Business and Personal Income Tax Planning Under The New Tax Law

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1 BRUCE GIVNER ( bruce@givnerkaye.com) OWEN D. KAYE ( owen@givnerkaye.com) KATHLEEN GIVNER ( kathy@givnerkaye.com) NEDA BARKHORDAR ( neda@givnerkaye.com) JACQUELINE BURBANK ( Jacqueline@GivnerKaye.com) SUITE WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA PHONE (310) (818) FAX (310) (818) Business and Personal Income Tax Planning Under The New Tax Law 1. In General Name. Tax Cut and Jobs Act was struck on a technicality, though it may continue to be known by that name. Official title is To provide for reconciliation pursuant to title II and V of the concurrent resolution on the budget for fiscal year May become known as the Reconciliation Act of Technical Correction Bills. Unlike legislation in the past, there is likely to be no technical corrections bill to clean up mistakes and uncertainties in this new law IRS Guidance. Potentially no IRS guidance due to Congress starving the IRS. Also due to: (i) the Trump rule that there must be a repeal of two regulations for every new one. (ii) sunsetting of many provisions in So, going forward, to avoid the 20% 6662 accuracy-related penalty: (i) (ii) the reasonable cause and good faith excuse of 6664 will become important; along with opinion letters showing you have (a) (b) reasonable basis (plus disclosure) or substantial authority. 2. To C Or Not To C In General. Most important planning provision of the new tax law (not the 20% deduction).

2 Page 2 of Double Tax. Not twice the tax amount. It is two taxable events. Since the transition from the death of the General Utilities doctrine at which time you could elect to EITHER pay a shareholder s level OR a corporate level tax. That election has now been gone for 30 years Before The New Tax Law. Double tax before: $1,000,000 of zero basis assets taxed at the corporate level ($13,750 on 1 st $75, % of $925,000 = $314,500 for total of $328,250 federal plus a deductible 8.84% state which is a tax adjusted or $58,344 for a total of $386,594) leaves $613,406 to be received by the shareholder on liquidation leaving to be taxed at (20% + 3.8% % = ) 37.1% or $227,574 for a total tax of $614,168. So the double tax was 61% With The New Tax Law. Double tax now: $1,000,000 of zero basis assets taxed at the corporate level of 21% federal plus a tax adjusted state rate of 7% for a total of $280,000 leaves $720,000 to be taxed at an individual 37.1% rate or $267,120, for a total tax of $547,120. So the double tax is now 55% Conclusion. Under the new tax law it is less than before but still higher than it would be were it an S corporation: 33.3%. So 55% - 33% = 22% per million dollars of sales price Which Corporations Should Revoke Their S Elections? Which LLCs Should Incorporate? Economic Advantage. $1,000,000 earned by a sole proprietor taxed at maximum 37% federal plus 13.3% state = 50.3% leaves $497,000. $1,000,000 earned by a C Corporation taxed at 21% federal plus (8.84% X 79% = %) 7% state leaves $720,000. C advantage: $720,000 - $497,000 = $223,000 per million or 22.3%!!! That means for every $1,000,000 of taxable income you can pay down an extra $1,115,000 of debt every 5 years in C corporation form.

3 Page 3 of Those that must: (i) (ii) (iii) (iv) pay down debt. increase inventory. increase receivables. accumulate capital for other reasons, e.g., hire, open facilities, marketing Those that simply want to: (i) accumulate cash at a lower tax rate!!!! (ii) pay state and local taxes. 1 (iii) shift income away from the unincorporated business so it can qualify for the 199A 20% QBI deduction Long Distance Sale. Those that can put off a sale for a long period of time, e.g., a decade, or that will never be sold (will be taken over by the heirs) Which Corporations Can Revoke Their S Elections? Which LLCs Can Incorporate? Existing S corporations (or unincorporated businesses) that can: (i) (ii) funnel taxable income to a parallel owned C corporation. divide and have income go to a C corporation that is not a member of a controlled or affiliated service group corporation Increasing Use Of The Lower Rates. Stuff the C Corporation, e.g., with bonds. 3 Dividends received will be taxed as low as 6.3% compared with 23.8% for individuals. 4 1 This is important because corporations are still entitled to deduct all state and local income and property taxes, but individuals are not. SALT due to a trade or business carried on by a taxpayer is still deductible in arriving at an individual's AGI, even if the itemized deduction for state and local income taxes is repealed. See, e.g., Revenue Ruling ; 164(a); and Treas. Reg T(d). 2 The longer a shareholder can defer the second level of tax on the distribution of a dividend, the more valuable the reduced corporate tax rate becomes. 3 Interest on bonds would be taxed to individuals at federal rates of up to 40.8% (37% plus 3.8% NIT), about twice the rate of tax on the same income held through a corporation: 21% federal. 4 70% deduction for domestic corporation dividends: 30% X 21% = 6.3%.

4 Page 4 of 17 Transform labor income into corporate profits by setting up a corporation or checking the box so a partnership is treated as a corporation for tax purposes. Reduce salaries in closely held corporations. Corporations can deduct state and local income taxes that individuals cannot How To Minimize The Double Tax Eliminate (Or Reduce) Shareholder s Tax. California C corporation owned by a NNG to eliminate the shareholder s California tax on liquidation. Double tax becomes $280,000 + $171,360 = $451,360, 45%, instead of 55%. Move from California to eliminate the shareholder s California tax on liquidation. Again, 45% double tax instead of 55%. Give the stock to a child who lives in a zero tax state to reduce the double tax by 10%. Sell the stock to a complex children s trust to step up the basis. There is no double tax. It is just a corporate level tax of 28%. Heirs get a basis step-up at death, eliminating the shareholder level of tax. IRC 1202: Move $10,000,000 of stock into a completed gift asset protection trust. Own the closely held corporate stock through a Roth IRA. Wait to retirement to receive distributions. Do an S election a few years before the liquidation or sale. Get a favorable appraisal at the time of the S election. That reduces the amount to be double taxed at the time of the sale or liquidation Bail Out Corporate Earnings. C corporation enters into a split dollar life insurance arrangement with the shareholderemployee. Bails out corporate earnings at a 70% discount on a 65 year old. Can the split dollar arrangement be to the shareholder s children to get the discount up to 90%? Have the corporation adopt a defined benefit pension plan. If there are significant rank and file employees in the other corporation, this must not be a member of a controlled

5 Page 5 of 17 or affiliated service group. If there is uncertainty, get an opinion letter on the IRS s inability to treat the corporations as members of a controlled or affiliated service group IRS Weapons. General anti-abuse rules: assignment of income and economic substance doctrine. Specific rules: Accumulated Earnings Tax and Personal Holding Company Rules. Conclusion: existing rules are notoriously porous, easy to evade, costly to enforce IRC 199A s 20% Deduction Of Qualified Business Income Forget The Word Passthrough. Does not appear in the statute. Rule applies to all non- C corporations. A sole proprietorship is not a pass-through entity. Neither is a sole owner (or TIC) of rental real estate The Rules. The 199A deduction results in a top rate of 29.6% % Deduction Wage Limit. The deduction is equal to 20% of qualified business income (QBI) from non- C corporations, limited to 50% of the taxpayer s pro rata share of the total W-2 wages the business paid. The W-2 wages limit is meant to deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20% deduction Qualified Business Income. QBI is generally the net amount of income, gain, deduction, and loss from an active trade or business within the U.S., but not including certain types of investment income (capital gains, dividends or interest unless the interest is allocable to a trade or business), and not including reasonable compensation paid to the taxpayer, any guaranteed payment under 707(c), or payment to a partner for services under 707(a). A net loss from a particular business in one year carries over to the next taxable year as a loss for that business. 5 The Games They Will Play: Tax Games, Roadblocks, and Glitches Under The New Legislation, Avi-Yonah, Batchelder, Fleming, Gamage, Glogower, Hemel, Kamin, Kane, Kysar, Miller, Shanske, Shaviro and Viswanathan (December 13, 2017), page 7, footnote 2.

6 Page 6 of Real Estate Exception to Wages Limitation. The wages limit is the greater of (a) 50% of W-2 wages, or (b) the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of all tangible property subject to depreciation (beneficial to real estate companies). Qualified property means tangible property subject to the allowance for depreciation for which the depreciable period has not ended before the close of the taxable year. Depreciable period means the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of (i) 10 years or (ii) last day of the applicable recovery period, e.g., 27.5 for residential and 39 for non-residential. Does a cost segregation study make sense? Do a present value study. May make sense since Section 199A sunsets on 12/31/25. If the parent no longer has basis, how about a sale to a complex children s trust? Specified Service Businesses. The deduction does not apply for specified service businesses in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset is the reputation or skill of one or more of its employees (by reference to 1202(e)(3)(A)), except for engineering or architecture. This decreases the incentive of SSBs to pay low compensation income for the service-provider employees and claim that most of the income from the business is QBI entitled to the 20% deduction Exceptions for Lower Income Taxpayers. The wage limit and the SSB limit do not apply if the taxpayer has taxable income below a threshold amount of $315,000 (indexed) for married individuals filing jointly and $157,500 (indexed) for other taxpayers, with a phase-out of the deduction for taxpayers over the next $100,000/50,000 of taxable income. Even though the SSB limit may not apply for a particular taxpayer whose income is below the threshold, reasonable compensation concepts still apply in determining what constitutes QBI Trusts and Estates. The deduction is available to trusts and estates: Non-grantor completed gift trusts. Non-grantor incomplete gift trusts.

7 Page 7 of 17 Meaning NNGs, NINGs, non-grantor NAPTs, non-grantor ILITs, non-grantor children s trusts, non-grantor CLATs. In applying the wage limit, W-2 income from entities owned by trusts and estates is apportioned between beneficiaries and the fiduciary under 199(d)(1)(B)(i), which has the effect of applying the rather complicated rules in Reg (d)-(e) Deduction Cannot Exceed Taxable Income Less Net Capital Gain. The deduction cannot exceed taxable income reduced by the taxpayer s net capital gain for the year. In effect, the 20% deduction cannot exceed the taxpayer s ordinary and qualified dividend income No Reduction of AGI; Deduction Available to Non-Itemizers. The deduction reduces taxable income, but not AGI (so the deduction does not affect limits throughout the Code based on AGI). The deduction is available to both itemizers and non-itemizers. (It is available in addition to the standard deduction.) Detailed Statement Of The Rule. The deduction for QBI for the taxable year is equal to the sum of: (a) (b) the lesser of the combined QBI amount for the taxable year [defined below] or an amount equal to 20% of the excess of taxpayer s taxable income over any net capital gain and qualified cooperative dividends, plus 20% of qualified cooperative dividends (limited to taxable income (reduced by net capital gain). This sum may not exceed the taxpayer s taxable income for the taxable year (reduced by net capital gain). The combined QBI amount for the taxable year is the sum of the deductible amounts determined for each qualified trade or business [defined below] carried on by the taxpayer and 20% of the taxpayer s qualified REIT dividends and qualified publicly traded partnership income. The deductible amount for each qualified trade or business is the lesser of: (a) (b) 20% of the taxpayer s QBI as to the trade or business, or the greater of: (i) 50% of the W-2 wages as to the trade or business or

8 Page 8 of 17 (ii) the sum of 20% of the W-2 wages as to the trade or business and 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. [What is qualified property?] Wages does not include any amount not properly included in a return filed with the Social Security Administration on or before the 60 th day after he due date (including extensions) for the return. Deduction not allowed for purposes of determining NIIT Phase-Out. For every $10,000 above the $157,500 or $315,000 threshold you lose 10% of the deduction Examples Lesser Of Limit. Owen is a married, sole practitioner CPA. He has $100,000 of QBI, so a combined QBI amount of $20,000. His taxable income is $300, % of $300,000 is $60,000. The lesser of calculation does not limit his QBI deduction. Igor is a married real estate owner. His QBI is $250,000, so a combined QBI amount of $50,000. Due to losses his taxable income is only $100,000. $100,000 X 20% = $20,000. So he is caught by the lesser of calculation Wage Test. Not Limited. Owen owns picture frame manufacturing company and has taxable income of $600,000. The company generates $100,000 of QBI; pays $50,000 of W-2; and has virtually no Qualified Property. Owen s deduction is $100,000 X 20% = $20,000 and is not limited by the W-2 test since 50% of $50,000 is $25,000. Not Limited. Igor and Masha have taxable income of $1,000,000. They own two rental duplexes, one in Venice and one in Santa Monica. The one in Venice generates $10,000 of QBI for a $2,000 deduction. The property is fully depreciated and has no employees, so the QBI deduction is zero (limited by the wages test). The Santa Monica duplex generates $20,000 of QBI for a $4,000 deduction. The property was purchased for $400,000 of which ½ was allocable to the land, only 5 years ago. There are no employees. Therefore the QBI deduction is the lesser of $4,000 or the greater of $0 (W- 6 Based on Robert S. Keebler, CPA, MST, AEP (Distinguished), Robert.Keebler@KeeblerAndAssociates.com; 420 S. Washington Street, Green Bay Wisconsin 54301; phone ; appearing in The Ultimate Estate Planner, Inc. January 10, 2018, seminar; ; for a complete list of their seminars which can be purchase even after broadcast for listening.

9 Page 9 of 17 2 wages X 50%) or (ii) $5,000 ($0 of W-2 wages X 25% plus $200,000 of unadjusted basis of property X 2.5%). Limited. Neda has taxable income of $500,000 as a lawyer. She also has a sole proprietorship photocopying business. It generates $50,000 of QBI, pays no wages and has virtually zero qualified property. Neda s deduction could be 20% of $50,000 or $10,000. However, she is limited by the wage limit to zero. If she formed a partnership with a friend, she would still not have a deduction as guaranteed payments are not W- 2. As an S corporation might not help as a reasonable wage to herself would reduce QBI (as is true of guaranteed payments under 707(c)) Entity Selection. $1,000,000 of QBI as a sole proprietorship or partnership: no wages so no QBI deduction. 37% tax rate on the $4000,000 over $600,000 MFJ. Change it to an S corporation, pay $300,000 of wages and you have a $140,000 QBI deduction. 37% tax rate on the $100,000 over $600,000 MFJ Value Of Additional Taxpayers. SSBs: every extra $315,000 is worth 20% or $63,000 X 37% maximum rate = $23,310. Every extra $157,500 is worth 20% or $31,500 X 37% maximum rate = $11,655. Non-SSBs: every extra $1,000,000 allocated to a different taxpay is worth $200,000 X 37% = $74, Value Of Additional Employees. Owen has a picture frame business. It generates $200,000 of QBI; has $50,000 of qualified property; and pays wages of $60,000. Owen s taxable income is $500,000. His QBI deduction is limited: it is not $200,000 X 20% = $40,000. It is limited to the lesser of (i) 50% of wages of $60,000 = $30,000; or (ii) 25% of wages which is $15, % of $50,000 which is $1,250 for a total of $16,250. Hiring another employee for $30,000: the limit is now the lesser of (i) 50% of $80,000 of wages = $40,000 or (ii) 25% of $80,000 of wages = $20,000 + $1,250 = $21,250. So the $30,000 of wages saves him the tax on the extra $5,000 of QBI deduction Planning For SSBs. Tax qualified employee retirement plans to push taxable income down to $315,000. Set up non-controlled group, non-affiliated service group corporations to keep the first SSB down to $315,000, and to have a second tax qualified employee retirement plan. Opinion letter that it is not a member of a controlled or affiliated service group.

10 Page 10 of 17 Set up a controlled or affiliated service group corporation that is not an SSB, e.g., equipment leasing and non-service aspects of business, e.g., marketing, management. Oil & gas investments to generate large upfront and on-going deductions with sheltered income. Tax-free bonds. Life insurance and annuities. Charitable gifts. Shift income to complex trusts. Bonus depreciation and 179 expensive Penalty. New 6662(d)(1): 10% instead of a 5% accuracy-related penalty for taxpayer who claims a 199A deduction in appropriately Problems. Can a SSB owner with $500,000 of taxable income rent a building to the practice to make the QBI deduction available? Can a non-ssb owner with $500,000 of taxable income rent a building to the business and make the QBI deduction available? Can a business spin-off its real estate to increase its QBI deduction? Leverage is a problem as it decrease taxable income which decreases QBI. Buildings acquired too long ago are a problem. Definitional problem with IRC 1202(e)(3): QUALIFIED TRADE OR BUSINESS For purposes of this subsection, the term qualified trade or business means any trade or business other than (A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.

11 Page 11 of Bob Keebler s Diagram Planning Trusts. Once the parents get $315,000, have them give a portion of the property to trusts for their heirs to create additional $157,500 pieces. Better still: NNGs. Toggle the switch and make some grantor trusts complex trusts. If no toggle switch, amend them under California Probate Code 15404(a) if the grantors and beneficiaries are available and can agree. If the grantor is no longer available it should no longer be a grantor trust. If it is a QSST and you want it to be an ESBT, the trust may permit the 7 Robert S. Keebler, CPA, MST, AEP (Distinguished), Robert.Keebler@KeeblerAndAssociates.com; 420 S. Washington Street, Green Bay Wisconsin 54301; phone ; appearing in The Ultimate Estate Planner, Inc. January 10, 2018, seminar; ; for a complete list of their seminars which can be purchase even after broadcast for listening.

12 Page 12 of 17 trustee to make the change. If not, and the beneficiaries agree, petition the court under 15403(a). Or decant to Nevada Changing From Employee To Partner. Admit the law firm associate as a partner with small profit interest. The associate could potentially deduct 20% of his partnership income. Or put them into a separate partnership paid to provide services to the original firm Specified Service Activity: Split With C Corporation. If income exceeds $315,000 ($157,500 for single filers), split income with a C corporation which will have a 21% rate. If held to death the shareholder level tax is eliminated by step-up in basis. If held to retirement, liquidate at lower long-term capital gains tax rate (or move to Nevada or to NNG) Split Off The Brand. Put law firm s name into one entity which manages the brand but does not do most of the restricted business. That brand entity gets a nice swath of income not part of the restricted services, subject to the lower pass-through rate. 4. Repeal of State and Local Tax Deduction. Create more NNGs to own assets. Create more Nevada corporations to be owned by NNGs to be paid management fees by California corporations. Or divide the California business so that the California corporation handles the California customers and the Nevada business handles the non- California customers. More home-offices. 5. General Planning Pensions. More valuable than ever Cash Value Life Insurance. Tax free borrowing more valuable than ever. Private placement life insurance. Long-term care insurance.

13 Page 13 of Home Ownership. $750,000 mortgage at 5% for 30 years requires $4,000 per month. Parents will want to employ children for $10,000 per month or more and give the children $250,000 or more for the downpayment. California property tax on $1,000,000 residence starts at $10,000, the amount deductible under the new law. Treasury Regulation T(e)(4) Function Test-- (i) In General. A corporation meets the function test if substantially all the corporation's activities for a taxable year involve the performance of services in one or more of the following fields-- (A) (B) (C) (D) (E) (F) (G) (H) Health, Law, Engineering (including surveying and mapping), Architecture, Accounting, Actuarial science, Performing arts, or Consulting. Substantially all of the activities of a corporation are involved in the performance of services in any field described in the preceding sentence (a qualifying field), only if 95% or more of the time spent by employees of the corporation, serving in their capacity as such, is devoted to the performance of services in a qualifying field. For purposes of determining whether this 95% test is satisfied, the performance of any activity incident to the actual performance of services in a qualifying field is considered the performance of services in that field. Activities incident to the performance of services in a qualifying field include the supervision of employees engaged in directly providing services to clients, and the performance of administrative and support services incident to such activities. (ii) Meaning Of Services Performed In The Field Of Health. For purposes of paragraph (e)(4)(i)(a), the performance of services in the field of health means the provision of medical services by physicians, nurses, dentists, and other similar healthcare professionals. The performance of services in the field of health does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient. For example, the performance of

14 Page 14 of 17 services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers. (iii) Meaning Of Services Performed In The Field Of Performing Arts. For purposes of paragraph (e)(4)(i)(g), the performance of services in the field of the performing arts means the provision of services by actors, actresses, singers, musicians, entertainers, and similar artists in their capacity as such. The performance of services in the field of the performing arts does not include the provision of services by persons who themselves are not performing artists (e.g., persons who may manage or promote such artists, and other persons in a trade or business that relates to the performing arts). Similarly, the performance of services in the field of the performing arts does not include the provision of services by persons who broadcast or otherwise disseminate the performances of such artists to members of the public (e.g., employees of a radio station that broadcasts the performances of musicians and singers). Finally, the performance of services in the field of the performing arts does not include the provision of services by athletes. (iv) Meaning Of Services Performed In The Field Of Consulting (A) In General. For purposes of paragraph (e)(4)(i)(h), the performance of services in the field of consulting means the provision of advice and counsel. The performance of services in the field of consulting does not include the performance of services other than advice and counsel, such as sales or brokerage services, or economically similar services. For purposes of the preceding sentence, the determination of whether a person's services are sales or brokerage services, or economically similar services, shall be based on all the facts and circumstances of that person's business. Such facts and circumstances include, for example, the manner in which the taxpayer is compensated for the services provided (e.g., whether the compensation for the services is contingent upon the consummation of the transaction that the services were intended to effect). (B) Examples. The following examples illustrate the provisions of paragraph (e)(4)(iv)(a). The examples do not address all types of services that may or may not qualify as consulting. The determination of whether activities not specifically addressed in the examples qualify as consulting shall be made by comparing the service activities in question to the types of service activities discussed in the examples. With respect to a corporation which performs services which qualify as consulting under this section, and other services which do not qualify as consulting, see paragraph (e)(4)(i) which requires that substantially all of the corporation's activities involve the performance of services in a qualifying field.

15 Page 15 of 17 Example (1) A taxpayer is in the business of providing economic analyses and forecasts of business prospects for its clients. Based on these analyses and forecasts, the taxpayer advises its clients on their business activities. For example, the taxpayer may analyze the economic conditions and outlook for a particular industry which a client is considering entering. The taxpayer will then make recommendations and advise the client on the prospects of entering the industry, as well as on other matters regarding the client's activities in such industry. The taxpayer provides similar services to other clients, involving, for example, economic analyses and evaluations of business prospects in different areas of the United States or in other countries, or economic analyses of overall economic trends and the provision of advice based on these analyses and evaluations. The taxpayer is considered to be engaged in the performance of services in the field of consulting. Example (2) A taxpayer is in the business of providing services that consist of determining a client's electronic data processing needs. The taxpayer will study and examine the client's business, focusing on the types of data and information relevant to the client and the needs of the client's employees for access to this information. The taxpayer will then make recommendations regarding the design and implementation of data processing systems intended to meet the needs of the client. The taxpayer does not, however, provide the client with additional computer programming services distinct from the recommendations made by the taxpayer with respect to the design and implementation of the client's data processing systems. The taxpayer is considered to be engaged in the performance of services in the field of consulting. Example (3) A taxpayer is in the business of providing services that consist of determining a client's management and business structure needs. The taxpayer will study the client's organization, including, for example, the departments assigned to perform specific functions, lines of authority in the managerial hierarchy, personnel hiring, job responsibility, and personnel evaluations and compensation. Based on the study, the taxpayer will then advise the client on changes in the client's management and business structure, including, for example, the restructuring of the client's departmental systems or its lines of managerial authority. The taxpayer is considered to be engaged in the performance of services in the field of consulting. Example (4) A taxpayer is in the business of providing financial planning services. The taxpayer will study a particular client's financial situation, including, for example, the client's present income, savings and investments, and anticipated future economic and financial needs. Based on this study, the taxpayer will then assist the client in making decisions and plans regarding

16 Page 16 of 17 the client's financial activities. Such financial planning includes the design of a personal budget to assist the client in monitoring the client's financial situation, the adoption of investment strategies tailored to the client's needs, and other similar services. The taxpayer is considered to be engaged in the performance of services in the field of consulting. Example (5) A taxpayer is in the business of executing transactions for customers involving various types of securities or commodities generally traded through organized exchanges or other similar networks. The taxpayer provides its clients with economic analyses and forecasts of conditions in various industries and businesses. Based on these analyses, the taxpayer makes recommendations regarding transactions in securities and commodities. Clients place orders with the taxpayer to trade securities or commodities based on the taxpayer's recommendations. The taxpayer's compensation for its services is typically based on the trade orders. The taxpayer is not considered to be engaged in the performance of services in the field of consulting. The taxpayer is engaged in brokerage services. Relevant to this determination is the fact that the compensation of the taxpayer for its services is contingent upon the consummation of the transaction the services were intended to effect (i.e., the execution of trade orders for its clients). Example (6) A taxpayer is in the business of studying a client's needs regarding its data processing facilities and making recommendations to the client regarding the design and implementation of data processing systems. The client will then order computers and other data processing equipment through the taxpayer based on the taxpayer's recommendations. The taxpayer's compensation for its services is typically based on the equipment orders made by the clients. The taxpayer is not considered to be engaged in the performance of services in the field of consulting. The taxpayer is engaged in the performance of sales services. Relevant to this determination is the fact that the compensation of the taxpayer for its services it contingent upon the consummation of the transaction the services were intended to effect (i.e., the execution of equipment orders for its clients). Example (7) A taxpayer is in the business of assisting businesses in meeting their personnel requirements by referring job applicants to employers with hiring needs in a particular area. The taxpayer may be informed by potential employers of their need for job applicants, or, alternatively, the taxpayer may become aware of the client's personnel requirements after the taxpayer studies and examines the client's management and business structure. The taxpayer's compensation for its services is typically based on the job applicants, referred by the taxpayer to the clients, who accept employment positions with the clients. The taxpayer is not considered to be engaged in the performance of services in the field of consulting. The taxpayer is involved in the performance of services economically similar to brokerage services. Relevant to this determination is the fact that the compensation of the taxpayer for

17 Page 17 of 17 its services is contingent upon the consummation of the transaction the services were intended to effect (i.e., the hiring of a job applicant by the client). Example (8) The facts are the same as in example (7), except that the taxpayer's clients are individuals who use the services of the taxpayer to obtain employment positions. The taxpayer is typically compensated by its clients who obtain employment as a result of the taxpayer's services. For the reasons set forth in example (7), the taxpayer is not considered to be engaged in the performance of services in the field of consulting. Example (9) A taxpayer is in the business of assisting clients in placing advertisements for their goods and services. The taxpayer analyzes the conditions and trends in the client's particular industry, and then makes recommendations to the client regarding the types of advertisements which should be placed by the client and the various types of advertising media (e.g., radio, television, magazines, etc.) which should be used by the client. The client will then purchase, through the taxpayer, advertisements in various media based on the taxpayer's recommendations. The taxpayer's compensation for its services is typically based on the particular orders for advertisements which the client makes. The taxpayer is not considered to be engaged in the performance of services in the field of consulting. The taxpayer is engaged in the performance of services economically similar to brokerage services. Relevant to this determination is the fact that the compensation of the taxpayer for its services is contingent upon the consummation of the transaction the services were intended to effect (i.e., the placing of advertisements by clients). Example (10) A taxpayer is in the business of selling insurance (including life and casualty insurance), annuities, and other similar insurance products to various individual and business clients. The taxpayer will study the particular client's financial situation, including, for example, the client's present income, savings and investments, business and personal insurance risks, and anticipated future economic and financial needs. Based on this study, the taxpayer will then make recommendations to the client regarding the desirability of various insurance products. The client will then purchase these various insurance products through the taxpayer. The taxpayer's compensation for its services is typically based on the purchases made by the clients. The taxpayer is not considered to be engaged in the performance of services in the field of consulting. The taxpayer is engaged in the performance of brokerage or sales services. Relevant to this determination is the fact that the compensation of the taxpayer for its services is contingent upon the consummation of the transaction the services were intended to effect (i.e., the purchase of insurance products by its clients).