2019
• The fee is based on the average number of covered lives
under the plan for the year
PCORI Fee on Self-funded Plans Due July 31,
cont’d.
Plan Years Ending on or After
PCORI Fee per
Covered Life
October 1, 2012 $1
October 1, 2013 $2
October 1, 2014 – September 30, 2019 $2*
* Increased by percentage increases in projected per capita amount of
National Health Expenditures 20

21. • One of several methods may be used to calculate the
average number of covered lives under the plan during the
year
– Consult your tax or benefits advisor to determine which calculation
method results in the lowest fee
• The first annual fee is due by July 31, 2013 for plan years
ending between October 1, 2012, and December 31, 2012
• The fee is reported on Form 720, Quarterly Excise Tax
Return
• The fee is tax deductible
PCORI Fee on Self-funded Plans Due July 31,
cont’d.
21

22. Cases
22

23. • Windsor v. U.S., S.Ct., 6/23/13, 2013-2 USTC ¶50,400
• U.S. Supreme Court in a 5-4 decision found Section 3 of
the Defense of Marriage Act (DOMA) violates the equal
protection clause of the Fifth Amendment for same sex
couples legally married under the laws of their state
• Section 3 of DOMA served to deny federal benefits to
same sex couples that are available to opposite sex
couples
• The Windsor case involved an estate tax issue where the
estate could not claim the unlimited marital deduction on
property transferred to the decedent’s same sex spouse
Supreme Court Strikes Down Sec. 3 of DOMA
23

24. • The decision specifically applies to same sex couples
who are legally married under state law
– The status of civil unions and domestic partnerships is unclear
• The case did not consider Section 2 of DOMA which
allows states to not recognize same sex marriages from
other states
– Will a same sex married couple qualify for federal benefits if they
were legally married in a state that recognizes same sex marriage
but currently live in a state that doesn’t?
Supreme Court Strikes Down Sec. 3 of DOMA,
cont’d. – Many Unanswered Questions
24

25. States Recognizing Same Sex Marriage
State
Date of
Recognition
Massachusetts 5/17/04
Connecticut 11/12/08
Iowa 4/27/09
Vermont 9/1/09
New Hampshire 1/1/10
District of Columbia 3/9/10
New York 7/24/11
State
Date of
Recognition
Washington 12/6/12
Maine 12/29/12
Maryland 1/1/13
Delaware 7/1/13
Rhode Island 8/1/13
Minnesota 8/1/13
California* 6/26/13
* Via Supreme Court decision on
California Proposition 8
25

26. • Filing Status
– Same sex couples now must file as Married Filing Joint or Married
Filing Separately – filing as Single no longer an option
– Couples with comparable incomes will receive a marriage penalty
– Couples where one spouse has majority of income will receive a
marriage bonus
• Inherited IRA Payments to Surviving Spouse
– Surviving spouse has flexibility with respect to required minimum
distributions not afforded to other beneficiaries
• Family Attribution Rules
– Same sex couples would now constructively own each other’s
business interests for purposes of applying loss and other
limitations
Supreme Court Strikes Down Sec. 3 of DOMA,
cont’d. – Income Tax Implications
26

27. • Unlimited Marital Deduction
– Same sex couples may now pass property to each other upon
death or during their lifetimes without using any of their lifetime
exclusion or paying estate or gift tax
• Portability of Estate Tax Exclusion Amount
– Any unused estate tax exclusion should now pass to the surviving
same sex spouse
• Gift Splitting
– Same sex couples may now elect to split their gifts to take
advantage of the double annual exclusion ($14,000 each for 2013)
Supreme Court Strikes Down Sec. 3 of DOMA,
cont’d. – Estate and Gift Tax Implications
27

28. • Exclusion of Employer Provided Health Benefits
– Previously, if an employee added a same sex spouse to the
company health plan, the employer had to impute income to the
employee equal to the fair market value of the health coverage
provided to the same sex spouse
– This resulted in additional taxes to both the employee and the
employer since the additional income was subject to FICA and
Medicare taxes
• Benefits from other Tax Favored Vehicles
– Same sex spouses can now benefit from cafeteria plans, health
flexible spending accounts and health savings accounts
Supreme Court Strikes Down Sec. 3 of DOMA,
cont’d. – Employee Benefits Implications
28

29. • Wells Fargo v. U.S., 2013-1 USTC ¶50,368, 6/5/2013
• In Textron v. U.S., First Circuit Court of Appeals found
that work product privilege did not protect tax accrual
workpapers because the work was performed in
conjunction with preparing financial statements, not in
anticipation of litigation
• In Wells Fargo, the workpapers in question were those
used to identify uncertain tax positions (UTPs) and the
subsequent recognition and measurement analysis
Portion of Tax Accrual Workpapers Protected
29

30. • Conclusion:
– Workpapers prepared in identifying UTPs were not protected
• They often were prepared in the ordinary course of business around the
time the transactions were entered into
• Mere identification of positions that should be analyzed under FIN 48 is
too far removed from any litigation to be protected
– The recognition and measurement analysis was protected as it was
prepared in anticipation of litigation
• Wells Fargo was actively in litigation or appeals on many UTPs
• Legal analysis was not created merely for FIN 48 – included settlement
figures, assessment of chances in litgation, etc.
• Material developed in anticipation of litigation can be incorporated into
an audit document without sacrificing privilege
Portion of Tax Accrual Workpapers Protected,
cont’d.
30

31. • Peek et al v. Commissioner, 140 T.C. No. 12, 5/9/2013
• Taxpayer formed self-directed IRA
• IRA bought company formed by taxpayer
• Taxpayer guaranteed loan taken by company
• Court deemed guarantee was indirect extension of credit
between IRA and disqualified person
• IRA was disqualified and liquidated
Guarantee of Loan to IRA-Owned Company a
Prohibited Transaction
31

32. • Elick et al v. Commissioner, TC Memo 2013-139, 6/3/2013
• Dentist sets up separate company (Mgmt Co) to manage
his dental practice’s (Dental Co) operations
• Mgmt Co has no employees, except Dentist is a “co-
employee” of Mgmt Co and Dental Co
• Dentist was Mgmt Co’s only officer and board member
• ESOP benefitting Dental Co’s employees purchases Mgmt
Co’s stock from Dentist
• Dental Co pays over $700,000 in management fees to
Mgmt Co
• Mgmt Co uses fees to fund ESOP
Deduction for Purported Management Fee
Disallowed
32

33. • Court disallowed deduction for entire management fee
• Reasoning:
– Taxpayer never established that Mgmt Co rendered any services
– Taxpayer never provided any documentation corroborating that any
services were provided
– Management agreement established only what Mgmt Co agreed to
provide; not what it actually did provide
– Most terms of the management agreement (e.g., monthly billing)
were ignored
– Third parties provided services that Mgmt Co was to provide
– Dental Co’s office manager performed same functions as before
– Neither Dentist nor office manager were compensated by Mgmt Co
Deduction for Purported Management Fee
Disallowed, cont’d.
33

34. • Davis v. Com’r., 2013-1 USTC ¶50,330 (CA-11)
• Taxpayer owned 23% of S corporation
• Spouse demanded half of Taxpayer’s shares in a divorce
• Taxpayer declared he would stop working for the company
if his ownership percentage was not restored
• Spouse issued Taxpayer an option to repurchase shares
• S Corp redeemed Spouse’s shares and assumed
obligation under the option
• Modifications to the option:
– Cashless exercise provision
– Notification requirement if Taxpayer makes 83(b) election
Exercise of Stock Options Taxable under Sec. 83
34

35. • Taxpayer exercised option in cashless exercise
– S Corp took compensation deduction for value of shares exercised
– Taxpayer recognized no income, claiming:
• Option was from Spouse, not S Corp
• No gain is recognized on transfer of property incident to divorce
• Court of Appeals disagreed
– Testimony proved that Taxpayer structured transaction this way to
avoid income recognition; intent was always for Taxpayer to receive
the shares from S Corp, not Spouse
– The non-recognition provision on transfer of property pursuant to
divorce would have only applied to the grant of the option itself, not
the shares received upon exercise
Exercise of Stock Options Taxable under Sec. 83,
cont’d.
35

36. • Issue: Are severance payments made to employees
pursuant to a reduction in work force subject to FICA tax?
• In Quality Stores v. U.S., the district court and 6th Circuit
Court of Appeals say “No!”
– Conclusion: Supplemental unemployment compensation benefits
(SUBs) paid because of an employee’s involuntary separation
resulting directly from a reduction in force, discontinuance of
operations, etc. are not wages for FICA purposes
– IRS tried to extend the federal income tax withholding requirement
on SUBs to FICA taxes
• 6th Circuit’s opinion in direct contrast to Federal Circuit
Court of Appeals’ decision in CSX Corp v. U.S.
FICA Treatment of Severance Payments
36

37. • IRS asking Supreme Court to settle the split between the
appeals courts
• Employers that withheld FICA on severance payments
resulting from a reduction in force should file protective
refund claims before the statute of limitations expires
– Statute to file refund claim for payments made in 2010 expires on
April 15, 2014
– Unless employer is in 6th Circuit, IRS will deny the claim
– Employer then has 2 years to file a refund suit or file Form 907 to
extend time to file suit
• IRS has informally said that it will agree to sign Form 907
FICA Treatment of Severance Payments, cont’d.
37

38. Regulatory Pronouncements
38

39. • Extending taxpayers who file returns containing certain
delayed forms are not subject to late payment penalty if:
– a good faith effort was made to properly estimate the tax liability
on the extension application;
– the estimated amount is paid by the original due date of the return;
and
– any balance of tax owed on the return is fully paid by no later than
the extended due date of the return.
• Common forms include Form 4562 and Form 8582
• Taxpayer needs to respond to notice assessing penalty
with a letter explaining how he qualifies for relief
Late Payment Penalty Relief (Notice 2013-24)
39

40. • §1.263(a)-5(a)
– Amounts paid to facilitate a business acquisition or reorganization
must be capitalized
• §1.263(a)-5(f)
– Amount contingent on successful closing of a transaction
(“success based fee”) presumed to facilitate the transaction
– Taxpayer may rebut presumption with sufficient documentation
• Rev Proc 2011-29 (4/8/11)
– Safe harbor allows taxpayer to treat 70% of success based fee as
not paid to facilitate transaction (i.e., deductible)
• LB&I 04-0511-012 (7/28/11)
– Examiners instructed not to challenge treatment of success based
fee if at least 30% is capitalized
Success Based Fees
40

41. • CCA 201234027
– $10 million fee on successful transaction
– $2 million nonrefundable fee paid at various milestones
• Would be applied towards $10 million fee if successful transaction
– Chief Counsel ruled $2 million fee nondeductible since not
contingent on successful transaction
• LB&I 04-0413-002
– IRS directs examiners not to challenge a taxpayer’s treatment of
eligible milestone payments if:
• Taxpayer qualified and properly elected 70% safe harbor
• Taxpayer did not deduct more than 70% of eligible milestone payment
• Taxpayer is not contesting liability for milestone payment
Success Based Fees – Milestone Payments
41

42. • C corporation elects S corporation status (S Corp)
• S Corp wants to sell assets (“target assets”) to Buyer but
would incur built-in gains (BIG) tax
• S Corp and Buyer form a partnership (P-ship)
– S Corp contributes target assets
– Buyer contributes notes
• P-ship borrows from bank and distributes cash to S Corp
– Collateral: P-ship’s assets & Buyer’s equity interest
– Guaranty: Debt guaranteed by P-ship and Buyer
– Indemnification: S Corp indemnifies Buyer for amounts Buyer
actually pays under the guarantee
Attempt to Avoid BIG Tax Deemed Disguised Sale
42

43. • Generally, a transfer of property to a partnership followed
by a distribution within 2 years presumed to be a
disguised sale
• However, a debt-financed distribution only considered for
disguised sale rules to extent it exceeds partner’s
allocable share of debt
• S Corp attempted to use indemnification to allocate entire
debt to itself, thus avoiding disguised sale income
• IRS disregarded the indemnification:
– Lacked important features of a commercial indemnity
– No practical risk that indemnity would be enforced
– Buyer merely used P-ship as a conduit to accommodate S Corp
Attempt to Avoid BIG Tax Deemed Disguised Sale,
cont’d.
43

44. • Two corporations (“A” and “B”) entered into collaboration
agreement to develop and commercialize a product
• A and B each maintained records of transactions
• A submitted records to B and B calculated enterprise’s
profits and losses and A’s allocable share
• A and B did not file partnership tax return or elect out of
Subchapter K
• Side agreements between A and B indicated they did not
intend for collaboration to be a partnership or joint venture
Collaboration Must Be Treated as Partnership
44

45. • IRS concluded that collaboration was a partnership or
joint venture
– Was not merely a cost sharing arrangement but an attempt to use
each other’s know-how to make a profit from selling the product
• Could not elect out of Subchapter K as it was not an
investment partnership but an active business
• Each partner was eligible to claim the Sec. 199 deduction
on its separate corporate return, if applicable, on its
allocable share of the activity
Collaboration Must Be Treated as Partnership,
cont’d.
45

46. • Tax Reform Update
– Political dynamics necessitate bi-partisanship for agreement
– Senate looking to start with “blank slate”
– Many key individual tax expenditures largely benefit top quintile
• Proposals to Reform Taxation of Small Businesses and
Passthrough Entities
– Core components – Sec. 179, expanded cash method, due dates
– Option 1: Tweak partnership and S corporation rules
– Option 2: Scrap current partnership/S corporation rules in favor of
unified, simplified regime
Summary/Key Takeaways
46

47. • Affordable Care Act Update
– Employer mandate postponed until 2015
– Other ACA provisions remain in effect
– PCORI fee on self-funded plans due July 31
• Cases
– Supreme Court strikes down Sec. 3 of DOMA
• Many income tax, estate/gift tax & benefit implications
• Many unanswered questions
– Limited tax accrual workpaper protection
– Protective refund claims on FICA from severance payments
• Regulatory Pronouncements
– Late payment penalty relief
Summary/Key Takeaways
47

48. QUESTIONS?
48

49. Upcoming Webinars – Save the Date
Exit Strategies for Contractors on Wednesday, July 31st from 2:00 –
3:00 ET
California as a Backdrop for recent State Tax Developments on
Wednesday, August 21st from 2:00 – 3:00 ET
Eye on Washington: Quarterly Business Tax Update (3rd Quarter) on
Wednesday, October 30th from 2:00 – 3:00 ET
Registration will be available closer to webinar date.
49

50. CBIZ MHM, LLC Contact Information
Stephen C. Henley
National Tax Practice Leader
 770.858.4443  shenley@cbiz.com
William M. Smith
Managing Director
 301.951.3636  billsmith@cbiz.com
50

51. Thank You
51