Taxation Section: 27Th Annual Tax Conference--2014

th 27 Annual Tax Conference

Thursday, May 22, 2014 Inn at St. John’s, Plymouth

Conference Schedule

Moderator: Carolee Kvoriak Cameron Consumers Energy Jackson

8:00 a.m. – 8:30 a.m. Registration and Continental Breakfast

8:30 a.m. – 8:45 a.m. Welcome and Introductions

Lynn A. Gandhi Chair, State Bar of Michigan Taxation Section Council Honigman Miller Schwartz and Cohn LLP Detroit

8:45 a.m. – 9:45 a.m. Washington Update: Current Legislative, Regulatory, and Administrative Developments • Future budget outlook • Trends in US taxation • Legislative outlook • Prognosis for tax reform • The current state of affairs at the IRS

Christopher E. Bergin President and Publisher Tax Analysts Falls Church, VA

9:45 a.m. – 10:35 a.m. The DOMA Supreme Court Case and Its Tax Implications • Status of marriage equality • Federal agency response to Windsor • Michigan after Windsor • Michigan response to IRS actions • How to advise clients today

Gina M. Torielli Director, Graduate Tax Program Thomas M. Cooley Law School Ann Arbor

10:35 a.m. – 10:50 a.m. Vendor Visits and Break

10:50 a.m. – 11:40 a.m. An Update on the Michigan Economy • Past challenges addressed • Current state of Michigan’s economy and budget • What does the future hold?

Robert J. Schneider Director of State Affairs Citizens Research Council of Michigan Lansing

11:40 a.m. – 12:30 p.m. State Tax Commission • An introduction to the STC • Tips on presenting a matter to the STC • Changes in store if personal property tax reform is adopted by voters

Douglas B. Roberts Chairperson, State Tax Commission Lansing

12:30 p.m. – 1:30 p.m. Lunch and Awards Presentation

Carolee Kvoriak Cameron Tax Conference Planning Chair Consumers Energy Jackson

Marla Schwaller Carew Grant Program Chair Marla Schwaller Carew PLLC Troy

1:30 p.m. – 2:30 p.m. Breakout Sessions

Estates and Trusts Committee and Employee Benefits Committee – Kings I/II Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World • Planning, drafting, and administration issues for employee benefit plans • Transfer tax planning for same-sex couples in Michigan

Thomas H. Bergh Varnum LLP Novi

State and Local Taxation Committee and Practice and Procedure Committee – Wisdom Transactional Taxes: A National and State Review of Compliance Challenges • Current compliance challenges in sales, use, and other transactional taxes • Avenues to obtain guidance • Best practices for working with your auditors from a taxpayer and department perspective • Addressing state non-compliance with the SSTA

Loren L. Chumley KPMG LLP Nashville, TN

Michael A. Eschelbach Director Michigan Department of Treasury – Bureau of Tax Policy Lansing

International Taxation Committee and Federal Income Tax Committee – Grande Ballroom (WEBCAST) Base Erosion: Will the OECD Change the World? • The Apple case • Territorial tax system • Morality and taxes • What’s next

Christopher E. Bergin President and Publisher Tax Analysts Falls Church, VA

2:30 p.m. – 2:40 p.m. Vendor Visits and Break

2:40 p.m. – 3:40 p.m. Breakout Sessions

Estates and Trusts Committee – Grande Ballroom (WEBCAST) Tax Court Update: Davidson, Steinberg and Koons • Self-cancelling installment notes • Deducting the actuarial computed liability of estate taxes triggered by a gift • New valuation cases

William H. Frazier Stout Risius Ross Dallas, TX

Employee Benefits Committee -Wisdom Health Care Reform Strategies for Employers • Health care reform tax credits, subsidies, and penalties • Group health plan mandates under the Affordable Care Act

Elizabeth H. Latchana Fraser Trebilcock Davis & Dunlap PC Lansing

Mark E. Kellogg Fraser Trebilcock Davis & Dunlap PC Lansing

Practice and Procedure Committee / New Tax Lawyer Committee – Kings I/II Ask the Tax Masters • In roundtable format, get your questions answered about the practice of tax law • Practical advice from the masters

Marla Schwaller Carew Marla Schwaller Carew PLLC Troy

Eric M. Nemeth Varnum LLP Novi

Joseph Falcone Joseph Falcone, PC Southfield

3:40 p.m. – 3:50 p.m. Vendor Visits and Break

3:50 p.m. – 4:50 p.m. Breakout Sessions

State and Local Taxation Committee – Grande Ballroom (WEBCAST) Transparency Laws: Should Taxpayers Be Worried • Overview of states’ transparency laws • Identifying, tracking, and controlling disclosure issues • Michigan’s proposed legislation

Cara Griffith Tax Analysts Falls Church, VA

Tricia Kinley Senior Director of Tax & Regulatory Reform MI Chamber of Commerce Lansing

International Taxation Committee - Wisdom FACTA Update and Tax Structuring for Private Equity Portfolio Companies • FACTA implementation and the new federal rules coming summer 2014 that affect withholding • Tips to prepare clients for implementation • Adapting deferral tax planning techniques in a non- deferral environment to increase a portfolio company’s cash flow

William W. Henson Plante Moran PLLC Auburn Hills

Randall Janiczek Plante Moran PLLC Grand Rapids

Joel Mitchell Plante Moran PLLC Grand Rapids

Federal Income Tax Committee – Kings I/II Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance • Overview of historic tax credit arrangements • The historic Boardwalk Hall case, Consolidated Edison case and the 2012 chief counsel memorandum on historic tax credit transactions • The impact of these cases on current arrangements • How to structure future arrangements • Potential impact on other types of federal tax incentive arrangements

Anthony Ilardi, Jr. Dykema Bloomfield Hills

Joseph S. Kopietz Clark Hill PLC Detroit

5:00 p.m. – 6:00 p.m. Cocktail Reception (included)

Adjourn

Tax Conference, 27th Annual Thursday, May 22, 2014 The Inn at St. John's, Plymouth Faculty List

Thomas H. Bergh Speaker Varnum LLP 39500 High Pointe Blvd Ste 350 Novi, MI 48375 (248) 567-7400 Fax: (248) 567-7423 [email protected] Christopher E. Bergin Speaker Tax Analysts 400 S. Maple Ave Ste 400 Falls Church, VA 22046 (703) 531-4810 Fax: (703) 533-4629 [email protected] Carolee Kvoriak Cameron Moderator CMS Energy Corporation One Energy Plaza EP10-205 Jackson, MI 49201 (517) 788-2209 Fax: (517) 788-0043 [email protected] Marla Schwaller Carew Speaker Marla Schwaller Carew PLLC 101 W Big Beaver Rd Ste 1400 Troy, MI 48084 (248) 270-8536 Fax: (248) 209-6582 [email protected] Loren L. Chumley Speaker KPMG LLP 401 Commerce St Ste 1000 Nashville, TN 37219 (615) 248-5565 Fax: (615) 469-3041 lchumley@kpmg.com Michael A. Eschelbach Speaker Michigan Department of Treasury - Bureau of Tax Policy 430 W Allegan Lansing, MI 48922 (517) 373-9600 [email protected] Joseph Falcone Speaker Joseph Falcone PC 3000 Town Center Ste 2370 Southfield, MI 48075 (248) 357-6610 Fax: (248) 357-6613 [email protected] William H. Frazier Speaker Stout Risius Ross 1700 Pacific Avenue Ste 4680 Dallas, TX 75201 (214) 389-3480 [email protected] Lynn A. Gandhi Speaker Honigman Miller Schwartz and Cohn LLP 660 Woodward Ave STE 2290 Detroit, MI 48226 (313) 465-7646 Fax: (313) 465-7647 [email protected] Cara Griffith Speaker Tax Analysts 400 S. Maple Ave Ste 400 Falls Church , VA 22046 (703) 531-4810 [email protected] William W. Henson Speaker Plante Moran PLLC 2601 Cambridge Court Ste 500 Auburn Hills, MI 48326 (248) 375-7311 Fax: (248) 233-7644 [email protected] Anthony Ilardi Jr. Speaker Dykema 39577 N Woodward Avenue Ste 300 Bloomfield Hills, MI 48304 (248) 203-0700 Fax: (248) 203-0763 [email protected] Randall Janiczek Speaker Plante Moran PLLC 634 Front Ave NW Ste 400 Grand Rapids, MI 49504 (616) 643-4368 Fax: (248) 233-9146 [email protected] Mark E. Kellogg Speaker Fraser Trebilcock Davis & Dunlap PC 124 W Allegan Ste 1000 Lansing, MI 48933 (517) 482-5800 Fax: (517) 482-0887 [email protected] Tricia G. Kinley Speaker Michigan Chamber of Commerce 600 S. Walnut St. Lansing, MI 48933 (517) 371-7669 [email protected] Joseph S. Kopietz Speaker Clark Hill PLC 500 Woodward Avenue Ste 3500 Detroit, MI 48226 (313) 965-8300 Fax: (313) 965-8252 [email protected] Elizabeth H. Latchana Speaker Fraser Trebilcock Davis & Dunlap PC 124 W Allegan Ste 1000 Lansing, MI 48933 (517) 482-5800 Fax: (517) 482-0887 [email protected] Joel Mitchell Speaker Plante Moran PLLC 634 Front Ave. NW Ste 400 Grand Rapids, MI 49504 (877) 622-2257 ext 34010 Fax: (248) 233-7501 [email protected] Eric M. Nemeth Speaker Varnum LLP 39500 High Pointe Blvd Ste 350 Novi, MI 48375 (248) 567-7402 Fax: (248) 567-7440 [email protected] Douglas B. Roberts PhD Speaker State Tax Commission 430 W. Allegan Lansing, MI 48909 (517) 335-3429 Fax: (517) 241-1650 [email protected] Robert J. Schneider Speaker Citizens Research Council of Michigan 115 W Allegan Ste 480 Lansing, MI 48933 (517) 485-9444 [email protected] Gina M. Torielli Speaker Thomas M. Cooley Law School 3475 Plymouth Rd Ann Arbor, MI 48105 (734) 372-4900 ex 8732 Fax: (734) 372-4912 [email protected] 5/14/2014 Faculty Biographies Tax Conference, 27th Annual

Thomas H. Bergh Varnum LLP Novi, Michigan Thomas H. Bergh practices in the areas of probate and estate planning, business law, and taxation. His practice includes estate planning, with an emphasis on succession planning for closely-held businesses; corporate transactional matters; and ERISA. Mr. Bergh also has extensive experience in trust design and administration, including audit representation and litigation. A member of the Taxation, Business Law, and Probate and Estate Planning Sections of the State Bar of Michigan, he also serves on the Closely Held Business and Employee Benefits Committees of the Section of Taxation of the American Bar Association. Mr. Bergh was president of the Financial and Estate Planning Council of Metropolitan Detroit, Inc., for 2006. Christopher E. Bergin Tax Analysts Falls Church, VA Christopher E. Bergin, president and publisher of Tax Analysts, is an authority on federal tax policy. He writes a monthly column for "Tax Notes," Tax Analysts' flagship publication, and is a regular contributor to Tax Analysts' blog and Forbes.com. Mr. Bergin joined Tax Analysts in 1991, serving as the editor of Tax Notes for eight years before taking control of the overall operations of the organization. For almost 30 years, he has written extensively on federal tax issues in national newspapers and journals while working in tax publishing. During his tenure, "Tax Notes" magazine has been recognized as one of the nation's top tax journals. Before joining Tax Analysts, he managed several federal tax products at Prentice Hall Inc. In 2008 he completed the Senior Executive Program at the Columbia University Graduate School of Business. He has made a number of media appearances on CNNMoney, "Financial Times," "Forbes," "The Hill," "Roll Call," "The Seattle Times," and more. Carolee Kvoriak Cameron CMS Energy Corporation Jackson, Michigan Carolee Kvoriak Cameron is a senior tax attorney at CMS Energy. Before joining the company in 2010, she was in-house tax counsel for Magna International, Inc., and an associate attorney at Miller Canfield Paddock and Stone PLC, and Honigman Miller Schwartz and Cohn LLP. Ms. Cameron served as judicial clerk to Hon. Marilyn Kelly, justice of the Michigan Supreme Court, in 2000. She is a member of the State Bar of Michigan and currently serves on the Taxation Section's Tax Council as the state and federal legislation monitor and public policy liaison. Marla Schwaller Carew Marla Schwaller Carew PLLC Troy, Michigan Marla Schwaller Carew's practice focuses on federal, state, and local tax planning and controversy litigation. She also has substantial experience in corporate and securities transactional law. Ms. Carew is a member of the American Bar Association's Business Law and Taxation Sections. She is also member of the State Bar of Michigan's Business Law Section and Taxation Section, where she is a member of the Taxation Section Council and edits "Michigan Tax Lawyer." She is an officer and board member of the Michigan Women's Tax Association and a member of Inforum. Ms. Carew is a frequent speaker on state and federal tax issues, including presentations to Michigan manufacturers, the Novi Chamber of Commerce, and certified public accountants. She is published in "Journal of Taxation" and "Michigan Tax Lawyer," among others. Loren L. Chumley KPMG LLP Nashville, TN Loren L. Chumley is a state and local tax principal and is national practice leader for the firm's U.S. Indirect Tax network. She joined KPMG in 2007 and was integrally involved in the recent acquisition of the Thomson Reuters Indirect Tax Managed Services business, assisting in the transition of over 500 clients to the KPMG compliance center. Prior to joining KPMG, she served as the commissioner of revenue and director of the Department of Revenue's Audit Division for the State of Tennessee. During her career in state government, she led the governor's effort to overhaul tax incentives to attract business to Tennessee and worked with companies on tax issues relating to locating or expanding operations in Tennessee; led the effort to authorize and implement sales and use tax compliance agreements; drafted and achieved passage of Streamlined Sales Tax conforming legislation; and served on the State Board of Equalization from 2003 to 2006. Michael A. Eschelbach Michigan Department of Treasury - Bureau of Tax Policy Lansing, Michigan Michael A. Eschelbach has been the director of the Bureau of Tax Policy since 2011. Prior to that, he was acting administrator of the Tax Policy Division of the Michigan Department of Treasury after joining the division in 2004 as an administrative law specialist. He also practiced law in Michigan for many years, primarily in the areas of school and municipal law, and served as a small claims hearing referee for the Michigan Tax Tribunal. He has served for a number of years as Michigan delegate to the Streamlined Sales Tax Governing Board. Joseph Falcone Joseph Falcone PC Southfield, Michigan Joseph Falcone's law practice focuses on federal and state tax controversies and tax- related civil and criminal litigation. He worked for the Detroit IRS Office of District Counsel after law school before entering private practice. During his 39 year career, Mr. Falcone, after leaving government service, practiced first in firms and for the last twenty-five years, as a solo practitioner. He has represented thousands of clients in hundreds of cases before all levels and types of federal and state courts and before federal and state tax agencies, including the Internal Revenue Service, Department of Labor, and the Michigan Department of Treasury. William H. Frazier Stout Risius Ross Dallas, TX William H. Frazier is a managing director in the firm's Valuation & Financial Opinions Group. He has over 35 years of experience in business valuation and corporate finance and has participated as an appraiser and/or expert witness in numerous U.S. Tax Court cases. Prior to joining SRR, Mr. Frazier was a founding partner of HFBE Inc., where he provided financial advisory and valuation opinions for issues including corporate mergers, acquisitions and spin-offs, reorganizations and recapitalizations, estate, gift and income tax requirements, estate planning, and employee stock ownership plans. He developed the Non-Marketable Investment Company Evaluation Method and has authored numerous publications on business valuation for tax purposes, including "The Cost of Capital of Private Company Interests" in the valuation textbook, 'The Cost of Capital." Mr. Frazier has been an accredited senior appraiser of the American Society of Appraisers (ASA) since 1987 and currently serves on the board of the ASA's Education Foundation. Mr. Frazier holds professional licenses as a Financial Industry Regulatory Authority (FINRA) Series 7 General Securities Representative, the FINRA Series 63 Uniform Securities Agent State Law Exam, and the FINRA Series 24 General Securities Principal. He is a member of the Valuation Advisory Board of Trusts & Estates. He previously served on the Business Valuation Committee of the ASA and the Government Relations Committee. Lynn A. Gandhi Honigman Miller Schwartz and Cohn LLP Detroit, Michigan A partner in the firm, Lynn A. Gandhi practices in the area of taxation and tax appeals, advising clients nationwide on multistate tax strategies, resolving tax disputes, and litigating state tax cases. She concentrates in matters involving single business tax, sales and use tax, insurance company and retaliatory tax, investment incentives and tax savings, corporate income and franchise taxes, net worth taxes, and gross receipts taxes. She also has extensive experience practicing law in a corporate setting with such companies as Visteon and CMS Energy. Ms. Gandhi is also a certified public accountant, registered in Michigan and Illinois; an adjunct professor at Wayne State University Law School; and editor of "Michigan Tax Lawyer." She is a member of the American Bar Association, State Bar of Michigan, Michigan Association of Certified Public Accountants, and Illinois State Bar Association and an advisory board member of the Paul J. Hartman State and Local Tax Forum of the Vanderbilt University Law School. Ms. Gandhi is a former board member of the Council on State Taxation and former chairperson of the State and Local Tax Committee of the Detroit Chapter Tax Executive Institute. A frequent speaker and moderator at tax conferences and seminars, Ms. Gandhi has also written numerous articles on pertinent state and local tax issues, such as Michigan's new business tax, nexus issues, Sarbanes Oxley processes and controls, and investment incentives and tax credits. Cara Griffith Tax Analysts Falls Church, VA Cara Griffith, editor in chief of Tax Analysts' state publications, is an expert on state and local tax issues and policy and the author of the State Tax Notes column "Practice Notes." She is a regular contributor to Tax Analysts' blog and Forbes.com. Since joining Tax Analysts, Ms. Griffith has reported on many federal and state court cases, congressional hearings, and tax conferences. Previously, she was a manager with PwC and has written for a broad range of tax policy publications, including "The Tax Adviser," "The Hedge Fund Law Report," and "The Hill." William W. Henson Plante Moran PLLC Auburn Hills, Michigan An international tax partner in the firm, William W. Henson has more than 20 years of experience working in both public accounting and industry. He specializes in cross-border tax planning and has extensive experience in structuring and due diligence for multinational acquisitions, seller-side strategies for multinational dispositions, cross-border partnership planning, planning for foreign-owned U.S. businesses, and post-acquisition restructuring. In addition, Mr. Henson has significant experience in FAS 109, U.S. international tax compliance, and transaction-related tax return disclosures. He has worked in a variety of industries, including oil and gas exploration and production, beer brewing, bottle and container manufacturing, auto and auto supplier manufacturing, chemicals and fibers, and offshore services. Mr. Henson also did a one year rotation in Sao Paulo, Brazil, when he worked for Ernst and Young. He has taught a cross-border mergers and acquisitions course for a "Big 4" firm and frequently speaks on international tax topics. Mr. Henson is a member of the American Institute of CPAs, the Texas Society of CPAs, the Michigan Association of CPAs, and the State Bar of Texas. Anthony Ilardi, Jr. Dykema Bloomfield Hills, Michigan Anthony Ilardi, Jr. is a member in the firm's Taxation Practice Group, concentrating in federal and state tax credits and other economic development incentives, tax planning for businesses and individuals, particularly partnerships and limited liability company formation and operation, and tax aspects of municipal finance. He is also a member of the firm's Economic Development Team. Mr. Ilardi is a member of the committee that drafted the Michigan Limited Liability Company Act and subsequent amendments. He is a past chairperson of the Taxation Section of the State Bar of Michigan Partnership Committee and was a member of the Taxation Section council. He is the author of numerous articles and a frequent lecturer on partnership and LLC planning issues. Previously, Mr. Ilardi was a Appellate Trial Attorney in the Tax Division of the U.S. Department of Justice. Randall Janiczek Plante Moran PLLC Grand Rapids, Michigan Randall Janiczek is a member of Plante Moran's International Tax Services Group and has more than 10 years of public accounting experience in both the U.S. and Germany. He has worked with public and private companies within a wide variety of industries, including manufacturing and distribution, wholesale trade, and the service industry in both an inbound and outbound context. Mr. Janiczek has significant experience with U.S. international tax planning and compliance, transfer pricing, and transaction-related planning and compliance matters, and worked with multinational companies on U.S./German and cross-border European Union tax issues while in Frankfurt, Germany. He has spoken on international tax topics for the Chicago Tax Club, Michigan Association of CPAs, and Michigan Bar Association, in addition to various internal and external live and web-based international tax updates. He is licensed to practice as a certified public accountant in Michigan and Illinois and is a member of the American Institute of Certified Public Accountants. Mark E. Kellogg Fraser Trebilcock Davis & Dunlap PC Lansing, Michigan Mark E. Kellogg is a shareholder with the firm where he practices in the areas of family and closely-held business law, taxation, business succession planning, estate planning, commercial transactions, non-profit and tax exempt organizations, real estate transactions, agricultural law, corporate, and probate law. He is a Certified Public Accountant. Mr. Kellogg is president of the Michigan Chapter of the American Association of Attorneys-Certified Public Accountants, a member of the board of directors of the international organization of Attorneys for Family-Held Enterprises, and a member of the board of directors and treasurer of the Mid- Michigan Planned Giving Council. He is listed in Best Lawyers in America for Closely Held Companies and Family Business Law and has been selected as a Leading Lawyer in Michigan in the area of Trust, Will & Estate Planning Law. Mr. Kellogg has presented for a variety of community and professional groups and is a frequent author, covering corporate, business, tax, estate and succession planning, and charitable and non-profit topics. Tricia G. Kinley Michigan Chamber of Commerce Lansing, Michigan Tricia G. Kinley advocates key tax policy and regulatory positions for the Michigan Chamber of Commerce. As senior director of tax and regulatory reform, she works extensively with administration officials and legislators and educates the public about state tax policy proposals through the media and other public forums. In addition to her work at the Chamber of Commerce, Ms. Kinley worked for Johnson & Johnson, handling a wide range of key legislative and regulatory issues, and the Detroit Regional Chamber of Commerce as director of public policy, where she developed and advocated taxation and workplace policies. She also served as government affairs coordinator for the American Society of Employers, where she was the lead representative for the organization's governmental activities, lobbying, and legislative inquiries at the state and national level. Joseph S. Kopietz Clark Hill PLC Detroit, Michigan Joseph S. Kopietz is a member of the firm's Real Estate Group and focuses his practice on economic development, representing lenders, investors, nonprofit and for profit developers, municipalities, syndicators, underwriters, and governmental authorities. He has experience with a variety of tax credits and incentives including low-income housing, renewable energy, historic and New Markets Tax Credits, as well as state tax credits, tax abatements, and "green" incentives. He is also a LEED Accredited Professional. Mr. Kopietz has successfully closed transactions involving more than $500 million in tax credit-related financing since 2007 and is experienced in choice of entity planning, formation and maintenance, and incorporation and qualification of tax exempt organizations, and regularly advises clients on Federal, state, and local tax issues. Prior to joining Clark Hill, he was the chief operating officer of a nonprofit agency that provided affordable housing and health services in Southeast Michigan. Joseph was selected for inclusion on the Crain's Detroit Business "40 Under 40" list of professionals in 2012 for his ability to navigate and facilitate financing for real estate deals in Detroit. Elizabeth H. Latchana Fraser Trebilcock Davis & Dunlap PC Lansing, Michigan Elizabeth H. Latchana is a shareholder at the firm and focuses her practice on employee health and welfare benefits. She is an accomplished attorney representing employers and corporations throughout the U.S. Her expertise includes ERISA, COBRA, cafeteria plans, wrap plans, health savings accounts, health reimbursement arrangements, and the Affordable Care Act (ACA). Recently recognized for her outstanding legal work, she was selected by some of Michigan's leading lawyers for inclusion in The Best Lawyers in America 2013 and 2014 for Employee Benefits (ERISA) Law. She has written numerous articles on employee benefits-related matters, has participated in various expert panels regarding the ACA, and is a past president of the Women Lawyers Association of Michigan's Mid-Michigan Chapter. Joel Mitchell Plante Moran PLLC Grand Rapids, Michigan Joel Mitchell is a partner with Plante Moran's international tax team. He has more than 13 years of experience in international tax and helps to identify global tax minimization opportunities designed to reduce both corporate and individual tax obligations and provides tax planning that fits within other organizational goals, including global cash management. He has experience with both corporate and firm work and provides consulting, compliance, and tax provision services with particular expertise in international structuring and repatriation planning. Joel has a B.B.A. and a Master of Accounting from The University of Michigan Ross School of Business, and a Master of Science of Taxation from Grand Valley State University Seidman School of Business, where he was named "Most Outstanding M.S.T. Student." Eric M. Nemeth Varnum LLP Novi, Michigan Eric M. Nemeth practices in the areas of civil and criminal tax controversies, litigating matters in the various federal courts. Before joining Varnum, he served as a senior trial attorney for the Office of Chief Counsel of the Internal Revenue Service and as a special assistant U.S. attorney for the U.S. Department of Justice, as well as a judge advocate general for the U.S. Army Reserve. Mr. Nemeth is the former chairperson of the Taxation Sections of both the State Bar of Michigan and the Federal Bar Association. He speaks and writes frequently on matters of tax practice and procedure for the ABA and locally. Mr. Nemeth is an adjunct professor of tax at Michigan State University College of Law and serves on the board of directors of the law college's Tax Clinic. Douglas B. Roberts, PhD State Tax Commission Lansing, Michigan Douglas B. Roberts has served as a member of the State Tax Commission since 2003 and as chairperson since 2011. He is the director of the Institute for Public Policy and Social Research (IPPSR) at Michigan State University, and has been affiliated with IPPSR since 2003. He has more than 28 years of experience in Michigan government, including 10 years as state treasurer, time as director of the Senate Fiscal Agency, deputy superintendent of the Department of Education, and as both deputy director and acting director of the Department of Management and Budget (DMB). He played a major role in the creation and adoption of what is now called "Proposal A," adding fairness and equity to the state's property taxes, and is considered the state's expert on school taxation, and public employee healthcare and pension financing. Under Governor John Engler's leadership, Dr. Roberts authored the report "Our Kids Deserve Better," which dramatically reformed the way public schools are financed in Michigan. He also served for two years as a vice president with Lockheed Martin IMS. He speaks frequently for universities, professional associations, and private groups on topics relating to state finance, and is a regular guest on local and statewide public affairs radio and television programming. Robert J. Schneider Citizens Research Council of Michigan Lansing, Michigan Robert G. Schneider joined the Citizens Research Council of Michigan in 2013 after serving as Associate Director for the non-partisan Michigan House Fiscal Agency (HFA). During his 15-year tenure at HFA, he provided non-partisan advice and analysis to state House members on state policy and budget matters in areas including corrections, human services, and transportation. Prior to joining HFA, he was a research assistant and project manager from 1994 to 1996 for Public Policy Associates, a Lansing-based policy research and consulting firm. He also served for two years within the Michigan Department of State working on department budget and financial issues. Gina M. Torielli Thomas M. Cooley Law School Ann Arbor, Michigan Gina M. Torielli is a professor of law and the director of the Graduate Tax Program where she teaches courses about tax practice and procedure, standards and ethics of tax practice, and tax exempt organizations. She also teaches a course about wills, estates, and trusts in the J.D. program. Professor Torielli joined Cooley in 2003 after serving five years as president and CEO of Howard and Howard, PC, the first woman to serve as president of a major Michigan law firm. Her own practice centered on taxation and public finance, and in that capacity she advised many nonprofit organizations and governmental entities on issues relating to tax exemption, tax-exempt financing, and state and federal tax issues. A past chairperson of the Taxation Section of the State Bar of Michigan, Professor Torielli is a member of the National Association of Bond Lawyers, the Taxation Section of the American Bar Association, and the Tax Committee of the Oakland County Bar Association, as well as the American Association of Legal Scholars. She was designated one of the "Top 10 Business Women of the Year" by the National Association of Women Business Owners in the spring of 2003. Ms. Torielli was named one of "Corp!" magazine's 95 most powerful women in 2002.

STATE BAR OF MICHIGAN Taxation Section 2013-2014 Council Roster

OFFICERS

Chairperson Vice Chairperson Lynnteri Arsht Gandhi (P60466) Marjorie B. Gell (P46974) Honigman Miller Schwartz & Cohn LLP Thomas M. Cooley Law School 660 Woodward Ave, Ste 2290 111 Commerce Ave SW Detroit, MI 48226 Grand Rapids, MI 49503 P: (313) 465-7646 P: (616) 301-4080 F: (313) 465-7647 E: [email protected] E: [email protected]

Treasurer Secretary Michael Antovski (P57175) Alexander G. Domenicucci (P58898) Clark Hill, PLC Ernst & Young, LLP 151 S. Old Woodward Ave, Ste 200 One Kennedy Square Birmingham, MI 48009 Detroit, MI 48226 P: (248) 988-5885 P: (313) 628-7342 F: (248) 642-2174 E: [email protected] E: [email protected]

EX-OFFICIO Wayne D. Roberts (P62706) Dykema Gossett 300 Ottawa Ave NW, Ste 700 Grand Rapids, MI 49503-2306 P: (616) 776-7514 F: (616) 776-7573 E: [email protected]

COUNCIL

Tax Conference – 2014 Tax Conference – 2015 Carolee Kvoriak Cameron James Combs CMS Energy Honigman Miller Schwartz and Cohn LLP 1 Energy Plaza Dr., #EP-10-205 660 Woodward Ave, Ste 2290 Jackson, MI 49201 Detroit, MI 48226 P: (517) 788-2209 P: (313) 465-7588 F: (517) 788-0043 F: (313) 465-7589 E: [email protected] E: [email protected] Term expires 2014 Term Expires 2016

COUNCIL (cont.)

State/Federal Legislation Monitor & Grant Program and After Hours ICLE Public Policy Liaison Jackie Cook (P68781) Marla Carew (P58525) Schiff Hardin, LLP Marla Schwaller Carew 350 S. Main Street, Suite 210 101 W. Big Beaver Road, Floor 14 Ann Arbor, MI 48104 Troy, MI 48084 P: (734) 222-1529 P: (248) 270-8536 F: (734) 222-1501 E: [email protected] E: [email protected] (Term Expires 2015) (Term expires 2015)

Membership Outreach & Tax Court Luncheons Editor, Michigan Tax Lawyer Tammie Tischler (P59516) William C. Lentine (P71691) Smith Haughey Rice & Roegge, P.C. Dykema Gossett 213 S. Ashley Street, Suite 400 400 Renaissance Center Ann Arbor, MI 48104 Detroit, MI 48243 P: (734) 913-5586 P: (313) 568-5371 F: (734) 332-0971 F: (313) 568-6735 E: [email protected] E: [email protected] (Term expires 2014) (Term expires 2015)

Annual Meeting & Directory Internet and Bar Journal Liaison Frank Henke (P51464) Andrew C. Lane (P71668) Warner Norcross & Judd LLP PricewaterhouseCoopers LLP 45000 River Ridge Drive, Suite 300 500 Woodward Avenue Clinton Township, MI 48038 Detroit, MI 48226 P: (248) 784-5008 P: (313) 394-6554 F: (248) 603-9608 F: (813) 639-2536 E: [email protected] E: [email protected] (Term expires 2015)

Community Service Initiative(pro-Bono) Paul V. McCord (P61138) Michigan Tax Tribunal 7150 Harris Drive, Fl 1A-WING Dimondale, MI 48821 P: (517) 636-7551 F: (517) 636-7580 E: [email protected] Term expires 2014

COMMITTEE CHAIRPERSONS

Business Entities Employee Benefits Andrew W. MacLeod (P51390) Michelle M. Bartlett P58067 Dickinson Wright, PLLC Stevenson Keppelman Associates 500 Woodward Avenue, Ste. 4000 444 S. Main Street Detroit, MI 48226 Ann Arbor, MI 48104 P: (313) 223-3187 P: (734) 747-7050 F: (313) 223-3598 F: (734) 747-8010 E: [email protected] E: [email protected] Term Expires 2016 Term Expires 2016 Estates and Trusts Practice and Procedure Sean H. Cook (P54846) Evan H. Kaploe (P75831) Warner Norcross & Judd, LLP Varnum, LLP 2000 Town Center, Ste 4000 39500 High Pointe Blvd., Ste 350 Southfield, MI 48075 Novi, MI 48375 P: (248) 784-5058 P: (248) 567-7400 F: (248) 603-9658 F: (248) 567-7400 E: [email protected] E: [email protected] Term Expires 2016 Term Expires 2016

State and Local International Tamika Mayes (P76918) Hassan Jaafar (P74640) General Motors Company 2524 Galpin Avenue 300 Renaissance Center Royal Oak, MI 48073 Detroit, MI 48265 P: (313) 269-9585 P: 313) 665-2371 E: [email protected] F: (313) 665-4125 Term Expires 2015 E: [email protected] (Term expires 2015)

Young Tax Lawyers Open Position

LIAISONS

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Tax Conference, 27th Annual

Table of Contents

1. Washington Update: Current Legislative, Regulatory, and Administrative Developments 1-1

Christopher E. Bergin Tax Analysts Falls Church, VA

I. Federal Budget Crisis 1-1 II. Trends in U.S. Taxation 1-2 III. Legislative Outlook 1-3 IV. Prognosis for Tax Reform 1-3 V. The Current State of Affairs at the IRS 1-6

2. The DOMA Supreme Court Case and Its Tax Implications 2-1

Gina M. Torielli Thomas M. Cooley Law School Ann Arbor

I. Status of Marriage Equality 2-1 II. Federal Response to Windsor 2-4 III. Michigan After Windsor 2-14 IV. Michigan Response to DeBoer 2-16 V. Federal Response to DeBoer 2-16

3. An Update on the Michigan Economy 3-1

Robert J. Schneider Citizens Research Council of Michigan Lansing

Exhibit A PowerPoint Presentation 3-3 4. State Tax Commission 4-1

Douglas B. Roberts, PhD State Tax Commission Lansing

Exhibit A PowerPoint Presentation 4-3

5. International Taxation Committee and Federal Income Tax Committee - Base Erosion: Will the OECD Change the World? 5-1

Christopher E. Bergin Tax Analysts Fall Church, VA

I. Base Erosion and Profit Shifting 5-1 II. Territorial Taxation 5-5 III. Morality and Taxes 5-6

6. State and Local Taxation Committee and Practice and Procedure Committee - Transactional Taxes: A National and State Review of Compliance Challenges 6-1

Loren L. Chumley KPMG LLP Nashville, TN

Michael A. Eschelbach Michigan Department of Treasury - Bureau of Tax Policy Lansing

Exhibit A PowerPoint Presentation 6-3

7. Estates and Trusts Committee and Employee Benefits Committee - Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World 7-1

Thomas H. Bergh Varnum LLP Novi

I. Introduction 7-1 II. Application of Windsor Principles to Retirement Plans 7-4 7. Estates and Trusts Committee and Employee Benefits Committee - Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World (continued)

III. Application of Windsor Principles to Health and Welfare Plans 7-5 IV. Estate Planning Issues 7-6

8. Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons 8-1

William H. Frazier Stout Risius Ross Dallas, TX

Exhibit A PowerPoint Presentation 8-3

9. Employee Benefits Committee - Health Care Reform Strategies for Employers 9-1

Mark E. Kellogg Fraser Trebilcock Davis & Dunlap PC Lansing

Elizabeth H. Latchana Fraser Trebilcock Davis & Dunlap PC Lansing

I. Introduction 9-1 II. Overview of the Patient Protection and Affordable Care Act 9-2 III. Are You a Large or Small Employer? 9-3 IV. Pay or Play Mandate (2015) 9-4 V. Employer Reporting Requirements (Section 6055 and Section 6056) 9-7 VI. Additional Health Plan Mandates and Changes 9-9 VII. Individual Insurance Mandate 9-12 VIII. Small Business Health Option Program (SHOP) 9-12 IX. Small Business Health Care Affordability Tax Credits 9-12 10. Practice and Procedure Committee and New Tax Lawyer Committee - Ask the Tax Masters 10-1

Marla Schwaller Carew Marla Schwaller Carew PLLC Troy

Joseph Falcone Joseph Falcone PC Southfield

Eric M. Nemeth Varnum LLP Novi

Exhibit A IRS Tax Division Enforcement Priorities 10-3

11. State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried? 11-1

Cara Griffith Tax Analysts Falls Church, VA

Tricia G. Kinley Michigan Chamber of Commerce Lansing

Part One: Exhibit A PowerPoint Presentation 11-3

Part Two:

Exhibit A PowerPoint Presentation 11-15 12. International Taxation Committee - FACTA Update and Tax Structuring for Private Equity Portfolio Companies 12-1

William W. Henson Plante Moran PLLC Auburn Hills

Randall Janiczek Plante Moran PLLC Grand Rapids

Joel Mitchell Plante Moran PLLC Grand Rapids

Exhibit A PowerPoint Presentation 12-3

13. Federal Income Tax Committee - Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance 13-1

Anthony Hardi, Jr. Dykema Bloomfield Hills

Joseph S. Kopietz Clark Hill PLC Detroit

Exhibit A PowerPoint Presentation 13-3

Washington Update: Current Legislative, Regulatory, and Administrative Developments

by Christopher E. Bergin Tax Analysts Falls Church, VA

Washington Update: Current Legislative, Regulatory, and Administrative Developments

Christopher E. Bergin Tax Analysts Falls Church, VA

I. Federal Budget Crisis ...... 1-1 II. Trends in U.S. Taxation ...... 1-2 III. Legislative Outlook...... 1-3 IV. Prognosis for Tax Reform ...... 1-3 V. The Current State of Affairs at the IRS ...... 1-6

I. Federal Budget Crisis A. Short-Term Issues Sequestration, the American Taxpayer Relief Act, the Affordable Care Act, and an improving economy have removed many of the budget pressures that existed from 2008 through 2011.

• During the recession, deficits ballooned to record levels—$1.4 trillion in 2009— but last year’s deficit declined to $564 billion. While that remains higher than any deficit during the Bush administration, the short-term pressure to cut spending or raise taxes because of a growing debt-to-GDP ratio has eased. • Congress may decide soon to tweak tax increases associated with Obamacare (particularly the medical device excise tax), but it is unlikely that a major deficit reduction package will be needed again during the Obama presidency. B. Long-Term Issues The rosier picture in the short-term budget window does not make the long-term situation any better.

• Rising healthcare costs and the impending drains on Social Security will almost certainly require some kind of entitlement reform or major tax increase outside the 10-year budget window. • Long-term budget issues will probably force Congress and the White House to consider revenue sources other than the corporate and individual income taxes. • While value added taxes are unpopular in the United States, some form of consumption tax may be necessary to raise the revenue needed to pay for the level of Social Security and healthcare that taxpayers expect on retirement.

1-1 Tax Conference, 27th Annual, May 22, 2014

• Republicans have a different view, and House Budget Committee Chair Paul Ryan continues to insist that the budget should be balanced in the next 10 years for reasons of fiscal security. • Conservative Republicans, such as Sen. Rand Paul, have pushed for even more extreme budget measures to finance both a balanced budget and lower taxes.

Other issues that might be tackled as part of the budget process in the long term include:

1. The estate tax, which could move closer to repeal or be expanded—again, depending on the party in power; 2. The capital gains preference, which could be repealed as part of tax reform or as a way to raise revenue; and 3. Changes to how the United States taxes business income, as more and more entities are formed as passthroughs and not traditional corporations. II. Trends in U.S. Taxation A. Divide on Revenue The two political parties have a major divide on revenue issues.

• Republicans believe the government collects enough or too much in taxes, • While Democrats insist that new taxes and sources of revenue are needed to pay for infrastructure or other expanded government initiatives.

This disagreement on revenue permeates every major tax debate. B. Income Inequality Many progressives believe the tax system is responsible for a growing divide between high-income taxpayers and everyone else. There has been a lot of focus on the 1 percent in the last few years, and the tax system has been at the center of the debate. President Obama and congressional Democrats were successful in raising rates on upper-income earners with the passage of the American Taxpayer Relief Act early in 2013, reversing a long trend in favor of tax cuts (started by the Clinton administration almost immediately after the 1993 tax increase). For a long time, not even most Demo- crats would discuss the possibility of higher taxes, but things have changed and tax increases are now seen as politically viable. C. Increased Enforcement and Transfer Pricing The IRS, Treasury, and the Justice Department continue to crack down on individual tax avoidance using offshore bank accounts and entities—through the Foreign Account Tax Compliance Act, for example—and to fight the last lingering battles of the tax shelter wars. The trend in the next few years will likely be to extend increased enforcement to the transfer pricing area. The OECD’s base erosion and profit-shifting action plan might be too radical for the United States to support, but that doesn’t mean that congressional and Treasury attention won’t be focused on shoring up transfer pricing rules and continuing to fight abuses of intracompany transactions and income shifting.

1-2 Washington Update: Current Legislative, Regulatory, and Administrative Developments

III. Legislative Outlook A. Short-Term Legislative Extenders Many extenders have expired, including the research credit. House Ways and Means Chair Dave Camp and former Senate Finance Committee Chair Max Baucus did not want to address the extenders outside tax reform. They were hoping to cull the number of targeted provisions and eliminate temporary tax policy. Baucus’s approach essentially eliminated all extenders and asked senators to argue for their re-inclusion as permanent tax policy. Camp eliminated some extenders and modified others—including the research credit, proposing a change to how it works for small businesses and eliminating expens- ing. However, Baucus left the Senate, and Camp’s tax reform package has not received much support. New Finance Chair Ron Wyden has made extenders his top priority. Originally, he introduced a bill that left out several extenders, but the proposal that will be marked up by the Finance Committee now includes almost all of the provisions that have expired. The research credit is unaffected. Camp has also agreed up to mark up an extenders package, abandoning his insistence that the expired provisions be dealt with only as part of tax reform. The big debate in the Senate is whether to pay for an extension. Wyden and most Republicans have argued no, but some Democrats disagree. Paying for extenders would be expensive and might put a few provisions back on the chopping block. Camp is hoping to reach an agreement that permanently extending the provisions should not be paid for. That would give him a new budget baseline to work with, making his tax reform plan much less expensive. B. Timing The timing for extenders is unclear. Usually they pass as part of a broader bill, but no such bill is forthcoming in an election year. Despite the momentum in the taxwriting committees, no one really knows when extenders might get done, leaving most to expect a last-minute deal—as usual—in a possible lame-duck session after the elections. However, the time does seem to be right this year for at least dealing with extenders, whereas last year the focus on tax reform meant that neither taxwriting committee had much interest in renewing the provisions. IV. Prognosis for Tax Reform A. Camp Reform Overview Camp’s recently released comprehensive tax reform proposal addresses some details that will be the starting point not only for other tax reforms, but also legislation. It has changed the tax policy landscape like no other single document in the last three decades, for two reasons:

1. First, the Camp plan is the ultimate reality check on tax reform. Tax reform is far more complicated than what the public is led to believe. It is unlikely that any tax reform plan would be simpler than the Camp draft. 2. The second reason is the extensive and detailed workmanship that went into it. The staff of the Ways and Means Committee and the Joint Committee on Taxa- tion worked for three years on the draft. They received input from hundreds of

1-3 Tax Conference, 27th Annual, May 22, 2014

experts who deal daily with modern tax practice. They took into account practical administrative and political considerations, and they made hundreds of detailed suggestions on how to improve the code. B. Nothing Will Happen Unless Something Catastrophic Happens Unfortunately, the Camp reform won’t pass for the following reasons:

1. There is tremendous opposition from special interests, such as the real estate and municipal bond industry. 2. There is no agreement on overall revenue. Republicans insist on revenue neutrality, and Democrats insist that tax reform raise revenue. And even if there were agreement on this point, there is still too much partisanship 3. Finally, there is no presidential leadership. It is highly unlikely that this president will advance tax reform, which means there will be no tax reform until 2017. Even then, it would happen only if a Republican is elected—the chances of which are less than 50-50. C. If Not Camp, Then What? So if the Camp draft is out of the running, what is the future of tax reform? Let’s look at the tax reform “supermarket.” In this marketplace of ideas, there are four possibilities:

1. 1986-Reagan-style reform 2. New sources of revenue to reduce income taxes 3. Integration proposals (that eliminate double taxation of corporate profits) 4. Consumption tax replacements for income taxes D. Supermarket of Ideas 1986-Reagan-Style Tax Reform. This is a revenue-neutral, distributionally neutral reform that lowers the rates and broadens the base. Examples include:

1. Camp’s discussion draft 2. 2005 Bush tax reform panel’s simplified income tax 3. Wyden-Coats tax reform plan (35 percent individual, 24 percent corporate)

Why this approach won’t work: In addition to the tremendous political resistance of special interests, there are some hurdles that make tax reform more difficult than in 1986:

1. Tax rates are lower and the base is broader now than in 1986 2. Corporate rate was 46 percent then and 35 percent now 3. Top individual rate was 50 percent then and 39.6 percent now 4. All the good sources of revenue were taken in 1986

1-4 Washington Update: Current Legislative, Regulatory, and Administrative Developments

New Sources of Revenue to Pay for Tax Reform

1. 2007 Treasury report had a 5 or 6 percent VAT to pay for repeal of the corporate tax 2. Carbon tax 3. Graetz competitive tax plan: • Standard deduction of $100,000 gets 100 million people off the income tax roles • Top individual rate 25 percent, corporate rate 15 percent, VAT rate 13 percent

Integration Proposals

• 1992 Treasury comprehensive business tax (CBIT), but rate is high and shifts taxation from business entities to individual investors in those entities; corporations would not deduct dividends (as under current law) and no longer deduct interest; a large tax increase on businesses, but no taxation of interest or dividends at individual level • Edward Kleinbard, a former chief of staff for the JCT who is now a professor at the USC Gould School of Law, has proposed a business enterprise income tax (BEIT) that would allow businesses to deduct the estimated cost of capital of debt and equity (no matter how much they actually pay out in interest and dividends) and then tax individuals on an estimated expected return on equity and debt investments (no matter how much these investors actually receive in cash). Com- pared with the CBIT, this proposal shifts the burden from business to investors, where, for many reasons, it is better placed. • Finally, in the integration aisle we have the Viard and Toder proposal “the proposal from…” to repeal the corporate tax and replace it with mark-to-market taxation of corporate shares that are publicly traded.

Consumption Tax Proposals

• Linder “FairTax,” which is a national retail sales tax. It is not progressive. • The Armey-Forbes-Hall-Rabushka flat tax is just a VAT split in two: a wage tax on individuals and a cash flow tax on business.

The problem with both of these proposals is their lack of progressivity. This is solved by the next proposal.

• Progressive consumption tax or X-tax originally proposed by Bradford, and Trea- sury progressive wage tax on individuals and cash flow tax on businesses.

The top four proposals are the Graetz VAT proposal, Kleinbard’s BEIT, Toder and Viard’s progressive mark-to-market proposal, and the progressive consumption tax (X-

1-5 Tax Conference, 27th Annual, May 22, 2014 tax). The major benefit of these proposals is economic growth. The major problem is no income redistribution. Back to 1986—, Reagan-Style Tax Reform

• Consider business-only tax reform • Lower corporate rates and broaden the base • Massive concessions to passthroughs (1) Cantor 2012 (28%) (2) Kind (20%) but only for manufacturing and construction • Consider international-only tax reform. The big advantage of this is it is likely to unlock the $2 trillion. V. The Current State of Affairs at the IRS A. Agency in Crisis Scandal The IRS scandal is continuing to consume agency resources and congressional attention.

• Former EO exempt organizations director Lois Lerner was recently found in con- tempt of Congress for her refusal to testify after providing a statement to the Oversight Committee defending her actions. • The Ways and Means Committee asked the Justice Department to pursue criminal charges against her. The Senate Finance Committee is expected to wrap up its investigation. • According to the IRS commissioner, dozens of IRS employees are still working full time to comply with the numerous requests for documents. They appear to mostly be working on sending the full set of Lerner’s e-mails.

The exempt organization scandal has allowed Republicans to continue to demonize the IRS. It, along with mainstream news reports about conferences and training videos, has made it easy for the GOP to withhold funding. The agency’s damaged credibility has made it hard for Democrats to make counterarguments. The scandals have also affected employee morale and led to major restructurings of the EO division and lots of leadership turnover. B. Transparency and FOIA Over the years, the IRS has had trouble with transparency. Tax Analysts has always worked hard to convince the IRS that transparency is vital to ensuring that application of the tax laws is fair and efficient. Also, Tax Analysts was founded to foster informed debate. Unfortunately, it is impossible to have a fully informed debate about the tax system if the government hides information. Because of the IRS’s trouble with transparency, Tax Analysts has had to rely on the Freedom of Information Act and the courts to persuade the IRS to do the right thing.

1-6 Washington Update: Current Legislative, Regulatory, and Administrative Developments

The Two-Hour Rule In the early 1970s, Tax Analysts used the still fairly new Freedom of Information Act to request from the IRS a public release of its technical advice memorandums (TAMs).

• The IRS fought Tax Analysts tooth and nail, and in the end, Tax Analysts won. A law was enacted, and the IRS was ordered to make the TAMs available to all. • But the IRS did not give up. Instead it began issuing memos to the field it called FSAs (for field service advice). • They were very much like TAMs, but since they weren’t exactly TAMs, the IRS insisted it could keep them secret. During the 1990s, FSAs flourished while TAMs started to diminish/disappear. • Tax Analysts returned to the courts to ensure that FSAs would be released to the public, and again Tax Analysts won. • This time, lawmakers told the IRS, “Stop playing hide the ball.” Use whatever acronym you want for your secret administrative law, but we’re calling it chief counsel advice, and it all belongs to the public. • But the IRS did not fear Congress. No sooner was the chief counsel advice law enacted in 2000 than the IRS came up with a new rule: All chief counsel advice that takes less than two hours to prepare does not have to be disclosed to the public. • And as absurd as the two-hour rule sounds, the IRS was prepared to go to the mat to defend it. • After four years and hundreds of thousands of dollars in taxpayer money, four federal judges—one in the district court and three in a unanimous decision by a court of appeals—told the IRS that its two-hour rule was nonsense.

Tax Analysts v. IRS We won the two-hour rule battle and continued our fight for transparency.

• On May 21, 2013, Tax Analysts sent a FOIA request to the IRS seeking all materials used since 2009 to train personnel in exempt organizations determinations office in Cincinnati. • We were trying to get to the bottom of what led the agency to being forced to admit that it had inappropriately targeted some conservative organizations that were seeking tax exemption under section 501(c)(4) of the tax law. We asked the IRS to expedite the process, and it agreed, telling us that our request had “priority” and that it would “make every effort to respond as quickly as possible.”

1-7 Tax Conference, 27th Annual, May 22, 2014

• But on June 25 the IRS invoked a 10-day extension period, which extended the deadline to July 10. In the same letter, the IRS also told us it wouldn’t be meeting that deadline either, and it unilaterally extended the response date to August. • But on August 9, the IRS sent us a letter saying it would get back to us on Sep- tember 20 to let us know what it would do next. • Then in September, the IRS released roughly 1,000 pages, followed by another 1,800 pages in November. • Unfortunately, they were essentially no help in figuring out what went on, and almost all were dated 2012. • I believe the revealing material—good or bad—would be dated between 2009 and 2012, and we had asked for those as well. • Our current case against the IRS is now officially over. • The IRS has agreed to state in the court’s order “that it has conducted an exhaus- tive search and produced all non-exempt responsive documents” in response to Tax Analysts’ request.

I have been involved in two Tax Analysts FOIA lawsuits against the IRS. Neither one of them should have gone to federal judges. But the IRS’s secrecy, paranoia, and belief that it has the absolute right to hide information drives it in this area. This lawsuit was a waste of time and money—against an agency that argues that it doesn’t have enough of either—over documents that should have been public from the beginning. Tax Analysts v. Kentucky Department of Revenue On December 16 Tax Analysts joined a lawsuit brought by Mark Sommer of Frost Brown Todd LLC seeking to force the Kentucky Department of Revenue to begin releasing redacted copies of final letter rulings. Oral arguments were held late last year. At the hearing, Franklin Circuit Judge Philip Shepherd seemed inclined to agree that the rulings are subject to the state’s Open Records Act. The attorney for the Kentucky DOR argued that the state’s confidentiality statutes require such significant redaction as to rend them unhelpful. The department also argued that it was overly burdensome to require it to prepare the 700 existing rulings for publication. Judge Shepherd didn’t seem to agree. After describing the DOR’s publication burden as not insurmountable, Shepherd said the rulings have “real and significant consequences for the taxpayer and the public.” Shepherd further noted that he could think of no other administrative decision made by a public agency that is withheld from the public. We are still waiting on an opinion. Judge Shepherd is known to ponder his decisions, but we hope to hear something on this matter soon.

1-8 The DOMA Supreme Court Case and Its Tax Implications

by Gina M. Torielli Thomas M. Cooley Law School Ann Arbor

The DOMA Supreme Court Case and Its Tax Implications

Gina M. Torielli Thomas M. Cooley Law School Ann Arbor

I. Status of Marriage Equality ...... 2-1 II. Federal Response to Windsor ...... 2-4 III. Michigan After Windsor ...... 2-14 IV. Michigan Response to DeBoer ...... 2-16 V. Federal Response to DeBoer ...... 2-16

I. Status of Marriage Equality The last 12 months has seen an explosion of activity regarding the legal recognition of same sex marriages. A. U.S. v Windsor (133 S.Ct. 2675, June 16, 2013) In the Windsor case, the U.S. Supreme Court held that Section 3 of the federal Defense of Marriage Act (1 U.S.C. §7, also known as “DOMA”), which restricted the federal interpretation of “marriage” and “spouse” to apply only to heterosexual unions, was unconstitutional under the Due Process Clause of Fifth Amendment to U.S. Constitution. The holding affected only “those persons who are joined in same sex marriages made lawful by the State.” B. Hollingsworth v. Perry (133 S.Ct. 2652, June 16, 2013) Under Perry, the U.S. Supreme Court allowed same sex marriages in California to resume. The Court ruled proponents of California’s Proposition 8 same sex marriage ban initiative lacked U.S. Constitution Article III standing to appeal in federal court, based on its interpretation of the case or controversy clause. In Perry, California’s Governor and Attorney General both declined to appeal the District Court decision. However, the defen- dant-intervenors (including the official proponents of Proposition 8) did appeal The case left for another day the question of whether the U.S. Constitution’s 14th Amendment equal protection clause requires States to recognize same sex marriages. States remain still free to recognize same sex marriages or not, for purposes of rights controlled by the State, principally inheritance, property ownership, and state taxation. C. Status of Marriage Equality Internationally. According to the Freedom To Marry website (last updated March 2014, http://www.freedomtomarry.org/landscape/entry/c/international), same sex marriage is legal throughout these 16 countries:

2-1 Tax Conference, 27th Annual, May 22, 2014

• The Netherlands, 2000 • Belgium, 2003 • Canada, 2005 • Spain, 2005 • South Africa, 2006 • Norway, 2009 • Sweden, 2009 • Iceland, 2010 • Portugal, 2010 • Argentina, 2010 • Denmark, 2012 • France, 2013 • Brazil, 2013 • Uruguay, 2013 • New Zealand, 2013 • Great Britain, 2014 (except Ireland).

The same website reports that same sex marriages are also legal in Mexico City and in the Mexican state of Quintana Roo. For information regarding international marriage equality as of 2010 with citations, see S. Elizabeth Foster, The World After Proposition 8: A Global Survey of the Right to Marry, The California International Law Journal, www.calbar.ca.gov/ILS, Vol. 18 No. 1 Winter 2010. In the United States. Prior to the Windsor and Perry decisions, 12 States had permitted same sex couples to marry. The first same sex marriages in the United States were performed in Massachusetts in 2004. After the decisions, a flurry of activity ensued, at first in states that had not authorized marriage, but had provided some form of protection for same sex couples. By March 2014, 17 states (California, Connecticut, Delaware, Hawaii, Iowa, Illinois, Massachusetts, Maryland, Maine, Minnesota, New Hampshire, New Jersey, New York, Rhode Island, Washington and Vermont) and the District of Columbia allowed the performance of same sex marriages. http://www.freedomtomarry.org/states/ Due to differences in reporting and recordkeeping methods, it is impossible to accurately determine how many same sex marriages have been performed in the United States to date. It has been estimated that over 95,000 marriages have been performed. http:// wiki.answers.com/Q/How_many_same sex_couples_have_married_in_the_ United_States. Twenty-nine states, including Michigan, have constitutional prohibitions against same sex marriage. Four other states (Indiana, Pennsylvania, West Virginia and Wyoming) have statutes limiting marriage to one man and one woman. There is activity in many of

2-2 The DOMA Supreme Court Case and Its Tax Implications these states to repeal the prohibition legislatively or through ballot initiative. See, http:// www.marriageequality.org/state-ballots-polls. For example, in 2013, the Nevada legislature began the process of reversing its ban, which, if successful, would be effective 2016. As of April 2014, there were lawsuits pending in 30 states challenging state constitutional bans on same sex marriage. Since the Supreme Court ruled in Perry and Windsor, no state marriage ban has survived a federal court challenge. Plaintiffs have won cases in trial courts in Texas, Oklahoma, Tennessee, Kentucky, Ohio, Nevada, Utah, Virginia and Michigan. The first of these cases was just argued on appeal. The same Tenth Circuit Court of appeals panel conducted hearings in April on appeals from the Utah (Kitchen v. Herbert, 961 F.Supp.2d 1181, D.Utah, Dec. 20, 2013, 10th Circuit Docket No.13-4178) and Oklahoma cases (Bishop v. Oklahoma, 962 F.Supp.2d, 1252, N.D. Okla., Jan 14, 2014, 10th Circuit Docket No. 14-5003). The Tenth Circuit put the Oklahoma and Utah cases on the same fast track, but the cases were argued separately. A variation on the challenges to a ban on performance of same sex marriages in a state comes in the form of lawsuits requiring recognition—in states with policies generally favoring recognition of extra territorial marriages—of same sex marriages validly performed outside those state. Some states, such as Ohio, Kentucky and Oregon have law favoring recognition of extra territorial marriages validly entered into, even in instances (such as common law marriage or first cousin marriage) where performance of the marriage would not be legal if conducted in the state. Plaintiffs have won federal district court suits in Ohio (Obergefell v. Kasich [now Himes], 2013 WL 3814262, S.D.Ohio, Jul. 22, 2013, 6th Circuit Docket No. 14-3057) and Kentucky (Love [formerly Bourke] vs. Beshear, February 12, 2014 ____ F.Supp.2d ____, W.D. Ky. February 12, 2014, Trial Ct. Docket No. 3:13-cv-00750, 6th Circuit Docket No. 14-5291) mandating recognition of same sex marriages performed elsewhere for purposes such as parental rights or surviving spouse status, even if the state has a constitutional provision banning same sex marriage. These cases are on appeal with the Sixth Circuit. Other cases that soon will go before circuit courts include: Sevcik v. Sandoval (911 F.Supp.2d 996, D. Nevada, Nov. 26, 2012, 9th Circuit Docket No.12-17668), De Leon v. Perry (____ F. Supp. 2d. ____, W.D. Texas, February 26, 2014, Trial Court Docket No, 5:13-CV-982 2014, WL 715741, 5th Circuit Docket No. 14-50196), and Bostic v. Rainey of Virginia (____ F.Supp.2d ____, E.D. Va., February 13, 2014, Trial Court Docket No. 2:13-cv-00395-AWA-LRL, 4th Circuit Docket No. 14-1169). Bostic is scheduled for oral argument in the Fourth Circuit on May 13, 2014. The Sixth Circuit holds the distinction of being the only federal appeals court to date that will soon consider marriage cases from all four states within its jurisdiction, including Tanco v. Haslam (____ F. Supp. 2d. ____, 2014 WL 997525, Trial Court Docket No. 3:13- cv-01159, M.D.Tenn., Mar. 14, 2014, 6th Circuit Docket No. 14-5297), and the Michigan, Ohio and Kentucky cases mentioned above and below. Several websites are attempting to track the progress of same sex marriage cases. See, http://www.marriageequality.org/lawsuits; and http:// www.americansformarriageequality.org/marriage-in-the-courts.

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II. Federal Response to Windsor Until same sex couples can marry in every state, there will be uncertainty about the extent to which same sex spouses will receive federal marital-based protections. As of December 31, 2003, the Government Accounting Office identified 1,138 federal statutory provisions in the United States Code in which marital status is a factor in determining or receiving benefits, rights, and privileges. U.S. GAO, Defense of Marriage Act: Update to Prior Report, 2004 [the report and its predecessor http://www.gao.gov/new.items/ d04353r.pdf, and (http://www.gao.gov/assets/230/223674.pdf, respectively, list the 1138 items, by subject, including taxation]. Authorizing legislation for these programs, benefits and rights have differing definitions of “married” and “spouse,” or, in many cases, do not define those terms—leaving the definition to regulations or policy statements of the administering agency. Especially in states, such as Michigan, that do not recognize same sex marriages (as of this writing), it is important to determine if the definition of “spouse” or “marriage” is based on a variant of the “state of domicile rule” or a variant of the “state of ceremony” rule. Using a “state of ceremony” rule would provide federal spousal status for couples legally married elsewhere, but domiciled in Michigan. A “state of domicile” rule would not provide spousal status for those couples. Legislation was introduced in both houses of Congress in June 2013 that would create a uniform federal landscape for same sex married couples. The so-called “Respect for Marriage Act” amends Section 7 of title 1, United States Code, to read:

(a) For the purposes of any Federal law in which marital status is a factor, an individual shall be considered married if that individual’s marriage is valid in the State where the marriage was entered into or, in the case of a marriage entered into outside any State, if the marriage is valid in the place where entered into and the marriage could have been entered into in a State. (b) In this section, the term “State” means a State, the District of Columbia, the Commonwealth of Puerto Rico, or any other territory or possession of the United States.

113th Congress (2013–2014) H.R.2523, and S.1236. As of this writing, the bills remain in Committee, and it is unlikely that action will be taken on them in this Congress. In the absence legislation creating a uniform definition of marital status, federal agencies have been releasing guidance on how marital status is determined for key programs and the status of claims processing for same sex couples. The day after the Windsor ruling, President Obama “directed the Attorney General to work with other members of my Cabinet to review all relevant federal statutes to ensure [the Windsor] decision, including its implications for federal benefits and obligations, is implemented swiftly and smoothly.” See, Obama Administration Statements on the Supreme Court’s DOMA Ruling (http://www.whitehouse.gov/blog/2013/06/27/obama- administration-statements-supreme-court-s-doma-ruling). On the question of how the ruling would affect bans on same sex marriage in those states that prohibit it, Obama said: “My personal belief, but I’m speaking now as a president as opposed to as a lawyer, is that if you’ve been married in Massachusetts and you move someplace else, you’re still married, and that under federal law you should be able

2-4 The DOMA Supreme Court Case and Its Tax Implications to obtain the benefits of any lawfully married couple.” (emphasis added) http:// abcnews.go.com/blogs/politics/2013/06/doma-ruling-victory-for-american-democracy- obama-says/. This “state of ceremony” rule has become the default position of the federal executive branch. However, for some important federal benefits, “state of domicile” remains the statutory rule for determining marital status. The following describes the guidance available from the Internal Revenue Service regarding federal tax matters, as well as those agencies whose programs may affect coun- seling or planning of tax, estates or benefits practitioners. A. Internal Revenue Service (“IRS”) The Windsor case was a federal estate tax matter, directly affecting federal tax administration. The Internal Revenue Code does not define “spouse” or “marriage,” and those terms were left to administrative definition. Revenue Ruling 2013-17. On September 16, 2013, the IRS released Revenue Ruling 2013-17, 2013-38 I.R.B. 201. The ruling concludes gender-neutral terms in Internal Reve- nue Code that refer to marital status, such as “spouse” and “marriage,” include, respectively, (1) an individual married to a person of the same sex if the couple is lawfully married under state law, and (2) such a marriage between individuals of the same sex. In determining whether a couple is lawfully married under state law, the IRS employed a “state of ceremony” rule, and recognizes the validity of a same sex marriage valid in the state where it was entered into, regardless of the married couple’s place of domicile. In reaching this conclusion, the IRS analogized to its long-standing position in Revenue Ruling 58-66, 1958-1 C.B. 60, relating to common law marriages. There, the IRS recognized common law marriages valid in the state the marriage was entered into, even where the couple later moved to a state that did not recognize such marriages. The IRS reasoned that, although states have different rules of marriage recognition, uniform nationwide rules are essential for efficient and fair tax. Revenue Ruling 2013-17:

• Applies to all references to spouse and marriage in the Internal Revenue Code and Treasury and IRS regulations for Federal tax purposes; • Holds that, for Federal tax purposes, “marriage” does not include registered domestic partnerships, civil unions, or similar formal relationships recognized under state law and not denominated as a marriage under that state’s law, and “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals who have entered into such relationship, whether relationships are of opposite sex or same sex; and • Applies prospectively as of September 16, 2013.

With some caveats, affected taxpayers may rely on the Revenue Ruling for filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from these holdings, if the applicable statute of limitations for filing the claim under Code §6511 has not expired.

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• A taxpayer who files for a prior year must adjust all items affected by the marital status of the taxpayer to be consistent with the marital status reported on the return or claim.

Taxpayers may rely on Revenue Ruling 2013-17 (subject to the applicable limitations period and consistency within the return or claim) retroactively to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludable from income under Code §§106, 117(d), 119, 129, or 132 based on an individual’s marital status.

• If an employee made a pre-tax salary-reduction election for health coverage under an employer cafeteria plan and also elected to provide health coverage for a same sex spouse on an after-tax basis under a group health plan sponsored by that employer, an affected taxpayer may treat the amounts that were paid by the employee for the coverage of the same sex spouse on an after-tax basis as pre-tax salary reduction amounts.

Revenue Ruling 2013-17 also stated that IRS intended to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and the revenue ruling. IRS expected future guidance would address the following, among other issues:

• Plan amendment requirements (including the timing of any required amendments). • Any necessary corrections relating to plan operations for periods before future guidance is issued. • IRS anticipates future guidance will provide sufficient time for plan amendments and any necessary corrections so plan and benefits will retain favorable tax treatment for which they otherwise qualify.

IRS Notice 2014-19, Notice 2014-1; and Department of Labor (“DOL”) Techni- cal Release 2013-14 provide some of the further guidance promised in Revenue Ruling 2013-17. These are discussed Thomas Bergh’s breakout session outline. IRS Notice 2013-61, 2013-44 I.R.B. 432, set out special administrative procedures for employers to correct overpayments of employment taxes (FICA and FUTA) for 2013 and prior years with respect to certain same sex spouse benefits and certain remuneration paid to same sex spouses, including overpayments that result from a taxpayer’s retroactive application of the holdings of Revenue Ruling 2013-17. For tax year 2013 overpayments, this notice provides two alternative special administrative procedures.

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1. Employers may use the fourth quarter 2013 Form 941, Employer’s QUAR- TERLY Federal Tax Return, to correct overpayments of employment taxes for the first three quarters of 2013; or 2. Employers may file one Form 941-X, Adjusted Employer’s QUARTERLY Fed- eral Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct these overpayments of FICA taxes for all quarters of 2013.

With respect to overpayments of FICA taxes for years before 2013, employers can make a claim or adjustment for all four calendar quarters of a calendar year on one Form 941-X filed for the fourth quarter of such year if the period of limitations on refunds under Code §6511 has not expired and, in the case of adjustments, the period of limitations will not expire within 90 days of filing the adjusted return. Under normal procedures, employers are required to file a Form 941-X for each calendar quarter for which a refund claim or adjustment is made. The special administrative procedures provided in this notice are optional. Employers that prefer to use the regular procedures for correcting employment tax overpayments related to same sex spouse benefits and remuneration paid to same sex spouses, may do so. IRS Q and A’s Regarding Same Sex Spouses. The IRS had provided a list of questions and answers on its website regarding common issues, such as filing status, dependents, the standard deduction, credits, the application of certain Code sections and transitional issues relating to same sex married spouses.

• For tax year 2013 and after, same sex spouses generally must file using a married filing separately or jointly filing status. • For tax year 2012 and before, same sex spouses who file a late original tax return on or after Sept. 16, 2013 generally must file using married filing separately or jointly filing status. • For tax returns for years before 2013 filed before Sept 16, 2013, same sex spouses may choose to amend their federal tax returns to file using married filing separately or jointly filing status, provided the statute of limitations for amending has not expired (generally 3 years from the date the return was filed or 2 years from the date the tax was paid, whichever is later). • A taxpayer’s spouse cannot be a dependent of the taxpayer. • A married taxpayer cannot file using head of household filing status. However, a married taxpayer may be “considered unmarried” and may use head-of-household filing status if taxpayer lives apart from spouse for the last 6 months of the tax year and provides more than 1/2 the cost of maintaining a household that is the principal place of abode of taxpayer’s dependent child for more than 1/2 of the year. See IRS Pub. 501. • If child is a “qualifying child” under Code §152(c) of both parents who are spouses (filing as “married filing separate”), either parent, but not both, may claim dependency deduction for the qualifying child.

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• If both parents claim the child, IRS will treat child as the qualifying child of the parent with whom child resided for the longer period of time during the tax year. If the child resides with each parent for same amount of time during the tax year, IRS will treat child as the qualifying child of parent with the higher adjusted gross income (“AGI”). • If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (Code §63(c)(6)(A)). • A parent adopting as a second parent or co-parent may not claim an adoption credit. Taxpayer may not claim an adoption credit for expenses incurred in adopting the child of taxpayer’s spouse (Code §23). • Provisions of the federal tax law such as treatment of community income and the $25,000 offset for passive activity losses for rental real estate activities apply to same sex spouses. Like other provisions of the federal tax law that apply to married taxpayers, Code §§66 and 469(i)(5) apply to same sex spouses because same sex spouses are married for all federal tax purposes. • If the period of limitations for filing a claim for refund is open, the employer may claim a refund of, or make an adjustment for, any excess social security taxes and Medicare taxes it paid on the benefits for same sex spouse. • Claims for refunds of overwithheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years. Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year. • Services performed by an employee in the employ of his or her spouse are excluded from definition of employment for purposes of FUTA. For all open tax years, a sole proprietor can claim a refund of FUTA tax paid on compensation that sole proprietor paid spouse as an employee in the business. • Services of a spouse are excluded from Social Security and Medicare taxes only if the services are not in the course of the employer’s trade or business, or if it is domestic service in a private home of the employer. • Qualified retirement plans are required to comply with the following rules pursuant to Revenue Ruling 2013-17: • A qualified retirement plan must treat a same sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans. • For purposes of federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same sex marriage validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same sex marriages. • Persons in registered domestic partnership or civil union are not considered spouses, regardless of whether that person’s partner is of the opposite or same sex.

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See, http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same sex-Married-Couples IRS Q and A’s Regarding Registered Domestic Partners and Individuals in Civil Unions. A number of states or municipalities that do not recognize same sex marriages do recognize relationships short of marriage for purposes of state or local tax, employee benefits, inheritance, or other purposes. These relationships are typically called registered domestic partnerships or civil unions and may apply to both same sex and opposite sex couples. In Michigan, a number of employers provide domestic partner benefits to the same sex domestic partners of their employees based on a private affidavit of domestic partnership. The city of Ann Arbor offers a civil union registry, as does the county of Washtenaw. Ingham and Wayne counties, and the cities of Lansing, Kalamazoo and Detroit also offered civil union registries, but it is unclear what the status of those registries is at the writing. Some same sex couples are in domestic partnerships or civil unions for state of domicile purposes, but have been validly married in one or more states in which they are not currently (or were never) domiciled in. This may be the case because the couple moved after marriage, or because, as marriage became legal in other states couples traveled to be able to marry. When apply the Code to these couples, their state law status is not determinative. The test in Revenue Ruling 2013-17, described above controls, and the couple is treated as married for federal tax law purposes. Other same sex couples did not marry, and remain in state domestic partnerships, civil unions or other similar formal relationships that are not marriages under state law. These individuals are not considered as married or spouses for federal tax purposes. The IRS has issued a series of 27 questions and answers to address common federal tax situations. Questions and answers 9 through 27 concern registered domestic partners who reside in community property states and who are subject to their state’s community property laws. (Michigan is not a community property state.) These questions and answers have been updated since the Supreme Court issued its decision in United States v. Windsor. Gener- ally, state law determines whether an item of income constitutes community income. Reg- istered domestic partners must each report half the combined community income earned by the partners. In addition to half of the community income, a partner who has income that is not community income must report that separate income. (see answer to question 9). Therefore, registered domestic partners in community property states can be treated differently than they would be if single taxpayers and differently than if married taxpayers. The IRS questions and answers are helpful in discovering those differences. See, http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Registered- Domestic-Partners-and-Individuals-in-Civil-Unions Other Tax Issues. Revenue Ruling 2013-17 applies to all references to “spouse” and “marriage” in the Internal Revenue Code and regulations for Federal tax purposes. The issue of marital status is relevant across the Code, and practitioners should be aware that the Windsor case and Revenue Ruling 2013-17 could change the treatment of certain payments, transactions or holdings between same sex couples and their families.

• Taxability of Social Security Benefits (Code §86) • Payments Pursuant To Divorce (Code §71)

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• Qualified Domestic Relations Orders (QDROs) • No Gain Or Loss On Transfer Of Property To Spouse (Code §1041) • Family Attribution Rules (Code §267(b)) • Child Care Savings Accounts (Code §125) • Tax on Excess Benefit Transactions with Charitable Organizations (Code §4958) • Private Foundation Excise Taxes (IRC 4940 et seq) • Estate and Gift tax • Gift Splitting • Marital Deduction • Portability of Unified Credit • Individual Retirement Account (“IRA”) Minimum Required Distributions • Spousal Consent For Other Beneficiaries • Rollovers and Inherited IRAs • Hardship Withdrawals

See also, Sept 30, 2013 Tax Notes, p 1571 DOMA Implications for Employee Benefit Plans by Prof Kathryn Kennedy B. Other Programs and Agencies Important to Estates and Tax Social Security. The Social Security Administration (“SSA”) has set up a web site to advise same sex couples on social security and SSI issues. http://www.ssa.gov/ same sexcouples/. Social security does NOT use the default “state of ceremony” position, because the Social Security Act sets its own definition of spouse, which is a variant of the “state of domicile” rule. An applicant is the wife or husband of a fully or currently insured individual if:

1. the courts of the State in which such insured individual is domiciled at the time such applicant files an application, or, if dead, in which he was domiciled at the time of death, would find the applicant and the insured individual were validly married at the time such applicant files such application or, if the insured individual is dead, at the time of died, OR, 2. if the applicant would, under the laws applied by such courts in determining the devolution of intestate personal property, have the same status with respect to the taking of the property as a wife, husband, widow, or widower of the insured individual, OR, 3. it is established to the satisfaction of the Commissioner of Social Security that the applicant in good faith went through a marriage ceremony with the individual resulting in a purported marriage between them which, but for a legal impedi- ment not known to the applicant at the time of such ceremony, would have been a valid marriage. In the case of any person who would be deemed a spouse under the preceding sentence of the insured individual, the marriage is not a valid mar-

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riage unless the applicant and the insured individual were living in the same household at the time of the death of the insured individual or (if the insured individual is living) at the time the applicant files the application. A marriage that is deemed to be a valid marriage by reason of the preceding sentence shall continue to be deemed a valid marriage if the insured individual and the person entitled to benefits as the wife or husband of the insured individual are no longer living in the same household at the time of the death of such insured individual. (emphasis added) 42 U.S.C. §416(h).

The SSA had interpreted this definition, in light of the Windsor decision to require that a spouse for whom benefits for the aged are requested be:

1. Married in a state that permits same sex marriage AND 2. Domiciled in a state that recognizes same sex marriage either at time of application OR while claim is pending final determination.

SSA, Program Operations Services Manual, GN 00210.100 Same sex Marriage— Benefits for Aged Spouses (https://secure.ssa.gov/apps10/poms.nsf/lnx/0200210100#b1). The same definition is used for purposes of determining eligibility for SSI, for benefits for surviving spouses, and for lump sum death benefits. The processing procedures for each of these benefits it set out on the website identified above. See, e.g., https://secure.ssa.gov/ apps10/poms.nsf/lnx/0200210800. All claims pending on, or filed on or after, June 26, 2013, the date of the Windsor decision, are subject to these new instructions. See Program Operation Manual System, Windsor Same sex Marriage Claims and Statement of Carolyn W. Colvin, Acting Com- missioner of Social Security, on Payments to Same sex Couples. Claims processing is in a state of flux. SSA is only processing those claims involving same sex spousal issues for which it has issued processing instructions that fall within the range of processable claims under those instructions. SSA is holding all other claims, actions, and appeals that implicate a same sex marriage. Lump sum death benefits will not be paid to someone lower on the relation list, if a claim is being held pending processing. SSA has also issued a public statement encouraging individuals who believe they may be eligible for Social Security benefits to apply now, and stating that the agency will move swiftly to process claims once it has finalized instructions for its personnel implementing the Windsor decision. See Update on the Supreme Court Decision Regarding the Defense of Marriage Act and Its Implications for Social Security Benefits. The status of the March 22nd marriages is unclear. As of April 24, 2014, the operating manual for processing claims does not mention Michigan among the states where marriage some or all same sex marriages are legal. https://secure.ssa.gov/apps10/poms.nsf/ lnx/0200210100. What is unknown is whether this is just a matter of procedural delay or the result of a determination about the status of these marriages. Claims related to these marriages could be held. An issue has arisen in terms of whether some accommodation will be made for long term same sex couples in states where access to marriage was previously restricted. To receive Social Security survivor benefits, a spouse must have been married to the deceased for at a year. See, https://secure.ssa.gov/apps10/poms.nsf/lnx/0200210400. SSA uses the

2-11 Tax Conference, 27th Annual, May 22, 2014 date same sex marriages were permitted by the marriage license-issuing state, rather than the date of the Windsor decision, to determine compliance with this duration requirement. A case arose presenting these facts in New York in 2011, and resolution of that matter is pending. http://www.nytimes.com/2014/03/22/your-money/a-same sex-couple-together- for-58-years-but-husband-is-still-fighting-for-benefits.html?_r=0 Medicare. The definition of spouse for purposes of Medicare eligibility is tied to the same definitions for purposes of Social Security described above. However, the Depart- ment of Health and Human Services (“HHS”) employs the default position when it does not feel bound by the Social Security Act definition. For example, HHS issued a memo clarifying that all beneficiaries in private Medicare plans (Medicare Advantage) have access to equal coverage when it comes to care in a nursing home where their spouse lives. See HHS Announces First Guidance Implementing Supreme Court’s Decision On the Defense of Marriage Act, (http://www.hhs.gov/news/press/2013pres/08/20130829a.html). For these purposes, “spouse” includes individuals of same sex who are lawfully married under the law of a state, territory or foreign jurisdiction [either state of ceremony OR state of domicile].” On April 4, 2014, the Department of Health and Human Services (HHS) announced that the Social Security Administration (SSA) is now able to process requests for Medi- care Part A and Part B Special Enrollment Periods, and reductions in Part B and premium Part A late enrollment penalties for certain eligible people in same sex marriages. When the work history of a same sex spouse is needed for an applicant to be eligible for premium-free Part A, Social Security will use the same rules for recognizing the marriage when determining eligibility for Medicare as it uses for determining eligibility for Social Security benefits (the “state of domicile” rule variant described in the previous section). The rules for recognizing a marriage for purposes of Medicare Special Enrollment Periods aren’t the same as the rules for determining eligibility for Social Security benefits and premium-free Part A. The date of the marriage and domicile of the spouses are not considered for Special Enrollment Period eligibility. For this reason, Social Security is able to process Special Enrollment Period requests for people with group health plan or large group health plan coverage based on the current employment of a same sex spouse. See, HHS announces important Medicare information for people in same sex marriages (http://www.hhs.gov/news/press/2014pres/04/20140403a.html) and (http:// medicare.gov/sign-up-change-plans/same sex-marriage.html). Medicaid. On September 27, 2013, the director of the HHS Centers for Medicare & Medicaid Services (“CMS”) sent a five page letter to state Medicaid and public health directors. http://medicaid.gov/Federal-Policy-Guidance/Downloads/SHO-13-006.pdf. The purpose of this guidance was to advise states of the CMS position on implications of the Windsor decision for Medicaid and the Children’s Health Insurance Program (“CHIP”). CMS determined that DOMA is no longer a bar to states recognizing same sex marriages in Medicaid or CHIP. CMS directed that States may start recognizing same sex marriages in the administration of their Medicaid and CHIP programs immediately, but understanding the operational challenges that they might face in doing so. States were told they must implement this guidance as soon as reasonably practicable and implement interim workarounds where reasonably possible. CMS will provide state plan amendment pre- prints for Medicaid and CHIP, which states will be required to complete, indicating whether or not the state recognizes same sex marriages for purposes of Medicaid and

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CHIP. Guidance on this process is forthcoming. States may implement their same sex marriage recognition policy prior to submitting a state plan amendment to CMS. Medicaid eligibility rules vary depending on the eligibility group. For certain Medic- aid and CHIP populations, financial eligibility is determined using modified adjusted gross income (MAGI). Section 1902(e)(14)(G) of the Social Security Act (the “Act”) incorporates the definition of MAGI provided in Code §36B(d)(2). Consistent with IRS Revenue Ruling 2013-17, described above, CMS will treat lawfully married couples as spouses for purposes of the MAGI calculation. CMS believes, as a general matter, that it is appropriate to recognize same sex marriages that: (1) are recognized by the state or territory in which the applicant or beneficiary resides, or (2) were celebrated in accordance with the laws of any state, territory, or foreign jurisdiction. However, in view of the unique federal-state relationship that characterizes the Medicaid and CHIP programs, CMS has interpreted Act §1902(e)(14)(G), which incorporates Code §36B(d)(2), to permit states and territories to apply their own choice-of-law rules in deciding what law governs the determination of whether a couple is lawfully married. That is, CMS is permitting states and territories to adopt a different same sex marriage recognition policy if they do not recognize same sex marriages consistent with their laws. Under this approach, with respect to Medicaid and CHIP, a state is permitted and encouraged, but not required, to recognize same sex couples who are legally married under the laws of the jurisdiction in which the marriage was celebrated as spouses for purposes of Medicaid and CHIP. Notwithstanding the policy described above, for individuals whose financial eligibility for Medicaid is not determined using MAGI rules, financial eligibility is based on the methodologies applied by the SSA in determining eligibility for SSI. See Social Security discussion, above, for a discussion of SSI eligibility. CMS is also released related policy guidance from the Center for Consumer Informa- tion and Insurance Oversight (“CCIIO”). That guidance (available at: http:// www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/marketplace- guidance-on-irs-2013-17.pdf) acknowledges that the premium tax credit eligibility rules under Code §36B will treat same sex spouses in the same manner as opposite-sex spouses and that therefore eligibility rules with respect to advance payments of the premium tax credit and cost-sharing reductions will do the same. Department of Labor. The Family Medical Leave Act defines “spouse” as the husband or wife of the employee, but does not define the terms “husband” or “wife.” 29 U.S.C. §2611. Department of Labor regulations defines spouse to mean:

a husband or wife as defined or recognized under State law for purposes of marriage in the State where the employee resides, including common law marriage in States where it is recognized. 29 C.F.R. §825.102. (emphasis added)

DOL has updated its guidance on the Family and Medical Leave Act (FMLA) to make clear that an employee is eligible for leave to care for a same sex spouse where the state in which the employee resides recognizes his or her marriage. See Wage and Hour Division Fact Sheet #28F: Qualifying Reasons for Leave under the Family and Medical Leave Act, (http://www.dol.gov/whd/regs/compliance/whdfs28f.htm). Thus, FMLA does not apply to most same sex spouses living in Michigan, regardless of status of same sex marriage in the state where they work or in the state of celebration. However, the status of March 22nd marriages for this purpose may differ, as Governor has said those marriages

2-13 Tax Conference, 27th Annual, May 22, 2014 are “legal.” U.S. Attorney General Holder has declared the March 22nd marriages will be “recognized by the federal government” (see Federal Response to DeBoer, below). Immigration. The U.S. Citizen and Immigration Services (“USCIS”) generally looks to the place where the marriage was celebrated to determine the validity of the marriage. If marriage is valid in the jurisdiction (U.S. state or foreign country) where it took place, it is valid for immigration purposes.

• USCIS has announced, for purposes of immigration law, same sex marriages will be treated exactly the same as opposite-sex marriages. • U.S. embassies and consulates are adjudicating visa applications that are based on a same sex marriage in the same way they adjudicate applications for opposite gender spouses. Same sex spouse of a visa applicant coming to the U.S. for any purpose—including work, study, international exchange or as a legal immi- grant—will be eligible for a derivative visa. Likewise, stepchildren acquired through same sex marriages can also qualify as beneficiaries or for derivative status. • For persons engaged to foreign citizen living in a country where same sex marriage is not legal, US citizen may file a Form I-129F and apply for a fiancé(e) (K) visa. As long as all other immigration requirements are met, same sex engage- ment may allow fiancé to enter the US for the purpose of marriage.

For more information, see Citizenship and Immigration Service’s (USCIS) website, http://www.uscis.gov/family/same sex-marriages. III. Michigan After Windsor According to The Williams Institute’s analysis of the 2010 U.S. Census, 14,598 same sex couples are living in Michigan. The geographic distribution of those self-reporting couples can be found at http://williamsinstitute.law.ucla.edu/wp-content/uploads/ Census2010Snapshot_Michigan_v2.pdf. Several statutes, enacted in 1996, ban marriage for same sex couples in Michigan. M.C.L. §551.1 states:

Marriage is inherently a unique relationship between a man and a woman. As a matter of public policy, this state has a special interest in encouraging, supporting, and protecting that unique relationship in order to promote, among other goals, the stability and welfare of society and its children. A marriage contracted between individuals of the same sex is invalid in this state.

MCL §551.3 provides, in part, that a man shall not marry another man, and MCL §551.4 provides, in part, that a woman shall not marry another woman. MCL §551.271(1) prohibits recognition of same sex marriages performed in other states. Since 2004, Michigan had prohibited same sex couples from marrying under a voter- approved “Marriage Amendment” to the state constitution, Mich. Const. art. I §25, which provided:

2-14 The DOMA Supreme Court Case and Its Tax Implications

To secure and preserve the benefits of marriage for our society and for future generations of children, the union of one man and one woman in marriage shall be the only agreement recognized as a marriage or similar union for any purpose. A. Legislative Just prior to, and in anticipation of, the Windsor decision, a package of legislative bills was introduced to repeal the State Marriage Amendment and the anti-sam sex marriage recognition statutes. Senate Joint Resolution W and House Joint Resolution V would give Michigan voters the opportunity to repeal 2004 state constitutional amendment banning same sex marriage. Senate Bill 405 would overturn state restrictions on same-gender relationships that existed before the amendment. Senate Bill 406 recognizes same sex marriages approved by other states. There is no expectation that these bills will be considered in this legislative session. No 2014 voter-initiated ballot language to change the Michigan constitutional ban on same sex marriage has been submitted to the Secretary of State for approval. http:// www.michigan.gov/documents/sos/Bal_Prop_Status_2013_410795_7.pdf The deadline for obtaining signatures is July 7, 2014. http://www.michigan.gov/ documents/sos/Ini_Ref_Pet_Website_339487_7.pdf B. Treasury In response to the Windsor decision, the Michigan Department of Treasury issued a Notice To Taxpayers: Same sex Couples Filing Joint Federal Income Tax Returns Must File Michigan Income Tax Returns As Single Filers (http://michigan.gov/documents/taxes/ DOMAnotice_434103_7.pdf). Same sex couples who file a joint federal income tax return must continue to file income tax returns for Michigan with each individual using the single filing status, regardless of their federal filing status. Each individual who has income attributable to Michigan and who has filed a joint return with the IRS as a same sex couple must separately report AGI for Michigan income tax as a single filer. Each individual must recalculate their federal AGI as if they had filed a single federal return. The Department will provide a worksheet on its website that can be used to recalculate income. Filing as single individual may affect the filer’s eligibility for Michigan tax credits. C. Judicial In October 2012, April DeBoer and Jayne Rowse, individually and on behalf of their children, filed an amended complaint in DeBoer v. Snyder, Case No. 12-cv-10285-BAF (E.D. Mich.), challenging as unconstitutional Michigan’s ban on marriage for same sex couples. On March 21, 2014, following a bench trial in the DeBoer case, Judge Bernard Friedman declared the Michigan Marriage Amendment and its implementing statutes unconstitutional and permanently enjoined state officials from enforcing them. The Mich- igan case is notable, as it is the only post-Windsor decision involving a full-blown trial, as opposed to deciding the case on motions. The Court did not stay its judgment in DeBoer. The following day, county clerks in four Michigan counties (Ingham, Muskegon, Oakland, and Washtenaw) opened their offices and began issuing marriage licenses and certificates to same sex couples. Late in the afternoon of March 22, 2014, the U.S. Court of Appeals for the Sixth Circuit entered an order temporarily staying the district court’s judgment in DeBoer until March 26, 2014. The Sixth Circuit’s stay order was entered after more than 300 same sex couples got married. Once the Sixth Circuit’s stay order was

2-15 Tax Conference, 27th Annual, May 22, 2014 entered, county clerks in Michigan stopped issuing marriage licenses to same sex couples. On March 25, 2014, the Sixth Circuit extended its stay of the DeBoer judgment pending final disposition of the state’s appeal. For a copy of the March 25th stay, see, http:// www.freep.com/assets/freep/pdf/C4220278325.PDF Neither of the Sixth Circuit’s stay orders addressed the legal status of the marriages that same sex couples entered into in Michigan on March 22, 2014. The Sixth Circuit appeal is being expedited. Docket No. 14-1341 April DeBoer, et al v. Richard Snyder, et al. IV. Michigan Response to DeBoer A. The Governor’s Statement On March 26, 2014, Governor Rick Snyder issued the following statement regarding marriage licenses distributed to same sex couples in Michigan on Saturday, March 22:

After comprehensive legal review of state law and all recent court rulings, we have concluded that same sex couples were legally married at county clerk offices in the time period between U.S. District Judge Friedman’s ruling and the 6th U. S. Circuit Court of Appeals temporary stay of that ruling. In accordance with the law, the U.S. Circuit Court’s stay has the effect of suspending the benefits of marriage until further court rulings are issued on this matter. The couples with certificates of marriage from Michigan courthouses last Saturday were legally married and the marriage was valid when entered into. Because the stay brings Michigan law on this issue back into effect, the rights tied to these marriages are suspended until the stay is lifted or Judge Friedman’s decision is upheld on appeal. (emphasis added) http://www.michigan.gov/snyder/0,4668,7-277-57577-324717--,00.html. B. The ACLU Litigation On April 14, 2014, the American Civil Liberties Union filed a lawsuit in federal district court on behalf of eight of the couples married on March 22, 2014. Plaintiffs seek declaratory and injunctive relief requiring that their marriages be given immediate and ongoing recognition by the State of Michigan pursuant to the due process and equal protection guarantees of the U.S. Constitution. Caspar et al v. Snyder et al. E.D. Mich case number 4:14-cv-11499-MAG-MKM, before Judge Mark Goldsmith. For a copy of the complaint in the ACLU case, see, http://www.aclumich.org/sites/default/files/2014_ LGBT_CasparVSnyder_complaint.pdf V. Federal Response to DeBoer On March 28, 2014, Attorney General Eric Holder issued the following statement on the status of same sex marriages performed in the state of Michigan:

I have determined that the same sex marriages performed last Saturday in Michigan will be recognized by the federal government. These families will be eligible for all relevant federal benefits on the same terms as other same sex marriages. The Governor of Mich- igan has made clear that the marriages that took place on Saturday were lawful and valid when entered into, although Michigan will not extend state rights and benefits tied to these marriages pending further legal proceedings. For purposes of federal law, as I announced in January with respect to similarly situated same sex couples in Utah, these

2-16 The DOMA Supreme Court Case and Its Tax Implications

Michigan couples will not be asked to wait for further resolution in the courts before they may seek federal benefits to which they are entitled.

Last June’s decision by the Supreme Court in United States v. Windsor was a victory for equal protection under the law and a historic step toward equality for all American families. The Department of Justice continues to work with its federal partners to implement this decision across the government. And we will remain steadfast in our commitment to realizing our country’s founding ideals of equality, opportunity, and justice for all. (emphasis added) http://www.justice.gov/opa/pr/2014/March/14-ag-320.html.

2-17

An Update on the Michigan Economy

by Robert J. Schneider Citizens Research Council of Michigan Lansing

An Update on the Michigan Economy

Robert J. Schneider Citizens Research Council of Michigan Lansing

Exhibit Exhibit A PowerPoint Presentation ...... 3-3

3-1

An Update on the Michigan Economy

Exhibit A PowerPoint Presentation

Michigan’s Budget and Economy: Progress and Challenges

Bob Schneider, Director of State Affairs

Presentation to the 27th Annual Tax Conference Taxation Section – State Bar of Michigan May 22, 2014

www.crcmich.org

Citizens Research Council

• Founded in 1916 • Statewide • Non-partisan • Private not-for-profit • Promotes sound policy for state and local governments through factual research – accurate, independent and objective • Relies on charitable contributions of Michigan foundations, businesses, and individuals

• www.crcmich.org

3-3 Tax Conference, 27th Annual, May 22, 2014

Outline • Update on national economy

• Michigan economy: where we were, and where we’re going now

• Michigan’s budget: impact of the Great Recession on revenues and spending; where do we go now?

• Tax policy and the state budget: PPT and homestead credit

• Longer-run outlook: positive trends, but budget challenges remain

Update on National Economy

3-4 An Update on the Michigan Economy

Output has Been Growing for 4 Years

Real GDP Growth

5 Source: U.S. Bureau of Economic Analysis. Numbers are real quarterly growth at an annual rate.

But Growth Has Been Slow

Average Growth since Recession Average Growth: 1982-2007 6 Source: U.S. Bureau of Economic Analysis and CRC calculations. Post recession growth is 2009Q2 to 2014Q1. 25 year pre-recession growth is calculated using 1982Q4 to 2007Q4.

3-5 Tax Conference, 27th Annual, May 22, 2014

Vehicle Sales Are Back to Pre-recession Levels Monthly Light Vehicle Sales (Seasonally Adjusted Annual Rate)

Mar 14 16.3M

Feb 09 9.0M

7 Source: St. Louis Federal Reserve (FRED).

S&P 500 Up 178% From March 09 Low

4/24/14 1,879

3/9/09 676

Source: St. Louis Federal Reserve (FRED).

3-6 An Update on the Michigan Economy

Housing Starts Begin to Recover But Have a Long Way to Go

Source: St. Louis Federal Reserve (FRED).

Employment Growing with Labor Force But Not Regaining Lost Jobs

+9.9M

-98K

-8.7M

10 Source: U.S. Bureau of Labor Statistics. Red line assumes monthly growth of 130,000 per month. U.S. labor force grew by an average of 130,000 per month between 1990 and 2007.

3-7 Tax Conference, 27th Annual, May 22, 2014

Michigan’s Economy: Climbing Out of the Great Recession

Solid Job Growth Forecast For Michigan

12 Source: U.S. Bureau of Labor Statistics. May 2014 Consensus Conference.

3-8 An Update on the Michigan Economy

After Tremendous Decline Vehicle Employment is Growing

Michigan Transportation Equipment Employment (In Thousands)

13 Source: Bureau of Labor Statistics.

Almost Every Sector in Michigan Lost Jobs in Michigan’s Lost Decade

14 Source: Bureau of Labor Statistics. CRC calculations.

3-9 Tax Conference, 27th Annual, May 22, 2014

Michigan Has Added Jobs Over Past 3 Years

15 Source: Bureau of Labor Statistics. CRC calculations. Data extracted February 2014.

Michigan Employment Has Grown Faster Than U.S. Since Recession End

Cumulative Change in Employment Since June 2009 MI 7.2% U.S. 5.6%

16 Source: U.S. Bureau of Labor Statistics and CRC Calculations.

3-10 An Update on the Michigan Economy

Going Back to 2000 Michigan Trails U.S. By a Wide Margin

Cumulative Change in Employment Since April 2000

U.S. 4.6%

MI -12.3%

17 Source: U.S. Bureau of Labor Statistics and CRC Calculations.

Michigan’s Budget Picture: Impact and Aftermath of Recession

3-11 Tax Conference, 27th Annual, May 22, 2014

Nominal Revenues Back at 08 Level But Real Revenues Still Down Combined GF/SAF Revenues (2000 = 100)

Nominal Nominal FY15=109.8 FY08=106.2

Real FY15=80.8 Real FY08=87.4

Actual Forecast

19 Source: Revenue data Senate Fiscal Agency and May 2014 Consensus estimates. Indexing and inflation adjustment CRC calculations. Inflation adjustment done using Detroit CPI-U.

The Economists Giveth… and the Economists Taketh Away

3-12 An Update on the Michigan Economy

Revenues Going Forward Uncertainty with Regard to Business Tax Revenue

• Michigan Business Tax credits: When will outstanding “certificated credits” get cashed in? • FY2013: Expected $490M outflow; actual was $75M • Will FY2013 credits be claimed now? • Or will they never be claimed?

• Corporate Officer Liability: How will new law affect revenues? Estimated at $67M in FY2014, $104M in FY2015

• New Corporate Income Tax: Level and stability of revenue from this new tax

Michigan Taxes Now Below Average Per Capita and as Share of Income

State and Local Taxes

22 Source: State and Local Tax Finance Initiative and CRC calculations.

3-13 Tax Conference, 27th Annual, May 22, 2014

Michigan Taxes as a Percent of Income Have Fallen Sharply

23 Source: State and Local Tax Finance Initiative and CRC calculations.

Current Budget Situation • After decade of budget constraints, available fund balances coming into FY2015 and the promise of healthy revenue growth in future years • Stability shifts decision-making from “how to cut” to “how to spend” • Restore previous budget cuts? • Revise budget priorities with new programs? • Save dollars today for future “rainy days”? • Reduce revenues through tax reductions? • Retirement legacy costs are still an issue, but state close to clearing the hurdle caused by 2008 financial crisis • Challenges remain, including a permanent solution to the state’s road funding issues

3-14 An Update on the Michigan Economy

Governor’s Proposal Large Fund Balances Drawn Down During FY2015

Note: Balance estimates as of February release of Governor’s budget proposal based on January revenue estimates. 25

Major Budget Increases for FY2015 Revenue Sharing, K-12, and Higher Education See Increases in Governor’s Budget

• Local Revenue Sharing: 45% increase to counties ($65M); remaining $56M to eligible municipalities • K-12 Education: 3.2% boost in Governor’s proposal • Foundation allowance: $150 million increases funding by between $83 and $111 per pupil • Increase of $270 million to cover unfunded pension liability costs • Second round increase ($65M) for pre-K program • Higher Education: $77M provides for 6% increase for university operations • Half of increase distributed on performance criteria • Tuition increases capped at 3.2% to receive performance-based funding 26

3-15 Tax Conference, 27th Annual, May 22, 2014

Recent History of Revenue Sharing Cities, Villages, and Townships – Payment vs. Formula

Effects of MPSERS Costs on Foundation Grant Estimated Impact on Minimum Grant

3-16 An Update on the Michigan Economy

University Operations Funding With Increase, Still Below FY2011 Level by 6%

Active Classified State Workforce Down 24% from FY1995 and 6% from FY2010

30 Source: Department of Civil Service, Annual Workforce Reports

3-17 Tax Conference, 27th Annual, May 22, 2014

K-12 and Local Employment Still Falling While Private Employment Recovering

Cumulative Change in Employment Since March 2001

Local -8% Private -13%

K-12 -27%

31 Source: U.S. Bureau of Labor Statistics and CRC Calculations. Data through May 2013.

Transportation Funding Governor proposes stop-gap funding for FY2015 • No proposal for permanent new road revenues; FY2014 proposal to raise motor fuel taxes and vehicle registration fees was not acted upon by the legislature

• Governor proposes one-time GF/GP appropriation of $254M to buffer current dedicated transportation revenues: • $139M to be used to match federal aid • $115M for state trunkline road and bridge needs (no PA 51 distribution to local road agencies)

• House plan: Modify gasoline tax, increase diesel fuel tax, earmark 1% of state use tax to roads, certain fee 32 increases; hope to generate earmark of ~$500 million

3-18 An Update on the Michigan Economy

GF/GP Support for Transportation Status of Current Funding

• Already appropriated for FY2014: $121M in GF/GP for roads and first installment ($115M) from Roads and Risks Reserve Fund • House and Senate recently settled on additional supplemental funding for FY2014: • $100M for winter road maintenance (through Act 51 formula) • $115M for priority road projects (unspent funds may be shared by state and local road agencies) • Summary of one-time funding: • FY2014: $451 million • FY2015: ??? (Governor: $254M; House: $450M)

33 • FY2016: so far $0

Funding Reserved for City of Detroit $17.5 Million in Tobacco Settlement Revenue

• Funding will come out of tobacco revenues to Michigan under settlement agreement with tobacco companies • Budget impact: Tobacco dollars are used in the DCH budget to help finance Medicaid; additional allocation requires backfilling with GF/GP • Indications are that commitment will continue over 20 year period • Alternative proposal: take present value of this funding stream ($194M) and provide upfront funding from Budget Stabilization Fund

3-19 Tax Conference, 27th Annual, May 22, 2014

Savings for Future Needs • Planned FY2014 deposit of $140M into state’s Budget Stabilization Fund adds to current $506M balance • Governor would deposit additional $120M in FY2015 to bring BSF balance to $766M by end of FY2015 – about 3.5% of combined GF/GP and SAF revenues • Governor renews proposal to deposit one-half of Medicaid expansion savings to Health Savings Subfund: $122 million in both FY2015 and FY2016 • New revenue estimates make it much less likely that Legislature approves these deposits • Will BSF be tapped as part of Detroit bankruptcy plan?

Tax Policy and the State Budget

3-20 An Update on the Michigan Economy

Homestead Property Tax Credit Governor Proposes Expanded Eligibility for Credit

• Credit against the state income tax for households with property tax bills that are relatively high compared to household income • Governor’s proposal expands eligibility in two ways beginning in tax year 2013: • Household resources: cap raised from $50,000 to $60,000 • Income threshold: credit would equal a portion of property tax payment minus 3.0% of household resources (down from 3.5%) • Revenue impact: estimated at $102.7 million annually • 2014 challenge: Reaching those not currently eligible for the credit who won’t file for it on 2013 return 37

Personal Property Tax Reforms Phase-out of PPT through 2023 • Small taxpayers: less than $80,000 in true cash value; effective tax year 2014 • “Eligible manufacturing personal property”: eligible for industrial processing exemption under sales tax; tax phased out between tax years 2016 and 2023

3-21 Tax Conference, 27th Annual, May 22, 2014

Reimbursement to Local Units Recent legislation aimed to provide 100% reimbursement • Portion of existing Use Tax will be levied by a new Local Community Stabilization Authority with revenue dedicated to local reimbursement • Initial revenues of $96.1M in FY16 grow to $572.6M in FY28; 1% growth thereafter • No loss threshold to qualify for reimbursement

• State Essential Services Assessment replaces local option; assessed on exempted C&I personal property at rate of 2.4 mills phased down to 0.9 mills as property ages

• Reimbursement to local units will reflect actual losses from PPT exemptions

• Everything (exemptions, tax changes, reimbursement) is 39 subject to August 2014 vote

Long-Run Outlook for State Budget: Budget Risks

3-22 An Update on the Michigan Economy

Budget Risks Pose Challenges The Impact of “What Ifs” in Out Years

• Transportation Funding: If no permanent road funding solution is achieved, GF/GP contributions may continue to be needed to fill gaps • Health Insurance Claims Assessment: Shortfall in Medicaid budget will persist without either a revenue fix or offsetting cuts • Personal Property Tax Reforms: if approved by voters, GF/GP impacts escalate in out years • Inflation: even a continuation budget will incur inflationary costs 41

GF/GP Going Forward Transportation and HICA bring potential deficits

Note: FY2017 and FY2018 revenue estimates based on long-run estimates from May 2014 Consensus Revenue Estimating Conference. 42

3-23 Tax Conference, 27th Annual, May 22, 2014

Long-Run Outlook

• Budget is structurally balanced, but challenges remain • Any budget surplus has largely been accounted for in the short run; little “excess revenues” to spend or give back without offsetting spending cuts or revenue growth • Continues to build up reserves in both BSF and new Health Savings Subfund, but additional deposits will be needed to achieve goal of 6-8% of revenues • Looking forward, if economy and revenues cooperate, picture looks much brighter in FY2018 and beyond

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We hope you will consider supporting CRC. For more information or to donate, contact us at:

Citizens Research Council of Michigan 38777 Six Mile Road Livonia, MI 48152

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3-24 An Update on the Michigan Economy

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Providing Independent, Nonpartisan Public Policy Research Since 1916 45

3-25

State Tax Commission

by Douglas B. Roberts, PhD State Tax Commission Lansing

State Tax Commission

Douglas B. Roberts, PhD State Tax Commission Lansing

Exhibit Exhibit A PowerPoint Presentation ...... 4-3

4-1

State Tax Commission

Exhibit A PowerPoint Presentation

MICHIGAN STATE TAX COMMISSION

27TH Annual Tax Conference Douglas B. Roberts, Chairperson State Tax Commission

Introduction

Who is the Michigan State Tax Commission: 3 member body Appointed by the Governor Advice and Consent of the Legislature At least one member must be an Advanced (3) or Master (4) Assessor

4-3 Tax Conference, 27th Annual, May 22, 2014

Introduction

What are our primary responsibilities: General supervision of the administration of the property tax laws of Michigan State Equalization State Assessed Properties Omitted or incorrectly reported property (MCL 211.154) Exemptions Property classification appeals

Introduction

Responsibilities continued: Assessment of DNR owned property Audit of Local Unit Assessment Practices (AMAR) E.O. 2009-51 added responsibility for education and certification of assessing officers including hearing complaints regarding assessment administration P.A. 92 of 2014 added responsibility for hearing appeals of the State Essential Services Assessment. (PPT)

4-4 State Tax Commission

E.O. 2009-51

Education and Certification of Assessing Officers: There are currently 1,868 Certified Assessing Officers in Michigan. The Commission eliminated all existing educational programs and assessor levels in 2009. The goal of the Commission is to improve the professionalism of assessors. Four new levels and training programs were established.

E.O. 2009-51

Michigan Certified Assessing Technician (MCAT): Designed primarily for individuals who work in an assessing office but do not want to sign an assessment roll. 2 ½ day tested program offered through our educational partner Michigan Assessors Association.

4-5 Tax Conference, 27th Annual, May 22, 2014

E.O. 2009-51

Michigan Certified Assessing Officer (MCAO): Replaced the former Level 1 and Level 2 certification. 16 month program Program is offered in January and July each year in Lansing and the January of even numbered years in St. Ignace. Demand for the program far exceeds available space – over 70 applications are received for each program with 35 spots available.

E.O. 2009-51

Michigan Advanced Assessing Officer (3) (MAAO): Replaced the former Level 3 certification. Program consists of five pre-requisite classes offered through the Michigan Assessors Association at the Spring and Fall Schools and A one year program of intensive study in specific areas. This program begins in May each year.

4-6 State Tax Commission

E.O. 2009-51

Michigan Master Assessing Officer (4) (MMAO): Replaced the former Level 4 certification. Program consists of a two year program that includes the writing of a case study. The Commission has certified 20 new Master Level Assessing Officers since beginning the new program in 2011 as compared to 3 in the prior 7 years. This program begins in May each year.

Tentative 2014 SEV

Total preliminary state equalized value recommended for 2014 is more than the final state equalized value of taxable properties in Michigan in 2013 by 2.93%.

4-7 Tax Conference, 27th Annual, May 22, 2014

Tentative 2014 SEV

Agricultural $20,065,650,154 Commercial $50,367,888,270 Industrial $15,922,117,451 Residential $242,391,571,646 Timber – Cutover $251,968,165 Developmental $176,633,422 Total Real Property $329,175,829,108 Total Personal Property $31,426,155,025 Total Real + Personal $360,601,984,133

SEV History

Total Real and personal property SEV (in billions of dollars)

$500 $453 $448 $424 $450 $385 $363 $361 $400 $349 $350

$350

$300

$250

$200

$150

$100

$50

$- 2007 2008 2009 2010 2011 2012 2013 2014 12

4-8 State Tax Commission

STC Meetings

MCL 211.154 matters are heard at every meeting A letter of representation must be filed in order for a taxpayer representative to receive notice of STC meetings and determinations. Notice of the meeting is provided 60 days before the meeting. Each party may receive one postponement for cause. Pursuant to STC Rule 209.16 information to be presented must be received by the STC 30 days before the meeting (please provide 4 copies)

Omitted and Incorrectly Reported Property

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4-9 Tax Conference, 27th Annual, May 22, 2014

STC Meetings

Property Classification Appeals Industrial versus commercial Petitions must be postmarked by June 30 of the current tax year. Determinations are made before the end of the year in which the petition is filed. Recommendations are made by staff and presented to the STC. The STC does not hear from the parties involved at an STC meeting.

Classification Appeals

Number of Classification Year Appeals Received

2009 1601 2010 1020 2011 379 2012 98 2013 149

4-10 State Tax Commission

Assessment Roll Changes

State Assed 2013 Final 2014 Tentative % Change Company Taxable Value Taxable Value Railroad $561,349,397 $596,544,458 6.27%

Telephone $1,433,032,899 $1,396,040,603 - 2.58%

Carline $78,966,251 94,853,724 20.12%

Totals $2,073,348,547 2,087,438,785

Assessment Roll

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4-11 Tax Conference, 27th Annual, May 22, 2014

Assessment Roll

VJ : 10VVVR 7]VQ` QI]:J7 VH`1] 1QJQ``Q]V` 7 IQ%J :C%: 1QJ

VJ `%V:.:C%V $ 5 5 8

VJ (VVR:C%V :`%G=VH Q :6: 1QJG7 .V $ 5 5 8 :`Q:J1J$ : V :6QII11QJ VJ : 10VH:]]VR:C%V $ 5 58

VJ : 10V:6:GCV:C%V $ 5 5 8

VJ `%V:.:C%V $ 5 5 5 8

VJ (VVR:C%V $5 5 5 8 Q :C 1C1 7QCC VJ : 10VH:]]VR:C%V $5 5 5 8

VJ : 10V:6:GCV:C%V 19 $5 5 5 8

Property Tax Changes

Although some changes are hard to predict, it is clear that the big change coming in property tax over the next few months/years is the change in personal property tax.

4-12 State Tax Commission

Property Tax Changes

MCL 211.9o Eligible Personal Property Began in 2014. Under $80,000 True Cash Value. Taxpayer must file an affidavit by February 10th each year. See STC Bulletin 11 of 2013 for more information.

Contact Information

STC website: www.michigan.gov/statetaxcommission Phone: 517-335-3429 Email: [email protected] Sign up for the STC listserv on the STC website. The STC uses their listserv to distribute Bulletins, Memorandum and other information regarding property tax administration.

4-13

International Taxation Committee and Federal Income Tax Committee - Base Erosion: Will the OECD Change the World?

by Christopher E. Bergin Tax Analysts Falls Church, VA

International Taxation Committee and Federal Income Tax Committee - Base Erosion: Will the OECD Change the World?

Christopher E. Bergin Tax Analysts Fall Church, VA

I. Base Erosion and Profit Shifting ...... 5-1 II. Territorial Taxation ...... 5-5 III. Morality and Taxes ...... 5-6

I. Base Erosion and Profit Shifting In response to abuses in the current international tax environment, the G-20 directed the OECD to create the base erosion and profit-shifting project. The project involves members of the OECD and non-OECD members of the G-20. It also seeks input from developing countries. The action plan released on July 19, 2013, includes 15 items:

(1) Address the challenges of the digital economy. (2) Neutralize the effects of hybrid mismatch arrangements. (3) Strengthen the controlled foreign company rules. (4) Limit base erosion via interest deductions and other financial payments. (5) Counter harmful tax practices more effectively, taking into account transparency and substance. (6) Prevent treaty abuse. (7) Prevent the artificial avoidance of permanent establishment status. (8, 9, and 10) Ensure that transfer pricing outcomes are in line with value creation regarding intangibles, risks and capital, and other high-risk transactions. (11) Establish procedures to collect and analyze data on BEPS and the actions to address it. (12) Require taxpayers to disclose their aggressive tax planning arrangements. (13) Reexamine transfer pricing documentation. (14) Make dispute resolution mechanisms more effective. (15) Create a multilateral instrument to enable interested countries to implement measures developed in the course of the BEPS work and amend bilateral tax treaties.

Pascal Saint-Amans, head of the OECD Centre for Tax Policy and Administration, said January 23 that the need for the BEPS project is at least in part due to the OECD’s

5-1 Tax Conference, 27th Annual, May 22, 2014 success in eliminating double taxation, which has in turn resulted in the conditions for double nontaxation. So far, actions 1, 2, 6, and 13 are in the discussion draft/consultation phase, with final reports and recommendations due in September. A preexisting project, including a revised discussion draft issued July 30, 2013, on the transfer pricing aspects of intangibles, is also being treated as part of the BEPS project under action 8. While the general conclusions of the drafts tend to accord with the U.S. view, they often also contain discussions of alternative arrangements proposed by other members. Action 1 on the digital economy, for instance, concludes that the digital economy does not need different rules from the economy at large. However, it also includes options specifically targeting digital economy issues, such as creating a “virtual permanent establishment” standard for companies doing business in a country where they do not have a PE that meets the normal definitions. The treaty abuse draft under action 6 proposes a limitation on benefits clause that is modeled on the U.S. treaty approach, but also includes a more subjective “main purpose” test. Under action 8, the OECD’s work on intangibles is also an area of concern for the United States because some countries seek recognition of market country intangibles that would subject more corporate profits in countries such as China and India. The U.S. is insisting that there are no intangible transactions that cannot be priced, though some may be harder than others. It wants to avoid any inclusion of non-arm’s- length measures, but, failing that, to avoid having any such measures narrowly defined. Under action 13, the U.S. has indicated a willingness to go along with country-by- country reporting of tax information as long as the information is kept strictly confidential and is not used to implement formulary apportionment. Observations This argument seems to animate the U.S. approach to the BEPS process. The United States recognizes that there is a problem, but is skeptical of the measures surfacing in the OECD. Likewise, in the U.K., there is widespread anger that U.S. companies are making sales, but not paying taxes. If we are applying a principle that taxes should be paid where profits are earned, does the U.K. have a stronger claim on those profits than the U.S.? In a recent webcast on the digital economy draft, David Ernick, now at PwC but formerly with Treasury, pointed out that the expansive PE proposals seemed to confuse the purpose of an income tax. “Both of these [PE] options seem to call into question the fun- damental distinction between an income tax and a consumption tax, with income taxes generally being imposed in the location of activities of the enterprise that create profits, whereas consumption taxes are imposed at the location of consumption,” Ernick said. It would seem that a similar argument could be raised often in the BEPS discussion. A. Apple Apple’s arrangements are often misunderstood to be a “double Irish Dutch sandwich” tax dodge. It is not, instead what Apple has created are pure “stateless” companies by

5-2 Base Erosion: Will the OECD Change the World? using the difference in residency rules between the United States and Ireland. The United States determines tax residency based on the place of incorporation, while Ireland uses a management and control test. By incorporating in Ireland but managing its companies from Cupertino, Calif., Apple has created companies that are not considered resident by either country’s tax authority. The companies are resident in both countries while also resident in neither—a “Schrödinger’s company,” if you will. Key Events:

• May 21, 2013—The Senate Homeland Security and Governmental Affairs Per- manent Subcommittee on Investigations held a hearing on Apple’s tax affairs. At the hearing, Apple CEO Tim Cook argued for a simplification of U.S. tax rules that would likely lead to his company paying more in tax. He recommended permanent change rather than another repatriation holiday, which would have bene- fited Apple given its more than $100 billion in offshore cash. • October 15, 2013—Irish Finance Minister Michael Noonan announced that the Irish government would act on “stateless companies.” The action it later took would assert tax residency over companies that lack tax residency in their country of management and control. This change ends the arrangement Apple was using. Assuming full implementation without counter tax planning, Apple’s income from operations outside the U.S. would be subject to Ireland’s 12.5 percent tax rate.

Observations While the action Ireland took eliminates the primary concern raised by lawmakers at the May hearing, it leaves unchanged the amount of income that will be taxed currently by the United States. The income that was subject to deferral before will remain so, but will now result in additional foreign tax credit amounts for the company to use to offset any U.S. taxes payable on repatriation. There is no transfer pricing issue raised here, beyond whatever may have been paid for the initial transfer of the intellectual property from the United States and any ongoing cost-sharing arrangements. As professor J. Richard Harvey of Villanova University School of Law has pointed out, the change in residency rules does not prevent Apple from reorganizing to use a double Irish structure to reduce future tax bills. B. Double Irish Dutch Sandwich Description This arrangement requires three companies using transfers of rights in intellectual property to reduce tax rates. First, income is earned by an Irish resident company. This could be, as with Google, revenue from advertising sales made outside the United States. This company pays royalties for intellectual property to a Dutch holding company. The Dutch holding company then pays over the royalties to the second Irish incorporated company that is the ultimate owner of the intellectual property for exploitation in non-U.S. jurisdictions. While this company is incorporated in Ireland, it is managed and controlled from a tax haven, such as Bermuda, where there is no tax on corporate profits. Unlike the Apple arrangement, the Irish subsidiary does have a recognized tax residence (Bermuda), but still pays no income tax. The imposition of the Dutch holding company is meant to

5-3 Tax Conference, 27th Annual, May 22, 2014 take advantage of preferential rules for royalty income while avoiding withholding tax as an intra-European Union transfer. To avoid a subpart F inclusion, the parent checks the box to have the Dutch holding company treated as a disregarded entity so that it and the Irish companies are treated as one entity for U.S. purposes. Google has a U.K. subsidiary that works to generate advertising sales. However, the actual sales are made between the customer and the Irish operating company. As a result, the U.K. subsidiary makes a minimal profit on which it is taxed, while generating significant profits for the Irish operating company. C. Starbucks Starbucks has come under intense scrutiny by the U.K. House of Commons Public Accounts Committee, chaired by Labour MP and Public Accounts Committee Chair Mar- garet Hodge. Hodge and her fellow legislators were incensed that Starbucks was reporting profits from its U.K. operations while the subsidiary company incorporated there is reporting year after year of losses. Among the expenses that kept Starbucks’s U.K. operations in the red for 14 of 15 years were royalty payments ranging between 4.5 and 6 percent of sales for licensing Star- bucks intellectual property from its European headquarters in the Netherlands. The company also sources its beans through a Swiss subsidiary via a Netherlands roasting operation and funded its U.K. expansion through offshore intercompany loans. The result has been an almost unbroken string of U.K. company losses, but overall profits from U.K. sales. The public outrage in response to Starbucks’s tax arrangement led the company to promise to overpay its U.K. tax obligations by £20 million in two installments in 2013 and 2014. On April 16, 2014, Starbucks announced that it would open a regional headquarters in the U.K. to manage its businesses in Europe, the Middle East, and Africa. It has said the move will result in more taxes payable to the United Kingdom. D. Caterpillar In 1999 Caterpillar reorganized its foreign parts sales business under a Swiss subsidiary. By buying and selling third-party parts through the Swiss subsidiary rather than the U.S. parent, CAT was able to book 85 percent of its parts business profits in the Swiss entity. In an April 1 Senate Permanent Subcommittee on Investigations hearing, Sen. Carl Levin criticized the shift in profits that occurred without a significant change in business operations. Under an arrangement known as the “virtual inventory system,” U.S. manu- factured parts are recharacterized as parts owned by the Swiss subsidiary when an order is received for delivery outside the United States. The change has allowed Caterpillar to attribute $8 billion in profits to its Swiss subsidiary between 2000 and 2012, which the committee found had saved the company $2.4 billion. “I am as big a supporter of U.S. manufacturing as you will find. But the Caterpillar case study demonstrates that offshore profit shifting is not reserved for those high-tech companies that transfer intellectual property to themselves offshore,” said Levin.

5-4 Base Erosion: Will the OECD Change the World?

II. Territorial Taxation The U.S. stands out in two ways among its peers in international taxation. It has the highest statutory corporate tax rate in the world and a worldwide corporate tax system with deferral, while its competitors impose corporate taxes on a territorial basis. The federal statutory rate is 35 percent, but the effective tax rate is 39.1 percent after accounting for state corporate taxes. By comparison, Ireland has a 12.5 percent statutory rate, and the U.K. rate is now 21 percent with another percentage point reduction planned for 2015. Many of the current proposals to reform the U.S. corporate tax system seek to tackle one or both of these features. Under the worldwide system, income earned anywhere is subject to U.S. tax. How- ever, income that does not fall into one of the subpart F categories will be taxed only when it is repatriated to the United States. When it is repatriated, foreign taxes paid on the income will generally be eligible for foreign tax credits. This has led to a large amount of corporate earnings being locked out of the United States. Essentially, companies do not want to bring the money back and have to pay the full 35 percent tax rate if it’s unneces- sary. The proposals for a switch to territorial taxation include windfalls of tax revenue through the inclusion of transition taxes that would be imposed on foreign retained earnings at a reduced rate. Once the transition takes place, the money could flow back to the U.S. without incurring additional taxes. In 2004 the U.S. tried to overcome the lockout effect with a one-year tax holiday that applied an 85 percent exemption on repatriated earnings. The system allowed for volun- tary repatriation of foreign earnings at an effective rate of 5.25 percent. A. Camp Proposal On February 26 House Ways and Means Committee Chair Dave Camp released a comprehensive discussion draft on tax reform. In the draft, Camp refers to $2 trillion in “trapped cash,” unrepatriated foreign earnings subject to tax if it is brought back into the United States. The plan moves toward territorial taxation through a dividend exemption for foreign business income with changes to the subpart F rules intended to prevent base erosion. Camp’s proposal would lower the statutory rate to 25 percent, but would also create a 15 percent “innovation” rate that would apply to intangibles-related income whether the products are made in the U.S. or elsewhere. The proposal would also change the subpart F rules to deem foreign income earned from intangibles as U.S.-source income if that income had been subject to a foreign tax rate of less than 15 percent. Foreign personal holding company income and foreign base company sales income would be fully taxable in the U.S. if it was subject to rates below 25 percent and 12.5 percent, respectively. The dividend exemption would apply to 95 percent of foreign business income. The proposal would impose a one-time tax on retained earnings and profits at a rate of 8.75 percent of E&P held as cash or cash equivalents and 3.5 percent of any additional E&P.

5-5 Tax Conference, 27th Annual, May 22, 2014

B. Baucus Proposal Former Sen. Max Baucus, now the U.S. ambassador to China, presented a similar reform framework in his November 19, 2013, discussion draft. The proposal’s “Option Y” would allow a 100 percent exemption of foreign-source dividends, but would include “low-taxed income” (income subject to taxation of less than 80 percent of the U.S. rate) in U.S. income. Passive, U.S.-related, or insurance income would also be subject to inclusion as U.S. income. The plan would subject E&P currently retained offshore to a 5.25 percent transition tax. C. Obama Budget While the latest Obama budget does not move toward a foreign dividend exemption regime, it would close many of the same avenues for avoiding current taxation though an expansion of the subpart F rules. It would also seek a reduction in the federal corporate tax rate to 28 percent. The proposal also:

1. Seeks to limit base erosion through limitations on interest deductions. 2. Creates a new subpart F category for foreign base company digital income. 3. Expands the definition of foreign base company sale income. 4. Would bar deductions for payments of interest or royalties to a related party when that payment would result in a double deduction or a deduction and no corre- sponding inclusion (similar to the OECD work on hybrid entities in BEPS). 5. Limit the application of subpart F exemptions for reverse hybrids. 6. Broadens rules for limiting corporate inversions. III. Morality and Taxes A. U.K. Seeking Morality “We are not accusing you of being illegal; we are accusing you of being immoral,” said Hodge in a November 2012 hearing into tax avoidance by Starbucks, Amazon, and Google. Hodge also held hearings in January 2013 with the Big Four accounting firms on their role in tax avoidance. Similarly, Prime Minister David Cameron has said that aggressive tax avoidance raises “moral questions.” Hodge has led the official charge, but has been supported by outside pressure groups and individuals who have taken up the issue as a moral crusade.

• Richard Murphy—A vocal opponent of corporate tax avoidance who has an influential blog, taxresearch.org.uk, and provides nongovernmental organizations with an expert voice for their concerns. Murphy is pushing a concept called the “Fair Tax Mark.” Similar to the concept of the “Fair Trade” stamp seen often on premium coffees, the Fair Tax Mark certifies that a company is transparent and has adopted a “fair tax policy” that seeks to pay the “right amount of tax.”

5-6 Base Erosion: Will the OECD Change the World?

• UK Uncut—An advocacy group that attempts to draw a connecting line between corporate tax avoidance and the cuts to government services imposed following the global economic downturn. The company holds high-profile protests of well- known brands whose parent companies use tax avoidance structures. (http:// www.ukuncut.org.uk/) • ChristianAid—A U.K. charity that has for years campaigned against corporate tax avoidance as being harmful to developing countries. It and similar groups have been calling for country-by-country reporting of corporate tax information and for those reports to be made public.

Observations While the U.K. argues that tax avoidance is immoral, the government has actively encouraged one form of base erosion and profit shifting through the adoption of a patent box regime. Because much of the tax avoidance discussion in the U.K. focuses on companies using EU rules that allow them to sell into the U.K. through entities in other EU member states, one solution could be the adoption of the stalled common consolidated corporate tax base, which would effectively create formulary apportionment in the EU. The U.K. has not supported the proposal, which would need unanimous support to become EU law.

5-7

State and Local Taxation Committee and Practice and Procedure Committee - Transactional Taxes: A National and State Review of Compliance Challenges

by Loren L. Chumley KPMG LLP Nashville, TN Michael A. Eschelbach Michigan Department of Treasury - Bureau of Tax Policy Lansing

State and Local Taxation Committee and Practice and Procedure Committee - Transactional Taxes: A National and State Review of Compliance Challenges

Loren L. Chumley KPMG LLP Nashville, TN Michael A. Eschelbach Michigan Department of Treasury - Bureau of Tax Policy Lansing

Exhibit Exhibit A PowerPoint Presentation ...... 6-3

6-1

Transactional Taxes: A National and State Review of Compliance Challenges

Exhibit A PowerPoint Presentation

Transactional Taxes: a National and State Review of Compliance Challenges

May 22, 2014

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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6-3 Tax Conference, 27th Annual, May 22, 2014

Agenda

Indirect Tax – Key Functions Legislative Trends Marketplace Fairness Act Trends in Audits Trends in Taxation: Cloud-based Technologies, Software and related Services, Digital Services

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Indirect Tax Key Functions

Reporting, Tax Calculation, Policy, Compliance, Systems, Technology Planning, Governance Audit Management 1. Understand existing business processes 1. Maintain tax calendar with nexus 1. Adopt and adapt an indirect tax strategy for sales and purchases and be involved in footprint and keep registrations 2. Research, document and maintain process changes updated a. Taxability of products and services for existing and new business markets 2. Know inventory of tax relevant systems and 2. Extract data from/for transaction tax identify owners of each b. Exemption eligibility reporting c. Nexus footprint changes 3. Understand how each system is “tax d. Opportunities for tax recoveries sensitized” 3. If necessary, perform use tax accruals 2. Perform planning and evaluate 4. Understand all indirect tax scenarios on 4. Data scrubbing activities credit/incentive opportunities sales and purchase side 3. Communicate with key stakeholders in all 5. Monthly returns process for completing business areas that are tax relevant 5. Know all data elements used for tax returns, obtaining payments, approvals calculation 4. Ensure research and planning are embedded and sign offs, and filing (EDI, EFT, in Tax Calculation and Reporting online, paper) 6. Understand system for tax rate and 5. Perform SOX testing jurisdiction updates 6. 3 way reconciliation (G/L, reports, 6. Develop KPIs for department performance returns) 7. Understand Billing, POS and other system 7. Stay informed and implement “best in class” updates for product/service taxability strategies 7. Management and internal reporting 8. Maintain tax requirements 8. Develop knowledge management and 8. Exemption certificate process training plans 9. Maintain tax relevant data necessary for management 9. Perform due diligence reporting, audit defense, internal audit 9. Understand risks and exposure areas 10. Understand all personnel engaged in indirect tax-related functions domestically and 10. Perform monthly sales and use tax globally calculations 10. Process review for overpayment 11. Align team skills with key functions

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6-4 Transactional Taxes: A National and State Review of Compliance Challenges

Compliance Challenges

According to Vertex, in March 2014 there were 9998 sales and use tax jurisdictions in the United States. A recent report from The Tax Foundation regarding sales tax rates noted that the state and local combined sales tax rates vary from an average of 1.69 percent in Alaska (locally imposed sales tax only) to a wallet-squeezing average of 9.45 percent in Tennessee. The five states with the highest average combined state-local sales tax rates are: Tennessee (9.45 percent) Arkansas (9.19 percent) Louisiana (8.89 percent) Washington (8.88 percent) Oklahoma (8.72 percent) Virginia, Arkansas, Ohio, and Maine have recently raised sales tax rates. Source: The Tax Foundation, State and Local Tax Rates 2014 (March 18, 2014)

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Legislative Trends

6-5 Tax Conference, 27th Annual, May 22, 2014

Legislative Proposals in 2013: Setting the Scene

Significant number of proposals made by Governors and legislators General themes of reducing direct taxes, increasing reliance on consumption taxes by expanding sales tax base Prospects seemed ripe Budget stability created ‘breathing room’ to make a move Lawmakers may be more willing to consider or enact significant changes due to recent recession New ideas and drastic reforms may be more palatable in states that have suffered for years from high unemployment and tight revenue Many states lack partisan gridlock that exists federally A number of states now have single-party control of legislatures and governorships Republicans have a supermajority in 25 chambers; Democrats have a supermajority in 12 houses (per National Conference of State Legislatures) General desire to improve in-state business climate

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The Proposals

Income Tax Reductions/Repeal Income Tax Increases

-- Louisiana – Repeal individual and corporation −Massachusetts – Increase rate

−Nebraska – Repeal individual and corporation −Minnesota – Upper income taxpayers

−Ohio – 20% reduction and exclude substantial business income −Montana – Reduce credits and deductions through pass-through

−Kansas – Phased-in rate reductions

−North Carolina – Various proposals to repeal or reduce

−Missouri – Reduce rates and pass-through exclusion

−Montana – Reduce rates

Sales/Use Tax Reductions Sales/Use Tax Base Increases

−Minnesota −Louisiana – Expand to services and repeal exemptions Nebraska – Repeal exemptions −Ohio − −Ohio – Expand to services −Massachusetts −Kansas – Maintain temporary rate increase

−North Carolina – Expand to services, repeal exemptions, increase rate

−Minnesota – Expand to services

−Massachusetts – Select services

−Missouri – Increase rate

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6-6 Transactional Taxes: A National and State Review of Compliance Challenges

What Happened in 2013?

Louisiana – Governor’s plan shelved quickly; no action Nebraska – Proposal rejected; study committee formed Ohio – Sales tax base expansion rejected; more modest income tax reductions enacted Minnesota – Sales tax base expansion rejected; property tax relief shelved North Carolina – Limited sales tax base expansion; personal income tax ‘flattened’ and rate lowered; corporate rate reduced Massachusetts – Sales tax imposed on certain computer and software-related services; repealed within two months of becoming effective Kansas – Sales tax increase partially retained; some income tax changes adopted Montana – Income tax rate cut offset by credit and deductions limitations vetoed Missouri – Income tax reduction and sales tax changes vetoed

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Legislative Trends in 2014 for Sales and Use Taxes?

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6-7 Tax Conference, 27th Annual, May 22, 2014

Approaches to nexus expansion

Click-through legislation (New York and others) Presumption of nexus is generally established when an in-state person posts a link to a retailer’s website on its own website; the in-state person receives a commission or other consideration for sales made through the link – Ex: Hockey club website links to Amazon to raise funds Affiliate nexus legislation (California and others) Activities of related parties may create nexus for affiliate entities – Ex: In-state retailer accepts returns of books purchased from Internet affiliate Attributional Nexus (Colorado and others) Activities of unrelated parties may create nexus for a company – Ex: In-state contractors fix computers that were purchased over the Internet Reporting requirements (Colorado and others) MTC model sales and use tax notice statute

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Approaches to nexus expansion: “Click-through” nexus (continued)

Enacted Legislation as of 2/1/2014

Hawaii Held Unconstitutional Alaska Previously Enacted

Enacted in 2013

Source: State tax codes; 2012-13 Legislative matrix

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6-8 Transactional Taxes: A National and State Review of Compliance Challenges

Approaches to nexus expansion: Affiliate & attributional nexus

Entities are in a similar line of business In-state and out-of-state entities are related parties that are in the same or similar line of business, sells similar products, uses similar marks, etc. – Arkansas, Illinois, New York, Oklahoma, South Dakota, Georgia, and Utah In-state entity is an affiliated distribution facility Arkansas, Oklahoma, South Dakota, Texas, Georgia, Utah, and Virginia In-state entity performs other services (installation, advertising, accepting returns, etc.) on behalf of the out-of-state entity Arkansas, Oklahoma, Georgia, and Utah Out-of-state entity is a member of a commonly controlled group that has a component member that is a retailer with nexus in the state California, Colorado, Oklahoma, and South Dakota – California also requires that the in-state member perform certain services on behalf of the out-of-state entity, including product development or solicitation

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Approaches to nexus expansion: Affiliate & attributional nexus (continued)

Enacted Legislation as of 2/1/2014

Alaska Hawaii Previously Enacted D.C. Enacted in 2013

Source: State tax codes; 2012-13 Legislative matrix

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6-9 Tax Conference, 27th Annual, May 22, 2014

Approaches to nexus expansion: Reporting requirements

Colorado: Non-collecting retailer has three reporting obligations Notify purchaser at the time of sale that use tax may be due and purchaser is responsible for filing return Notify each Colorado purchaser annually of the volume of goods purchased during the year, that use tax may be due and that purchaser must file return Notify state tax authority annually of the amount of goods purchased by each Colorado customer along with a general description of the goods purchased Kentucky, Oklahoma, South Dakota and Vermont have adopted provisions requiring notice to purchaser of use tax obligation at the time of the purchase

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Sales & Use Tax Nexus

Direct Marketing Association v. Colorado Dep’t of Revenue (Feb. 18, 2014, 2nd. Jud. Dist.) A Colorado district court judge for the City and County of Denver granted a preliminary injunction prohibiting the Department from enforcing the use tax reporting requirements – Recall, a federal court of appeals denied rehearing after a federal district court decision held that the Tax Injunction Act (TIA) precluded a federal court judge from enjoining the enforcement of Colorado’s use tax reporting requirements The judge determined the reporting requirements to be facially discriminatory because the requirements burden out-of-state retailers with notification and reporting while in-state retailers have no such obligation – The judge also noted that collecting and remitting sales taxes was a different burden than reporting use tax and thus the two burdens could not be compared A status conference has been scheduled for late March to discuss various procedural issues and the necessity of a trial on the merits

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6-10 Transactional Taxes: A National and State Review of Compliance Challenges

Sales & Use Tax Nexus

Direct Marketing – Department Guidance on Reporting Requirements In response to the state court’s injunction, the Department of Revenue has again issued guidance regarding the use tax reporting requirements – Accordingly, retailers are not required to comply with the law – The Department reinforced that a customer’s liability for use tax on purchases where sales tax was not collected is still enforceable and that those customers are required to file a Consumer Use Tax Return with the Department for any amounts owed Previous guidance indicated that the Department would not enforce penalties for noncompliance with the use tax reporting requirements for any period under the federal district court injunction

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Marketplace Fairness Act of 2013

6-11 Tax Conference, 27th Annual, May 22, 2014

Marketplace fairness Act of 2013

Marketplace Fairness Act of 2013 (S. 743) After being routed through an expedited voting process, S.743 passed the Senate May 6, 2013 in a 69-27 vote If enacted, S. 743 would grant certain states the authority to require remote sellers to collect and remit sales and use taxes on sales into the state Bill now moves to the House, where it arguably faces greater opposition Which Sellers Would be Required to Collect and Remit? Generally, any seller making remote sales that is not currently required to collect sales and use taxes in certain states Small seller exception – Only sellers with gross annual receipts from total U.S. remote sales in the preceding calendar year exceeding $1 million can be required to collect and remit – Aggregation rules apply for certain related sellers No carve out for foreign (Non-U.S.) sellers or sellers located in jurisdictions that do not impose a sales and use tax

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Marketplace fairness Act of 2013 (continued)

Which States Would S.743 Grant this Authority to? SSUTA full member states Other states implementing certain simplification requirements – Authority could be exercised the first day of the calendar quarter that is at least 180 days after S.743 is enacted “State” is broadly defined and includes the District of Columbia, Puerto Rico, Guam, American Samoa, the United States Virgin Islands, the Northern Mariana Islands, tribal organizations, and any other territory or possession of the United States

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6-12 Transactional Taxes: A National and State Review of Compliance Challenges

Marketplace fairness Act of 2013 (continued)

What Minimum Simplification Requirements Must be Implemented by non-SSUTA States? Designating a single agency in the state responsible for all state and local sales tax administration, return processing, and audits for remote sales sourced to the state; Designing a single return to be used by remote sellers for all state and local sales taxes Having a single state and local audit for remote sellers Adopting a uniform tax base for state and local taxes; Adopting sourcing rules in accordance with the Act or the SSUTA; Providing a taxability matrix; Providing software available free of charge to remote sellers – Software must have certain functionalities including: (1) calculating the sales and use taxes due on each transaction; (2) filing sales and use tax returns, and (3) reflecting rate changes within a 90-day period Having procedures for certifying certified service providers S. 743 does not address how or who will determine whether non-SSUTA states have appropriately implemented the simplification requirements

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Marketplace fairness Act of 2013 (continued)

Other Key Provisions Hold harmless provisions – States must agree to hold remote sellers and certified service providers harmless under certain circumstances if relying on erroneous state provided information S. 743 does not subject a remote seller to any state taxes other than sales and use taxes – Likewise, the bill does not confer nexus over a remote retailer, affect intrastate sourcing rules, or preempt the Mobile Telecommunications Sourcing Act

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6-13 Tax Conference, 27th Annual, May 22, 2014

Marketplace Fairness Act States

ME MT ND MN OR VT ID NH WI SD MI NY MA WY CT RI IA PA NV NE NJ OH UT IL IN DE CA CO WV MD KS VA DC MO KY NC TN AZ OK NM AR SC

MS AL GA AK

TX LA

HI FL

Full Member SST States Non-sales tax states Associate Member SST States Non-SST states with legislation adopted Non-SST state without legislation adopted

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Marketplace fairness Act of 2013 (continued)

Next Steps S. 743 has been assigned to the House Judiciary Committee and will likely go through a more robust debate process than in the Senate On September 18, 2013, Chairman Goodlatte of the House Judiciary Committee issued seven basic principles that he believes should serve as the starting point for discussion of any remote sales tax bill: – Tax Relief – Tech Neutrality – No Regulation Without Representation – Simplicity – Tax Competition – States' Rights – Privacy Rights Potential amendments to be considered include an increase in or an elimination of the small seller exception, additional simplification requirements, and role for federal court review Judiciary Committee also has Immigration Reform within its jurisdiction – Post-Labor Day Congress will also be dealing with appropriations/continuing resolutions and a debt ceiling issue

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6-14 Transactional Taxes: A National and State Review of Compliance Challenges

Serious compliance challenges

Major “game-changer” in state and local sales taxation of interstate commerce Issues for sellers Registration in expanded number of states Expanding collection to larger number of states Acquiring, retaining, managing and retrieving exemption certificates Taxability determinations in multiple states Appropriate rate determination Remittances and filing Integrating automated systems Managing additional audit demands Dealing with increased “vendor-billed” tax

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Trends in Audits

6-15 Tax Conference, 27th Annual, May 22, 2014

Audit Selection and Procedure

Audit Selection Trends Data Mining and Data Matching Information Sharing

Audit Procedure: Computer Assisted Audits Statistical Sampling Managed Audits

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States that Allow Managed Audits: Number of states is growing

State Provision `1

QJJVH 1H% TQ C1:GCV `Q` $! Q` 1J 8 Q` `Q` Q Q` :RR8 1J 8 #CQ`1R: TCC ]VJ:C 1V 1:10VR6 :G: V $ ! Q` 1J 8 U Q 1J 8 &VQ`$1: T:`1V )R:.Q TCC ]VJ:C 1V 1:10VR Source: CCH Chart, !:J: TQ `VR%H 1QJ “Managed Audit +Q%11:J: TCC ]VJ:C 1V 1:10VR6 ]Q1GCV 1J V`V `VR%H 1QJ Programs” (2013) ,:`7C:JR TQ `VR%H 1QJ ,::H.%V TQ `VR%H 1QJ ,1H.1$:J TQ `VR%H 1QJ VG`:@: T:`1V V1 ,V61HQ TCC ]VJ:C 1V :JR 1J 8 1:10VR 1` :6 ]:1R 1J R:7 Q` . :`QC1J: T:`1V 0.1Q T Q `VR%HVR 1J V`V 1VJJ7C0:J1: TCC ]VJ:C 1V :JR 1J V`V 1:10VR 1` ]:1R G7 VJR Q` :%R1 ]V`1QR 2Q% . :`QC1J: T:`1V 3V6: TCC ]VJ:C 1V 1:10VR6 1J V`V 1:10VR5 :GVJ ``:%R :.1J$ QJ TCC ]VJ:C 1V 1:10VR6 %] Q $ ! Q` 1J V`V :G: VR 1HQJ1J T:`1V

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6-16 Transactional Taxes: A National and State Review of Compliance Challenges

States that Have Informal Managed Audit Programs

Idaho Annual sales less than $1MM to participate Maine May make informal arrangements with taxpayer Minnesota May make informal arrangements with taxpayer North Carolina Program normally extended for use tax South Dakota Program directed at small to medium-sized businesses Utah Self-review program in selected industries Virginia Limited to companies that use corp. purchasing card use tax accrual system

Source: CCH Chart, “Managed Audit Programs” (2013)

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Trends in Taxation: Cloud- based Technologies, Software and related Services, Digital Services

6-17 Tax Conference, 27th Annual, May 22, 2014

Tax in the Cloud—Then and Now

Challenging tax issues Correctly identifying tax obligations and filing the right forms was the most significant tax challenge, according to 36 percent of executives. This represents a slight decline from 44 percent in 2012. Source: KPMG’s Tax in the Cloud 2013 Survey

Q. What do you believe is the biggest tax issue related to doing business in the cloud?

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Access to Web-Based Content, Services, or Software - Indiana

Ltr. of Findings No. 04-20130306 (Ind. Dep’t of State Revenue Jan. 29, 2014) Facts: – Taxpayer purchases several information based technologies such as internet-based information platforms and computer software programs. – Taxpayer claims that, since it remotely accessed the software and did not receive a copy of the software, it was purchasing a service instead of tangible personal property. Finding: – The Department looked to previously published Information Bulletins that provide that “prewritten computer software maintained on computer servers outside of Indiana is subject to tax when electronically accessed via the internet.” – The accessing of prewritten software by Indiana residents constitutes a transfer of the software because the customer gains constructive possession and the right to use, control, and direct the use of software.

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6-18 Transactional Taxes: A National and State Review of Compliance Challenges

Access to Web-Based Content, Services, or Software – Michigan

Thomson Reuters Inc. v. Department of Treasury, 2014 WL 1921257 (Mich. App. 2014) The Taxpayer sold subscription to online tax and accounting legal research tools. Subscribers used their own web browsers to search and retrieve multiple up-to-date sources, browse compiled information on specific topics, and go to links between sources. Michigan assessed tax asserting that the sale of subscriptions constituted the sale of prewritten computer software. The Department prevailed at the Court of Claims, where the court held that, because the subscriptions had been taxable when previously sold in tangible form, they continued to be taxable when sold online. The Court of Claims also concluded that the subscribers wanted “information,” which was taxable tangible personal property. The Court reversed the Court of Claims decision and ruled that a taxpayer was not subject to tax. The court concluded that the taxpayer’s subscribers primarily sought access to the content and information compiled and organized on Checkpoint, rather than access to any de minimis software incidentally transferred. The court rejected the Court of Claims reasoning that because the subscription was previously taxable as prewritten software, it remained subject to tax. The taxpayer, the court noted, changed the product (into an online research tool) and thus the nature of the transaction was no longer the same.

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Access to Web-Based Content, Services, or Software – Michigan

Auto-Owners Insurance Company v. Department of Treasury, Case No. 12-000082-MT (Mich. Ct. Cl., Mar. 20, 2014) Facts: – Taxpayer contracts with third party service providers for remote access to: Computer networks, servers, data storage, and software applications. – Tasks are performed using remotely accessed tools included: Acquiring data reports, risk analysis, property valuation, legal research. Finding: – Software must be “delivered by any means” to be subject to use tax. – However, remote access does not constitute delivery. Applied three part test:

1) Software must be “delivered by any means” for sales and use tax (Remote access does not constitute delivery) 2) Taxpayer must “use” under definition of Use Tax Act (TP lacked requisite control) 3) Apply “incidental to services” test (TPP use was merely incidental to 3P provided services)

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6-19 Tax Conference, 27th Annual, May 22, 2014

Access to Web-Based Content, Services, or Software - Missouri

Proposed Amendment Mo. Code Regs. Ann. tit. 12, § 10-109.050 Proposed Regulation clarifies that cloud computing is not subject to sales tax. Cloud computing is defined to include: – Software as a Service (SaaS) – Platform as a Service (PaaS) – Infrastructure as a Service (IaaS) Does not extend to service models including tangible personal property. Adopts “Multiple Points of Use” Exemption for Software, by example.

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Access to Web-Based Content, Services, or Software – Missouri

Ltr. Rul. 7267 (Mo. Dep’t of Revenue July 23, 2013) Facts – Taxpayer is restaurant chain that provides back-office services to franchisee locations via computer network. – The services provided include labor scheduling, inventory control, supply ordering, cash tracking, and prep lists. – Franchisees access the computer network through a website and all data is stored on servers located outside of Missouri. Finding: – Missouri held that the services provided were not subject to tax. – The Department pointed to the fact that the franchisee stores data on servers that are not located in Missouri.

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6-20 Transactional Taxes: A National and State Review of Compliance Challenges

Access to Web-Based Content, Services, or Software – New Jersey

Tech Bulletin 72 (N.J. Div. of Taxation July 3 ,2013) Comprehensive Bulletin addressing Cloud Computing including: – Taxation of Software as a Service (SaaS) Not taxable as software is not “delivered electronically”. SaaS is not an enumerated service, however, charges for SaaS where the software is accessed and used as a tool for providing information to customers by an information service provider are sales of information services (e.g. Westlaw, LexisNexis, CCH, RIA). – Taxation of Platform as a Service (PaaS) Not taxable since PaaS only provides customer with access to software and software is not “delivered electronically”. So long as use and access to PaaS does not include transfer of TPP. – Taxation of Infrastructure as a Service (IaaS) Not taxable since IaaS only provides customer with access to software and software is not “delivered electronically”. IaaS providers may provide separately stated charges for the use or rental of hardware. – These charges are part of the underlying service and are not treated as rental of TPP.

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Digital Equivalents – Minnesota

Sales Tax Fact Sheet No. 177 (Minn. Dep’t of Revenue July 2013); and Sales Tax Fact Sheet No. 134 (Minn. Dep’t of Revenue June 2013) Fact Sheet No. 177: – Highlights items considered to be taxable digital products beginning July 1, 2013. Digital audit works (music, ring tones), digital audiovisual works (movies, music videos), digital books. – Provides that, beginning July 1, 2013, digital products may be sourced to multiple locations if purchaser knows at the time of purchase that the items will be used in more than one taxing jurisdiction. Fact Sheet No. 134: – Re-affirms that prewritten software is TPP regardless of delivery method. – Beginning July 1, 2013, electronically delivered software may be sourced to multiple locations. Purchaser must know at time of purchase of multi-jurisdiction use.

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6-21 Tax Conference, 27th Annual, May 22, 2014

Digital Equivalents – North Carolina

Important Notice Sourcing for Certain Digital Property (N.C. Dep’t of Revenue Aug. 2013) Reiterates that digital property is taxable when the tangible equivalent is subject to tax. – Audio works – Audiovisual works – Books – Other publications – Photographs – Greeting cards Provides that the sale of digital property is sourced according to the SSUTA sourcing rules.

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Digital Equivalents – Ohio

Ohio House Bill 59 – Signed June 30, 2013 Effective January 1, 2014, Ohio sales tax applies to transactions by which a specified digital product is provided for permanent use, regardless of whether continued payment is required. Digital products is defined to include: – Digital audiovisual works; – Digital audio works; and – Digital books.

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6-22 Transactional Taxes: A National and State Review of Compliance Challenges

Information Services – New York

Advisory Op. TSB-A-13(24)S (N.Y. Dep’t of Taxation and Fin. Sept. 9, 2013) Facts: – Taxpayer provides data processing and data warehousing services to aid in compliance with the requirements of Medicare & Medicaid. – Taxpayer has a computer platform that collects data from customers, stores the data, and submits data to Medicare/Medicaid. – Customer submits data to Taxpayer and Taxpayer’s personnel validate and format data so that it can be loaded onto platform. Taxpayer then runs data to determine which meets Medicare/Medicaid eligibility requirements. Finding: – New York imposes tax on information services but excludes from tax the furnishing of information which is personal or individual in nature and which can not be substantially incorporated in reports furnished to others. – Department held that Taxpayer is providing an information service because it includes analyzing and compiling customer information. However, the Department held that the information is personal and individual in nature because the information is not used in reports provided to others.

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Taxability of Software - Idaho

H.B. 243, 62d Leg., 1st Reg. Sess. (Idaho 2013) Application software accessed over the internet or through wireless media is excluded from the definition of TPP if: – Software accessed over Internet or wireless media; – From a location owned or maintained by a seller or agent; and – Software is not loaded and left at the user’s location. “Application software accessed over the internet or through wireless media” excludes: – Remotely accessed software if the primary purpose of such software is for entertainment use; or – If the vendor of that software offers for sale, in a storage media or by electronic download, to the user’s computer or servers, and either directly or through wholesale or retail channels, [offers] [sic.] that same or comparable software that performs the same functions.

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6-23 Tax Conference, 27th Annual, May 22, 2014

Taxability of Software – Idaho (cont’d)

H.B. 598 – Signed by Governor on April 4, 2014 Clarifies that “tangible personal property” does not include computer software delivered electronically, remotely accessed computer software, and software that is delivered by the load and leave method. Defines “remotely accessed computer software” as software that user accesses over the internet, over private or public networks, or through wireless media, where the user has only the right to use or access the software by means of a license, lease, subscription, service or agreement. Provides that “tangible personal property” includes software that constitutes digital music, digital books, digital videos and digital games. Removes paragraph that addresses exclusions from previous law.

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Taxability of Software - Illinois

General Information Letter 13-0015-GIL, Ill; Dep’t of Revenue (Mar. 31, 2013) General Information Letter addressing taxability of licensed software Sale of software is not a taxable Illinois retail sale if (five elements): – It is evidenced by a written agreement signed by licensor/customer; “Check-the-box” licensing agreements insufficient to satisfy. – It restricts the customer’s duplication and use of the software; – It prohibits the customer from licensing or transferring software to third party; – The licensor has a documented policy of providing replacement CD; and – The customer must destroy or return all copies at end of license period. Deemed met in event of perpetual license, even if undocumented.

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6-24 Transactional Taxes: A National and State Review of Compliance Challenges

Taxability of Software – North Carolina

Directive SD-13-5 (N.C. Dep't of Revenue Jan. 17, 2014)

Sales and Use Tax now applies universally to: – Sales price of service contract to maintain prewritten computer software. – Sales price of service contract to repair prewritten computer software. Previously, taxability was determined by optional/mandatory dichotomy. Sales and Use Tax exempt: – Contracts that only provide labor to operate taxable computer software.

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Questions?

6-25 Tax Conference, 27th Annual, May 22, 2014

Presenters

Loren Chumley KPMG LLP Nashville 615-248-5565 [email protected]

Michael Eschelbach Director, Bureau of Tax Policy Michigan Department of Treasury 517-373-3210 [email protected]

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6-26 Estates and Trusts Committee and Employee Benefits Committee - Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World

by Thomas H. Bergh Varnum LLP Novi

Estates and Trusts Committee and Employee Benefits Committee - Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World

Thomas H. Bergh Varnum LLP Novi

I. Introduction...... 7-1 II. Application of Windsor Principles to Retirement Plans ...... 7-4 III. Application of Windsor Principles to Health and Welfare Plans ...... 7-5 IV. Estate Planning Issues ...... 7-6

I. Introduction A. Background and Current Status In the United States, the definition and regulation of marriage has traditionally been left to the individual states. Under general principles of federalism, the national government has taken little direct part in determining the scope and legal outcomes related to marital status. As issues of the marital state became important in contexts relating to the rights and obligations in the federal tax area, certain issues such as community property, common law marriage (Rev. Ruling 58-66), and outlier situations such as polygamy became a concern of the Internal Revenue Service in determining their impact on federal tax liabilities. In the early 1990’s, another related situation began to develop about predictions, often expressed in alarmist terms, that a particular state (usually postulated to be Hawaii), might issue marriage licenses to and memorialize marriages of same-sex couples. Congress became concerned that federal tax consequences could be determined accordingly. Fur- ther, under the full faith and credit clause of the United States Constitution, in theory one state could be “forced” to recognize a marriage involving a same-sex couple if validly memorialized in another state. Congress promptly reacted to this (one-sided) debate by passing a statute aimed at preventing these outcomes, the Defense of Marriage Act (“DOMA”), which was signed by President Clinton in 1996. In 2013, a divided Supreme Court decided Windsor v United States, and thereby partly invalidated DOMA. Those of us in the tax area were perhaps cheered that this widely publicized case arose out of the denial of the benefits of the estate tax marital deduction under Internal Revenue Code (“IRC”) §2056 to a same-sex couple, a topic not previously noted for leading national news reports. Nevertheless, the opacity of the Court’s reasoning, and the lack of conceptual clarity of its application to the general recognition of the marriage rights of same-sex couples, left individuals, employers, their advisors and federal and state taxing authorities with many unanswered questions.

7-1 Tax Conference, 27th Annual, May 22, 2014

For residents and advisors in Michigan, further context is provided by Article I, Sec- tion 25 of the Michigan Constitution, which defines “marriage” as the union of one man and one woman. Michigan tax law, along with other state jurisprudence, has accordingly developed around this specific definition of marriage, and the “benefits” of the marital state, including those related to the taxing authority, have been made unavailable to those outside of the one-man/one-woman situation. Continuance of the status quo of that situation is in jeopardy under the recent DeBoer v Snyder case, currently on appeal to the 6th Circuit, which invalidated the cited Constitutional restrictions as violative of federal constitutional principles of equal protection. Therefore, the tax law in this area, as with other legal principles, is in flux and certainty is lacking. Uncertainty of proper tax treatment is unsettling in any context, but it is particularly difficult where individuals must plan their estates, provide for their loved ones and settle their financial affairs in an atmosphere of uncertainty. Similarly, employers must make decisions about how best to provide pension and other employee benefits for their workforce and their families on a continuing basis, without the practical ability to take a “timeout” to await a final judicial determination of the legal definition of marriage. As advisors, our role is to counsel clients on how best to arrange their affairs in light of this period of legal transition. Thankfully, relevant administrative agencies, particularly the IRS, have promptly provided comprehensive guidance on methods for dealing with commonly encountered issues. The goal of this presentation is to survey the current legal landscape, to point out where decision points are today and will most likely be tomorrow, and to provide a timeline on when action is or will be required. Practice Pointer: Information gathering is a key aspect of every issue confronting estate planning, tax, or employee benefit advisors. It is necessary to inquire (in a mature and respectful manner) about same-sex relationships, and, where an affirmative response is received with regard to a client, interest, beneficiary, benefit plan participant or other individual, to determine basic details. In particular, the domicile of the individuals, and whether the relationship has been registered or sanctioned as “marriage” or some other categorization such as “civil union partner”, all need to be determined. Only with that information at hand can an effective evaluation of the circumstances be made and the client properly advised. B. Key Statutes, Cases, Ruling and Concepts DOMA: For purposes of this discussion, DOMA has two operative provisions. §3 of DOMA, commonly referred to as “Federal DOMA”, provides that for purposes of federal law, a marriage other than that between one man and one woman will not be respected. Therefore, a same-sex couple validly married under the laws of a particular state would nevertheless be considered unmarried for all federal legal purposes, including but not limited to the various income, estate, and other tax provisions which are triggered by marriage. §2 of DOMA, the so-called “state DOMA”, allows (but does not require) a particular state to refuse to recognize an otherwise valid same-sex marriage performed under the laws of another state. Windsor: Because Windsor is extensively covered elsewhere in this seminar, only a brief outline is presented here. Windsor invalidated §3 of DOMA, Federal DOMA, in holding that a validly married same-sex couple could not be denied the benefits of the estate tax marital deduction available to other validly married couples under IRC §2056. Therefore, the pre-DOMA tradition of federal deferral of the determination of marital sta-

7-2 Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World tus to the states has been restored. It is critical to understand that Windsor did not address §2 of DOMA, the state DOMA provision, so pending further developments, a state may opt out of recognition of same-sex marriages regardless of their validity in the state where performed (“state of ceremony”). Therefore, a state may base recognition of marriage on the domicile of the parties (“state of domicile”). Michigan has opted for this approach, and refuses to recognize the marriage of a same-sex couple regardless of the validity of the marriage in the state of ceremony. The constitutionality of state laws prohibiting the recognition of same-sex couples in various states are under legal challenge, and further significant developments in this are certain in the near term. While as already mentioned, DeBoer invalidated the Michigan prohibition of same-sex couple marriage and in an appeal to the 6th Circuit, it is likely to be decided after the Utah case of Kitchen v Hubert, which is on appeal to the 10th Circuit, and which for procedural reasons most commentators believe will be the vehicle for the U. S. Supreme Court to make its ruling on this issue. Revenue Ruling 2013-17: This ruling provides for the general recognition of a same- sex marriage that is validly performed in a particular state for federal tax purposes. It adopts the state of ceremony approach, so that a marriage validly performed in a recognizing jurisdiction will be respected for all federal tax purposes. The ruling specifically provides that civil unions, or other similar “quasi-marriage” provisions as may be provided under state law, will not be so respected for federal tax purposes. Notice 2014-19: For qualified plan purposes, uniform treatment of the marital status determination is required, again using “state of ceremony principles”. The Notice, ana- lyzed in further detail below, provides both operational and plan document amendment timing rules for conformance to Windsor. Notice 2014-1: This Notice extends guidance on the impact of Windsor to Cafeteria Plans, Flexible Spending Accounts (“FSAs”) and Health Savings Accounts (“HSAs”). In general terms, it extends general “state of ceremony” principles to ERISA-covered health and welfare plans. Technical Release 2013-14: Department of Labor (“DOL”) guidance issued in reaction to Windsor, referencing that for ERISA purposes, the DOL will also utilize a state of ceremony determination for employee benefit plan definitional purposes. As in Revenue Ruling 2013-17, state law civil unions or other “quasi-marriage” characterizations will not be so treated. C. Key Dates June 26, 2013: Effective date of Windsor. September 16, 2013: Effective date of Revenue Ruling 2013-17, and repeatedly ref- erenced in subsequent IRS and DOL administration guidance. D. “Windsor Principles”

• Federal tax law determination of validity of marriage is determined by the law of the state of ceremony; • The law of the state of domicile is not determinative for federal tax or employee benefits purposes;

7-3 Tax Conference, 27th Annual, May 22, 2014

• Federal tax law “marriage” is limited to arrangements referred to as such by state of ceremony, so civil unions, domestic partnerships, or other similar arrangements will not be treated as “marriage”; • State law determinations of the validity of same-sex marriage, including those memorialized in a “recognizing state”, has not been decided and remains an open issue. Various subsequent cases are in the pipeline and will decide the matter. II. Application of Windsor Principles to Retirement Plans A. Notice 2014-19 and Accompanying FAQs Effective Date: The IRS in this Notice provides rules which require uniform treatment of married individuals regardless of whether or not the couple is mixed or same sex. The mandatory Windsor-based effective date is June 26, 2013. If a plan nevertheless determines on a conforming amendment with a prior effective date (i.e. an effective date prior to June 26, 2013, such as the first day of the 2013 plan year), that earlier date is allowable if general principles of retroactive effectiveness are followed. Substantive Terms: Areas of Intersection between Notice 2014-19 and the various spousal provisions required by law:

Required Spousal Joint and Survivor - Same-sex spouses are “spouses” for purposes Annuities (J & S) of determining the right to and calculating the J & S benefit - Spousal consent rights, including that for plan loans, apply to same-sex spouses Qualified Pre-Retirement Survivor - Same-sex spouses are considered “spouses” Annuities (QPSAs) for purposes of determining the right to and the calculation of the QPSA benefit and other spousal death benefits Beneficiary Designations - Default spousal designations apply to same- sex spouses: Spouse is beneficiary unless valid waiver provided Minimum Required Distributions - Spousal deferral and rollover rules that apply to death benefits apply to same-sex spouses under IRC §401(a)(9) Hardship Distributions - Plans that provide for hardship distributions for payment of a spouse’s medical bills, tuition, or funeral expenses must allow hardship distributions for such expenses for same-sex spouses

7-4 Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World

Qualified Domestic Relations Orders - Plans are required to honor QDROs that (QDROs) assign benefits to a same-sex spouse in the same manner as for any other spouse Stock Attribution Rules - A same-sex spouse is treated as owning shares owned by the other spouse for purposes of determining whether corporations are members of a controlled group under IRC §414(b) - A same-sex spouse is treated as owning shares of the other spouse for purposes of determining whether an employee is a key employee (IRC §416(i))

B. Practical Effects of Notice 2014-19

• A plan which adopts non-recognizing state law (such as Michigan) must recognize same-sex marriage regardless of the fact that the state would not. Therefore, a review of choice of law provisions is necessary. • A retroactive amendment needs to be consistent with notice requirements and to follow EPCRS requirements (Rev. Proc. 2013-12). • New plan rights must comply with general qualification requirements. • Required amendments to plan documents: • If plan terms conflict with Notice 2014-19, an amendment is required • If Windsor principles are to be applied prior to June 26, 2013, a plan amendment is required • No plan amendment is required if plan terms are not inconsistent with Wind- sor principles • If a plan amendment is required, it must be adopted by the end of the 10th month after the plan year end in which June 26, 2013 fell; or December 31, 2014 if later. • Plan Administrators need to review plan terms to determine if a conforming amendment is required. Since operational compliance is also required, procedures should be updated immediately. Participant communication such as the SPD should be reviewed and updated as necessary. Post-Windsor operations should be reviewed to determine if any corrective actions are required.

(Notice 2014-19 is applicable only for tax qualification purposes—other assertions of spousal rights must be handled through the plan’s claim and appeal procedures.) III. Application of Windsor Principles to Health and Welfare Plans Notice 2014-1: The same state of ceremony standard used in other contexts is applicable for health and welfare plans covered by ERISA. Therefore, the status of fully insured plans that are subject to state law insurance regulation is uncertain under current law, but self-insured plans subject to ERISA are fully subject to Windsor principles. Under

7-5 Tax Conference, 27th Annual, May 22, 2014

DOMA, employer/sponsors of cafeteria plans, FSAs and HSAs could not permit partici- pants to elect coverage for same-sex spouses unless the spouse otherwise qualified as a tax dependent to the participant, which is no longer the case under the new guidance.

• A cafeteria plan can permit an election change of status based on the 2013 valida- tion of a same-sex marriage under Windsor principles. The same treatment is available for a subsequent same-sex marriage. • A same-sex spouse who has been paying for spousal coverage on a post-tax basis is subject to pre-tax treatment for the plan year that includes September 16, 2013, and any prior plan year. The participant can file an amended return. • A cafeteria plan may reimburse covered expenses incurred by the participant’s same-sex spouse, as of the first day of the plan year that includes June 26, 2013, or the date of marriage if later. • HSA joint deduction limit applies between same-sex spouses beginning in calendar 2013. Resulting excess contributions made under prior limits can be with- drawn. A cafeteria plan need not be amended if it already recognizes a change in legal marital status as a mid-year qualifying change. IV. Estate Planning Issues A. General Planning and Drafting Windsor Principles in the Estate Planning Context: Even after the Windsor decision, a same-sex couple faced two hurdles in taking advantage of the various spousal rights and benefits provided under the estate and gift tax law. First, they had to have entered into a valid marriage in the state where performed. In addition, they had to live in a state which recognized same-sex marriage as valid. As a result, in the immediate aftermath of Windsor, some commentators anticipated a migration of same-sex couples to states that met both criteria. The adoption of state of ceremony principles by the IRS in Rev. Ruling 2013-17, however, has ameliorated that concern by removing the vagaries of the law of the state of domicile of a same-sex couple from a determinative role in the applicable federal estate and gift tax law. Fortunately for Michigan, therefore, the incentive for same-sex couple to relocate to other states for federal transfer tax purposes has been removed, since most studies indicate that same-sex couples have above-average income, education, and asset levels, the exact type of individuals which the state otherwise struggles to attain and attract. Therefore, a Michigan same-sex couple has the same access to the benefits of marital status offered under the federal estate and gift tax regimen as any other validly married couple. Since Michigan has no state inheritance or estate tax, the non-recognition of the marriage by the state will have no direct negative post-death tax consequences (but see below for concerns relating to residents of non-recognition states which have state inheritance or estate taxes). Decision Points—Potential Benefits of Marital Recognition for Same-Sex Partners:

• Unlimited marital deduction for qualifying lifetime or death transfers (IRC §§2056 and 2523); • Gift splitting (IRC §2513);

7-6 Trusts, Estates, Plans, and Uncertainty: How to Advise Clients in the Post-Windsor World

• Gift exception for certain property settlements (IRC §2516); • Spousal rollover rights; • Portability (both availability and possible extinguishment by remarriage); • Special basis rules for jointly-owned property • Ability to make a reverse QTIP election; • Ability to treat a much younger spouse as in the same generation for GST tax purposes.

Special Problems: If a client or his or her same-sex spouse is (arguably) a domiciliary of a non-recognition state with a state inheritance or estate tax, watch out for possible liability for that tax due to the potential loss of the applicable state marital deduction, and possible federal tax problems if tax apportionment language is not appropriately provided. Clarity and Certainty: After determining client desires, check existing documents for consistency in definitions of relevant terms: spouse, child, marriage, and related items. Check choice of law provisions, and make sure that there is consistency. For example, if a document refers to Michigan law, and also defines “spouse” as including both parties in a same-sex marriage, which provision controls? Be explicit about how the client wants the operative provisions to be interpreted. It is the client’s decision to make, except to the extent of the application of Windsor principles by the IRS, which are mandatory. B. Prenuptial Agreements for Same-Sex Couples The usual reasons for considering a prenuptial agreement are present in no less measure for a same-sex couple contemplating marriage: to confirm intent as to property ownership and division in the event of divorce; and to alter default testamentary rules. In a non-recognition state such as Michigan, other factors are important: including the opportunity to determine pre-agreed determination of venue and process in the event of divorce; and to determine choice of law principles generally. As a general proposition, it is best for Michigan residents currently considering entering into a same-sex marriage to marry in one of the four states that provide for non-domiciliary divorces: currently California, Vermont, Delaware and Minnesota. Since a prenuptial agreement is in essence a contract, it is possible that the domiciliary state (even if a non-recognition state such as Michigan) could be the venue and controlling law for property settlement determination and enforcement pursuant to the “contract”.

7-7

Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

by William H. Frazier Stout Risius Ross Dallas, TX

Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

William H. Frazier Stout Risius Ross Dallas, TX

Exhibit Exhibit A PowerPoint Presentation ...... 8-3

8-1

Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Exhibit A PowerPoint Presentation

Update on Cases with Valuation Issues in the U.S. Tax Court May 2014

27th Annual Tax Conference Taxation Section of the State Bar of Michigan The Inn at St. John’s Plymouth, Michigan Global Financial Advisory Services

Table of Contents

Estate of John Koons v. Commissioner, TCM 2013-94 Page 2

Estate of William M. Davidson Page 20

Estate of Tanenblatt, T.C. Memo. 2013-263 Page 31

Estate of Richmond, T.C. Memo. 2014-26 Page 34

8-3 Tax Conference, 27th Annual, May 22, 2014

Estate of John Koons v. Commissioner, TCM 2013-94

• Tax Court ruled for IRS in valuation of a 46.9% voting interest in LLC • LLC held $318 million in primarily cash • Unfinished redemption in process • Stock purchase agreement continued until January, 2012 • Discount allowed: 7.5% • Taxpayers’ discount: 31.7%

Estate of John Koons v. Commissioner, TCM 2013-94

The Players

The Father – John F. Koons, III (“JK”)

The 4 Adult Children

CI, LLC The Board of Managers

The Revocable Trust Trustees

8-4 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of John Koons v. Commissioner, TCM 2013-94

Important Facts

• JK Owned 46.9% voting interest in CI 2-10-05 put his interest in a revocable trust (“RT”) Died March 3, 2005 • CI Jan. 2005 received +/- $400 million from Pepsi 2-27-05 all children had signed letter to have their shares redeemed at FMV (NAV) After redemption JK to own 70.42% voting interest Only Majority required for control of assets

Estate of John Koons v. Commissioner, TCM 2013-94

Important Facts

• CI had NAV of about $318 million at valuation date (March 3, 2005) • Sale Agreement with Pepsico required until January 10, 2012: Cash in CI of $10 million at all times Net worth of $40 million Perhaps $15 million of NAV from two small operating businesses • The redemption not finalized at JK’s death on March 3, 2005 • Redemption was finalized on April 30, 2005

8-5 Tax Conference, 27th Annual, May 22, 2014

Estate of John Koons v. Commissioner, TCM 2013-94

Taxpayer’s Valuation Argument

• The taxpayer’s expert, Dr. Mukesh Bajaj • Opined that: no discount was appropriate for lack of control discount for lack of marketability of 31.7% • Discount determined by from his 2001 study • “Not reasonably foreseeable” that the redemption would occur

Estate of John Koons v. Commissioner, TCM 2013-94

IRS Expert’s Opinion

• Francis Burns relied upon the IRS’ opinion • Signed acceptance of the redemption offer was a binding contract • The voting interest would rise from 46.94% to 70.42% • Power to distribute substantially all of assets

8-6 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of John Koons v. Commissioner, TCM 2013-94

Observations • Appropriate discount lies in between the opinion of the two experts

• Dr. Bajaj’s approach does not appear to be the right methodology

• IRS underestimates the risks. It seems implausible that a willing buyer would so casually step into the middle of an unfinished redemption offer

Estate of John Koons v. Commissioner, TCM 2013-94

Father Knows Best?

• On February 4, 2005 JK changed the provisions of the RT Removed the children as beneficiaries None of the children were trustees of the RT a retiring trustee was to be replaced by remaining trustees No replacement trustee could be a descendant of JK • On Feb. 28th JK eliminated the Board of Advisors—a body made up of the children and with whom the Board of Managers was required to consult • He then eliminated his children as permitted transferees of CI LLC membership interests • Lastly, he limited distributions for the first 15 years of CI’s existence

8-7 Tax Conference, 27th Annual, May 22, 2014

Estate of John Koons v. Commissioner, TCM 2013-94

• The trustees were being charged by JK with the managing the for the long haul

• The clear message to the trustees was to invest in operating businesses and not to preserve capital, pay out distributions and plan for liquidation

Estate of John Koons v. Commissioner, TCM 2013-94

•On February 27, the last of four children signed the redemption offer letter the trustees already had effective majority control of the Company (via JK’s interest plus interest of other small trusts controlled) They would exit at NAV (no discount) Balance of NAV (+$200 million) to be invested by the Managers

8-8 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of John Koons v. Commissioner, TCM 2013-94

• It was not the proposed redemption but the prospect of the control of CI in the hands of the RT trustees that appeared to have the most likelihood of controversy

• This concern prompted one son to warn his father that there would surely be future litigation

Estate of John Koons v. Commissioner, TCM 2013-94

• The valuation premise suggested by the IRS and Mr. Burns and endorsed by the Court was that Buyer would: redeem the children pay himself a $140 million dividend liquidate the rest of the business in 7 years

8-9 Tax Conference, 27th Annual, May 22, 2014

Estate of John Koons v. Commissioner, TCM 2013-94

• Successful Redemption Invest $148.5 million Immediately get back $132 million Exposure of $16.35 million on residual NAV of $28.4 million This amount subject to adjustment Assumes CI is cash neutral over 7 years Represents an 8% return

8-10 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of John Koons v. Commissioner, TCM 2013-94

• If Unsuccessful Redemption Buyer has invested $148.5 million- No Control Illiquid Uncertain financial results No distributions for 15 years Unlimited holding period

Estate of John Koons v. Commissioner, TCM 2013-94

• The risks to the buyer of not gaining control should not be overblown

• Most arguments would come down on the side of the redemption going through

• But, even if the odds of not gaining control were small, the valuation consequences would be significant

8-11 Tax Conference, 27th Annual, May 22, 2014

Estate of John Koons v. Commissioner, TCM 2013-94

• It is a fact that investment behavior does not follow straight mathematical odds (expected value). According to the “prospect theory” and the utility theory of money, as financial stakes get higher, investors become risk averse

•At $148.5 million, the investor must be becoming quite risk averse

• A prudent investor would significantly hedge the investment prospect of owning the subject interest

Estate of William M. Davidson

The IRS proposed deficiencies in May 2013 of gift, estate and GST taxes exceeding $2.6 billion against the Estate of William M. Davidson (owner of the Detroit Pistons) who died in March 2009.

Primary IRS claims: taxable gifts relating to Self-Cancelling Installment Notes (SCINs) undervalued assets given or sold

8-12 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of William M. Davidson

• The petition the Estate has filed in the United States Tax Court shows the Estate intends to fight back ferociously

• Its counsel is Skadden, Arps, Slate, Meagher & Flom

• Same firm that successfully defended a proposed deficiency against the Estate of Newhouse of approximately $1Billion

Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

Estate of William M. Davidson

• Even if the gift tax value of the property Mr. Davidson sold is no greater than what the trusts paid for them, there is another valuation issue-- the SCINs

• Estate of Gribauskas v. Comm'r, 116 T.C. 142, states that the fair- market-value presumption can be refuted by evidence that the note is worth less than its presumed value

Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

8-13 Tax Conference, 27th Annual, May 22, 2014

Estate of William M. Davidson

• A SCIN leaves "no interest remaining in decedent at his death," it is, when bona fide,"not includible in his gross estate." Estate of Moss v. Comm'r, 74 T.C.

• But a SCIN signed by family members is presumed to be a gift and not a bona fide transaction. Estate of Labombarde v. Comm'r, 58 T.C. 745, 755, 1972 WL 2474 (1972)

Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

Estate of William M. Davidson

As such, "a note or other evidence of indebtedness which may be legally enforceable is not in itself conclusive of the existence of a bona fide debt.

It must be clearly shown that it was the intention of the parties to create a debtor-creditor status."

Estate of Van Anda v. Comm'r, 12 T.C.

Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

8-14 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of William M. Davidson

• There is uncertainty on how SCINs should be valued when received in exchange for assets

• The IRS contends that the value of the SCIN cannot be determined using standard actuarial tables

• Estate of Frazee v. Commissioner, 98 T.C. 554 (1992) -note will be treated as having a value equal to face if it carries at least the AFR of interest

Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

Estate of William M. Davidson

What are the SCIN rules? • Payments under the note will be cancelled by reason of the seller’s death • The interest and/or principal under the note will be adjusted on account of the cancellation-upon-death feature • In order to attempt to ensure that the value of the note will be worth the value of what was sold in exchange for it, despite the unresolved basic questions: a seller who takes back a SCIN will not be treated as making a gift if the note is regarded as bona fide fair market value equal to the value of assets sold Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

8-15 Tax Conference, 27th Annual, May 22, 2014

Estate of William M. Davidson

• How to determine the increase in the note on account of the cancellation possibility?

• Increase is sometimes called the SCIN or mortality premium

• No developed law states how this premium is to be determined

• The IRS has stated that the value of the installment obligation and the property sold must be substantially equal

Source: Steve Leimberg’s Estate Planning Newsletter August 28, 2013 Jonathan G. Blattmachr & Mitchell Gans on the Davidson Estate

Estate of William M. Davidson

SCIN Valuation

• Principal Risk (Mortality) Premium built into Payments Either Increase interest rate Increase sale price

• Set Market Rate of a non-SCIN note as the yardstick Comparable credit analysis Term and size Security

8-16 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of William M. Davidson

SCIN Valuation

Terms should not exceed seller’s actuarial life expectancy (Mortality Table 90CM )

but

Must exceed the seller’s expected life taking into account seller’s health (Medical opinion)

Estate of William M. Davidson

Aaron M. Stumpf, CPA/ABV SRR Journal

8-17 Tax Conference, 27th Annual, May 22, 2014

Estate of Tanenblatt, T.C. Memo. 2013-263

• MPI valued the LLC Interest at $1.7 million and the IRS at $2.5 million

• They agreed on NAV but MPI used a DLOC of 20% and a DLOM of 35%

• In its deficiency notice the IRS used discounts of 10% and 20%

• The taxpayer drops MPI and hires a Dr. Laura Tindall

Estate of Tanenblatt, T.C. Memo. 2013-263

• Dr. Tindall opines that the value is $1 million

• She opines that the interest is just an “assignee interest” and is worth far less than a regular membership interest

• Now they have an unresolvable gap and head for trial

• The IRS brings in an oustside expert - John Thompson

• Thompson’s uses discounts of 10% and 26% and arrives at a value of $2.3 million

8-18 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of Tanenblatt, T.C. Memo. 2013-263

• At trial, Dr. Tindall refused to show up due to a fee dispute

• Because she is not available for cross, the judge throws her report out

• Also, the IRS had never stipulated to her report as a replacement for MPI’s

• The taxpayers now have no expert

Estate of Helen P. Richmond, T.C. Memo. 2014-26

The decedent, Helen P. Richmond, died on December 10, 2005 holding a 23.44% interest in the stock of Pearson Holding Company (“PHC” or the “Company”).

The parties disagreed over:

1. the appropriate valuation method to use; 2. the magnitude of adjustments related to built-in gains (“BIG”) tax liabilities; 3. discount for lack of control (“DLOC”); and 4. discount for lack of marketability (“DLOM”).

8-19 Tax Conference, 27th Annual, May 22, 2014

Estate of Helen P. Richmond, T.C. Memo. 2014-26

PHC portfolio of marketable securities with a value of approximately $52.1 million.

PHC’s investment philosophy, as described by its chairman and president, is:

1. to preserve capital, to grow capital where possible; and 2. To maximize dividend income for the family shareholders.

Estate of Helen P. Richmond, T.C. Memo. 2014-26

• PHC had paid dividends regularly from 1970 through 2005 at agrowthrateof5%

• The turnover of securities was 1.4% over the last ten years, implying a turnover of 70 years

• Unrealized appreciation was $45.6 million

• Effective 39.74% Federal and State tax rate

• BIG tax liability of $18.1 million resulted

8-20 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of Helen P. Richmond, T.C. Memo. 2014-26

• The estate retained the Company’s accountant, who had appraisal experience consisting of 10 to 20 valuation engagements and prior testimony experience, but did not have any appraiser certifications.

• The accountant issued an unsigned draft valuation report indicating a value of the decedent’s interest of $3.1 million based on a capitalization-of-dividends method.

• Despite the fact that the accountant was not consulted upon issuing the draft report and never asked to finalize his report, the estate reported this value on the estate tax return.

Estate of Helen P. Richmond, T.C. Memo. 2014-26

The Commissioner’s expert valued the decedent’s interest using a net asset value (“NAV”) method.

He applied:

a DLOC of 6% based on closed-end fund studies,

a discount of 36%, a BIG tax discount of 15%, and a DLOM of 21% based on restricted stock studies.

Commissioner’s expert determined value of $7.3 million.

8-21 Tax Conference, 27th Annual, May 22, 2014

Estate of Helen P. Richmond, T.C. Memo. 2014-26

• Knowing deficiency of “report” filed with return, had a secnd expert prepare a report

• The estate’s second expert valued the decedent’s interest by the capitalization-of-dividends method

• Determined a value of $5.0 million v. filed value of $3.1 million

Estate of Helen P. Richmond, T.C. Memo. 2014-26

• To corroborate his conclusions, the estate’s expert also employed a NAV method

• Citing opinions by the Fifth Circuit (Dunn) and Eleventh Circuit (Jelke), he applied a dollar-for-dollar reduction for the BIG tax liabilities

• DLOC of 8% based on closed-end fund studies

• DLOM of 35.6% based on restricted stock studies

• Resulted in a value of $4.7 million

8-22 Estates and Trusts Committee - Tax Court Update: Davidson, Steinberg, and Koons

Estate of Helen P. Richmond, T.C. Memo. 2014-26

• The Tax Court used a NAV method, starting with $52.1 million

• Citing Jensen and Litchfield, the Tax Court determined the discount for BIG tax liabilities from a present value approach

• Based on testimony from the Commissioner’s expert, the Tax Court assumed the portfolio would turn over within a period of 20 to 30 years

• The Tax Court held the potential BIG tax liability constant and amortized it ratably over this time frame

• Tax Court calculated: the present value of BIG tax liability at $7.8 million a DLOC of 7.75% a DLOM of 32.1% value of the decedent’s interest of $6.5 million

Estate of Helen P. Richmond, T.C. Memo. 2014-26

•As in Jelke, The Tax Court misses the point yet again

• For an appreciating asset, that the present value of the BIG can less than its GAAP-stated value is a myth

•As in Jelke, the Tax Court failed to recognize that the assets would continue to appreciate and the BIG would grow commensurately

• If the percentage of asset sold are held constant (i.e., 4%) and the other 96% of the assets are appreciating at a greater rate (i.e., 4.4%), then the company will continue to grow and pay annual BIG taxes forever

8-23 Tax Conference, 27th Annual, May 22, 2014

Estate of Helen P. Richmond, T.C. Memo. 2014-26

The Tax Court held a 20% accuracy-related penalty under Section 6662 was applicable given the “substantial” valuation understatement.

The Tax Court determined the estate did not act with reasonable cause and good faith in filing with: 1. an unsigned draft report; 2. prepared by the Company’s accountant; 3. who was not a certified appraiser; 4. and did not explain the valuation analysis.

Contact Information

For more information please contact:

William H. Frazier, ASA Managing Director +1.214.389.2=3480 [email protected]

1118``8HQI 44

8-24 Employee Benefits Committee - Health Care Reform Strategies for Employers

by Mark E. Kellogg Fraser Trebilcock Davis & Dunlap PC Lansing Elizabeth H. Latchana Fraser Trebilcock Davis & Dunlap PC Lansing

Employee Benefits Committee - Health Care Reform Strategies for Employers1

Elizabeth H. Latchana Fraser Trebilcock Davis & Dunlap PC Lansing Mark E. Kellogg Fraser Trebilcock Davis & Dunlap PC Lansing

I. Introduction...... 9-1 II. Overview of the Patient Protection and Affordable Care Act ...... 9-2 III. Are You a Large or Small Employer?...... 9-3 IV. Pay or Play Mandate (2015) ...... 9-4 V. Employer Reporting Requirements (Section 6055 and Section 6056) ...... 9-7 VI. Additional Health Plan Mandates and Changes ...... 9-9 VII. Individual Insurance Mandate ...... 9-12 VIII. Small Business Health Option Program (SHOP) ...... 9-12 IX. Small Business Health Care Affordability Tax Credits ...... 9-12

I. Introduction The Patient Protection and Affordable Care Act (“ACA”) created sweeping reform to the health insurance, tax and health care delivery systems in the United States. In doing so, the ACA has impacted nearly every business in the country. Today, businesses large and small must understand and monitor the regulatory landscape like never before. Unfortunately, health care reform is not a single event that businesses can study, understand and adjust to. Since the constitutionality of the ACA was upheld in June of 2012, we have seen continuous changes and updates to the law. Some of these changes have revolved around the implementation of components of the legislation, while others have centered around the obligations of individuals and businesses in the new system. The only constant in this change process is that businesses can expect health care reform to continue to evolve over time. Accordingly, business leaders must understand the current regulatory environment and be ready to adapt to future changes. In this overview of health care reform, we have focused on some of the most important aspects of the ACA for businesses to understand, including: the health insurance marketplace, employer classification, the Pay or Play Mandate, reporting requirements, group health plan mandates, the individual insurance mandate, the Small Business Health Option 1. Michael P. James, J.D., M.B.A., CSSGB, a senior health care and business attorney at Fraser Trebilcock, assisted with the preparations for this presentation.

9-1 Tax Conference, 27th Annual, May 22, 2014

Program, and the Small Business Health Care Affordability Tax Credits. While this is a strong beginning, health care reform requires each business to engage in a detailed and comprehensive analysis of its own facts, objectives and circumstances to develop a strate- gic plan that makes sense for its direction and goals. II. Overview of the Patient Protection and Affordable Care Act A. Legal The Patient Protection and Affordable Care Act (“ACA”) became law in March 2010. The Supreme Court upheld the constitutionality of the ACA in June 2012. B. Health Insurance Marketplace The Health Insurance Marketplace, also referred to as the Exchange, is the vehicle through which individuals and small businesses can purchase health insurance products. The Health Insurance Marketplace currently consists of three different delivery models:

1. Federally-facilitated Marketplaces; 2. State-based Marketplaces; and 3. Hybrid Marketplaces.

The federally-facilitated marketplaces are marketplaces run by the federal government. The state-based marketplaces are marketplaces operated by the appropriate state government. The hybrid marketplaces are a jointly administered by the federal government and applicable state government. Currently, Michigan has a federally-facilitated health insurance marketplace. C. Open Enrollment in the Health Insurance Marketplace The 2014 open enrollment period began on October 1, 2014 and closed on March 31, 2014. Additional time beyond the March 31st deadline was granted for individuals who had begun the applicable process through Healthcare.gov, but had not completed enrollment. The 2015 open enrollment period is scheduled to begin on November 15, 2014 and close on February 15, 2015. However, as with the initial open enrollment, it is possible that we could see modifications to the 2015 open enrollment period as we progress. D. Marketplace “Metal Levels” The Health Insurance Marketplace was designed to simplify the procurement process related to health insurance. With this aim in mind, the ACA created four (4) “metal levels” to standardize the classification of insurance products. Each metal level corresponds to a narrow range of actuarial values. Actuarial values are the percentage of total average costs for covered benefits that a plan will cover. The metal levels are:

1. Platinum: 88–92% Actuarial Value 2. Gold: 78–82% Actuarial Value

9-2 Employee Benefits Committee - Health Care Reform Strategies for Employers

3. Silver: 68–72% Actuarial Value 4. Bronze: 58–62% Actuarial Value

All health insurance products sold in the Marketplaces must conform to one of these metal levels. E. Essential Health Benefits The ACA also requires insurance products to offer a minimal amount of coverage to be considered a qualified health plan and compliant with the ACA. The minimal amount of coverage required by health plans is often referred to as the Essential Health Benefits. The Essential Health Benefits are:

1. Ambulatory Patient Services 2. Emergency Services 3. Hospitalization 4. Maternity and Newborn Care 5. Mental Health & Substance Use Disorder Services; Behavioral Health Treatment 6. Prescription Drugs 7. Rehabilitative and Habilitative Services and Devices 8. Laboratory Services 9. Preventative Wellness Services and Chronic Disease Management 10. Pediatric Services, Including Oral and Vision Care III. Are You a Large or Small Employer? A. Methodology Step 1: Evaluate employees’ monthly hours for each month: How many full-time employees does the business have that, with respect to a calendar month, average 30 hours of service per week? [Please note that special optional methods exist: a monthly equivalency rule (130 hours per calendar month) or a weekly rule (120 hours for months with 4 weekly periods; 150 hours for months with 5 weekly periods— special rules apply]. This gives you the number of full-time employees for the month. Next, add up all of the non-full-time employee hours for the month (but not more than 120 hours for any employee) and divide that number by 120. This gives you the total number of full-time equivalent employees (FTEs) for the month. Finally, add the number of full-time employees for the month and FTEs for the month together to get the company’s total count for the month. Step 2: Repeat this process for each month of the preceding calendar year. Step 3: Add all of the monthly calculations together. Step 4: Divide total monthly calculations by 12. Step 5: Round down to the nearest whole number.

9-3 Tax Conference, 27th Annual, May 22, 2014

The resulting number is the company’s baseline FT/FTE value to determine whether it is a large or small employer, before additional adjustments are made. The rules related to counting employee hours are complex and different rules and guidelines exist for different types and classifications of employees. B. Small Employers Small Employers are those employers with 50FT/FTEs or fewer. Small employers are not required to offer health insurance to their employees. However, if health insurance is offered, it must meet the essential health benefits, metal levels and be available to full- time employees. C. Examples Example 1: Employer has 45 full-time employees. Result: Employer is a small employer because employer has 45 FT/FTEs. Example 2: Employer has 25 full-time employees and 10 part-time employees, who each work 120 hours per month. Result: Employer is a small employer. Employer has 25 full-time employees. Employer has 10 additional FTEs (1,200 hours/120 = 10 FTEs). Employer has a total of 35 FT/FTEs. Example 3: Employer has 10 full-time employees and 60 part-time employees, who each work 100 hours per month. Result: Employer is a large employer. Employer has 10 full-time employees. Employer has 50 additional FTEs ( 6,000 hours/120 = 50 FTEs) Employer has a total of 60 FT/FTEs. Starting in 2016, employer would be required to offer health insurance to 95% of its full-time employees. IV. Pay or Play Mandate (2015) The Pay or Play Mandate (Mandate) applies to large employers and imposes employer shared responsibility requirements beginning in 2015. If a large employer either fails to offer health insurance to its full-time employees (and dependents) or fails to offer those employees affordable coverage that meets the required minimal value, that large employer is subject to penalties under the Internal Revenue Code if a Section 1411 Certifi- cation is issued (tax credit/subsidy received through the Exchange). Thus, the large employer must pay (penalties) or play (offer appropriate insurance coverage to its employees). For purposes the Mandate, large employers are those employers with 50 or more FT/ FTEs. [Transition Relief for 2015: If a business has between 50 and 99 FT/FTEs, it is not required to provide health insurance to its full-time employees until 2016 (if certain conditions are met).] Employer controlled group/aggregation rules under Code section 414(b), (c), (m) and (o) apply to determine large employer status. Once the Mandate becomes effective for a large employer, to avoid penalties, the employer must offer minimal essential coverage that provides minimum value (e.g. covers at least 60% of costs), must be affordable (e.g. single employee premium contribution not to exceed 9.5% of employee’s household income [safe harbors exist]), and must be offered to a certain percentage of full-time employees.

9-4 Employee Benefits Committee - Health Care Reform Strategies for Employers

A. Determine if Employer Is a Large Employer

1. For 2015, does it have 100 or more FT/FTEs? For 2015 only, employer can determine large employer status by reference to a period of at least six consecutive calendar months in the 2014 calendar year. 2. For 2015, does it have 50 FT/FTEs but less than 100 FT/FTEs? If so, does it meet the transition relief? a. Cannot reduce the size of workforce between February 9, 2014 and Decem- ber 31, 2014. b. Cannot eliminate or materially reduce the health coverage offered as of Feb- ruary 9, 2014 (including employer contributions). c. Must certify (as part of the transmittal form require to be filed with the IRS under Code section 6056 employer reporting requirements) that it meets the safe harbor. d. Not available if employer modifies its plan year after February 9, 2014 to begin on a later calendar date. 3. Special rules exist for new employers, employers first becoming large employers, employers part of a controlled group or affiliated service groups, and other circumstances mentioned in regulations. B. Determine Full-Time Employees

1. Calculating Hours of Service: Based on actual hours from records of hours worked and for which payment is made or due a. Days-worked equivalency option b. Weeks-worked equivalency option 2. Periods Used to Determine Full-Time Status a. Monthly Measurement Method i. Count hours of service for each calendar month ii. Weekly period alternative iii. Special rules for newly eligible employees (and exceptions from penalties) iv. Special rules for termination and rehire or resumption of services of returning from a leave of absence v. Special rules for international transfers b. Look-Back Measurement Method (But not for determining Large Employer Status) i. Ongoing Employees (1) Standard measurement periods (generally 3–12 months)

9-5 Tax Conference, 27th Annual, May 22, 2014

(2) Optional administrative periods (up to 90 days) (3) Stability periods (time period in which coverage must be offered if determined to be full-time employee under the standard measurement period). Different rules apply depending on whether full- time or non-full-time status. ii. New Full-Time Employees Special rules for newly eligible employees (and exceptions from penalties) iii. New Variable Hour/New Seasonal/New Part-Time (1) Initial measurement periods (generally 3–12 months) (2) Optional administrative periods (up to 90 days) (3) Stability periods (time period in which coverage must be offered if determined to be full-time employee under the standard measurement period). (4) Very specific rules apply to these categories of employees and are counted differently than for ongoing employees. (5) Special rules for transitioning to changes in employment status. (6) Special rules for transitioning to ongoing employees. iv. Special rules for rehire and termination or absences, including averaging methods for special unpaid leaves (or employment breaks if with an educational organization). v. Special rules for international transfers vi. Special rules regarding changes in employment status resulting a change in full-time employment determination method (for example, if used look-back to determine full-time, but employee changes to part- time position (actually averaging less than 30 hours for 3 full months following status change), the monthly measurement period can be used thereafter for a specified period of time. vii. Transition Relief for 2015: Even if employer intends to utilize a 12- month standard measurement period and stability period, it may adopt a period that is at least 6 months long (and shorter than 12 months ) and that begins no later than January 1, 2014 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015 (AP). C. The “No Coverage” Penalty: IRS Code 4980H(a) Under IRS Code 4980H(a), a large employer must pay a penalty for failing to provide minimal essential coverage to its full-time employees. The penalty is triggered if an eligible employer does not offer coverage to 95% of its full-time employees [70% for 2015] and their dependents [certain transition relief] and if a Section 1411 Certification is issued. The penalty for a calendar month equals 1/12 of $2000 multiplied by the number of full-time employees (minus the employer’s allocable share of 30 full-time employees [80 full-time employees for 2015] and employees in a limited non-assessment period.

9-6 Employee Benefits Committee - Health Care Reform Strategies for Employers

The payment is adjusted for inflation. All common law employees must be considered. Be careful of misclassified individuals (independent contractors, temporary employees, etc). Special rules apply to controlled groups. D. The “Unaffordable” and/or “Lack of Required Value” Penalty: IRS Code 4980H(b) Under IRS Code 4980H(b), a large employer must pay a penalty for failing to provide affordable health insurance coverage or for offering health insurance coverage that fails to meet the 60% minimum value. The IRS Code 4980H(b) penalty is only triggered if a full- time employee goes to the Marketplace and receives a tax credit or subsidy (Section 1411 Certification). Even if the large employer provides minimum essential coverage to 95% of its full- time employees (or 70% for 2015) and escapes the Code 4980H(a) “no coverage” penalty, a Code section 4980H(b) penalty may occur if a Section 1411 Certification is issued because (1) coverage under the plan is unaffordable [safe harbors exist]; (2) coverage under the plan does not provide MV; or (3) you offer coverage to at least 95% [70% transition relief for 2015] but less than 100% of your FT EEs (and Dependents) and 1 or more of those EEs who are not offered coverage receive a premium tax credit or cost sharing reduction. The penalty is the lesser of:

• The “no coverage” penalty; or • $3,000 for each full-time employee who enrolls in insurance through the Market- place and receives a tax credit or subsidy [minus employees in limited non- assessment period].

The payment is adjusted for inflation. Special rules apply to controlled groups. Affordable safe harbors exist: (1) Form W-2 Safe Harbor; (2) Rate of Pay; (3) Federal Poverty Line. E. Detailed Transition Relief May Apply for Non-Calendar Year Plans for 2015

V. Employer Reporting Requirements (Section 6055 and Section 6056) A. Who Is Required to Report? Optional reporting for 2014. Required reporting starts for calendar year 2015 (reported in 2016). Under Section 6055, starting in 2015, if an employer provides self-insured health coverage, it must file an annual return reporting certain information for each individual (including non-employees such as spouses and dependents) it covered. [Section 6055 applies to all providers of minimum essential coverage, although these materials only address employers.]

9-7 Tax Conference, 27th Annual, May 22, 2014

Under Section 6056, starting in 2015, a large employer (50 or more FT/FTEs) must file an annual return reporting whether and what health insurance it offered to its full-time employees. B. How Do Applicable Employers Report? Under Section 6055, a non-large employer providing self-insured health coverage must file an annual return (Form 1095-B) plus a transmittal form (Form 1094-B) on or before February 28th (March 31st if electronic filing) of the year following the calendar year in which the minimum essential coverage was provided. Numerous information is requested, including the names and tax identification numbers for each covered individual and months for which the individual was enrolled and entitled to receive benefits. Under Section 6056, a large employer must file an annual return (Form 1095-C) plus a transmittal form (Form 1094-C) on or before February 28th (March 31st if electronic filing) of the year immediately following the calendar year to which the return related. Numerous information, which is employee-specific and reported by month, is requested. Simplified Alternatives May Be Available:

1. Simplified return if Employer certifies is made a “qualifying offer” of coverage for all months an employee was a full-time employee. Applies to employers that provide a “qualifying offer” to their full-time employees. A qualifying offer is an offer of minimum value coverage that provides employee-only coverage at a cost to the employee of no more than 9.5 percent of the mainland single federal poverty line combined with an offer of minimal essential coverage for the employee’s spouse and dependents. 2. Further simplified return for 2015 only if employer certifies it made “qualifying offer” to at least 95% of its full-time employees and their spouses/dependents. 3. Employers can avoid separately identifying their full-time employees if they certify they offered minimum essential coverage providing minimum value that’s affordable under Section 4980H to at least 98% of its employees (and dependents). C. Combined Reporting Under Section 6055 and 6056 A large employer that provides self-insured coverage is subject to Section 6055 and 6056 reporting. All large employers will file a combined return.

1. Large employers that self-insure will report on Form 1095-C, completing both sections to report under sections 6055 and 6056. 2. Large employers that fully-insure will report on Form 1095-C, completing only the section to report under 6056. 3. Non-large employer reporting entities (such as small employers that self-insure) will report under Section 6055 on Form 1095-B.

9-8 Employee Benefits Committee - Health Care Reform Strategies for Employers

D. Statements Furnished to Individuals Under Section 6055, reporting entities must furnish statements to each responsible individual (employee/former employee or other person listed in regulation who enrolled one or more individuals in coverage) by January 31st of year following calendar year in which minimal essential coverage is provided. Under Section 6056, large employers must furnish statements to each full-time employee by January 31st of year following calendar year for which a 6056 IRS return was filed related to them. Under both Sections, first class mail to last known permanent address discharges responsibility. Special rules for electronic statements exist. VI. Additional Health Plan Mandates and Changes A. Prohibition on Excessive Waiting Periods Effective for plan years beginning on or after January 1, 2014, group health plans and a health insurance issuer offering group or individual health insurance coverage are prohibited from applying any waiting period that exceeds 90 days. Waiting Period = the period that must pass before coverage begins for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan. Check your plan! Many are changing waiting period. B. Cost of Employer-Sponsored Health Coverage on W-2 The cost of coverage under an employer-sponsored group health plan must be report on Form W-2, Code DD in Box 12. Certain transition relief still available. C. Uniform Summary of Benefits and Coverage Group health plans must provide a summary of benefits and coverage that:

1. In color or grayscale; 2. Presented in a uniform format; 3. Uses terminology understandable by average plan enrollee; 4. Does not exceed four double-sided pages in length; and 5. Does not include print smaller than 12-point font.

Applies to self-funded and fully-insured group health plans. SBC must also state:

1. Whether the plan or coverage provides minimum essential coverage (MEC). 2. Whether the plan or coverage meets the minimum value (MV) requirements. (Not less than 60% of costs (actuarial value)).

It is important to make sure your SBC is updated. Special distribution and timing rules apply.

9-9 Tax Conference, 27th Annual, May 22, 2014

D. Cost-Sharing Requirement (Deductible Limit for Small Group Market Repealed) Plan years beginning on or after January 1, 2014 cannot impose cost-sharing requirements exceeding certain limits (for 2014, those are $6,350 for self-only coverage, $12,700 for other than self-only coverage). Cost-sharing includes deductibles, co-insurance, co-payments or similar charges with respect to essential health benefits, but does not include premiums. Additionally, the ACA limited the deductibles for small insured plans to $2,000/ $4,000, but that provision was recently repealed. E. Prohibition on Annual (and Lifetime) Benefit Limits Beginning in 2014, annual limits on the dollar value of benefits for any participant or beneficiary will no longer be allowed. Lifetime limits were previously prohibited. However, group health plans may still place annual or lifetime limits on specific covered benefits that are not essential health benefits. F. Flexible Spending Account Limit to $2,500 The flexible spending account limit on salary deferral will be $2,500, adjusted in future years for changes in the cost of living. Applies to plan years effective on or after January 1, 2013. G. Exchange/Health Insurance Marketplace Notice An employer is required to provide notice of the availability of the Exchange, inform- ing employees of certain information, including:

1. The existence of the Marketplace; 2. That employees may be eligible for a subsidy under the Marketplace if the employer’s share of the aggregate cost of benefits is less than 60%; and 3. That if the employee purchases a policy through the Marketplace, he or she will lose the contribution to any health benefits offered by the employer.

A model notice exists. Notice must be provided to each employee at the time of hiring (within 14 days). For existing employees, employers were required to provide the notice no later than October 1, 2013. H. PCORI Fee Payments The fee will be used to partially fund the Patient-Centered Outcomes Research Insti- tute (PCORI) which was implemented as part of the Patient Protection and Affordable Care Act. The new Form 720, as well as the attached Form 720-V to submit payment, must be used to report and pay the requisite PCORI fee to the IRS. While Form 720 is used for other purposes to report excise taxes on a quarterly basis, for purposes of this PCORI fee, it is only used annually and is due by July 31st of each relevant year. Plan sponsors of applicable self-funded health plans are liable for this fee imposed by Code section 4376. The first fee is $1.00 per covered life for plan years ending on or after

9-10 Employee Benefits Committee - Health Care Reform Strategies for Employers

October 1, 2012 and before October 1, 2013. The fee increases per year and concludes with plan years ending on or after October 1, 2018 and before October 1, 2019. The fee is due no later than July 31 of the year following the last day of the plan year. There are specific calculation methods to be used to configure the number of covered lives and special rules may apply depending on the type of plan being reported. For example, HRAs and health FSAs that are not excepted from reporting only must count the covered participant and not the spouses and dependents. The Form 720 instructions do not outline all of these rules. I. Transitional Reinsurance Fees Section 1341 of the ACA provides for this transitional reinsurance program in each State from 2014 to 2016. This fee for benefit year 2014averages approximately $63.00 per covered life. The Department of Health and Human Services (HHS) will collect contributions from health insurance issuers and self-insured group health plans starting late 2014 (although self-funded plans must contribute, they are not eligible to receive reinsurance payments under the program). Contributing entities must submit enrollment counts by November 15, 2014 to HHS. HHS will invoice entity by December 15, 2014 and entity then has 30 days to make payment. Coverage that is not major medical is excluded. Also excluded are HSAs, integrated HRAs, expatriate coverage, health FSAs, prescription drug plans (if solely provide prescription benefits), and excepted benefits as defined by 2791 of PHSA. Wellness, disease- management and employee assistance programs are excluded if do not provided major medical. J. Automatic Enrollment for Large Employers Offering Coverage (Delayed) An employer with more than 200 full-time employees that offers employees enrollment in one or more health benefits plans must automatically enroll new, full-time employees in one of its plans and to continue the enrollment of current employees in a health benefits plan offered through the employer. (Subject to waiting period authorized by law.) Requires adequate notice and the opportunity to opt out of coverage. Effective date is unclear; Department of Labor says regulations by 2014. K. Extension of Non-Discrimination Rules (Delayed) No eligibility rules or levels of coverage that favor high-wage employees. New under the ACA for fully-insured group health plans, except for 125 cafeteria plans. Has been delayed; still need to keep in mind when making design choices. L. Excise Tax on Cadillac Plans Effective date 2018. A 40% nondeductible excise tax will be imposed on high-cost health coverage.

9-11 Tax Conference, 27th Annual, May 22, 2014

VII. Individual Insurance Mandate A. The Individual Mandate The individual health insurance mandate requires nearly all Americans to purchase and maintain health insurance. Qualified coverage evidenced through tax returns. B. Penalties for Failing to Purchase Health Insurance If an individual fails to have minimally essential coverage, he or she will be required to pay an excise tax. The penalty structure is as follows:

• 2014: Penalty is $95 per adult and $47.50 per child (up to $285 for a family) or 1.0% of family income, whichever is greater. • 2015: Penalty is $325 per adult and $162.50 per child (up to $975 for a family) or 2.0% of family income, whichever is greater. • 2016: Penalty is $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5% of family income, whichever is greater.

The penalty structure is progressive, exponential in growth and may eventually get to a level of near parity with the cost of obtaining health insurance. VIII. Small Business Health Option Program (SHOP) A. SHOP Background The SHOP is the Marketplace for small businesses to purchase health insurance for their employees, if they choose to do so. The SHOP is designed to give small employers better access to health insurance products in a competitive environment. Originally, the SHOP was scheduled to open for small businesses in 2014. However, the launch of the SHOP website was delayed. Notwithstanding the delay, SHOP insurance products were made available for small businesses. Some of the important dates and requirements for the SHOP are: 2014: SHOP insurance products available to employers with 50 FTEs or less. In 2014, employer chooses one insurance product for all employees. In 2015, employer picks the metal level, employees choose the insurance product. In 2016, SHOP expands to businesses with up to 100 FTEs. In 2017+, States have option to expand SHOP eligibility to large groups. IX. Small Business Health Care Affordability Tax Credits A. What Is the Tax Credit? The tax credit is designed to help small businesses offset the cost of providing health insurance to their employees. Under the ACA, these employers are not required to provide health insurance to their employees. However, if they do, they may be eligible to receive the Small Business Health Care Affordability Tax Credit.

9-12 Employee Benefits Committee - Health Care Reform Strategies for Employers

The tax credit became available to applicable small employers starting in 2010. Between 2010 and 2013, small businesses were eligible to receive the following tax credits:

• Non-Profit Entity: Up to 25% of employer contribution to employees’ health insurance premiums. • For-Profit Entity: Up to 35% of employer contribution to employees’ health insurance premiums.

Starting in 2014, the tax credit is only available to those employers that purchase health insurance for their employees through the SHOP. Because the SHOP website did not launch as planned, SHOP products would need to be purchased through independent agents and brokers licensed to sell small group products in the federally-facilitated marketplace or from applicable insurance issuers. Between 2014 and 2016, small business may be eligible to receive the following tax credits:

• Non-Profit Entity: Up to 35% of employer contribution to employees’ health insurance premiums. • For-Profit Entity: Up to 50% of employer contribution to employees’ health insurance premiums. B. Eligibility Requirements There are three general requirements that a small employer must meet to qualify for the tax credit:

1. The small employer must have under 25 employees; 2. The small employer must have average employee wages of less than $50,000; and 3. The small employer must contribute at least 50% of the premium cost of the plan.

The maximum tax credit is available to small employers with 10 or fewer FTEs and average annual employee wages of $25,000 or less.

• For each FTE above 10 FTEs, the credit is reduced by 1/15. • For each $1,000 above $25,000 in average wages, the credit is reduced by 1/25. C. Which Employees Count?

• Seasonal Workers: Seasonal workers do not count toward the number of employees or the average employee wages of the employer for purposes of the tax credit. However, if the employer offers insurance to its seasonal workers, the premiums do count toward the employer’s requirements for tax credit eligibility. • Leased Employees: Leased employees count toward both the number of employees and the average employee wages of the employer for purposes of the tax

9-13 Tax Conference, 27th Annual, May 22, 2014

credit. However, any insurance premiums related to the leased employees are likely paid by another company, and therefore, do not count toward the employer’s requirements for tax credit eligibility. • Owner of Business/Family Members of Business Owner: The owner of the business and family members of the business owner that work at the company do not count toward the number of employees, average employee wages of the employer or the insurance premium requirements for tax credit eligibility. D. Controlled Group or Affiliated Entities Members of a controlled or an affiliated service group may be treated as a single employer for tax credit purposes. As such, an employer may be required to aggregate the employees from controlled group or affiliated entities for purposes of determining its edi- bility for the tax credit. E. Calculating the Number of Employees There are three methods that an employer can use to calculate its FTEs for Tax Credit Purposes:

1. Actual Hours Worked + Paid Leave Limit of 2,080 hours per employee, per year 2. Days-Worked Equivalency + Paid Leave 8 hours for each day 3. Weeks-Worked Equivalency + Paid Leave 40 hours for each week

Add up the total hours of service the employer pays wages to employees and divide by 2,080. Round down. F. Calculating Average Employee Wages Add up the total wages paid by employer during the tax year. Divide total wages by the number of FTEs for the year. Round down the result to the nearest $1,000. G. Calculating Employer Contributions Employer must pay at least 50% of coverage. Employer pays at least 50% of the premiums for each employee enrolled in health insurance coverage offered by the employer. Uniformity Requirement: The employer is not required to pay the same percentage of the premium for each employee. Required to be at least 50% of the premium for single coverage; does not have to pay 50% of premium for more expensive coverage options. The payments must be made under a qualified arrangement. Therefore, only premiums paid to a health insurance issuer qualify, such as major medical plans, dental, vision, etc. However, each plan must meet the requirements, i.e. employer pays at least 50% of the premiums.

9-14 Employee Benefits Committee - Health Care Reform Strategies for Employers

The employer cannot count certain payments in calculating the employer’s contributions. These payments include: portions paid by employees; premium payments under a salary reduction arrangement; and employer contributions to HRAs, FSAs and HSAs. There is also a cap on the value of the employer’s contributions to premium payments that count toward the credit. Employer’s premium payments may not be more than the average premium for the small group market in the state where the employer offers coverage. The 2013 Michigan average premiums for small group markets are:

• Single: $5,569 • Family: $13,256 H. Summary of Tax Credit

1. Determine the employees who count toward the credit. 2. Calculate the hours of service for these employees. 3. Calculate the number of the employer’s FTEs 4. Calculate the average annual wages paid per FTE. 5. Calculate the relevant employer contributions.

Initial Amount of Credit (Contribution x Percentage)

- Reduction for FTE in excess of 10 - Reduction for avg. wages in excess of $25,000 Total Small Business Health Care Tax Credit

I. How to Claim the Credit Tax-exempt employer: Form 990-T with attached Form 8941 showing calculation of credit. Other employers: Claim the credit on income tax return, use attached From 8941 showing calculation of credit. Credit may be able to be used to offset Alternative Minimum Tax liability. The tax credit can be reflected in determining estimated tax payments for the year. The credit affects an employer’s allowable deduction for health insurance premiums; deduction is reduced by amount of credit. Credit does not affect employer’s employment tax payments.

9-15

Practice and Procedure Committee and New Tax Lawyer Committee - Ask the Tax Masters

by Marla Schwaller Carew Marla Schwaller Carew PLLC Troy Joseph Falcone Joseph Falcone PC Southfield

Eric M. Nemeth Varnum LLP Novi

Practice and Procedure Committee and New Tax Lawyer Committee - Ask the Tax Masters

Eric M. Nemeth Varnum LLP Novi

Exhibit Exhibit A IRS Tax Division Enforcement Priorities...... 10-3

10-1

Practice and Procedure Committee and New Tax Lawyer Committee - Ask the Tax Masters

Exhibit A IRS Tax Division Enforcement Priorities

10-3 Tax Conference, 27th Annual, May 22, 2014

10-4 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

by Cara Griffith Tax Analysts Falls Church, VA Tricia G. Kinley Michigan Chamber of Commerce Lansing

State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

by Cara Griffith Tax Analysts Falls Church, VA

State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Cara Griffith Tax Analysts Falls Church, VA

Exhibit Exhibit A PowerPoint Presentation ...... 11-3

11-1

State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Exhibit A PowerPoint Presentation

Transparency in State Tax Administration

Cara Griffith Editor in Chief, State Tax Publications Tax Analysts [email protected] 703-533-4412

On the Paper Trail

• A productive debate requires adequate information • Desire for certainty – What the law is – How to follow it – Understanding of how it will be enforced – Comfortable that it will be enforced consistently

11-3 Tax Conference, 27th Annual, May 22, 2014

The Federal Fight

• 1972 suit to gain access to IRS private letter rulings and technical memorandum • 40 years of litigation in defense of disclosure and tax transparency

On to the States

• The need for openness does not end with federal tax law. State taxing authorities should be held to the same standards. • Transparency is vital to a dynamic debate on state tax issues

11-4 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

The Need for Transparency

• State officials have been increasingly willing in the past few years to use their discretionary authority to adjust taxpayers’ income • Biggest transparency issues arise when states provide insufficient guidance on how they administer their tax laws

Examples of discretionary authority

• Alternative Apportionment • Adding back related-party expenses • Making transfer pricing adjustments • Unclear audit positions

11-5 Tax Conference, 27th Annual, May 22, 2014

Encouraging Transparency

• The fight for transparency at the state level will be different than it was at the federal level. – 50 unique states • Culture of mistrust between taxpayers and taxing authorities – “Us vs. Them”

What Does State Tax Transparency Look Like?

• Publication of guidance – Letter Rulings – Administrative-level tax rulings • Open legislative process • Independent tax tribunal

11-6 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Publication of Guidance

• Letter Rulings – Approximately 45 states issue letter rulings – Of those, approximately 35 make the rulings publicly available – Arkansas makes rulings available only by FOIA request by topic

Publication of Guidance

• Administrative-level tax rulings – Considered by an ALJ (there may be a hearing) – Apply tax law to a set of facts – Result in an opinion • Provide valuable guidance to taxpayers

11-7 Tax Conference, 27th Annual, May 22, 2014

Independent Tax Tribunal • Directly related to the publication of administrative-level rulings • Decisions by a judicial branch tax court or an independent tax tribunal are not confidential and are readily published • Judges are impartial and knowledgeable of tax issues • Opinions more consistently apply tax law

Independent Tax Tribunals

• States are increasingly turning to independent tax tribunals or judicial branch tax courts • More than half of the states now have one of the two

11-8 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Open Legislative Process

• Legislation gets created quickly and in quasi- secrecy with legislators, their aides, and revenue officials • Legislators lack adequate information about the effect of specific legislation or time to analyze related issues

Open Legislative Process

• Developing rules and regulations should be done via an open, collaborative process • Opening up a dialogue with the affected taxpayers can be eye-opening for those writing the legislation • Advertise and hold public hearings

11-9 Tax Conference, 27th Annual, May 22, 2014

Benefits of Transparency

• For taxpayers – Certainty – Improves taxpayer ability to voluntarily (and accurately) comply with tax laws

Benefits of Transparency

• For states – A transparent tax system • improves a revenue department’s efficiency in administering the tax system • increases taxpayer and tax practitioner certainty, and • reduces the likelihood that questions will turn into full-fledged controversies

11-10 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Roadblocks to Transparency

• Information overload – It’s not just a matter of increasing the amount of information that is publicly available, it has to be accurate, properly redacted, and organized • States don’t see the payoff – It’s difficult to find proof supporting the fact that states benefit from transparency – States may hesitate to make the initial investment in a transparent system it the efficiency payoff cannot be measured

Taxpayer Confidentiality

• Taxpayer confidentiality is the most cited reason for not making guidance publicly available – Redact, redact, redact – But is it too hard or costly?

11-11 Tax Conference, 27th Annual, May 22, 2014

Efforts to Improve Transparency

• Demanding improvements in state tax systems – Ongoing litigation in Kentucky – California – Connecticut – Michigan

11-12 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

by Tricia G. Kinley Michigan Chamber of Commerce Lansing

State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Tricia G. Kinley Michigan Chamber of Commerce Lansing

Exhibit Exhibit A PowerPoint Presentation ...... 11-15

11-13

State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Exhibit A PowerPoint Presentation

Michigan Transparency in Tax Law

Michigan Chamber Members Perspective

Member Feedback Over The Years:

• Michigan Department of Treasury unwilling to be transparent – resistant to providing taxpayers their own work papers, even upon request.

• Michigan Treasury inconsistent in their treatment of Taxpayers – lack of published guidance for positions, no criteria for settlement on “risk of litigation.”

5/13/2014

11-15 Tax Conference, 27th Annual, May 22, 2014

Member Feedback Over The Years:

Continued…

• Michigan Treasury hides behind “confidentiality” by using current law inappropriately as a shield – resist providing even redacted documentation.

• Litigate or Legislate – creating “have’s” and “have-not’s.”

• Results in a waste of resources for everyone involved!

5/13/2014

What “Areas” of Transparency Do We Hear about Most:

• Audit Work Papers

• Manuals, Letter Rulings, Internal Policy Memos, Technical Advice Letters…or “other similar types documents!” (A rose by any other name would smell as sweet (William Shakespeare)

• Documents the Department uses, but that don’t support their positions (multi-officer, multi-assessment corporate tax liability.) • Third-party records (sales/use taxes.) • Revenue estimates to sway opinion on pending legislation.

5/13/2014

11-16 State and Local Taxation Committee - Transparency Laws: Should Taxpayers Be Worried?

Some Signs of Improvement… • Governor Snyder and LG Calley emphasize “transparency” and the Administration endorsed these bills:

– HB 4289/PA 148 – Unclaimed Property (provide audit report) – HB 4291/PA 35 – Revenue Act (provide audit report) – HB 4288/PA 108 – Sales Tax (audit standards, evidence evaluated) – HB 4292/PA 109 – Use Tax (audit standards, evidence evaluated) – Reluctantly endorsed- SB 64 & SB 337/PA 3 – (officer liability)

But the “proof will be in the pudding!” Some of these bills require the passage of Rules – must monitor follow-through.

5/13/2014

And Some Signs that Maybe Things Aren’t Improving…

• Fradco/SMK v Treasury: Statute requires notification to Designated Representative. The fact that Michigan Treasury and AGs fought to the bitter end…does not reflect well. (Case speaks to process, Department refused to follow process, which results in “keeping people in the dark” (opposite of transparency.)

5/13/2014

11-17 Tax Conference, 27th Annual, May 22, 2014

Other Pending Bills:

• HB 4290 – Michigan Treasury must publish IPDs, Audit Standards, Sampling Manual, Other Manuals. (Letter Rulings already law, but not followed for years.) Missing right now: Technical Advice or “other similar documents”!

• HB 4730 – Disclose Revenue Estimating Methodologies

• SB 316 – Honor Legislator/Designated Representative requests for information to help taxpayers/constituents

• SB 327 – Ban on Collection Goals or Quotas

• HB 4003 - Offer in Compromise

5/13/2014

Summary: • Taxpayers shouldn’t have to legislate good government! But for now they do… • The Chamber is an active participant. You should be too! Call your legislators about these bills (in particular HB 4003!!) or about re- introducing HB 4730 and SB 316 for 2015. • The Michigan Chamber works to achieve member goals while interfacing with national professional organizations and grass roots initiatives.

THANK YOU FOR HAVING THE MICHIGAN CHAMBER TODAY!

5/13/2014

11-18 International Taxation Committee - FACTA Update and Tax Structuring for Private Equity Portfolio Companies

by William W. Henson Plante Moran PLLC Auburn Hills Randall Janiczek Plante Moran PLLC Grand Rapids

Joel Mitchell Plante Moran PLLC Grand Rapids

International Taxation Committee - FACTA Update and Tax Structuring for Private Equity Portfolio Companies

William W. Henson Plante Moran PLLC Auburn Hills Randall Janiczek Plante Moran PLLC Grand Rapids Joel Mitchell Plante Moran PLLC Grand Rapids

Exhibit Exhibit A PowerPoint Presentation ...... 12-3

12-1

FACTA Update and Tax Structuring for Private Equity Portfolio Companies

Exhibit A PowerPoint Presentation

FATCA

The Next Wave of FATCA Is Coming: Are You Prepared?

webinars.plantemoran.com

Moderator

Joel Mitchell, CPA, Partner, International Tax QVC1: :6 :` JV`1JQ%``:JR:]1RQ``1HV:JR:IVIGV`Q`Q%`J V`J: 1QJ:C :6V`01HV]`:H 1HV8 QVC.:IQ`V .:J7V:`Q`J V`J: 1QJ:C :6V6]V`1VJHV51JHC%R1J$.QCR1J$ .V]Q1 1QJQ` :6 #1`VH Q``Q`:I%C 1J: 1QJ:C]%GC1HHQI]:J78QVC]`Q01RVHQJ%C 1J$5HQI]C1:JHV:JR :6]`Q011QJ V`01HV5:CQJ$11 .]QV1J$RVV]V6]V` 1V1J1J V`J: 1QJ:C `%H %`1J$:JR`V]: `1: 1QJ]C:JJ1J$8 QVC;]`Q:H 10V`QH%.::CCQ1VR.1I Q1RVJ 1`7$CQG:C :6I1J1I1<: 1QJQ]]Q` %J1 1VRV1$JVR Q `VR%HVGQ .HQ`]Q`: V:JR1JR101R%:C :6QGC1$: 1QJ8QVC%JRV` :JR .VJVVR Q :@VG%1JV HQJ1RV`: 1QJ1J Q:HHQ%J :JR1Q`@ Q]`Q01RV :6]C:JJ1J$ .: `1 11 .1JQ .V`Q`$:J1<: 1QJ:C $Q:C51JHC%R1J$$CQG:CH:.I:J:$VIVJ 8

webinars.plantemoran.com

12-3 Tax Conference, 27th Annual, May 22, 2014

Presenters

Bill Henson, CPA, Partner, International Tax 11CC.:IQ`V .:J7V:`Q`V6]V`1VJHV1Q`@1J$1JGQ .]%GC1H:HHQ%J 1J$:JR1JR% `7811CC ]VH1:C1#V@?`Q`0`J :JRQ%J$1J:Q :%CQ51`:<1C8+1V6]V`1VJHV 1JHC%RV1JRRV] .1JR% `7V6]V`1VJHV1JQ1C:JR$:V6]CQ`: 1QJ:JR]`QR%H 1QJ5GVV`G`V11J$5GQ CV :JRHQJ :1JV`I:J%`:H %`1J$5:% Q:JR:% Q%]]C1V`I:J%`:H %`1J$5H.VI1H:C:JR`1GV`5:JRQ``.Q`V V`01HV811CC:CQ.:1$J1`1H:J V6]V`1VJHV1J-7 5881J V`J: 1QJ:C :6HQI]C1:JHV:JR `:J:H 1QJ`VC: VR :6`V %`JR1HCQ%`V8

Randall J. Janiczek, CPA, Senior Manager, International Tax :JR7.:IQ`V .:J7V:`Q`]%GC1H:HHQ%J 1J$V6]V`1VJHV1JGQ . .V:JRVÌ:J7:JR1: IVIGV`Q` C:J V*Q`:J;J V`J: 1QJ:C :6V`01HV`Q%]8:JR71C1HVJVR Q]`:H 1HV::HV` 1`1VR ]%GC1H:HHQ%J :J 1J*1H.1$:J:JRCC1JQ18 +V.:V6 VJ10VV6]V`1VJHV1Q`@1J$11 .GQ .]%GC1H:JR]`10: VHQI]:J1V11 .1J:11RV0:`1V 7Q` 1JR% `1V%H.:I:J%`:H %`1J$:JRR1 `1G% 1QJ51.QCV:CV `:RV5:JR .VV`01HV1JR% `71JGQ .:J 1JGQ%JR:JRQ% GQ%JRHQJ V6 8:JR7.:1$J1`1H:J V6]V`1VJHV11 .881J V`J: 1QJ:C :6]C:JJ1J$:JR HQI]C1:JHV5 `:J`V`]`1H1J$5:JR `:J:H 1QJ`VC: VR]C:JJ1J$:JRHQI]C1:JHVI: V`8 .1CV1Q`@1J$1J -`:J@`%` 5VÌ:J75.V$:1JVR0:C%:GCVV6]V`1VJHV1Q`@1J$11 .I%C 1J: 1QJ:CHQI]:J1VQJLVÌ:J :JRH`QRGQ`RV`0 :61%V8

webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

Agenda

• What is FATCA • Compliance for US domestic entities • Classification/Compliance for foreign entities • Application to Fund Structures • Application to US Multinationals • New IRS Forms

4 webinars.plantemoran.com

12-4 FACTA Update and Tax Structuring for Private Equity Portfolio Companies

The Next Wave of FATCA Is Coming: Are You Prepared?

What is FATCA

• Designed to identify assets of US persons being held offshore • New withholding regime which Imposes a withholding tax if certain requirements are not met • Imposed in a similar manner to the existing withholding tax • Payors (or withholding agents) of U.S. sourced income and gross proceeds must withhold 30% on payments to non-U.S. entities that do not certify their compliance with FATCA or disclose their substantial US owners. • FATCA withholding does not allow tax treaty based exemptions or other reductions of the withholding tax rate.

5 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

Who Should Care about FATCA

• Foreign banks and other financial institutions • US persons making payments to foreign recipients • US citizens residing in other jurisdictions • US businesses with potential FFI’s in structure • Investment groups (venture capital, private equity, hedge funds) • US multinationals • Foreign subsidiaries • Acquiring companies performing due diligence

6 webinars.plantemoran.com

12-5 Tax Conference, 27th Annual, May 22, 2014

The Next Wave of FATCA Is Coming: Are You Prepared?

FATCA – Alphabet Soup

• FFI – foreign financial institution • NFFE – non-financial foreign entity • IGA – intergovernmental agreement • GIIN – global intermediary identification number • PFFI – participating financial institution • CDCFFI – certified deemed compliant FFI • RDCFFI – registered deemed compliant FFI

7 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

US persons making payments to foreign recipients – 4 Steps • Identify foreign payees • Internal and external • FFI’s and NFFE’s • Analyze nature of payments • Withholdable or non-withholdable • Obtain proper documentation •New W-8 • W-8BEN-E is 8 pages long • Old W-8BEN is insufficient • Withhold and report • Updated1042 Series forms 8 webinars.plantemoran.com

12-6 FACTA Update and Tax Structuring for Private Equity Portfolio Companies

The Next Wave of FATCA Is Coming: Are You Prepared?

US persons making payments to foreign recipients • Analyze nature of payments • Withholdable payments • US source FDAP • No deposit or portfolio interest exemptions • Interest from foreign branch of US bank is considered US source • Gross proceeds from sale of property that would produce US source FDAP • Starting December 31, 2016

9 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

US persons making payments to foreign recipients • Analyze nature of payments • Non-withholdable payments • Items of effectively connected income (ECI) • Non-financial payments in the ordinary course of business for: • Services • Office and equipment leases • Software licenses • Transportation / freight • Interest on outstanding accounts related to goods/services • Others and certain grandfathered obligations

10 webinars.plantemoran.com

12-7 Tax Conference, 27th Annual, May 22, 2014

The Next Wave of FATCA Is Coming: Are You Prepared?

US persons making payments to foreign recipients • Normal Chapter 3 withholding still applies • Example: Interest payment from US entity to Chinese entity. China entity is an active NFFE and provides W-8BEN-E certifying FATCA status. • 30% FATCA withholding should not apply • 30% withholding under IRC Section 1442 still applies • Can be reduced to 10% if W-8BEN-E properly makes claim for treaty benefits

11 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

US persons making payments to foreign recipients • Best practices • Obtain W-8 or W-9 for all vendors • Put process in place to require documentation of all new vendors • Review current vendors for indicia of foreign status • Review all W-8BEN forms currently on file • Develop process to “flag” US-source payments to Non-US recipients for review

12 webinars.plantemoran.com

12-8 FACTA Update and Tax Structuring for Private Equity Portfolio Companies

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to Non-US entities

• Step 1 – Determine FATCA status of entities • FFI or NFFE • Step 2 – If FFI, determine reporting method • IGA or FFI Agreement • Step 3 – Register and obtain GIIN • Step 4 – comply with requirements of IGA or FFI Agreement

13 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

FFI or NFFE

• FFI • Depository institution - accepting deposits in ordinary course of banking or similar business • Custodial institution - holds financial assets for third parties as a substantial portion of its business (over 20% of gross income) • Investment entity - engaged in the business of investing, reinvesting, trading in securities / partnerships / commodities, or any interest in securities / partnerships / commodities • Investment advisors / brokers, professionally managed investment funds, mutual funds, hedge funds, private equity funds, venture capital funds • Family trusts or other non-professionally managed entities should be excluded

14 webinars.plantemoran.com

12-9 Tax Conference, 27th Annual, May 22, 2014

The Next Wave of FATCA Is Coming: Are You Prepared?

FFI or NFFE

• Entities excluded from FFI classification • Certain holding companies / treasury centers • Certain start-up companies • 24-month limitation • Certain non-profit organizations

15 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

FFI or NFFE

• NFFE • Any entity that is not an FFI • Excepted NFFE’s • Publicly traded corporations, • Certain territory entities • Foreign governments

16 webinars.plantemoran.com

12-10 FACTA Update and Tax Structuring for Private Equity Portfolio Companies

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to NFFE’s

• Generally withholding will not apply if proper documentation is obtained • Active NFFE’s • Less than 50% of gross income is passive, and • Less than 50% of assets would give rise to passive income • Passive NFFE’s • Not excepted or active • Must disclose substantial US owners • Status is indicated on W-8BEN-E

17 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to FFI’s

• More substantial requirements to avoid withholding • General requirements • Maintain due diligence to identify US accounts • Obtain documentation from account holders to determine US or Non-US status • Report information regarding US accounts to IRS • Withhold 30% on certain payments to non-compliant account holders

18 webinars.plantemoran.com

12-11 Tax Conference, 27th Annual, May 22, 2014

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to FFI’s

• Avoiding FATCA withholding tax • Jurisdictions with no IGA • Enter into FFI agreement with IRS • Model 1 IGA • Report information on US account holders directly to local government • Model 2 IGA • Report information directly to IRS

19 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to FFI’s

• Jurisdictions with no IGA – FFI agreements • FFI will enter into agreement directly with IRS to comply with FATCA requirements • Must adopt a compliance program • Satisfy due diligence procedures • Identify responsible officer to review program • Certify that FFI maintained controls to comply with FFI agreement • Register with IRS and obtain a GIIN before May 5, 2014

20 webinars.plantemoran.com

12-12 FACTA Update and Tax Structuring for Private Equity Portfolio Companies

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to FFI’s

• Jurisdictions with Model 1 IGA’s • All FATCA related information will be reported to local government • Local governments will issue regulations to administer information collection • FFI must register with IRS and obtain a GIIN before May 5, 2014 • Jurisdictions with Model 2 IGA’s (less common than Model 1) • Information will be reported directly to IRS • FFI’s will sign a version of an FFI agreement reflecting the terms of the IGA • Must register and obtain a GIIN before May 5, 2014

21 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to Common Fund Structures

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22 webinars.plantemoran.com

12-13 Tax Conference, 27th Annual, May 22, 2014

The Next Wave of FATCA Is Coming: Are You Prepared?

Application to common multinational structures

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23 webinars.plantemoran.com

The Next Wave of FATCA Is Coming: Are You Prepared?

Due diligence Issues

• FATCA liabilities are assessed on withholding agent • Test processes in place for withholding compliance of US targets • Compliance with terms of FFI Agreement or IGA for foreign targets • Will nature of acquiring company change FFI status of group entities? • Integration into acquirer

24 webinars.plantemoran.com

12-14 FACTA Update and Tax Structuring for Private Equity Portfolio Companies

The Next Wave of FATCA Is Coming: Are You Prepared?

New Compliance Forms

• W-8BEN-E • Sections for both Chapter 3 and Chapter 4 withholding • FATCA statuses listed in Part I • Parts IV through XXVIII elaborate on FATCA status • Likely will be intimidating to foreign payment recipients • 1042-S • Sections for both Chapter 3 and Chapter 4 withholding • New set of exemption and entity codes • No instructions yet

25 webinars.plantemoran.com

Q&A

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12-15 Tax Conference, 27th Annual, May 22, 2014

Disclaimer

This presentation is intended for educational and discussion purposes only and cannot be relied upon as tax or accounting advice.

You should seek advice from a qualified advisor based on your specific facts and circumstances before taking any action.

To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code (“IRC”) or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

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Thank you for attending

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12-16 Federal Income Tax Committee - Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

by Anthony Ilardi, Jr. Dykema Bloomfield Hills Joseph S. Kopietz Clark Hill PLC Detroit

Federal Income Tax Committee - Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Anthony Hardi, Jr. Dykema Bloomfield Hills

Exhibit Exhibit A PowerPoint Presentation ...... 13-3

13-1

Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Exhibit A PowerPoint Presentation

Exceptional service. Dykema delivers.

Revenue Procedure 2014-12 Creates an Historic Tax Credit Investment Safe Harbor

Anthony Ilardi 39577 Woodward Avenue, Suite 300 Bloomfield Hills, MI 48304 Direct: 248/203-0763 Email: [email protected] Anthony Ilardi Dykema

Outline

• Background • Federal Historic Tax Credit (HTC) requirements • Virginia Historic Tax Credit Fund 2001 • Historic Boardwalk Hall • Rev. Proc. 2014−12 • Conclusion

2 Exceptional service. Dykema delivers.

13-3 Tax Conference, 27th Annual, May 22, 2014

History of Federal Historic Tax Credits

• 1986 Tax Reform Act enacted current federal tax credits • Goals: – Reduce demolitions of historic structures – Decrease cost of renovation below value of building – Make rehabilitation competitive with new construction

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3 Exceptional service. Dykema delivers.

Amount of Federal Historic Tax Credits

• 20% credit for qualified rehabilitation expenditures (“QRE”) of a certified historic structure

• If the building was placed in service before 1936 – 10% credit for QRE

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4 Exceptional service. Dykema delivers.

13-4 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Requirements to Obtain HTC

• Rehabilitation must be substantial

• Building must have been in service before rehabilitation

• Renovations must be consistent with historic character of the building

.Q Q71@1IVR1:QIIQJLQH:CV`Q `QRV`1H@Q1V`5 V `Q1

5 Exceptional service. Dykema delivers.

Basic Qualification

Although the National Park Service (“NPS”) formally has to approve the rehabilitation plan, approval generally is delegated to the State Historic Preservation Office (“SHPO”).

6 Exceptional service. Dykema delivers.

13-5 Tax Conference, 27th Annual, May 22, 2014

Basic Qualification (cont’d)

Application process: • Evaluation of significance by the NPS (“Part 1”) • Establishment of a rehabilitation plan, prepared by an architect versed in historic rehabilitations, and reviewed by the SHPO (“Part 2”), and • Request for certification of completion from SHPO (“Part 3”)

7 Exceptional service. Dykema delivers.

Pre-1936 Buildings

Buildings erected before 1936 that do not meet historic criteria may qualify for a federal credit of 10% of QRE.

The pre-1936 buildings must keep intact 50% of the external walls, use 75% of the external walls as either interior or exterior walls, and retain 75% of the existing framework.

8 Exceptional service. Dykema delivers.

13-6 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Pre-1936 Buildings (cont’d)

The credit is based on the amount of QRE.

In general, the qualified expenditures must exceed the building’s adjusted basis at the start of the testing period or $5,000.00.

The testing period is a 24-month period selected by the developer.

Expenditures for personal property, acquisition costs, or enlargement costs are not QRE.

9 Exceptional service. Dykema delivers.

Recapture

• For five years, original owner must own building and continue its historic features. If not: – Full or partial recapture of credit – Recapture period • Starts: Building placed in service • Ends: Five years following – Decreases credit by 20 percent each year of period

10 Exceptional service. Dykema delivers.

13-7 Tax Conference, 27th Annual, May 22, 2014

Structuring Credit Deal

Equity Investment Structure Master Tenant Structure • Investor must be member of ownership • The investor owns all, or substantially entity (usually LLC) before building is all, of the master tenant placed in service – Master tenant subleases projects to end users • Most common: – Investor receives 99.9 percent • Frequently, the developer group is the interest in entity and proportionate manager of the master tenant and is credit allocation responsible for leasing to the ultimate tenants

11 Exceptional service. Dykema delivers.

Frequent Issues in HTC Cases

• Tax Commissioner challenges HTC projects with partnerships where: – Transaction lacks economic substance – Transaction’s substance does not match its form – Disguised sales – Investors not actually partners or partnership is a sham

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12 Exceptional service. Dykema delivers.

13-8 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Recent Developments: Virginia Historic Tax Credit Fund LP 2001

• Investors pooled funds in partnership that financed historic redevelopment in exchange for allocation of state historic tax credits

• Tax credits allocated to partners proportionately

• General partner could exercise option to buy investors’ interest out

• Promoters would refund investors if partnership did not obtain tax credits

13 Exceptional service. Dykema delivers.

Virginia Historic Tax Credit Fund LP 2001: IRS Arguments

• The IRS challenged the partnership’s tax return and argued – that the investors were not partners and their investment was a sale of state tax credits; or – even if the investors were partners, the contribution was a disguised sale of state credits

14 Exceptional service. Dykema delivers.

13-9 Tax Conference, 27th Annual, May 22, 2014

Virginia Historic Tax Credit Fund LP 2001: Tax Court

• The Tax Court rejected both of the IRS’s arguments and found that – the investors were partners – there was no disguised sale

• The IRS appealed and the Fourth Circuit overturned the Tax Court

15 Exceptional service. Dykema delivers.

Virginia Historic Tax Credit Fund LP 2001: Fourth Circuit Court of Appeals

• The Court of Appeals found that even if the partnership was a true partnership, the transactions were disguised sales

• Disguised sales because the tax credits were like property and: – The investors lacked entrepreneurial risk – The transaction was like “an advanced purchaser who pays for an item with a promise of later delivery”

16 Exceptional service. Dykema delivers.

13-10 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Historic Boardwalk Hall

• The municipal owner of the Hall formed a partnership with an investor to renovate a convention center and obtain historic tax credits • Hall transferred to partnership • The investor was a 99.9 percent member of the partnership • The investor was entitled to a three percent preferred return • Agreement provided put and call options for the members of the partnership • Agreement provided tax benefits guarantee contract where the municipal owner agreed to pay investor if partnership did not obtain tax credits .Q Q71G`:`7Q`QJ$`V5`1J .Q Q$`:]."1011QJ5$5R '(5 R Q:`R1:C@:CC5# C:J 1H1 75$V1V` V7

17 Exceptional service. Dykema delivers.

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18 Exceptional service. Dykema delivers.

13-11 Tax Conference, 27th Annual, May 22, 2014

Historic Boardwalk Hall: Tax Court IRS Arguments

• The IRS challenged the partnership by arguing: – The transaction lacked economic substance, – The investor was not a partner, – The owner did not sell or transfer the Hall to the partnership, and – The partnership should pay an accuracy penalty

19 Exceptional service. Dykema delivers.

Historic Boardwalk Hall: Taxpayer Arguments

• The taxpayer argued that: – The economic substance doctrine did not apply because Congress intended HTC to spur otherwise unprofitable investments and even if it did, the investor expected a three percent return – The taxpayer is a partner because there was partnership agreement that the parties negotiated – The transaction documents and the parties’ conduct show that the Hall was actually transferred to the partnership

20 Exceptional service. Dykema delivers.

13-12 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Historic Boardwalk Hall: Economic Substance Argument

• Found economic substance: – Tax Credit – Three percent return – Partnership could invest more in the renovation because of investor’s contribution

21 Exceptional service. Dykema delivers.

Historic Boardwalk Hall: Partnership Argument

• Rejected because: – The investor entered into a transaction to facilitate an investment in exchange for tax credits and a three percent return – The investor’s interest was not more like debt than equity

22 Exceptional service. Dykema delivers.

13-13 Tax Conference, 27th Annual, May 22, 2014

Historic Boardwalk Hall: Hall Transfer

• The court rejected the IRS’s argument that the owner did not transfer the Hall to the partnership because: – The documents showed an intent that the Hall transfer – It was irrelevant that the Hall would continue to be operated by the former owner – The former owner’s purchase option did not destroy the transfer because it was consistent with the operation of the credits

23 Exceptional service. Dykema delivers.

Historic Boardwalk Hall: Accuracy Penalty Argument

• The court rejected the IRS’s anti-abuse regulations because: – There was a real business purpose to the transaction – It was unimportant that the investor’s tax liability was reduced by the transaction because Congress intended the HTC spur investment by doing just that

24 Exceptional service. Dykema delivers.

13-14 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Historic Boardwalk Hall: Tax Court Decision

• Tax Court upheld the partnership’s 99.9 percent allocation of the HTC to the investor

• IRS appealed the result to the Third Circuit Court of Appeals

25 Exceptional service. Dykema delivers.

Historic Boardwalk Hall: IRS Arguments on Appeal

• The investor was not a partner because it had no entrepreneurial risk or potential for upside gain

• The partnership was a sham

• The partnership was not the owner of the Hall

26 Exceptional service. Dykema delivers.

13-15 Tax Conference, 27th Annual, May 22, 2014

Historic Boardwalk Hall: Taxpayer’s Arguments on Appeal

• The partnership is a real partnership and both partners are bona fide

• The partnership is not a sham

• The Hall was transferred to the partnership

27 Exceptional service. Dykema delivers.

Historic Boardwalk Hall: Court of Appeals

• In August 2012, the United States Court of Appeals for the Third Circuit Tax Court held that because the investor had no risk in the partnership because of various guarantees and indemnities, the investor was not a partner. • The Court relied heavily on Comm’r v. Culbertson, 337 U.S. 733 (1949) and numerous tax shelter cases, especially TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006) (generally referred to as Castle Harbor) • As a result, the investor was denied the credit.

28 Exceptional service. Dykema delivers.

13-16 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Historic Boardwalk Hall: Court of Appeals

• The Third circuit relied on numerous factors to reverse the Tax Court: – Puts and Calls were at fair market value and guaranteed the investor a fixed return – The Puts and Call amounts were fully defeased – Evidentiary factors Substantial manipulation of the projections References to the investments a “sale” of the credits No projected operating cash flow; instead funded by manager

29 Exceptional service. Dykema delivers.

Historic Boardwalk Hall: Court of Appeals

• The Third Circuit did not employ an economic substance analysis, but instead invoked “substance over form” analysis to conclude that the investor was not a partner and therefore could not claim the credits • While the Third Circuit’s opinion is lengthy and detailed, it is apparent that the Court was most concerned over the investor’s lack of any risk in the investment.

30 Exceptional service. Dykema delivers.

13-17 Tax Conference, 27th Annual, May 22, 2014

Rev. Proc. 2012-14

• After the Third Circuit opinion, the market slowed down significantly • In reaction, the IRS announced that it would provide guidance, which it did in January, 2014 in Revenue Procedure 2014-12.

31 Exceptional service. Dykema delivers.

Key Aspects of the Safe Harbor Include:

• Minimum Principal Interest: The principal (general partner of a limited partnership or manager of an LLC) must have a minimum one percent interest in each item of income, deduction or credit. Until now, in many translations, the developer’s interest was substantially less than 1%.

32 Exceptional service. Dykema delivers.

13-18 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Key Aspects of the Safe Harbor Include (cont’d):

• Minimum Investment: The investor, at all times, must have a percentage interest in items of income, loss, credit, etc., that is never less than 5% of its highest percentage interest. The Revenue Procedure illustrates the rule in n example: – If the investor holds a 99% interest when it receives an allocation of credits, but after the 5-year historic credit recapture period its share of income and loss items falls to 5.0% - sometimes referred to as a “flip” – the “flip” in percentage of ownership from 99% to 5.0% meets the safe harbor.

33 Exceptional service. Dykema delivers.

Key Aspects of the Safe Harbor Include (cont’d):

• Participation in Profits & Losses: The investor must participate in partnership profits and losses; a preferred return alone will not meet the safe harbor. Implicitly, the investor may have a preferred return if it also has some common interest, but the Revenue Procedure is not explicit on this point. Moreover, the investor’s interest must be a bona fide equity interest with a “reasonably anticipated value commensurate with Investor’s overall percentage in the partnership” separate from any tax attributes to be allocated to the investor.

34 Exceptional service. Dykema delivers.

13-19 Tax Conference, 27th Annual, May 22, 2014

Key Aspects of the Safe Harbor Include (cont’d):

• Master Tenant: The safe harbor also contemplates the so- called master tenant structure where the credits are passed- through to the master tenant entity (typically owned by the investors). A number of special rules apply, including a rule that the investor may not also have a direct investment in the owner/landlord (with the direct exception of low-income housing tax credits and new markets tax credits) and a prohibition on the master tenant subleasing the building back to the owner/developer (with an exception for a sublease mandated by an unrelated third party lender).

35 Exceptional service. Dykema delivers.

Key Aspects of the Safe Harbor Include (cont’d):

• Value of Investor Interest: The value of the investor’s interest (a) cannot be artificially reduced by fees, lease terms or arrangements that are unreasonable when compared to similar real estate projects not using historic tax credits, and (b) cannot be reduced by disproportionate distribution rights or by issuances of interests in the partnership for less than fair market value. – This provision may require the developer to research and conform its agreements to current market practice. One area that likely will receive scrutiny is the size of deferred developer fees.

36 Exceptional service. Dykema delivers.

13-20 Historic Tax Credit Arrangements and the Impact of Recent Cases and IRS Guidance

Key Aspects of the Safe Harbor Include (cont’d):

• Investment Timing: The investor must contribute at least 20% of its overall anticipated investment before the project is placed in service. Contributions of promissory notes are disregarded in determining whether this requirement is met. Also, at least 75% of the investor’s contribution cannot be contingent

37 Exceptional service. Dykema delivers.

Key Aspects of the Safe Harbor Include (cont’d):

• Guaranties: • Permitted guaranties include guaranties that the developer or owner will not cause a recapture event, completion guaranties, operating deficit guaranties, environmental indemnities and financial covenants. • A guaranty of the investor’s tax credit, or a guaranty to make an equivalent cash payment, or guaranteed repayment of the investment because of a failure to be able to claim the credit after a challenge by the IRS, are not permissible.

38 Exceptional service. Dykema delivers.

13-21 Tax Conference, 27th Annual, May 22, 2014

Key Aspects of the Safe Harbor Include (cont’d):

Puts and Calls: First, the Revenue Procedure prohibits any call option. A put option is permissible, but cannot be exercisable for more than the fair market value of the investor’s interest. In determining fair market value, only obligations or rights entered into in the ordinary course of the partnership’s business can be taken into account. The Revenue Procedure is silent on whether the put can be for less than fair market value; practitioners have different views on this point.

39 Exceptional service. Dykema delivers.

13-22 NOTES

NOTES