Mid-Year Federal & California Tax Update for Individuals, Businesses & Estates

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Mid-Year Federal & California Tax Update for Individuals, Businesses & Estates Gary McBride, CPA, Esq. Annette Nellen, CPA, CGMA, Esq. http://www.calcpa.

1 Mid-Year Federal & California Tax Update for Individuals, Businesses & Estates Gary McBride, CPA, Esq. Annette Nellen, CPA, CGMA, Esq. 8/2/17 1 Learning Objectives Identify new federal tax law changes affecting taxpayers for 2017 and beyond. Identify recent developments relevant for year-end tax planning. Materials: Outline with links Slides 2

Tax Reform Plans to Watch House Republican Blueprint President Trump (April 26, 2017) Senate Finance Committee Asked for stakeholder ideas by 7/17/17.

com/content/dam/jofa/news/2017-tax-reform-for-economic-growth.jpg 7/27/17 joint statement - https://www.whitehouse.

2 Tax Reform Plans to Watch House Republican Blueprint President Trump (April 26, 2017) Senate Finance Committee Asked for stakeholder ideas by 7/17/17. Behind the scenes activity Speaker Ryan says tax reform will happen in /27/17 joint statement A Variety of Issues When? If not by end of 2017, will Congress renew provisions that expired at 12/31/16? List at Lowering rate for all business entities will require sole proprietors and pass-throughs to Separate owner compensation from capital income What do to now? Monitor Likely rates will go down Defer income and accelerate deductions 1031 could disappear Likely to be transition and anti-churning rules 4

Notice 2017-38 (July 7, 2017) 3 Regulations Facing Extinction Per Executive Order 13789 https://www.irs.gov/pub/irs drop/n 17 38.

3 Notice (July 7, 2017) 3 Regulations Facing Extinction Per Executive Order drop/n pdf 5 IRS Must I.D. Regs. that 1) Impose an undue financial burden on U.S. taxpayers; 2) add undue complexity to the Federal tax laws; or 6

4 3) exceed the statutory authority of the Internal Revenue Service (IRS). By Sept. 18, IRS I.D. d Eight Regs. that met one of the first two requirements 8

REG-163113-02 (8/4/16) Prop. Regs. 25.2701-2,-8, 25.

5 REG (8/4/16) Prop. Regs ,-8, , -2, -3, -4. Gift and Estate Tax Valuations 9 10

TD 9787 (10/5/2016) Final and Temp. Regs. on Disguised Sales 11 TD 9788; 1.

6 TD 9787 (10/5/2016) Final and Temp. Regs. on Disguised Sales 11 TD 9788; T (10/5/2016) Bottom Dollar Guarantees are Not Payment Obligations 12

7 Notice Regulations (all 8) 103 (REG ) 337(d) (TD 9770) 7602 (TD 9778) 2704 (REG ) 752 (TD 9788) 385 (TD 9790) Topic Definition of political subdivision Proposed regs (REG (2/23/16)) Certain property transfers to RICs and REITs Final, temp and proposed regs TD 9770 (6/8/16) REG (6/8/16) Summons interview Final regs; removal of temp regs. TD 9778 (7/13/16) Estate, GST and gift valuation Proposed regulations REG (8/4/16) Partnership recourse liabilities Final, temp and prop regs TD 9788 (10/5/16) REG (10/5/16) Treatment of certain corporate interest as stock or debt Final, temp and prop regs TD 9790 (10/21/16) Reg (10/21/16) 987 (TD 9794) 367 (TD 9803) Currency gain/loss for qualified business unit Final regs TD 9794 (12/8/16) Certain transfers of property to foreign corporations Final regs TD 9803 (12/16/16) 13 6 "21st Century Cares Act" (12/13/2016) 14

8 Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). 15 A QSEHRA is not a group health plan so the market reforms do not apply. 16

9 QSEHRA Effective Date Tax years beginning after 12/31/ Notice (2/27/2017) IRS Delays Employer Deadline To Provide QSEHRA Notice To Employees to 90 days after further guidance. 18

10 Prop. Regs. 12 REG (June 13, 2017) Centralized Partnership Audit Rules 19 Mandatory for tax years beginning on or after January 1,

11 Aimed at large partnerships (over 100 ptrs) and Tiered PSPs 21 Annual Small Partnership Election Out Entirely (Sec. 6221(b))

12 Partnerships with 100 or fewer K-1s can opt out, if all partners are: Individuals C Corps (RIC or REIT OK) Foreign Corps S Corps Estates (Sec. 6221(b)) Can Elect Out (Annual determination) C A 60% B 39% 1% LLC/Partnership

13 A No Election Out 60% B 39% C Grantor Trust 1% LLC/Partnership No Election Out C A 60% B 39% LLC 1% LLC/Partnership

14 No Election Out C A 60% B 39% PSP 1% LLC/Partnership Two Options for A Partnership Facing a Centralized Regime IRS Audit (TYBOA 1/1/2018) 28

15 1)Accept the IRS s partnership level imputed underpayment (Sec. 6225). The default! 29 Amended Returns Payments made with amended returns of the reviewed year partners reduce the imputed underpayment. (Sec. 6225(c)(2))

16 2) Elect to push-out the adjustment to the reviewed year partners within 45 days of the NFPA (Sec. 6226) 31 Before 2018, the PSP Agreement should be amended to address the centralized audit regime. 32

17 IRS Guidance to IRS LGB&I Employees on Elections into Centralized Audit Regime 22 (June 29, 2017) Implements Reg T 33 Can Elect Into Centralized Audit Regime for TYBA Nov. 2, 2015 and before Jan.1,

18 Why Elect In? Avoid the need for amended returns by the partners for the (2016 or 2017) reviewed year audits 35 Must elect IN within 30 days of the date the IRS notice of audit. IRS Letter 2205-D Memo LB&I

19 37 Either the Tax Matters Partner (TMP) or an individual authorized to sign the partnership return for the taxable year under examination is authorized to make this election 38

20 39 The [election in] statement must include representations that the partnership does not reasonably anticipate becoming insolvent, and reasonably anticipates having sufficient assets, to pay the potential imputed underpayment. Reg T(b)(ii)(E)(1)&(4) 40

Watch for details from VW, possible guidance from IRS and state Review nature of the transaction and reason for the

21 VW Settlement For VW s diesel emission problems Various arrangements including car buyback Likely also receive additional restitution payment. Watch for details from VW, possible guidance from IRS and state Review nature of the transaction and reason for the payment Reconcile any 1099 rec d to be sure what s taxable and what might not be 41 Hurford Investments No. 2, LTD v. Comm. (Apr. 17, 2017) (Judge Holmes) 26 Tax Court Order on Treatment of Inherited Phantom Stock Plan 42

22 When the surviving spouse (Thelma) transferred the Phantom Stock (IRD) to a partnership, it triggered $6.1 mil. of IRD (the FMV of the phantom stock). (Section 691(a)(2)) 43 Hardy, TC Memo (January 17, 2017) 28 Surgical Center LLC Was Separate Activity from Surgery Practice and No SE Tax 44

23 45 Dr. Hardy SE Tax Issue SMLLC Plastic Surgery Practice Material Participation 12.5% Profitable LLC Surgery Center Minimal Participation 46

24 Is Dr. Hardy subject to SE tax on his earnings from the LLC/PSP surgery center? NO says Tax Court. Dr. Hardy is a limited partner unlike Renkemeyer. 47 Dr. Hardy has never managed [the surgery center], and he has no dayto-day responsibilities there. Although he meets with the other members quarterly, he does not have any input into management decisions. 48

25 The legislative history of section 1402(a)(13) does not support a holding that Congress contemplated excluding partners who performed services for a partnership in their capacity as partners (i.e., acting in the manner of self-employed persons), from liability for self-employment taxes. Renkemeyer (cited in Hardy) 49 Taxpayer View-- Two PAL Activities Dr. Hardy SMLLC Plastic Surgery Practice Nonpassive 12.5% LLC Surgery Center Passive 50

26 The Hardy s used the passive income from the Surgery Center LLC to offset large passive losses from other sources. 51 Tax Court: Treating the LLC and medical practice as separate economic units was appropriate. (implicitly not a SPA) 52

27 IRS Position-- One PAL Activity Dr. Hardy 12.5% SMLLC Plastic Surgery Practice Nonpassive LLC Surgery Center 53 IRS further argued that the taxpayer regrouped (inappropriately) in The Hardy s treated the surgery center as nonpassive in 2006 and

28 Tax Court: The mere fact that the Hardys reported Dr. Hardy's activity as nonpassive [in 2006 and 2007] is not enough for us to find that they grouped Dr. Hardy's [12.5% LLC interest] with his medical practice [in those prior years]. 55 Tax Court found the CPA creditable : He explained that he determined that the income from [the LLC] was nonpassive [in 2006 and 2007] by applying his training and experience and by relying on the Schedule K-1, which reported income from a trade or business and self-employment tax. Moreover, he stated that he did not consider [reg.]

29 The outcome in Hardy helps explain why the IRS issued Rev. Proc , which requires taxpayers to identify PAL groupings for tax years beginning after 1/25/ Malpractice Alert Failure to Timely Amend Form

30 In 2008, the CPA did not recommend that the Hardy s amend 2006 and 2007 to claim a passive loss of <$119,615>. Instead, the loss was carried to Tax Court: Had the Hardys properly reported the [LLC] income as passive for 2006 and 2007, it would have fully absorbed their passive losses and there would have been no passive loss to carry forward to Accordingly, they are not entitled to the full passive activity loss deduction claimed [in 2008]. 60

31 The statute of limitations on refunds for 2006 and 2007 had expired. 61 No negligence penalty because the taxpayers relief upon an experienced CPA. 62

PLLC Attorneys Subject to SE Tax 34 Castigliola, TC Memo 2017-62 (4/12/17) 3 attorneys were

were in line with legal salaries in the area. Did not pay SE tax on their distributions beyond GP.

32 PLLC Attorneys Subject to SE Tax 34 Castigliola, TC Memo (4/12/17) 3 attorneys were member-managers of professional LLC in Mississippi Per CPA advice, only paid SE tax on their GP which were in line with legal salaries in the area. Did not pay SE tax on their distributions beyond GP. Rationale of CPA are limited partners per 1402(a)(13). Court NO! Applied Renkemeyer (TC 2011) 63 Vincent J. Castigliola, Jr. 64

33 PLLC Owners Limited Partners 1402(a)(13) enacted in 1977 No definition of limited partner in Code or regs So, use ordinary meaning in few states allowed LLCs Does person claiming exemption have position that is functionally equivalent to that of a limited partner in a limited partnership per state law? Here, owners had full control of PLLC, made all decisions. Under Mississippi law, would thus not be considered ltd partner. 65 Castigliola - continued Negligence penalty waived by court Reasonable reliance on CPA Query: Did the IRS assess a preparer penalty? 66

34 PLR (Released 1/17/2017) 36 IRS OKs Spousal IRA Rollovers From A Trust The Spouse Controlled 67 Prop Rev Proc Related to New GAAP Revenue Recognition Notice (3/28/17) IRS seeks comments on proposed rev proc on method changes related to FASB/IASB new standard Revenue from Contracts with Customers (Topic 606) FASB Update No IASB International Financial Reporting Standard (IFRS) Notice includes list of questions; comments due 7/24/17. Automatic change Cut-off proposed for small businesses (< $10 million assets or $10 million of less of average gross receipts in prior 3 years) 68

35 Research Credit / Payroll Credit Guidance Notice Interim guidance Basics, definitions, examples Comments requested by 7/17/17 Special amended return option If file return for tyba 2015 and don t elect to claim research credit as payroll credit, can amend that return by 12/31/17 to do so. FILED PURSUANT TO NOTICE at top of Form Corporate Due Date 40 Calendar year C corp return due date per PL (7/31/15) Normal = 4/15 Extended = 9/15 (through 2025); 10/15 after 2025 Starting with 2016 returns Feb 2017 Form 7004 instructions and IRS website Extended = 10/15 Query: Will this be true forever? Probably. 70

36 PTIN Fee Found Invalid 40 Steele, et al., No. 14-cv-1523-RCL (DC DC, 6/1/17) Class action launched 2016 challenging validity of PTIN fee in light of Loving. Held IRS has authority to require PTIN No authority to charge fee Fee implies regulatory scheme and can t regulate individuals who only prepare returns. No service or thing of value provided by IRS Anyone today can get a PTIN nothing special from IRS No proof that necessary for SSN disclosure purposes PTIN Fee What s Next IRS website at 6/2/17 PTIN reg and renewal suspended IRS working with DOJ on how to proceed Check back at PTIN system reopened 6/21/17 Refunds? Cost for just one year: 710,553 x $50 = $35.5 million!! Per 6/21/17 FAQ working with DOJ on next steps 72

Executive Orders EO 13765 (1/20/17) Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal. IRS still studying - Reminder us that ACA remains in effect.

37 Executive Orders EO (1/20/17) Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal. IRS still studying - Reminder us that ACA remains in effect ACA Status H.R. 1628, American Health Care Act (AHCA) Passed in House 5/4/17 ( ) 20 Republicans vote no Senate actions Discussion draft of 12 senators released late June Better Care Reconciliation Act of 2017 (BCRA). Revisions released 7/13/17 and 7/20/17 No vote (as of 7/24/17) House appropriations bill Includes provisions to stop IRS enforcement of individual mandate ACA all still in effect Wait and see Any consensus on legislation? Any action in budget or by Administration? 74

Relief for Partnership Returns AB 119 (Chap 21, 6/27/17) FTB to only pursue reasonable cause penalty if 2016 p/s return filed more than 7 months after year end.

38 Relief for Partnership Returns AB 119 (Chap 21, 6/27/17) FTB to only pursue reasonable cause penalty if 2016 p/s return filed more than 7 months after year end. 42 So, if missed that due date starting 2016 that is one month earlier and p/s requests relief, penalty relief from FTB possible. FTB allowed to grant 7-month extension for p/s returns starting with tax years beginning on or after 1/1/ CA Secure Choice Plan Delayed Congress - P.L (4/13/17) Disapproves of 2016 Dept. of Labor rule to allow such plans w/o concern over ERISA. Calif State Treasurer website: The mandate will not go into effect for at least 2 years is likely to be the earliest that large employers that do not offer a retirement plan to their employees will be required to provide access to Secure Choice. The mandate will be phased in over a 3-year period. Any information to the contrary is wrong. 76

functions Property, alcohol and insurance taxes Dept.

39 BOE Restructuring! AB 102 (Chap 16, 6/27/17) Taxpayer Transparency and Fairness Act of 2017 Effective 7/1/17 Board limited functions Property, alcohol and insurance taxes Dept. of Tax and Fee Administration (CDTFA) New Director Nicolas Maduros of Maryland Taxes it previously handled Office of Tax Appeals (OTA) hearings start 1/1/ BOE Marijuana Tax Resources 78

40 Final comments and tips We hope to see you for a lot more updates in December or January! 79

2018 Form 1065 K Form 1065 K 1

2018 Form 1065 K Form 1065 K 1 2018 Form 1065 K-1 2018 Form 1065 K 1 New 2018 Form 1065 K 1 Centralized Partnership Audit Regime Final regulations on elections out of the centralized partnership audit rules were issued on January 2,