Tax Cuts & Jobs Act

Entity Choice Analyses

Let’s begin our analyses with a detailed example we will use for several comparisons.
Because so many of our clients are “S” corporations, let us use the following example.

We built a simple Excel spreadsheet and filled in the business activities of the entity as
estimated for 2018. Baseline, LLC is a single member LLC taxed as an S corporation. We
present their 2018 estimated income first, with the estimated income tax and net total cash
available to the owners. The owner files a joint return and the spouse has no taxable
income. They do not itemize deductions. The business qualifies for the 20% flow through
deduction.

We are working on a software that will perform these calculations automatically that will
be out by the middle to end of tax season.

Example 1: Existing S Corporation Activity and Net Cash Flow under new laws
Example 2: LLC taxed as 1065 (treat income as partner’s share) and Net Cash Flow

Example 3: Existing C Corp and cash flow

Example 4: Existing C Corp with re-allocated wages

Example 5: Existing C Corp with wages maximized to top of 12% individual bracket

Summary Cash to Owners
S Corporation Net Cash available to owners $332,301 Ex. 1
LLC Net cash available to owners
C Corp net cash available to owners 307,056 Ex. 2
C Corp with wage re-allocation to dividends 301,981 Ex. 3
C Corp with wages allocated to end near top of 12% bracket 288,541 Ex. 4
290,317 Ex. 5

Issues to Consider
In example 1 the flow through deduction saved $16,000 in tax at 32%. In example 2 the
self-employment tax situation now existing for LLC’s makes them difficult to justify cash-
flow wise. In example 3, a reduction in W-2 wages will make a huge difference as shown
below in Example 4 with a re-allocation of $100,000 from wages to dividend income.
(Remember C Corporations have been historically audited for too much in wages, not too
little).

What does this analyses tell us? Simply that every client is different, with the key 3 items
being the flow through deduction, fringe benefits, and wage maximization at the top of the
12% bracket. The primary difference making the S corporation more inexpensive is the
20% flow through deduction.

For clients ineligible for the 20% flow through deduction or for clients with fringe benefits
for the owners other than health insurance such as employer provided housing, employer
provided child care or tuition, etc. the C Corporation will probably be a better choice.

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A QUICK COMPARISON GUIDE OF ENTITIES

NII Tax on distributions where active? S Corp 1065 C Corp
20% Flow Through Deduction for most? X X
Ability to take lower salary and save FICA? X
Ability to take net deduction for health X X
insurance of owners free of SE Tax? X X
Ability to deduct most fringe benefits for X
owners?
Ability to have distributions taxed at capital
gains rates?

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Electing “C” corporation tax status-New LLC-Some Notes
This one is simple. In the first year of existence of the LLC go ahead and make the check
the box election on IRS Form 8832. Then wait. Why? Because the late S election rule of
Revenue Procedure 2013-30 buys you until the due date of the first year return to make
the S election.

Electing “C” Corporation Status-Existing LLC taxed as 1065 or 1120S
The same termination rules discussed below apply. You have until March 15, 2018 to
make a retroactive termination.

Electing “C” Corporation Status-New Corporation
This one is also simple. The taxpayer is already a “C” corporation and also has the late
“S” election options of Revenue Procedure 2013-30 available to decide if they want to be
an “S” corporation through March 15, 2019.

Electing (Terminating) an Existing “S” corporation to become a “C:” corporation

Terminating the S Election

A. The election may be terminated voluntarily through a revocation; inadvertently
through other actions such as adding a non-qualifying shareholder; or when
passive income is more than 25% of gross revenues for 3 consecutive years.

1. An “S” election may take effect only at the beginning of a taxable year. A
termination or revocation may occur at any time during a taxable year, in
which case the corporation must file two tax returns for the year.

B. Revocations:

1. A revocation may be made only with the consent of shareholders who,
at the time the revocation is made, hold more than one-half of the
number of issued and outstanding shares of stock (including non-voting
stock) of the Corporation. Reg. 1.1362-2(a)(1)

2. If the shareholders consent to revoke an S election (specific
revocation), the revocation will be deemed to occur on either of two
dates.

a. Pursuant to Sec. 1362(d)(1)(c), if a revocation is made on or
before the fifteenth day of the third month of the current
taxable year, the revocation is effective on the first day of the
taxable year. A C corporation return will be filed for the entire
year.

b. If it occurs after the fifteenth day of the third month, then it is
effective on the first day of the following year.

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c. Alternatively, the shareholders may specify a particular
prospective date during the tax year in which the revocation
will take place. This would cause a split in the tax year
between the S period and the C period and the filing of 2 short
period returns.

d. An involuntary (but voluntary!) conversion may revoke the "S"
status at any time. This is usually accomplished by
transferring 1 share of stock to a disallowed shareholder.
In this case 2 tax returns will be filed for partial year of
operation as an S corporation and for partial year of
operation as a C Corporation.

3. In Chesterton Company, Inc. v. Chesterton 97-2 USTC 50,809
where a minority shareholder attempted to transfer stock to an ineligible
entity in order to terminate the election, state law said that the
shareholder’s fiduciary duty prevented that action from happening.

4. The actual revocation is made by the corporation filing a statement with
the IRS Service Center where the corporation's S election was filed.
The revocation statement should indicate:

a. That the corporation revokes its S corporation election under
Sec. 1362 (a),

b. The number of shares of stock that is issued and outstanding
at the time of the revocation,

c. The date on which the revocation is to be effective, and

d. The signature of an authorized person.

e. In addition, a statement of consent must be attached to the
revocation statement indicating that each undersigned
shareholder consents to the revocation.

f. The statement must be in the form of a written statement that
sets forth the name, address, and taxpayer identification
number of the shareholder, the number of shares of stock
owned by the shareholder, the date (or dates) on which the
stock was acquired, the date on which the shareholder's
taxable year ends, the name of the S corporation, and the
corporation's taxpayer identification number.

g. In addition, the statement must be signed by the shareholder
under penalties of perjury.

h. The date of postmark is treated as the date the revocation is
filed.

i. A revocation of the election can be rescinded at any time
before its effective date under Reg. 1.1362-2(a)(4).

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Corporate Statement of Revocation of S Election under IRC Section 1362(a)
<TODAYS DATE>
Internal Revenue Service Center

Re: <CLIENT>
<CLIENT ADDRESS>
<FEIN>

Revocation of S Corporation election

Please be advised that <CLIENT>, a corporation with its principal office located at
<CLIENT ADDRESS>, hereby revokes the Subchapter S election it previously made
under Section 1362(a) of the Internal Revenue Code. The first year for which this
revocation is intended to be effective is the corporation’s tax year beginning _________.
The corporation has _______ shares of stock issued and outstanding at the effective date
including all voting and non-voting stock.

A statement signed by shareholders owning more than 50% of the corporation’s stock and
consenting to the revocation is attached.

Sincerely,
<CLIENT REP>
_____________ Title

Shareholder Consent to Revocation of S Corporation Election
under IRC Section 1362(d)(1)

Taxpayer Name:
Address:
Address:
FEIN:
Number of Shares Owned & Tax Year End
Date Acquired:
Percentage of issued & outstanding shares of stock owned:

S Corporation Name: .
Address: .
Address:
FEIN:
Total shares issued & outstanding at effective date
Effective date of S revocation

I hereby consent to the revocation of the S election for the above corporation effective
1/1/20__. I certify under penalty of perjury that the personal information given below is to
the best of my belief true, correct, and complete.

Signed: ________________________

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• Involuntary Terminations

1. A corporation's S election will terminate if it violates the eligibility
requirements provided in §1361(b). If this occurs, the corporation
ceases to be a small business corporation, terminating S status on the
date of cessation.

2. The following specific events can terminate a corporation's S status:

a. Excess shareholders (more than 100; more than 75 for
taxable years beginning before 2005);

b. Ineligible shareholders, e.g., a nonresident alien, a C
corporation or a partnership;

c. More than one class of stock (other than common stock with
differences in voting rights);

d. Business operations making the S corporation an ineligible
corporation under §1361 (b)(2), e.g., an insurance company;

e. Passive investment income exceeding 25% of gross receipts
for three consecutive years and the corporation having
subchapter C earnings and profits;

f. Failure to use a permissible year.

• Allocating income between the S corporation and a C corporation during a year
of termination.

1. A termination effective at any point other than year-end will necessitate
2 short-period returns for the year; one as an “S” corporation and 1 as
a “C” corporation.

a. Both returns have the same due date.

a. The year end does not change as a result of the terminating
event.

b. The C corporation return will require an annualization of
income calculation.

2. If less than 50% of the stock is sold or exchanged during the year and
the company did not go through a Section 338 asset acquisition,
income is allocated on a pro rata method.

a. This means that income is allocated between the 2 entities
based on a percentage of time that each existed. If the C
corporation existed for 200 days, the C corporation will be
allocated 200/365 of the income, with the rest allocated to the
S corporation.

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• Post Termination Transition Period

A. This is the period of time after an S corporation revokes its election and
changes back to a C corporation, or where a C corporation acquires the S
corporation.

1. The common problem in this case is that the S corporation may
have some AAA on its books on which tax has already been paid
by the shareholders, but which has not been distributed to the
shareholders.

In CCA 201446021 the IRS determined that AAA resets to zero when the post-
termination transition period (PTTP) ended, and thus remained zero when the
corporation re-elected S status after an intervening C corporation period.

2. Generally when a C corporation distributes earnings it is a taxable
dividend, and this would cause a double tax in this situation.

3. The PTTP rules allow the shareholder an extended period of time
to claim suspended losses or to withdraw income which has already
been taxed.

4. There are 3 different periods, but the best one to remember is the
1 year rule, which allows exactly 1 year from the date of termination
to draw out the earnings or deduct suspended losses by
contributing more capital. A 2nd rule under Code Section
1377(b)(l)(B) allows the shareholder 120 days to distribute AAA that
has been increased as the result of an IRS audit adjustment.

5. The PTTP period may also be used when a shareholder has basis-
reduced losses, for the shareholder to ingest capital into the
corporation in order to increase basis and deduct basis-restricted
losses.

6. This special treatment is only available to those shareholders who
were shareholders at the time of termination (IRC Section
1377(2)(B).

7. Form 5452 must be filed whenever an S Corporation makes a cash
distribution during the post termination transition period.

8. The 2017 Tax Cuts and Jobs Act allows distributions of AAA after 1
year to be tax free in proportion to the respective balances in AAA
and corporate E&P prior to the distribution.

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Case Study 1-Converting S Corporation to C Corporation

Fake Company, Inc. is an S Corporation. They have decided to convert to a C Corporation
effective January 1, 2013. (Rules and forms unchanged for 2014-2018). They were formed
in 1995 and elected immediately to be taxed as an S corporation. The 1/1/2013 trial
balance is attached below. Use the same information for 12/31/2012 and 2013 year end.
Additional information is as follows:

▪ The method of accounting used by Fake Company is the accrual method,

▪ There are 2 shareholders: Farley Smith and Ken Jones who each own 60% and 40%
respectively of the company, and who each contributed their respective share of
assets upon formation,

▪ No distributions of profits have ever been made,

▪ The assets have a fair market value of:

FMV Basis Built in Gain<Loss>
$3,000 $2,000
o Inventory $5,000 $5,000 $0
$400,000 $200,000
o Land $5,000 $15,000 $10,000
$ -0- $25,000
o Building $600,000 $237,000

o Equipment $25,000

o Vehicles $25,000

o TOTAL NON-BOOKED GAIN

Questions to consider before making the conversion:

1. Does the built-in-gains tax concern apply?

2. Do all shareholders have to agree to the conversion?

3. What forms have to be filed with the IRS?

4. When are the forms due, when is the election effective and how are they filed?

5. Are there any special tax elections that must or should be made on conversion by
the company?

6. Is the conversion taxable to the company, and if so, how much and what type of
income and what is the effect on asset basis?

7. Is the conversion taxable to the owners, and if so, how much and what type of
income?

8. Are there any special tax elections that must or should be made on conversion by
the shareholders?

9. Are there any special forms that must be provided to the shareholder’s upon
conversion?

10. What are the owner’s ownership bases (not counting debt) after conversion?

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1. Does the built-in-gains tax concern apply?

Built in gains tax concerns do not apply when converting from an S to a C Corporation.

2. Do all shareholders have to agree to the conversion?

No. A revocation may be made with the consent of shareholders who, at the time the
revocation is made, hold more than one-half of the number of issued and outstanding
shares of stock (including non-voting stock) of the Corporation. Reg. 1.1362-2(a)(1)

3. What forms have to be filed with the IRS?

The actual revocation is made by the corporation filing a statement with the IRS
Service Center where the corporation's S election was filed. There is no IRS Form to
revoke an "S" election. We have included an example template in this section. The
new C Corporation will use the same FEIN as the old S corporation.

4. When are the forms due, when is the election effective and how are they
filed?

If the shareholders consent to revoke an S election (specific revocation), the
revocation will be deemed to occur on either of two dates.

j. Pursuant to Sec. 1362(d)(1)(c), if a revocation is made on or before the
fifteenth day of the third month of the current taxable year, the revocation
is effective on the first day of the taxable year. Only one tax return-a C
Corporation return-will be filed for the year if elected within this time frame.

k. If it occurs after the fifteenth day of the third month, then it is effective on
the first day of the following year. An S corporation return will be filed for
the full year of current operation, and a C corporation return will be filed for
the full year of operation next year.

l. Alternatively, the shareholders may specify a particular prospective date
during the tax year in which the revocation will take place. This would
cause a split in the tax year between the S period and the C period. See
Code Sec. 1362 (e)(2) for the pro-rata allocation rules in this case.

m. An involuntary (but voluntary!) conversion may revoke the "S" status at any
time. This is usually accomplished by transferring 1 share of stock to a
disallowed shareholder. In this case 2 tax returns will be filed for partial
year of operation as an S corporation and for partial year of operation as a
C Corporation.

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Corporate Statement of Revocation of S Election under IRC Section 1372(a)
March 1, 2013
Internal Revenue Service Center
Cincinnati, OH 45999

Re: Fake Company, Inc.
123 W. Main St
Indianapolis, IN 46206
12-3456789

Revocation of S Corporation election

Please be advised that Fake Company, Inc., a corporation with its principal office located
at 123 W. Main St Indianapolis, IN 46206 hereby revokes the Subchapter S election it
previously made under Section 1362(a) of the Internal Revenue Code. The first year for
which this revocation is intended to be effective is the corporation’s tax year beginning
January 1, 2013. The corporation has 100 shares of stock issued and outstanding at the
effective date including all voting and non-voting stock.

A statement signed by shareholders owning more than 50% of the corporation’s stock and
consenting to the revocation is attached.

Sincerely,
Farley Smith- Signature _________________________
President

Shareholder Consent to Revocation of S Corporation Election

Under IRC Section 1362(d)(1)

Taxpayer Name: Farley Smith

Address: 300 N. Sherwood Ave

Address: Clarksville, IN 47129

FEIN: 987-65-4321

Number of Shares Owned & Tax Year End 60, Year End 12/31

Date Acquired: 1/1/1995

Percentage of issued & outstanding shares of stock owned: 60%

S Corporation Name: Fake Company, Inc.
Address: 123 W. Main ST.
Address: Indianapolis, IN46204
FEIN: 12-3456789
Total shares issued & outstanding at effective date 100
Effective date of S revocation 1/1/2013

I hereby consent to the revocation of the S election for the above corporation effective
1/1/2013. I certify under penalty of perjury that the personal information given above is to
the best of my belief true, correct, and complete.

Signed: ________________

Farley Smith March 1, 2013

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5. Are there any special tax elections that must or should be made on
conversion by the company?
None are required or needed. However, the company may usually not re-elect to
be taxed as an "S" corporation for 5 years under IRC Sec. 1362 (g).

6. Is the conversion taxable to the company, and if so, how much and what type
of income and what is the effect on asset basis?
The conversion is non-taxable to the S corporation or the C Corporation. The S
corporation's asset bases, accumulated depreciation, depreciation lives and
remaining depreciation lives transfer to the C Corporation without modification.

7. Is the conversion taxable to the owners, and if so, how much and what type
of income?
The conversion is not taxable to the shareholders. A conversion of an "S"
corporation to a "C" corporation is not re-subjected to the tax-free Section 351
rules of incorporation.

8. Are there any special tax elections that must or should be made on
conversion by the shareholders?
There are no required shareholder elections. However, under the post
termination transition period rules (PTTP) the shareholders have one year to
remove any "S" corporation retained earnings without additional tax, or to
contribute capital to restore basis in order to deduct any basis-suspended losses.

9. Are there any special forms that must be provided to the shareholder’s upon
conversion?
No

10. What are the owner’s ownership bases (not counting debt) after conversion?
Unchanged at $6,000 for Farley and $4,000 for Ken plus their share of
undistributed prior S corporation AAA.

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Case Study 2-Converting LLC to C Corporation

Fake Company, Inc. is an LLC. They have decided to convert to a C Corporation effective
January 1, 2013. (Rules and forms unchanged for 2014-2018). They were formed in 1995
and elected immediately to be taxed as an S corporation. The 1/1/2013 trial balance is
attached below. Use Case 1 information for 12/31/2012 and 2013 year end. Additional
information is as follows:

▪ The method of accounting used by Fake Company is the accrual method,

▪ There are 2 members: Farley Smith and Ken Jones who each own 60% and 40%
respectively of the company, and who each contributed their respective share of
assets upon formation,

▪ No distributions of profits have ever been made,

▪ The assets have a fair market value of:

FMV Basis Built in Gain<Loss>
$3,000 $2,000
o Inventory $5,000 $5,000 $0
$400,000 $200,000
o Land $5,000 $15,000 $10,000
$ -0- $25,000
o Building $600,000 $237,000

o Equipment $25,000

o Vehicles $25,000

o TOTAL NON-BOOKED GAIN

Questions to consider before effectuating the conversion:

1. Does the built-in-gains tax concern apply?

2. Do all shareholders have to agree to the conversion?

3. What forms have to be filed with the IRS?

4. When are the forms due, when is the election effective and how are they filed?

5. Are there any special tax elections that must or should be made on conversion by
the company?

6. Is the conversion taxable to the company, and if so, how much and what type of
income and what is the effect on asset bases?

7. Is the conversion taxable to the owners, and if so, how much and what type of
income?

8. Are there any special tax elections that must or should be made on conversion by
the shareholders?

9. Are there any special forms that must be provided to the shareholder’s upon
conversion?

10. What are the owner’s ownership bases (not counting debt) after conversion?

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1. Does the built-in-gains tax concern apply?

Built in gains tax concerns do not apply when converting from an LLC to a C
Corporation.
2. Do all members have to agree to the conversion?
Each member of the LLC who is an owner at the time of the election must sign
the election, or a member may sign for all members if he or she represents under
penalties of perjury that they have the authorization to sign.
If an election is to be effective for any period prior to the time it is filed, each
person who was an owner between the date the election is to be effective and
the date the election is filed, must sign.
3. What forms have to be filed with the IRS?
IRS Form 8832 is required to be filed, as illustrated below. It is filed, according to
the 8832 instructions, with the IRS Service Center for the taxpayer's state. The
new C corporation will utilize the same FEIN as the LLC under Reg. 301.6109-
1(h). Be sure to use the latest version of the form which at manual date was
December, 2013.

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4. When are the forms due, when is the election effective and how are they
filed?

The election to be taxed as the new entity will be in effect on the date the LLC
enters on line 8 of Form 8832. However, if the LLC does not enter a date, the
election will be in effect as of the form’s filing date. The election cannot take
place more than 75 days prior to the date that the LLC files Form 8832 and the
LLC cannot make the election effective for a date that is more than 12 months
after it files Form 8832. However, if the election is the “initial classification
election,” and not a request to change the entity classification, there is relief
available for a late election (more than 75 days before the filing of the Form
8832).

Rev. Proc. 2009-41 provides guidance for requests for relief for late filed Forms
8832. Rev. Proc. 2009-41 extends late entity classification relief under Section
7701 to both initial classification elections and changes in classification elections.
This revenue procedure also extends the time for filing late elections to within
three years and 75 days of the requested effective date of eligible entity’s
classification. Under the procedures, relief is requested by filing Form 8832,
Entity Classification Election, a required declaration of eligibility, and a
reasonable cause statement with the appropriate IRS Service Center. Also check
the box noted at the top of Form 8832.

Even a 1-owner LLC may elect to be taxed as a "C" corporation utilizing Form
8832.

5. Are there any special tax elections that must or should be made on
conversion by the company?

There are no required or even suggested elections upon conversion. However
the tax adviser must understand that for tax purposes the entity is now a "C"
corporation, meaning all "C" corporation rules apply, including dividends, fringe
benefits, wages, etc.

Step-up basis elections are not available for this type of conversion. The author
does not believe a conversion of an LLC to a corporate tax entity via a "check the
box" election qualifies the owners of the corporation for Section 1244 loss
treatment or Section 1202 gain treatment.

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C corporations with greater than $5 million in revenues are required to use the
accrual method of accounting except for Personal Service C corporations.
Personal Service C corporations are taxed on every dollar of income at the
highest federal tax bracket.
6. Is the conversion taxable to the company, and if so, how much and what type
of income and what is the effect on asset bases?
The conversion is non-taxable to the LLC or the C Corporation. The LLC's asset
bases transfers to the C Corporation without modification using the same
method, accumulated depreciation and remaining life. None of the converted
assets re-qualify for bonus depreciation or Section 179 write-off.
7. Is the conversion taxable to the owners, and if so, how much and what type
of income?
The conversion is generally not taxed to the members... Note that this conversion
does not make the ownership interest now qualify for special 1244 ordinary loss
rules available to original shareholders in small C corporations. If the member
had previously used debt basis to deduct losses in excess of contribution basis, it
is possible that a taxable event will occur on conversion to bring contribution
basis equal to zero.
8. Are there any special tax elections that must or should be made on
conversion by the shareholders?
No.
9. Are there any special forms that must be provided to the shareholder’s upon
conversion?
No.
10. What are the owner’s ownership bases (not counting debt) after conversion?
The member's basis in the new corporate form will be equal to the contribution
basis of the old LLC on an investor-by-investor basis. The basis will not include
any basis from debt.

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What’s New 2017

Form 1040

• In Mckinney v. Comm'r, T.C. Memo. 2017-6, the Tax Court held that $40,000 that
a taxpayer received in settling claims against her former employer of discrimination
and a hostile work environment, and which were later expanded to include
constructive discharge, were not excludable from her gross income under Code
Sec. 104(a)(2). When determining whether damages received under a written
settlement agreement are excludable from income under Code Sec. 104(a)(2), the
court said that it examines the settlement agreement itself for indicia of its purpose.
Finding no indicia that the payment was based on physical injuries or sickness, the
court concluded that the $40,000 was includable in taxpayer's income.

• Similarly, in TC Summ. Op. 2017-49 (Maciujec) the Court held that damages an
individual received in a settlement from her former employer for emotional distress
were not attributable to a physical injury or physical sickness and were not
excludable from income, but the court declined to impose an accuracy-related
penalty because she relied on her return preparer's advice.

• In Skaggs, 148 T.C. No. 15 (2017) the court upheld the IRS’ use of the bank
deposit method to reconstruct income for an individual whose records from their
tax preparation business were so bad that it was impossible to reconstruct income
in an alternative manner.

• In TC Memo 2017-72 (Bates) the Tax Court determined that a couple was liable
for both the tax and an accuracy related penalty for the income tax due on a
settlement agreement with a prior employer based on her discrimination,
retaliation, and wrongful discharge allegations and not for personal physical injury
or sickness.

• In TC Summ. Op. 2017-2 (SAS) the taxpayer attempted to deduct legal fees
related to suing a former employer on Line 21 of Form 1040 as “Negative Other
Income”. The court determined that the expenses were employment related 2%
miscellaneous itemized deductions that should be deducted on Schedule A. They
did not qualify for the discrimination deduction of legal fees allowed because that
deduction is limited to income from any awards, and the taxpayer was awarded
nothing.

• In TC Summ. Op. 2017-54 (Welemin) the court determined once again that
bartering of services was taxable. A handyman traded work for the rent he owed
his landlord and was required to pay tax on the FMV of the work performed that
was applied to his rent.

What’s New

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What’s New 2017

• In the Federal Court of Claims case Foxx v. U.S., 2017 PTC 46 (Fed. Cl. 2017) a
$2,500 preparer penalty was assessed because the preparer artificially reported
additional income in order to claim a larger earned income credit for a client.

• In TC Summ. Op. 2017-37 (Nordloh) the taxpayer ran afoul of a fairly common
taxable disability situation. In 2007 he became disabled and unable to work
because of back pain, and his claim for disability from Social Security was denied,
which he appealed. In the meantime he received disability payments thorugh his
employer's insurance and reported them as income on his tax return. His
understanding was that if he won his Social Security disability appeal that he would
pay back his employer's insurance. In December, 2010 he won his Social Security
case and received an $87,004 lump sum check from SSA (and an SSA-1099). In
2011 he repaid $83,233 to his employer's insurer. He deducted the repayment on
his 2010 return. The court determined that, as a cash basis taxpayer, Nordloh
could not deduct the repayment until 2011.

• In TC Summ. Op. 2017-36 (Keeter) the Tax Court confirmed that disability
payments received by an individual with a military-related disability for injuries
received from service is tax-free under IRC Sec. 104(a)(4). In a disgusting example
of heavy-handedness by the IRS, Mr. Ketter had been twice-audited in the past on
the same issue, and also had to go to court, where he also won in court on both
previous occasions. He is also currently petitioning the court for payment of his
legal costs under IRC Sec. 7430.

• In TC Memo 2017-79 (Bulakites) the Tax Court held that an insurance consultant
wasn't entitled to alimony deductions that exceeded the amount in his separation
agreement and sustained the IRS's disallowance of his unsubstantiated
deductions for interest and other expenses; the court sustained accuracy-related
penalties, rejecting his attempt to blame Turbo Tax for his mistakes.

Schedule A Itemized Deductions

• The Tax Court, in a bench opinion, held that an individual can deduct as medical
expenses the cost of treatment for her spinal disease, explaining in part that
although the treatment is not routinely or universally recognized, the court has
recognized that expenses paid for alternative medical treatments can be deducted
under section 213. Victoria Malev v. Commissioner; No. 1282-16S

• In TC Memo 2016-225 (Carmody) the Tax court disallowed an individual's claimed
$500 noncash charitable contribution to Goodwill because the taxpayer's receipt
did not describe the items donated, and, in fact, was completely blank aside from
the date of the contribution.

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• In Ohde v. Comm'r, T.C. Memo. 2017-137, the Tax Court held that a couple was
not entitled to a $145,000 charitable contribution deduction for the alleged donation
of more than 20,000 items to Goodwill. The court found the couple's allegations
that they made such contributions implausible and upheld a 20 percent accuracy-
related penalty.

• In TC Summary Opinion 2017-19 (Singh) the Tax Court held that a taxpayer was
not entitled to a $4,000 deduction for mortgage points because he did not
demonstrate to the court that his refinancing was in connection with the purchase
or improvement of his personal residence. The court also concluded that the
taxpayer was not entitled to amortize points relating to a loan from a private lender
where the loan was for an indefinite period.

• In Dulik v. Comm'r, T.C. Summ. Op. 2017-51, the Tax Court held that a couple
could not deduct legal fees as an ordinary and necessary business expense
relating to the husband's activity as a sole shareholder of an S corporation. The
court concluded that the fees were deductible as a miscellaneous itemized
deduction, subject to applicable limitations, since the fees related to a severance
agreement with respect to a company the husband worked for prior to
incorporating the S corporation.

• In RERI Holdings I LLC v. Commissioner, 149 TC No. 1 the taxpayer (a
partnership) failed to show the cost basis of a non-cash charitable contribution.
Under Reg. §1.170A-13(c)(2)(i)(B) one of the requirements that must be fulfilled
when claiming noncash contribution of most assets with a value in excess of
$5,000 is the attachment to the return of a “fully completed appraisal summary” to
the return on which the contribution is first claimed. Per Reg. §1.170A-
13(c)(4)(ii)(E) one item to be included in that summary is “the cost or basis of the
property” as adjusted by IRC §1016. The court disallowed the entire amount! As a
side comment, the taxpayer had paid $3 million for the property 18 months prior to
the donation, and claimed a $33 million donation!

• In TC Memo 2017-38 (Kauffman) the Tax Court held that a taxpayer was not
entitled to certain mortgage interest deductions where he could not produce
evidence showing that the interest was incurred as acquisition indebtedness used
to improve his residence. In addition, because the taxpayer did not maintain
sufficient records to substantiate most of the expenses underlying deductions
disallowed by the IRS, and because the disallowed deductions were directly
attributable to the taxpayer's failure to maintain adequate records, the court upheld
the accuracy-related penalties assessed by the IRS.

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• In TC Memo 2017-165 (Gardner) the Tax Court determined that the comparable
sales method was the appropriate method for determining the fair market value of
specimens that a big game hunter donated to an ecological foundation, sustaining
the IRS's disallowance of most of his $1.4 million charitable contribution deduction
that was based on the replacement cost valuation method.

• In TC Summ. Op. 2017-58 (Wooten) the Tax Court held that a couple may not
deduct commuting expenses the husband incurred in traveling to temporary work
sites that weren’t outside the metropolitan area where he usually worked and held
that they aren’t entitled to a deduction for his meal expenses incurred at those sites
because he wasn’t "away from home."

Mr. Wooten worked at four worksites which were in either Gulfport or Biloxi,
Mississippi, approximately 20-25 miles from petitioners’ residence.2 Mr. Wooten
testified that Gulfport is his “normal work area”. While employed by AAS Mr.
Wooten worked at two worksites in Hattiesburg, Mississippi, approximately 56
miles from petitioners’ residence. While employed by AAS Mr. Wooten spent
approximately 85% of his time at the Forrest General Hospital worksite. In 2011
Mr. Wooten was also an employee of AAS and worked at the Forrest General
Hospital worksite in Hattiesburg, Mississippi, for six months. Each workday in 2012
Mr. Wooten drove directly from his residence to his then-current worksite, and at
the end of the day he drove directly home. Neither Donaghy nor AAS provided Mr.
Wooten with a company vehicle, nor did they reimburse him for his expenses of
commuting between his residence and these worksites.

Mr. Wooten testified that Gulfport was his “normal work area”. Therefore, the
worksites in Gulfport and Biloxi are not outside the metropolitan area where he
normally worked. Accordingly, petitioners may not deduct commuting expenses
attributable to Mr. Wooten’s employment at Donaghy. Given Mr. Wooten’s
recurring employment in Hattiesburg, Mississippi, we find that Hattiesburg is also
not outside the metropolitan area where he normally worked. Petitioners failed to
establish that they meet any exception to the general rule that commuting
expenses are nondeductible personal expenses. Accordingly, petitioners may not
deduct commuting expenses attributable to Mr. Wooten’s employment at AAS.

• In IRS Notice 2017-10 the IRS identified some syndicated conservation easement
transactions and substantially similar transactions as listed transactions for
purposes of reg. section 1.6011-4(b)(2) and sections 6111 and 6112.

In a syndicated conservation easement transaction, a promoter offers prospective
investors in a pass through entity the possibility of a charitable contribution
deduction for a donation of a conservation easement. The promoters syndicate
ownership interests in a pass through entity that owns real property using
promotional materials that suggest to prospective investors that they may be

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entitled to a share of a charitable contribution deduction that is at least 2-1/2 times
the amount of their investment. After an individual invests in the pass through
entity, the entity donates a conservation easement encumbering the property to a
tax-exempt entity. The promoters have obtained an appraisal that purports to be a
qualified appraisal but which greatly inflates the value of the conservation
easement based on unreasonable conclusions about the property's development
potential. Investors who have held interests in the pass through entity for one year
or less may rely on the entity's holding period in the underlying real property to
treat the donated conservation easement as long-term capital gain property under
section 170(e)(1). The promoter receives a fee or other consideration for the
promotion, which may be in the form of an interest in the passthrough entity.

The IRS intends to challenge the purported tax benefits from that transaction
based on the overvaluation of the conservation easement. The IRS may also
challenge the purported tax benefits from the transaction based on the partnership
anti-abuse rule, economic substance, or other rules or doctrines.

Transactions entered into after December 31, 2009, that are the same as or
substantially similar to the transaction described in the guidance are identified as
listed transactions effective December 23, 2016. Individuals must disclose those
transactions for each tax year in which they participated in them, provided the
period of limitations for assessment of tax has not ended before December 24,
2016. Material advisers who make a tax statement after December 31, 2009, for
transactions in effect after that date, have disclosure and list maintenance
obligations under sections 6111 and 6112. The guidance provides when disclosure
of a transaction must be made and who may be considered a participant in the
transaction, specifying that a donee isn't treated as a party to or a participant in the
transaction. The guidance also describes the applicable penalties for failing to
meet the disclosure requirements.

Schedule C Sole Proprietor

• In Jackson v. Comm'r, 2017 PTC 7 (9th Cir. 2017), the Ninth Circuit affirmed a Tax
Court decision that a couple couldn't deduct business expenses for their
recreational vehicle (RV) because they used it as a residence for the tax years at
issue. Although the court agreed that the couple's use of their RV was "appropriate
and helpful" in selling insurance policies at RV rallies, the taxpayers were
prohibited from deducting depreciation and interest relating to the RV by Code Sec.
280A, which disallows deductions for dwelling units used as a residence. The Ninth
Circuit noted that a dwelling unit is defined as "a house, apartment, condominium,
mobile home, boat, or similar property," and taxpayer's RV qualified as similar
property.

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• In TC Memo 2017-38 (Kauffman) the court denied a rent expense payment for
equipment paid by a Schedule C filer to his wholly owned C corporation after
determining that the amount paid ($266,000) was neither reasonable nor
necessary. There were no leases, FMV determinations or written agreements or
analyses present.

• In TC Summ. Op. 2016-81 (Berry) the taxpayer claimed $5,800 of self-employment
income from the one-time sale of tools and machinery, which conveniently qualified
him for a nice earned income credit. The court moved the income to Line 21 of
Form 1040, removed the self-employment tax (and earned income credit) saying
a one-time sale of tools is not considered an activity entered into for profit “with
continuity and regularity.”

• In TC Summ. Op. 2017-25 (Spurlock) the Tax Court denied a home office
deduction and imposed an accuracy penalty on an individual that deducted his
dining room as a home office because he was unable to prove it was used
exclusively used for the business.

• In TC Memo 2017-117 (Lewis) the taxpayer’s deduction for work related losses of
being a minister were denied when he stated he did not charge a fee for his minster
services. You have to have a profit motive to be in business! Mr. Lewis produced
no accounting records, bank statements, invoices, or any other records
traditionally associated with a business operating for a profit.

• In TC Memo 2017-115 (Ten Twenty Six Investors) a façade easement donation
deduction was denied because the charity did not record the easement until two
years after receipt. Under state law the easement is not legal unless recorded, so
the deduction was disallowed for the year of gift but allowed two years later when
recorded.

• In TC Memo 2017-171 (Lopez) The Tax Court disallowed a couple's loss
deductions pertaining to their child's pageant expenses, finding that her prize
winnings are compensation for her services in the pageants that is includable in
her income under section 73(a) and that section 73(b) treats related expenditures
as paid or incurred by the child, even if a parent makes the expenditure.

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• In Canna Care, Inc. v. Comm'r, 2017 PTC 345 (9th Cir. 2017), the Ninth Circuit
affirmed a Tax Court decision denying business expense deductions to a
corporation operating a marijuana dispensary in California. The court rejected the
corporation's arguments that (1) Code Sec. 280E, as applied to the taxpayer,
violated the Excessive Fines Clause of the Eighth Amendment to the U.S.
Constitution, (2) Code Sec. 280E did not preclude state and local tax deductions,
and (3) Code Sec. 280E did not preclude the corporation's net operating loss
carryover deduction from 2005.

Schedule D Capital Gains

• In TC Memo 2017-122 (Greenteam) the sale of a franchise contract was held to
be a capital gain asset rather than ordinary income. The contracts were exclusive
licenses with cities to haul trash.

Schedule F-Farmers and Fishermen

• In IRS SBSE-04-2017-0014 the IRS alerted all IRS employees about a pilot
program aimed at Schedule F filers from 4/1/2017-4/1/2018. It determined that
extra emphasis would be placed on compliance issues such as deducting
expenses on the wrong form, deducting another taxpayer's expenses, or issues
related to hobby losses under section 183. The IRS pointed out that Schedule F is
often incorrectly used to deduct employee business expenses, corporate
expenses and work related expenses or are often actually hobby activities.

Schedule SE Self Employment

• In TC Memo 2017-110 (Geneser) the Court determined that an insurance
salesman was liable for self-employment taxes on commission payments, finding
that his payments were not exempt from self-employment tax under section
1402(k). The court also upheld failure to file and pay penalties. 1402(k) exempts
termination payments paid to insurance agents who no longer work for the
insurance company with a 1 year (or more) non-compete agreement are exempt
from SE tax if the payments did not depend on the length of service to the
insurance company. Mr. Geneser’s payments were based on length of service.

Form 2106 Employee Business Expense

• In TC Summ. Op. 2017-13 (Beckey) the court disallowed an employee business
expense deduction. The Beckeys did not establish that Mrs. Beckey’s employer
did not or would not reimburse her for the employee business expenses, and
they failed to substantiate the expenses.

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Form 4562 Depreciation

• In TC Summ. Op. 2017-31 (Nielsen) the taxpayer allocated 100% of the purchase
price of several rental properties in California to the buildings and nothing to land
in their self-prepared returns. The court re-allocated based on property tax
appraisals. Not only did these brilliant folks self-prepare but they self-represented
in Tax Court, the results of both are self-evident. We are told that depreciation
errors are the number one error in self-prepared returns.

• In Rev. Proc. 2017-33 the IRS reminded taxpayers that portable heating and air
units qualify for Section 179 as Sec. 1245 property, and that non-portable heating
and air units may qualify for expensing under 1 other 4 types of qualified real
property improvements.

Form 8582 Passive Activity

• In TC Memo 2017-16 (Hardy) The Tax Court held that a doctor was correct in
recategorizing income from non-passive to passive and the IRS could not regroup
the doctor's plastic surgery activity with his investment in a business entity that
rents out surgical space. The grouping election is a positive election and the IRS
may not make it for a taxpayer unless an existing election (there was none here)
is incorrect. However, because the issue was not previously raised, the doctor was
not entitled to use that recharacterized passive income to offset prior year passive
losses from dead years, holding that the losses should have been claimed against
the re-characterized income at the time.

• In TC Summ. Op. 2017-6 (Jones) the Tax Court, in a summary opinion, sustained
the IRS's disallowance of a couple's deductions for rental real estate losses, finding
that the husband didn't qualify as a real estate professional under section 469(c)(7)
because he didn't show that he spent more time performing services for the rental
activity than for his insurance company.

Other than petitioner's general testimony that he spent more time performing
services for petitioners' rental real estate activity than he did for Georgia First,
petitioners did not present any evidence (such as time logs) or estimates of the
total time petitioner spent performing services for Georgia First from which we can
determine with any degree of certainty how many hours he dedicated to Georgia
First during the years in issue. Because petitioners have failed to establish how
many hours petitioner spent performing services for Georgia First, petitioners have
failed to establish that petitioner spent more time on petitioners' rental real estate
activity during the years in issue than he did for Georgia First.

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• In TC Memo 2017-65 (Penley) the Tax Court held that a couple can’t deduct losses
from their real estate activities because the husband wasn’t a real estate
professional, finding that the couple didn’t sufficiently substantiate their claim that
the husband worked more hours in his real estate activities than in his full-time
employment. Penley claimed he worked 10-12 hours every Saturday & Sunday,
and 4-6 hours every week day on a rental property, in addition to a regular full-time
job in another field. He had a hand written calendar supporting these hours, but
the court found it not only unreliable, they upheld an accuracy related penalty
against Penley. His total work hours were 13 hours daily according to the calendar
every single day for 365 days and the court did not believe him!

• In TC Memo 2017-68 (Windham) the Tax Court determined that a part-time
stockbroker met the material participation, 750 hours and 50% of work hour rules
because of her meticulous recordkeeping on the 11 properties involved. She
managed all aspects of the rentals and documented the time she spent on them.
According to the Tax Court, she materially participated in each rental property and
spent 889 hours as a whole on real estate activities.

• In what has become an example of a major tax compliance problem yet another
taxpayer who claimed they were a real estate professional has lost their court case.
In TC Memo 2017-118 (Ostrom) the taxpayer failed the >50% of work hours test
as well as the real estate activity test and the 750 hours per property test! She
worked a 40 hour weekly job as an IT specialist for a credit union, had substantial
gambling activity illustrating 152 days gambling and owned 4 homes that each
showed a loss, and late in the year she claimed to be a real estate professional
she obtained a brokerage license, but sold nothing!

Form 982 Cancellation of Debt Exclusion

• In TC Memo 2017-32 (Schreiber) was not required to include his California Calpers
pension plan in assets for purposes of the insolvency exclusion because he was
unable to convert the interest into a lump sum or borrow against the balance. They
also did not include $30,076 of interest cancellation in income under IRC Sec.
108(e)(2) because they had never deducted the amount.

• In Rev. Proc. 2017-24 the IRS provided that students at the American Career
Institute would not have taxable income from debt forgiveness related to the
bankruptcy of these schools.

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Accounting Methods

• In TC Memo 2017-26 (Basic Engineering) the Tax Court held that an engineering
company couldn't use the completed contract method of accounting to report
income from contracts to move, refurbish, and reassemble refineries in Bulgaria
and Pakistan. The company was required to use the percentage of completion
method because the construction contract exception to the percentage of
completion method didn't apply because the company could not have estimated
that the contracts would be completed within two years.

Under Reg. Sec. 1.446-1(c)(1), taxpayers can compute taxable income under the
(1) cash method, (2) accrual method, (3) other permissible special method, or (4)
any combination of these methods. The long-term contract method fits within
categories (3) and (4) because it is a permissible special method explicitly
referenced in Reg. Sec. 1.446-1(c)(1)(iii), but only applies to the taxpayer's long-
term contracts and so is used in tandem with the taxpayer's overall method (cash
or accrual) of accounting for other, non-long-term contract items of income or
expense.

Code Sec. 460(f)(1) defines a long-term contract as a contract for the manufacture,
building, installation, or construction of property that is not completed within the tax
year it is entered into. The general rule under Code Sec. 460(a) is that taxable
income from long-term contracts must be recognized over the life of the contract
using the percentage of completion method of accounting. The percentage of
completion method requires taxpayers to recognize income and expenses over the
life of the contract based on the percentage of the contract that is completed each
year. However, certain contracts are excluded from the requirement of reporting
income under the percentage of completion method. Code Sec. 460(f)(2) excludes
certain manufacturing contracts, and Code Sec. 460(e)(1)(B) excludes certain
construction contracts, from being reported under the percentage of completion
method.

Manufacturing contracts generally are not treated as long-term contracts. But if a
contract involves the manufacture of an item that normally requires more than 12
calendar months to complete, the contract is subject to Code Sec. 460. The two
contracts in this case each for the disassembly, transportation, refurbishing, and
reassembly of an oil refinery would normally require more than 12 calendar months
to complete.

In some cases, construction contracts can be accounted for under a method other
than the percentage of completion method, including the completed contract
method. The construction contract exception applies in pertinent part when the
taxpayer can estimate, when the contract is entered into, that it will be completed
within the two-year period beginning on the contract commencement date. The

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"contract commencement date" is defined by Reg. Sec. 1.460-1(b)(7) as the first
date that costs allocable to the contract (other than costs incurred in bidding for
and/or negotiating the contract) are first incurred.

For Basic to be eligible for the construction contract exception, it must have
reasonably estimated, when each contract was entered into, that the project would
be completed within two years from its commencement date. According to Reg.
Sec. 1.460-1(f)(4)(i), to be reasonable "an estimate of the time required to
complete the contract must include anticipated time for delay, rework, change
orders, technology or design problems, or other problems that reasonably can be
anticipated . . . . A contract term that specifies an expected completion or delivery
date may be considered evidence that the taxpayer reasonably expects to
complete or deliver the subject matter of the contract on or about the date
specified, especially if the contract provides bona fide penalties for failing to meet
the specified date."

• In Rev. Proc. 2017-30 the IRS provided an updated list of automatic changes in
methods of accounting to which the automatic change procedures in Rev. Proc.
2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev.
Proc. 2016-1, apply.

Credits

• In Polsky, 844 F.3d 170 (3rd Cir. 2016) the court dismissed a taxpayer’s claim for
a child tax credit (the $1,000 credit) for a permanently disabled child over age 17,
determining that the age limit applied to all children unlike the dependency
exemption.

Employee/Sub-Contractor

• In Mescalero Apache Tribe v. Commissioner 148 T.C. No. 11 (April 5, 2017) the
court determined that an employer of an independent contractor reclassified as an
employee is not liable for failing to withhold taxes if the employee pays the taxes
on her own. IRS Code Section 3402(d) states: “If the employer, in violation of the
provisions of this chapter, fails to deduct and withhold the tax under this chapter,
and thereafter the tax against which such tax may be credited is paid, the tax so
required to be deducted and withheld shall not be collected from the employer.”

One way to do this would be for the Tribe to ask each worker to complete Form
4669, Statement of Payments Received. The Tribe tried to do just that, but it was
only partly successful because many of the Tribe’s former workers have moved,
and some live in hard-to-reach areas where they lack cell-phone service and even
basic utilities. The Tribe was in the end unable to find 70 of these workers and thus
could not secure executed Forms 4669 from them. The Tribe then said the IRS
had to provide this information under open-records rules, and won.

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In CCA 201723020 the IRS says the provision of this information is only required
in a Court case under discovery rules, not in a normal audit.

• In Derolf v. Risinger Bros. Transfer, D.C., Ill. The court determined that a group of
truck drivers were sub-contractors and not employees. The truck drivers sued the
firm for which they hauled freight, claiming the company purposely misclassified
them as independent contractors. After reviewing the facts, the court disagreed.
The truckers controlled the work they did and how they did it. They contracted only
to transport the goods and could hire others to do the driving. They set their hours,
routes traveled, and rest and refueling stops. The drivers leased trucks from the
firm, and they could haul freight for other carriers with permission. They were paid
by the mile and had the opportunity to make a profit.

Foreign Income Reporting

• FinCEN announced that, to implement the new due date for FinCEN Form 114 it
will automatically grant all taxpayers filing the form a six-month extension every
year to Oct. 15. FinCEN explained that this six-month extension will be automatic
each year and that taxpayers do not have to request extensions.

Fringe Benefits

• In IRS INFO 2017-0005 the IRS advised that the fact that a health plan has a
deductible that meets the dollar amount for a high deductible health plan does not
mean the plan is an HDHP, noting that many plans may fail to be an HDHP
because the plan provides benefits that are not preventive care before the
deductible is satisfied.

• In IRS INFO 2017-0004 responding to a question on the rules for submitting
Medicare premium expenses as claims under a health flexible spending
arrangement, has explained that while health insurance premiums, including
Medicare premiums, are medical expenses for itemized deduction purposes, they
cannot be reimbursed by a health FSA. Prop.Treas. Reg. 1.125-5(k)(4) states a
health FSA cannot reimburse health insurance premium payments. Medicare
premiums are premiums for other health coverage and thus are not reimbursable
expenses.

• The Tax Court, in TC Summ. Op. 2017-71 (Johnson), held that per diem
allowances were not paid to an insurance adjuster under an accountable plan and
thus are includable in his income, rejecting his claim that he isn’t liable for the
alternative minimum tax because he overstated his reported income by including
those allowances.

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• In IRS INFO 2017-0003 the IRS advised that an individual who established a
health savings account and received contributions from his employer when he was
not eligible to participate in an HSA must withdraw the funds from his account and
include them in his income but that the withdrawal will not be subject to a fine.

• In Jacobs, Jeremy M. et ux. v. Commissioner; No. 19009-15; 148 T.C. No. 24 the
US Tax Court held that the owners of the National Hockey League's Boston Bruins
team are entitled to deduct the full cost of meals provided to the players and
traveling employees at away games, finding that the meals qualify as a de minimis
fringe and are excepted from the 50 percent limitation on deductions in section
274(n). The decision confirms that an employer can lease and operate an
employer-provided eating facility at a temporary work location.

The IRS disallowed half of the deductions the owners of the Boston Bruins claimed
for meal expenses for players and employees during away games. The Bruins play
82 regular season games, half of which occur in cities away from Boston. The team
contracts with hotels to provide specified meals in reserved banquet rooms. In
addition to eating during meal times, the team also conducts business and uses
rooms at the hotels for training, physical therapy, and medical purposes. The IRS
determined that the owners' deductions for meals were limited to 50 percent by
section 274(n), but the owners claimed that the de minimis fringe exception applied
to this limitation.

Judge Robert P. Ruwe, writing for the Tax Court, examined whether the meal
deductions met the de minimis fringe definition in section 132(e). First, Ruwe found
that the meals met the nondiscriminatory manner requirement of section 132
because the team provided meals to all traveling hockey employees.

The court then found that the owners met the section 132 requirement that the
facility be owned or leased by the employer because the team contracted for the
use of certain rooms and for food to be served and when it would be provided. The
court also found that by contracting for services, the owners met the requirement
that the facility be operated by the employer.

Ruwe considered the requirement that the dining facility be “located on or near the
business premises of the employer” and found that the away city hotels were part
of the Bruins’ business premises. Ruwe noted that the meals were required, that
business was conducted during the meals, and that the hotels were used in other
ways in preparation for games.

The Tax Court also held "that petitioners’ provision of meals at away city hotels is
for the convenience of the employer under section 119 …”

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Under section 119, meals are excluded from an employee’s gross income if
furnished to the employee for the convenience of the employer and on the
business premises, determined by facts and circumstances. The Tax Court was
satisfied that this was the case in Jacobs, given that the meals were provided “first
and foremost for nutritional and performance reasons” and that their provision
allowed the team to “effectively manage a hectic schedule by minimizing
unproductive time and maximizing time dedicated to activities that help achieve
the organization’s goal of winning hockey games.”

• In Notice 2016-79 the IRS issued the 2017 optional standard mileage rates used
to calculate the deductible costs of operating an automobile for business,
charitable, medical, or moving purposes. The IRS also issued the amount
taxpayers must use in calculating reductions to basis for depreciation taken under
the business standard mileage rate, as well as the maximum standard automobile
cost that may be used in computing the allowance under a fixed and variable rate
plan. Beginning on January 1, 2017, the standard mileage rates for the use of a
car (also vans, pickups or panel trucks) will be:
o 53.5 cents per mile driven for business purposes;
o 17 cents per mile driven for medical or moving purposes; and
o 14 cents per mile driven in service of charitable organizations.

HealthCare

• In IRS Info 2016-0051 the IRS advised that because participation in a healthcare
sharing ministry is not employer-provided coverage under an accident or health
plan, an employer's payment to the HCSM will be taxable income and wages to
the employee.

• The 21st Century Cures Act allows a new small business HRA for qualified
reimbursements of medical costs starting 1/1/2017, with a waiver of the $100 daily
penalty prior to that date for many plans as discussed in our CURE Act course.
The new rules allow, within guidelines, employers to reimburse up to $10,000
family ($4,950 individual) in annual costs for employee insurance and medical
care. Many planning opportunities are available for small businesses, but several
traps also apply such as an inability to reimburse employees who choose not to
participate in an employer sponsored group plan.

• TIGTA study 2017-33-044 from 7/24/17 shows the continued debacle of the Small
Business Health Care credit. Earlier reports from TIGTA identified the complexity
of the credit calculation combined with the lack of understanding of how small
business works by the original writers as responsible for the failure of the credit.

TIGTA noted that it was originally estimated that claims for the tax credit would be
$4 billion annually and that those estimates were later revised to $1 billion

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annually. However, the IRS indicated that credit claims for 2010 totaled only $519
million and then declined to an estimated $56 million as of 2015.

• On 12/16/2016 the President signed the Combat-Injured Veterans Tax Fairness
Act which extends the time that veterans, who were separated from service for
combat-related injuries and that had taxes improperly withheld from their
severance pay, have to file amended returns and claims refunds for such taxes.

The Combat-Injured Veterans Tax Fairness Act of 2016 directs the Department of
Defense (DOD) to identify certain severance payments to veterans with combat-
related injuries paid after January 17, 1991, from which DOD withheld amounts for
tax purposes. Once such veterans are identified, the DOD must provide the
identified veteran with a notice of the amount of improperly withheld severance
payments, and instructions for filing amended tax returns to recover such amount.

While the statute of limitations for filing a refund claim is generally three years from
the date the return is due or the date the return is filed, the Veterans Tax Fairness
Act of 2016 extends the period of time for filing a severance-related claim to the
date that is one year after DOD provides the veteran with the relevant information
to file an amended return. The Act further requires that, in the future, the DOD
ensure that amounts are not withheld for tax purposes from DOD severance
payments to individuals when such payments are not considered gross income.

IRA’s and Retirement Plans

• The IRS announced that it has provided (Announcement 2017-11) relief allowing
section 401(k) and similar employer-sponsored retirement plans to make loans and
hardship distributions to victims of Hurricane Harvey and members of their families.

Some plan participants may be eligible to take advantage of streamlined loan
procedures and liberalized hardship distribution rules. Though IRA participants are
barred from taking out loans, they may be eligible to receive distributions under
liberalized procedures, the IRS said. Retirement plans can provide this relief to
employees and some members of their families who live or work in the disaster
area. To qualify for this relief taxpayers must make hardship withdrawals by
January 31, 2018. The IRS also announced that it is relaxing procedural and
administrative rules that normally apply to retirement plan loans and hardship
distributions so that eligible retirement plan participants can access their money
more quickly.

What’s New

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What’s New 2017

• In TC Memo 2017-3 (Elaine) the Tax Court held that an individual is liable for the
additional tax under section 72(t) on early withdrawals from her IRA but declined
to impose an accuracy-related penalty, noting that there is a common
misunderstanding among taxpayers that financial hardship is an exception to the
section 72(t) additional tax.

• In TC Memo 2017-125 (Summers) a 35 year-old taxpayer getting a divorce
withdrew money from his IRA to give to his ex-wife without having a QDRO. He
was forced to pay tax and a 10% early withdrawal penalty. A QDRO makes the
distribution have no effect on the payor if it is a direct payment from his IRA trustee
to the ex. The ex avoids tax on any amounts rolled to an IRA, as well as penalties
on everything.

• In TC Summ. Op. 2017-57 (Gowen) the Tax Court held that a CPA who defaulted
on a loan from his section 401(k) plan in August 2012 received a taxable
distribution in 2012 despite having received a distribution statement dated 2013,
rejecting his argument that his default period expired in 2013. The court imposed
a 10 percent additional tax.

• In McGaugh, 7th Circuit, a taxpayer wanted to purchase stock in a non-public
company but the IRA custodian refused. He then had the custodian wire the funds
directly to the corporation, which issued shares in the IRA name more than 60 days
later. The IRA custodian issued a 1099-R but the taxpayer won and the appeals
court agreed with the taxpayer, finding he never received any cash, stock or other
assets personally.

• In TC Memo 2017-139 (Frias) an employer failed to withhold a 401-k loan payment
from an employee’s check while the employee was on maternity leave, and
therefore failed to comply with the loan repayment requirements of the 401k loan.
Sadly, the Court held that this made the amount of the loan a taxable distribution
to the taxpayer under IRS Reg. 1.72(p)-1, Q&A-4(a).

• On August 1, 2017 the Treasury Department announced the end of the myRA
program designed under then President Obama to help low and middle-income
workers. Treasury estimated that there were only about 20,000 accounts actually
funded in the 3 year life of the plan at a cost of $70 million. There is $34 million in
total myRA assets according to Treasury and annual costs going forward were
estimated at $10 million.

What’s New

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What’s New 2017

IRS

• A U.S. district court, following the D.C. Circuit's decision in Loving v. IRS, held that
a disbarred lawyer who prepares returns is not subject to the IRS's regulatory
authority under section 31 U.S.C. 330, finding that he is not a practitioner before
the IRS as defined in Circular 230. James C. Sexton Jr. et al. v. Karen L. Hawkins
et al.; No. 2:13-cv-00893

• In Mohamed v. Comm'r, T.C. Summary 2017-69, the Tax Court sustained a
proposed levy action against a CPA who operated a tax return preparation
business. The levy related to penalties owed by the CPA as a result of his failure
to satisfy earned income tax credit due diligence requirements.

• The IRS continues to trail the states addressing identity theft problems. The
Alabama Dept. of Revenue is the first in the country to launch a voluntary program
designed to add an extra security layer to prevent the filing of fraudulent returns
using stolen taxpayer information. If you have an iPhone, you can download an
app and establish a credential by scanning your driver’s license card, taking a
selfie and registering with the Dept. of Revenue. The selfie is cross-referenced to
the photo that was taken when you got your license. When a tax return is filed in
your name, you’ll get a text message from the Dept. of Revenue asking you to
authenticate it by taking another photo and then approving or denying the return
filing. Georgia is next on board. If the program is effective, expect more states to
adopt it.

• A U.S. district court held that the IRS has the authority to require a return preparer
to use a preparer tax identification number but cannot charge fees for the issuance
of PTINs, finding that PTINs are not a service or thing of value provided by the IRS
and the regulations requiring payment of fees for PTINs are unlawful. Steele, Adam
et al. v. United States; No. 1:14-cv-01523 June 1, 2017

• The outside debt collection companies that the IRS just brought back in to collect
old tax debts are already a problem according to the June 23, 2017 New York
Times. One of them, Pioneer Credit Recovery, is accused of being in clear violation
of the Tax Code by 4 members of Congress by using illegal and abusive collection
tactics. Pioneer has been sued by the Consumer Financial Protection Bureau and
fired by the Department of Education.

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What’s New 2017

• In August, TaxSlayer LLC became the first tax preparation service to face charges
of violating the law, according to the Federal Trade Commission. The Gramm-
Leach-Bliley (GLB) Privacy Act of 1999 requires companies to inform customers
about their privacy policies and practices with an initial and annual notice, while
the safeguard rule mandates that companies have measures to secure customer
data. The FTC also noted that TaxSlayer didn't have a written information security
program, failed to conduct the necessary risk assessment, and failed to implement
the safeguards to control those risks—specifically, the risk that hackers would use
the stolen credentials. It failed to provide a "clear and conspicuous initial privacy
notice" and to "deliver the initial privacy notice so that each customer could
reasonably be expected to receive the actual notice."

GLB requires that tax professionals protect client’s information, which is:
o Any information an individual gives you regarding name, address, SSN or
other information on any form, organizer or checklist,
o Any information you get about an individual from a transaction involving
your financial product(s) or service(s) (for example, the fact that an
individual is your consumer or customer, account numbers, loan balances,
and direct deposit or banking information); or
o Any information you get about an individual in connection with providing a
financial product or service (for example, information from court records or
from a consumer report).

In other words, all client data must be secured at all times, and may only be
disclosed or accessed with client permission and clear client identification
and written disclosure requirements.

According to the FTC, the GLBA Safeguards Rule requires organizations to
develop a written information security plan that describes how they protect client
information. The plan must be appropriate to the firm’s size and complexity, the
nature and scope of its activities, and the sensitivity of the client information it
handles.

Among other items, as part of this plan, each organization must:

• Designate one or more employees to coordinate its information security
program;
• Identify and assess the risks to client information in each relevant area of the
firm’s operation, and evaluate the effectiveness of the current safeguards for
controlling these risks.
• Design and implement a safeguards program, and regularly monitor and test it.
• Select service providers that can maintain appropriate safeguards, making sure
their contracts require them to maintain these safeguards

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What’s New 2017

• Evaluate and adjust the program in light of relevant circumstances, including
changes in the firm’s business or operations, or the results of security testing and

monitoring.

At TaxSpeaker we have extensively informed our customers about security and

privacy in our Technology seminars every year and our best-selling 3-hour Security
course is often “borrowed” by various CPE providers as examples of how to control

client security. It is not a simple process. It requires written policies for privacy,

confidentiality, computer use and remote access, combined with employee training
and periodic review, combined with basic office policies regarding “no-click” email
policies, no free “WiFi” use, securing in-office Wi-Fi and the like.

In 2006 CPAs (and only CPAs) were exempted from providing annual notices to
clients regarding privacy policies, but the policies must still exist! We have included
a confidentiality and privacy policy in our letters chapter.

• 2016 Statistics from the IRS:

o PTIN Holders 733,834
o Unlicensed PTIN Holders included above 429.209
o Unlicensed that have opted in to AFSP
o PTIN EA’s 62,509
54,000

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This page is Intentionally Blank and to be used for notes.

139 20

ACE SEMINARS

• PRESENTS
• TAX CUTS AND JOBS ACT

OF 2017 (TCJA)

Speaker 1
Bill Leonard CPA, MAFF, CGMA

Copyright 2018 Jennings
Advisory Group LLC

The Act: INTRODUCTION

Tax Cuts and Jobs Act

• Introduced by Ways & Means 11/2/17

– Passed the House week of 11/15/17

• Introduced in Senate Finance 11/9/17

– Passed by Senate 12/1/17

• Approved by Joint Committee 12/15/17
• President Trump signed into law 12/22/2017
• 50 days from introduction to law!
• Most provisions effective 1/1/2018

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Tax Cuts and Jobs Act FINAL

3 Things Affecting 2017 INTRODUCTION

Returns

• Medical deduction on Schedule A reverts
back to 7.5% limit

• Refinancings use a 12/15/17 date if existing

• Bonus depreciation changes after 9/27/2017

Copyright 2018 Jennings 3
Advisory Group LLC

The Act: Page 2-5
Expired 12/31 of 2016

and NOT renewed – S 1/7

• Alternative refueling property credit
• COD exclusion-principal residence
• New home energy efficiency credit
• Geothermal heat pump credit
• MIP deduction as mortgage interest
• Personal residence energy efficiency credit
• Tuition and Fees deduction

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141

The Act: Page 2-5

Extended by Act

NO CHANGE – Slide 2/7

• Blind/elderly additional standard deduction
• Capital gains rates (brackets adjusted)
• Medicare .9% Surtax
• Net investment income 3.8% surtax
• Self employment tax rates and application
• Teacher’s $250 deduction

Copyright 2018 Jennings 5
Advisory Group LLC

The Act: Page 2-5
Extended by Act
NEW ITEMS – Slide 3/7

• C Corp 21% flat rate
• Dependent care credit ($550)
• Employer family leave credit
• Flow through entity 20% deduction

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The Act: Page 2-5
Extended by Act

WITH CHANGE (** 2017 Effect) S 4/7

• Alternative Minimum Tax-Individuals Copyright 2018 Jennings 7
• **Bonus depreciation Advisory Group LLC
• Cash method of accounting
• C Corp Tax Rate
• Child <17 credit
• Estate & gift tax
• Luxury car depreciation
• **Medical deduction
• **Mortgage interest deduction
• Rehab credit
• Section 179
• Section 263A and 529
• Standard deduction

The Act: Page 2-5
REPEALED by Act
*WITH CHANGE – S 5/7

• *Alimony deduction-2019

• *Alimony income-2019

• AMT-C Corporations

• *Casualty losses-Presidentially declared exception

• Commuter fringe benefits

• DPAD (Production Deduction)

• Entertainment deduction

• Employee Business Expenses

• Equity interest on home

• Investment expenses

• *Individual insurance mandate-2019 Copyright 2018 Jennings 8
• Miscellaneous 2% itemized Advisory Group LLC

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The Act: Page 2-5
REPEALED by Act
*WITH CHANGE S 6/7

• Moving expense deduction

• Personal exemption

• Recharacterization of Roth conversion

• *State & local income, property and sales tax deduction

• Tax prep fees for individuals
• Turbo tax software deduction

Copyright 2018 Jennings 9
Advisory Group LLC

The Act: Page 2-5

UNMODIFIED by Act – S7/7

• Adoption assistance

• Applicable Large Employer insurance mandate

• Coverdell savings

• Dependent care assistance fringe

• Education assistance fringe

• Electric car credit

• Gain on sale of home exclusion AND holding period

• Graduate student tuition waiver

• Lifetime Learning credit

• New markets & Work Opportunity credit

• Retirement plans Copyright 2018 Jennings 10
• Student loan interest Advisory Group LLC

144

Page 7

Tax Brackets – S 1/5

The old way to figure filing threshold

Standard Deduction Minimum 1040
Personal Exemption Filing Threshhold

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Advisory Group LLC

Page 7

Tax Brackets – S 2/5

The new way to figure filing threshold

Standard Deduction Minimum 1040
Filing Threshhold

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Page 7

Tax Cuts and Jobs Act – S 3/5

Current Rates New Rates

1. 10% 1. 10%
2. 15% 2. 12%
3. 25% 3. 22%
4. 28% 4. 24%
5. 33% 5. 32%
6. 35% 6. 35%
7. 39.6% 7. 37%

Copyright 2018 Jennings 13
Advisory Group LLC

BJ1

“Top” of Single Rate Brackets S 4/5

Tax Bracket 2018-Old 2018-New

10% $ 9,525 $ 9,525

12% NA $ 38,700

15% $ 38,700 NA
22% NA
25% $ 82,500 Top of 
28% $ 93,700 $157,500 12% 
$195,450 Next $$ 
32% NA of 
33% NA income 
35% $424,950 $200,000 at 22%
37% $426,700 NA IRA?
39.6% Biggest 
NA $500,000 %% 
$426,700+ $500,000+ Increase

NA

14

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146

Slide 14

BJ1 Bob Jennings, 1/1/2018

147

“Top” of MFJ Rate Brackets – S 5/5

Tax Bracket 2018-Old 2018-New

10% $ 19,050 $ 19,050

12% NA $ 77,400

15% $ 77,400 NA Top of 
22% NA $165,000 12% 
25% $315,000 Next $$ 
28% $156,150 of income 
$237,950 NA at 22%
32% IRA?
33% NA $400,000 Biggest 
35% $424,950 NA %% 
$480,050 Increase
37% $600,000
39.6% NA
$480,050+ $600,000+
NA

15

Copyright 2018 Jennings Advisory Group LLC

The Act: Page 8

Comparison of tax savings

(Uses 2018 Old/New Rates Before credits) S 1/2

Single-Taxable Income Old 2018 Tax New 2018 Tax

9,525 $ 953 $ 953

38,700 $ 5,329 $ 4,454

40,000 $ 5,654 $ 4,740

50,000 $ 8,154 $ 6,940

75,000 $ 14,404 $ 12,440

100,000 $ 20,843 $ 18,290

150,000 $ 34,843 $ 30,290

200,000 $ 49,071 $ 45,690

300,000 $ 82,071 $ 80,690

500,000 $152,943 $150,690

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Advisory Group LLC

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