CBIZ MHM Executive Education Series Eye on Washington

CBIZ & MHM Executive Education Series™ Eye on Washington: Quarterly Tax Update (2 nd Quarter 2019) Steve Henley, Bill Smith and Nathan Smith August 8, 2019 #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 1

About Us • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 4, 800 professionals nationwide A member of Kreston International A global network of independent accounting firms MHM (Mayer Hoffman Mc. Cann P. C. ) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms. Questions? Email cbizmhmwebinars@cbiz. com 2

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CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer polling questions throughout the webinar. External participants will receive their CPE certificates via email within 15 business days of the webinar. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 4

Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 5

Presenters Steve has 30 years experience in serving the tax needs of clients in a variety of industries including retail, distribution and manufacturing, services, technology and communications. In serving as lead tax engagement executive, Steve’s focus is identifying and executing value creating strategies to meet the needs of his clients in a variety of technical areas, such as revenue recognition, acceleration of deductions, research and experimentation credits, state and local tax minimization, M&A tax structures, international tax planning and tax implications of compensation programs. Stephen C. Henley, CPA National Tax Practice Leader #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 770. 858. 4443 • shenley@cbiz. com 6

Presenters Bill Smith is a managing director in the CBIZ National Tax Office. Bill monitors federal tax legislation and consults nationally on a broad range of foreign and domestic tax services for businesses and individuals. He is frequently sought after by a myriad of media outlets to comment on the changing tax environment and its effects on companies and individuals. He has authored numerous tax articles, edits the CBIZ MHM In. Touch newsletter and federal Tax Alerts, and lectures on a broad range of tax topics across the country. William M. Smith, Esq. Managing Director, CBIZ National Tax Office #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 301. 961. 1943 • billsmith@cbiz. com 7

Presenters Nathan Smith is a Director in the CBIZ National Tax Office, bringing over 20 years of experience in public accounting to provide technical support and strategic solutions for the firm’s tax practice. Nathan leads the development of practice aids and tactical approaches used in responding to industry and Federal tax developments in a variety of subject matter areas. Nathan also consults nationally to facilitate delivery of client service opportunities and solutions, contributes as an author and editor to the firm's tax thought leadership publications and assists with the development and implementation of national tax policies and Nathan Smith, CPA Director, CBIZ National Tax Office #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com procedures. 727. 572. 1400 • nate. smith@cbiz. com 8

Agenda 01 Legislative 02 Administrative 03 Judicial #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 9

LEGISLATIVE #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 10

IRS Reform Bill Passed • On June 13 Senate passed Taxpayer First Act only days after it passed the House for the second time • After removing a controversial provision codifying the Free File Alliance • Signed by President on July 1 • Establishes an independent office of appeals • Requires the IRS to submit to Congress plans to: • redesign the structure of the agency to improve efficiency, • modernize its technology systems, • enhance its cybersecurity, and • better meet taxpayer needs #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 11

IRS Reform Bill Passed • Enhanced Identity Theft Protections • expands to all taxpayers an IRS program that currently only allows victims of tax ID theft to obtain a personalized PIN that better secures their identity • Improves the IRS whistleblower program • authorizes IRS to communicate with whistleblowers during processing of claims, while also protecting taxpayer privacy, • extends anti-retaliation provisions to IRS whistleblowers that are presently afforded to whistleblowers under other laws #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 12

Crystal Ball: What to Look for in Tax Reform Going Forward • Senate: • Republicans – 53 • Democrats – 47 (includes two Independents) • House of Representatives: • • Republicans – 197 Democrats – 235 Independent - 1 Vacancies – 2 • Result in North Carolina 9 th Congressional District not certified (Primary May 14; general election Sept. 10, 2019). • Walter B. Jones (R-NC) passed away February 10, 2019 (NC 3 rd Dist. – general election Sept. 10, 2019) • Tom Marino (R – PA) resigned effective Jan. 23, 2019. Representative Fred Keller (R) was elected May 21, 2019, in special election and took the oath of office on June 3, 2019 • Justin Amash changed parties July 4, 2019 from Republican to Independent (Mich. 3 rd Dist. ) • You do the math … #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 13

Extenders • Senate Finance Committee (SFC) Chairman Chuck Grassley, R- • • Iowa, took to the Senate floor on July 24 to voice his frustration with House Democrats’ reluctance to act on tax extenders. Generally, Congress on a bipartisan basis renews expired or soon to be expired tax breaks known as tax extenders by attaching such a measure to a government spending bill. However, various tax breaks with sunset dates spanning from 2017 through 2019 were not expected to be included in HR 3877 when it reached the House floor, and were not part of the bill passed by the House on July 25. The House began its summer recess after July 25. At this time, it is expected on Capitol Hill that Congress will likely punt talks on tax extenders to September when lawmakers return to Washington, D. C. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 14

No Retail Glitch Fix in Sight • Grassley made reference to the Bipartisan Budget Bill of 2019 (HR 3877)—which subsequently passed the House on July 25—as a "missed opportunity" for tax extenders • Because the budget bill was silent on the Retail Glitch, it is unlikely that it will be fixed before September 15 return due dates #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 15

ACA Cadillac Tax Repeal • The Middle Class Health Benefits Tax Repeal Bill (HR 748) cleared the House on the evening of July 17 by a 419 -to-6 vote. • The bipartisan bill would repeal the 40 percent excise tax under the ACA known as the "Cadillac tax" on certain high -cost employer-sponsored health care plans. • Congress has repeatedly delayed the ACA’s "Cadillac" tax, which is currently set to go into effect in 2022. However, HR 748 would fully repeal the tax. • Although the measure has bipartisan support in the Senate, as for when it will get its legs in the upper chamber remains to be seen. • Lately, Senate Majority Leader Mitch Mc. Connell, R-KY. , has been viewed on Capitol Hill as focusing more on moving nominations than considering tax bills. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 16

ADMINISTRATIVE #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 17

IRS Notifies Virtual Currency Owners of Tax Obligations • The IRS started sending "educational" letters to more than 10, 000 • • taxpayers who may have potentially failed to report income from their virtual currency transactions, urging them to review their tax filings, amend past returns and pay back taxes, interest and penalties. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand meet their obligations, " IRS Commissioner Chuck Rettig remarked. Notice 2014 -21, I. R. B. 2014 -16, 938, states that virtual currency is property for federal tax purposes. The IRS warned taxpayers who have not reported the income tax consequences of virtual currency transactions would be liable for tax, penalties and interest. The IRS will remain actively engaged in addressing noncompliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 18

IRS Allowed to Treat Partnership as Aggregate of its Partners • CCA 201917007 • Under Code Sec. 367(d) and its regulations, a U. S. person that transfers intangible property to a foreign corporation in a Code Sec. 351 or Code Sec. 361 exchange must recognize income with respect to the property either annually over the property’s useful life (general rule) or immediately upon the direct or indirect disposition of the property (disposition rule). • Transfers of appreciated assets to a foreign corporation are taxed under Sec. 367(d) unless the taxpayer can show that a principal purpose of the transfer was not the avoidance of tax. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 19

IRS Allowed to Treat Partnership as Aggregate of its Partners • CCA 201917007 • Taxpayer transferred IP offshore in a manner that would normally subject the transfer to tax under Section 367(d) • Taxpayer's reporting, if allowed, permits a U. S. partnership to recognize income under the general rule and allocate the annual inclusion to partners not subject to U. S. tax. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 20

IRS Allowed to Treat Partnership as Aggregate of its Partners • CCA 201917007 • Under the “anti-abuse” Reg. § 1. 701 -2(e), “The Commissioner can treat a partnership as an aggregate of its partners in whole or in part as appropriate to carry out the purpose of any provision of the Internal Revenue Code or the regulations promulgated thereunder. ” • Here, the Commissioner is asserting the rule to carry out the purpose of section 367(d) by ensuring that the outbound transfer of IP is subject to U. S. tax. • The IRS was allowed to assert its authority under the abuse of entity rule of Reg. § 1. 701 -2(e) #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 21

Proposed Regs On Withholding – Foreign Partners • The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. • Also affected are partnerships that directly or indirectly have foreign partners. • Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U. S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). • The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 22

Proposed Regs On Withholding – Foreign Partners • A transferee of a partnership interest must withhold a tax • equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income. Six exceptions – Certification by: • transferor of non-foreign status • transferor that no gain is realized on transfer by transferor • partnership that effectively connected gain from the disposition would be less than 10 percent • transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year; • transferor that a nonrecognition provision applies, and • transferor that a treaty provision applies #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 23

Proposed Regs On Withholding – Foreign Partners • Withholding obligation on the transfer of an interest in a publicly traded partnership is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor • A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. • Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8). #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 24

Section 199 A Updates • Section 199 A was added by the TCJA (P. L. 115 -97, Sec. 11011) and applies to tax years beginning after December 31, 2017 • Section 199 A generally provides a 20% deduction against qualified business income generated by the TOB of an individual or trust, or allocated to such owners from a pass-through entity • Section 199 A final regulations (T. D. 9847) were published in the Federal Register on February 8, 2019, and are effective for taxable years ending after such date 25 • Taxpayers may rely on the final regulations in their entirety for taxable years ending in calendar year 2018, or • Taxpayers may rely on the proposed regulations in their entirety for taxable years ending in calendar year 2018 #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 25

Section 199 A Updates • Notice 2019 -7 was simultaneously issued by the IRS in response to a significant number of comments regarding the appropriate treatment of real estate-related activities under Section 199 A • Provides a proposed Revenue Procedure under which a safe harbor can be applied to treat certain real estate activities as a trade or business for purposes of Section 199 A 26 • Step one – Is there a rental real estate enterprise? • Step two – Are rental services performed? • Step three – Are 250 or more hours of rental services performed? • Step four – Are recordkeeping requirements met? • Step five – Does the taxpayer engage in excluded arrangements? • Step six – Must meet procedural requirements #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 26

Section 199 A Updates (Comments on Notice 2019 -7) • Notice 2019 -7: Step one – Is there a RREE? • A RREE is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties • Each property must generally be treated as a separate RREE, however similar properties (except for certain excluded arrangements) can be treated as a single RREE • Commercial and residential real estate may not be a part of the same RREE § The regulations separately assert the same principle that such properties constitute separate TOB’s (Reg. § 1. 199 A-4(d)(16)) 27 • The NY Bar submitted comments to the IRS on April 8, 2019 and noted that the proposed distinction between residential and commercial real estate is illdefined and does not reflect commercial realities of many real estate properties (particularly when mixed use properties are involved) • The ABA submitted comments to the IRS on June 27, 2019 and noted that the fundamental activities (rental services, skill, and activities provided) involved with mixed use properties and other rental properties are essentially the same, thereby justifying a taxpayer’s ability to treat them as part of the same TOB • Holly Porter, IRS associate chief counsel (passthroughs and special industries) said at a speaking event on June 27, 2019 that a mixed use property could be considered one business under Section 199 A, depending on the facts and circumstances #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 27

Section 199 A Updates (Comments on Notice 2019 -7) • Notice 2019 -7: Step three – Are 250 or more hours of rental services performed? 28 • The NY Bar’s comments on April 8, 2019 also raised concern that the 250 hour threshold may not carry out Congressional intent for Section 199 A benefits, because in the case of any taxpayer having a “moderate size, ” it would be easy to hire a landscaping service or maintenance workers periodically, and attribute the hours from those contractors to the 250 hour threshold, whereas a small and unsophisticated taxpayer would have a more difficult time applying this same standard • The ABA’s comments on June 27, 2019 go somewhat in the opposite direction, where they recommend that the 250 hour requirement be reduced to 120 hours out of a concern that relatively few taxpayers who could satisfy the 250 hour requirement will actually need safe harbor protection, and instead suggest that the area where uncertainty exists (e. g. , 120 hours) is more appropriate for a safe harbor provision #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 28

Section 199 A Updates (Comments on Final Regs. ) • Determination and allocation of UBIA 29 • Reg. § 1. 199 A-2(a)(3)(ii) provides that “each partner’s share of the UBIA of qualified property is determined in accordance with how the partnership would allocate depreciation under § 1. 704 -1(b)(2)(iv)(g) on the last day of the taxable year” • The ABA submitted comments to the IRS on April 18, 2019 and noted that the above rule appears to preclude the allocation of UBIA to any partner who no longer holds a partnership interest on the last day of the year, but it appears to also require that UBIA be allocated according to the sharing percentages for depreciation on the last day of the tax year (rather than the average throughout the tax year) • The ABA recommended that the regulations be clarified to specify that the allocation should be made only to last-day partners in accordance with their entire-year average percentages that would exist disregarding those whom are no longer partners (moreover, would-be allocations of UBIA to the former partners should not disappear and benefit no partner at all) #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 29

Section 199 A Updates (Comments on Final Regs. ) • Determination and allocation of UBIA 30 • Audrey Ellis, attorney-adviser, Treasury Office of Tax Legislative Counsel said at a speaking event on May 10, 2019 that the “last day” reference was not intended to mean that the UBIA allocation should reference the static percentages existing on the last day (this is a widely held interpretation presently), and rather, it was intended to provide that partners who are still part of the partnership on the last day should use the entire year’s average percentage for Section 704(b) book depreciation • Clarifying further on the intent of the regulation, Ms. Ellis provided that the share of UBIA that would be allocable to former partners (those who are not in the partnership on the last day) cannot be re-attributed among the remaining partners, and in the view of Treasury is lost altogether #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 30

Section 199 A Updates (Comments on Final Regs. ) • Determination and allocation of UBIA • Reg. § 1. 199 A-2(a)(3)(iv) provides (contrary to the proposed regulations) that certain Section 743(b) basis adjustments will permit the transferee partner to take into account additional UBIA (referred to as an “excess section 743(b) basis adjustment”) • Shortly after a draft version of the final regulations was released, the a final version made significant changes to this rule that were intended to address drafting errors in the draft version • The final version of the rule essentially calls for a taxpayer to recompute the Section 743(b) adjustment where UBIA is substituted for adjusted tax basis in the equation, and that result is simply the answer for the additional UBIA the transferee partner can take into account, except such amount is capped at the amount of the normal Section 743(b) adjustment • Perhaps due to the haste of the last minute fix to the drafting error, the 31 term “excess section 743(b) basis adjustment” remains to describe the above calculation, despite that the equation no longer involves an “excess of” formula (whereas the obsoleted version of the rule once did) #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 31

Section 199 A Updates (Comments on Final Regs. ) • Determination and allocation of UBIA • The corrected regulation also contains an odd and potentially problematic rule regarding absolute value: • “The absolute value of the excess section 743(b) basis adjustment cannot exceed the absolute value of the total section 743(b) basis adjustment with respect to qualified property” • The ABA submitted comments to the IRS on April 18, 2019 and speculated that the intent may have been to ensure that an “excess section 743(b) basis adjustment” is not more negative or more positive than an actual negative/positive section 743(b) basis adjustment (see Reg. § 1. 199 A-2(a)(3)(iv)(D)(2)), but other problems emerge when a tentative “excess section 743(b) basis adjustment” is negative and the actual section 743(b) basis adjustment is positive, or vice versa • For instance, consider a tentative “excess section 743(b) basis adjustment” of <$100, 000>, and an actual section 743(b) basis adjustment of $30, 000 • The current regulation requires the final “excess section 743(b) basis adjustment” to be <$30, 000> § The ABA noted that this result is arbitrary, and requires a negative result when there is no actual negative section 743(b) basis adjustment 32 • In consideration of these potential problems, the ABA recommended that when one section 743(b) computation is negative and the other is positive, the final “excess section 743(b) basis adjustment” be limited to zero #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 32

JUDICIAL #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 33

North Carolina Dept. of Rev. v. Kaestner Family Trust, USSC 6/21/19 • North Carolina taxed the Kimberly Rice Kaestner 1992 Family • • • Trust for income that the trust earned from 2005 to 2008 Father created trust in NY, split into 3 trusts for children NC taxed trustee more than $1. 3 million over 3 years • Income wasn’t generated in North Carolina or distributed to Kaestner or her children NC Supreme Court held for trust – tax violated due process NC Dept. of Rev. argued residency established the “minimum contact” necessary to tax The U. S. sees $120 billion in income from trusts each year The ruling has broad implications: many trusts have beneficiaries in states other than where the trust was created. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 34

North Carolina Dept. of Rev. v. Kaestner Family Trust, USSC 6/21/19 • Supreme Court held that the presence of in-state beneficiaries alone does not give state right to tax trust income that • had not been distributed to the beneficiaries • where the beneficiaries have no right to demand that income and are uncertain to receive it • Two-step analysis for due process: • There must be "some definite link, some minimum connection, between a state and the person or property or transaction it seeks to tax. " • Second, the income attributed to the state for tax purposes must be rationally related to "values connected with the taxing State. " • The Court found that North Carolina’s tax on the Kaestner trust did not meet the first requirement, and therefore did not address the second requirement. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 35

Brokertec Holdings v. Comm’r, TC Memo 2019 -32 (Apr. 9, 2019) • Brokertec’s predecessor companies were brokers whose office • • • space was destroyed in Sept. 11 attacks, necessitating the search for new office space NJ had developed agencies and programs “to induce companies to locate in New Jersey” On April 2, 2002, the [NJ] informed [Brokertec] that its requests had been approved and [Brokertec’s] grant, originally estimated to be $8, 300, 000 paid over 10 years, was increased to an estimated $50, 967, 000 over 10 years In the case of a corporation, section 118 provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer. * * * Section 118 also applies to contributions to capital made by persons other than shareholders. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 36

Brokertec Holdings v. Comm’r, TC Memo 2019 -32 (Apr. 9, 2019) • Because “contribution to the capital” is not defined in Section • • 118, the court looked to legislative history which pointed it to prior case law IRS objected that [Brokertec] ultimately received $169, 780, 375 in aid via [NJ] grants while expending only some $40 million in moving to NJ Court said IRS conflated “capital asset” such as a factory or machinery with “working capital” -- “the value of that with which the enterprise carries on its activity” Held for taxpayer Protective refund claims may be necessary #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 37

Baldwin v. United States, (9 th Cir. Apr. 16, 2019) • The taxpayers sought to file a claim for refund in the 2005 tax • • • year from the carryback of a net operating loss (NOL). They asserted that they filed an amended return in June 2011, well before the October 2011 deadline. An amended return was not received by the IRS until July 2013, so the refund claim was denied. The taxpayers filed suit in district court, relying on the common law mailbox rule and the testimony of two employees to establish that the amended return was presumptively delivered to the IRS in June 2011. The district court ruled for the taxpayers that the claim for refund had been filed, and rejected the government’s argument that Code Sec. 7502 and its regulations barred application of the mailbox rule. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 38

Baldwin v. United States, (9 th Cir. Apr. 16, 2019) • Common-law mailbox rule: proof of mailing (such as by • • • testimony) provides a rebuttable presumption that the document was physically delivered Code Sec. 7502 allows documents to be deemed timely filed only if they are actually delivered to the IRS and postmarked on or before the deadline. For documents sent by registered mail, Code Sec. 7502 provides a presumption that the document was delivered even if the IRS claims not to have received it, so long as the taxpayer produces the registration as proof. Reg. § 301. 7502 -1(e)(2) was amended to provide that unless a taxpayer has direct proof that a document was actually delivered, Code Sec. 7502 provides the exclusive means to prove delivery (common-law mailbox rule is no longer available) #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 39

Baldwin v. United States, (9 th Cir. Apr. 16, 2019) • Two-step analysis under Chevron: • Code Sec. 7502 is silent as to whether the statute displaces the common-law mailbox rule • Reg. § 301. 7502 -1(e)(2) is based on a permissible construction of the statute • The Treasury Department chose to interpret Code Sec. 7502 to provide the sole means by which taxpayers may prove timely delivery in the absence of direct proof of actual delivery • Court reversed District Court and held for IRS that claim was not timely filed #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 40

Syzygy Insurance Co. , Inc. v. Comm’r (TC Memo. 2019 -34) • Microcaptive insurance arrangement did not meet the definition of insurance • the payments received by a corporation and its fronting carriers through the arrangement were not deductible as insurance premiums. • The corporation’s carriers did not qualify as bona fide insurance companies. • The carriers engaged in a circular flow of funds, the contracts were not arm’s-length contracts but were aimed at increasing deductions, and the premiums were not actuarially determined. #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 41

Syzygy Insurance Co. , Inc. v. Comm’r (TC Memo. 2019 -34) • Since the carriers did not qualify as bona fide insurance companies, they did not issue insurance policies. • Consequently, the corporation’s reinsurance of those policies did not distribute risk. • Further, the transactions also did not qualify as insurance in the commonly accepted sense. • The corporation’s Code Sec. 831(b) election was invalid, and it was required to recognize the premiums it received as income. • Individuals were not allowed to deduct the purported premium payments or any fees as payments for insurance • Court rejected the individuals’ argument that the payments qualified as payments for indemnification that were deductible as ordinary and necessary business expenses #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 42

Roth v. Comm’r (10 th Cir. 2019) The § 6751(b) Penalty Defense • Roths donated conservation easements • IRS challenged, got its own appraiser, determined deficiency and imposed a “gross valuation misstatement” penalty under I. R. C. § 6662(h), which allows for a 40% penalty on unpaid taxes when the claimed value of property exceeds its actual value by 200% or more • Taxpayer appealed • Appeals Officer agreed with agent but calculated penalty at 20% instead of 40% • IRS sent notice of deficiency with penalty calculated at 20% • Taxpayers sued in Tax Court #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 43

Roth v. Comm’r (10 th Cir. 2019) The § 6751(b) Penalty Defense • Section 6751(b) requires the IRS to obtain written, supervisory approval for its “initial determination” of a penalty assessment • Taxpayer argument • No dispute that the IRS obtained written, supervisory approval at every step in the agency's attempt to penalize them for the misstated value of the 2007 Easement. • Or that both agent and manager deemed a 40% penalty appropriate • Instead, claimed the notice of deficiency is the IRS's initial determination of the penalty under § 6751(b), so IRS cannot impose any penalty other than the 20% penalty it “initially determined. ” #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 44

Roth v. Comm’r (10 th Cir. 2019) The § 6751(b) Penalty Defense • Court’s Decision • Agreed with the Second Circuit that the plain language of § 6751(b) is ambiguous • No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. • Turned “to the legislative history and the underlying public policy of the statute” as indicators of the congressional intent lurking behind § 6751(b)'s words • Nothing in the broader statutory scheme requires the IRS to include its “initial determination” in a notice of deficiency #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 45

Roth v. Comm’r (10 th Cir. 2019) The § 6751(b) Penalty Defense • Court’s Decision • The IRS's “initial determination” of a 40% penalty under § 6662(h) in the Roths' case could, consistent with the statute's language, be said to rest with either agent or manager • § 6214(a) expressly contemplates the IRS's ability to bring claims for “any addition” to a taxpayer's deficiency in a proceeding before the Tax Court • This reading of the statute harmonizes § 6751(b)'s initial determination requirement with § 6214(a)'s grant of jurisdiction to the Tax Court to consider new penalties asserted by IRS counsel in a deficiency proceeding • Held for IRS #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 46

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If You Enjoyed This Webinar… Upcoming Courses: • 10/02/19: Third Quarter Accounting and Financial Reporting Issues Update • 10/22/19: Eye on Washington Quarterly Update Q 3 • 10/23/19: Important Revenue Recognition Implementation Issues for Notfor-Profit Organizations Recent Publications: • Maximizing the Tax Benefits of Qualified Opportunity Zone Fund Investments • Select a Lease Accounting Software Solution That Works for You • 4 Major Takeaways from the 2019 AICPA Not-for-Profit Conference • Reduce Accounting Challenges with the VIE Accounting Alternative #cbizmhmwebinar Questions? Email cbizmhmwebinars@cbiz. com 49

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