Tax Section Odyssey

In 2017, Congress made several permanent changes to the taxation of foreign earnings with the enactment of the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 . The TCJA imposed a deemed repatriation (Sec. 965). In the Moore v. United States case, the constitutionality of this policy is being challenged. Listen to Tony Nitti, CPA, Tax Partner — EY, and Damien Martin, CPA, Tax Partner — EY, discuss the pending case live from the 2023 AICPA & CIMA National Tax & Sophisticated Tax Conference, as well as the top tax cases of all time. What you’ll learn in this episode Background on the case and case law history involving U.S. taxation (0:44) Deeper dive into the history of U.S. tax law (11:41) Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796) (20:38) Temporary income tax enactment (23:47) Pollock v. Farmers’ Loan & Trust Company, 157 U.S. 429 (1895) (26:06) 16th Amendment (28:36) Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) (34:13) Lead up to the Moore case (35:20) Advice for how to explain the Moore case to clients (41:24) IRS resources Section 965 Transition Tax — IRS webpage detailing Sec. 965, including an overview, what taxpayers are impacted and what potentially impacted taxpayers need to know. Other resources Charles G. Moore, et ux., Petitioners v. United States — Case whether the 16th amendment authorizes Congress to tax unrealized sums without apportionment among the states. Transcript April Walker: Hello everyone and welcome to the AICPA's Tax Section, Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager from the Tax Section. I'm here today in person at the National Tax Conference with Tony Nitty and Damien Martin, both partners at EY. They have a session here that's titled, “The Top Tax Cases of All Time.” If that's not a high bar to set, I'll be surprised, but I thought it might be fun to go over some of the highlights of that session on this podcast episode today. Damien and Tony, I'm going to be here if you need me, but otherwise, I'm going to let you guys talk about the top tax cases of all time. Take it away. Damien Martin: All right Tony, I don't know how we get better than that saying — the top tax cases of all time. But, I’ll let you set the stage here because we're not just going to geek out like we usually do. We're going to do that. Tony Nitti: Somebody likes his buddy. I don't know how high up our gratitude needs to go. I don't know if it's April or the AICPA planning committee. I don't know if it's the Supreme Court in the United States. I don't know if it's a power even higher than that, whichever one you believe in, but somebody is looking out for us because, like you said, the description for this class is Tony and Damien are going to talk about the top court cases of all time. As you alluded too, yeah, we were totally geek out on that. But, I know we were both a little bit worried that it would be more of an academic exercise and there wouldn't be any real practical takeaway. It's not like everyone's going to go back to their respective offices and be better off because they understand the finer points of Duberstein or North American Oil. We were a little worried. But then we get this gift. We get this gift out of the State of Washington. A little court case involving $14,000 in disputed tax that the district court dismisses in favor of the government. Ninth Circuit does the same. But the Supreme Court of the United States decides, we're going to listen to this case. Now it changes everything for you and me because when these oral arguments start in a couple of weeks, mid-December, everybody is going to be talking about this Moore case. And when I say everybody, I don't just mean like the people at AICPA National Tax, or people make their living in the tax world. It's gonna lead morning talk shows and it's going to be the front page of papers. It's because while it's a small case, the implications are potentially huge. If I were to have to convince you, Damien Martin, why you should be paying attention to Moore and why all practitioners going to have to be able to talk about this stuff with their clients? What if I were to tell you that if the Supreme Court rules for Moore gone from the code goes section 965, the mandatory repatriation tax that was born as part of the Tax Cuts and Jobs Act, and potentially along with it, a couple of hundred millions of dollars of, did I say millions, a couple of hundred billions of dollars of federal income tax collected by the government. Would that be enough to pique your interest? Martin: You had me at a Supreme Court tax case, but when you're going to add billions to the hundreds of billions at that I'm sold. Nitti: Okay, you're sold. I don't make my living much in the international regimes. So, if it were me alone, I don't know if that's enough to pay attention, but what if I were to then say that depending on how a Supreme Court were to rule, also gone for the Internal Revenue Code could be all of the Tax Cuts and Jobs Act. Everything we've spent the last few years getting our arms around lower individual rates, lower corporate rates, doubled the state tax exemptions, 199A, all of it gone. That would be interesting, right? So, I'm going to listen to this conversation. Then what if I were to layer on top, buddy, that depending on how the Court would rule, it would open up the possibility soon stripped from the code could be all of pass-through taxation. No more subchapter S, no more subchapter K, no more S corps, no more partnerships. Say goodbye to all the pass-through regimes. Now, everybody is going to be like, I need to stand up and take notice. How can one case potentially jeopardize all of that? Martin: That's like a third of the code or something, but I'm a little bit…and you have to help me out here, Tony, because you said $14,000 was like $14,729. A third of the Internal Revenue Code itself. I'm a little bit like those are not the same thing. You're going to have to bridge that gap for me here as to why something about $14,000 is in front of the Supreme Court. Nitti: I'll do that. You're not alone with that one-third number. I think that's the same ratio that Paul Ryan, the former Speaker of the House, put on this and said, depending on how Moore goes, we can be kissing goodbye to a third of our tax law. What makes this cool as we go through this process is in order to understand exactly the answer to the question you just asked, like, how is this possible, you and I need to go through the same cases that we would have been going through if Moore had never come to be only now we get to do it in a context that's meaningful for people here at the conference because they can take this information they're going to learn and then go back to the respective offices and actually use this in the coming weeks. That's why I say somebody likes us because we get to have the same conversation that we both would have loved anyway, but now feel better about ourselves that we're adding some value to the people who are actually listening. Moore, like this is not a complicated set of facts. There's nothing about the facts that speak to just how meaningful this case can be. It's a married couple out of the state of Washington. They retired, and in 2006, they have a friend and the friend sees a need in India to get small tools in the hands of farmers. He conjures up this idea to form a company based in India, and the Moore's are intrigued and so they invest right around $40,000 for a 13% interest in this corporation's stock. It's pretty much the facts right there. Now, time goes on and the corporation does well, I think better than anybody could have hoped it would do. It's making some income year over year, but none of that income was distributed to the Moores. In the international regime that we operated under at that time, when you have income being accumulated in a controlled foreign corporation, or CFC, generally speaking (and we'll get into one of the exceptions later in Subpart F), but generally speaking, U.S. shareholders don't pay any tax on that CFCs income until it's repatriated to the US in the form of a dividend. Years are going by and this Indian corporation is making money but it never once repatriated anything in the form of a dividend to the Moores, so the Moores is never once have any taxable income as it relates to this investment in this corporation. Then 2017 rolls around. Do you remember what happened in 2017, Damien Martin? What changed your life in 2017? Martin: It's quite interesting. I can remember a lot of late evenings reading a lot of texts and that's different than usual, I guess. I'm not exactly sure but we had the Tax Cuts and Jobs Act. Nitti: So the Tax Cuts and Jobs Act comes along. As part of that TCJA, and this is a world that you and I don't live in as much as others, but as part of that regime, they are going to switch us from a worldwide system of international taxation to a territorial system. Really as a way to shortcut that explanation — in this new territorial system, if US shareholders own stock of a controlled foreign corporation, some of that income is going to be subject to the GILTI regime. But when the money is eventually repatriated in the form of a dividend from the CFC to the US shareholder, it won't be subject to tax. But you can't just flip a switch and move from a worldwide regime to a territorial regime because there were trillions of dollars stashed overseas that had never been taxed in the US. Suddenly we put up a green light and say, you're free to repatriate those dollars and there won't be any dividend income at the US level, that income would never be subject to US tax. To prevent that windfall, what they did in the TCJA is they added Section 965, mandatory repatriation tax. The mandatory repatriation tax says, look, we get that you haven't gotten these distributions from the CFC but at the end of 2017, we're going to pretend that all 10 percent or more shareholders of a CFC have received their pro rata distribution of the CFC’s income accumulated from 1986 until 2017. You're going to pay tax on that deemed distribution and then now you can move forward in the future knowing that any distribution you get will be tax-free. We're going to pave the way for this move to a territorial regime. Now for the Moore's, that means my share of this income over the last 2006 to 2017, 11 years or so is about 132,000 bucks, as I recall and so we're going to pay tax on that right around $14,700. They get to thinking and they are like something doesn't sit right with me because I'm paying tax on $132,000 of income. I never touched the income. I never got a penny from this corporation. It doesn't feel right. And so they immediately challenged, as I said, and the district court dismisses and rules in favor of the government, appealed up to the Ninth Circuit. Ninth Circuit does the same. Now, the Supreme Court is going to hear and they're going to hear it because of why they're disputing it and why everyone has to stand up and take notice because it's not just a run-of-the-mill argument about $14,000. The Moores are saying, and when we first introduced this concept, it's probably not going to make a lot of sense to a lot of people, but we'll drill into it a little bit. The Moores are saying that Section 965, this mandatory repatriation tax, is unconstitutional. That's a big deal. They say it's unconstitutional because the 16th Amendment grants Congress the power to levy and collect taxes on income from whatever source derived without apportionment among the states and that's the part that's going to trip people up, but we'll get there. What they're saying here is, when's 16th Amendment says we can tax, income has to be realized. I have to have been made richer in my individual capacity to have to have something severable from my investment in the CFC that I can go and spend however I want. I never had any of that. If this 965 tax isn't taxing something that fits under the definition of income, then it is required to be allocated among the states based on relative population. Now, is that surprise you, or is that something where perhaps in your free time you are a constitutional scholar and I'm not privy to that, but I'm guessing for most of our listeners there, I don't know what you're talking about as far as taxes allocated based on population. Nitti: There's going to be a recurring theme. I think there's a lot of our knowledge about what's happening here comes from popular culture and that's okay. However you get it as long as you get it, that's what matters. What they're doing as we drill in a little bit more here, is we need to look at two clauses of the Constitution at a high level and then we'll understand how they came to be. But as I said, 16th Amendment says, you can levy and collect taxes on income from whatever source derived without allocating among the states. Then you have this Article 1, Section 9 Clause 4 of the Constitution that says all direct taxes must be allocated among the states or based on population. It's a very simple argument by the Moores. What they're saying is income has to be realized. You can see it right there in the 16th Amendment where it says is income from whatever source derived. That means it has to be derived from a source. There's this realization requirement, and here under 965, I never got a penny. You're just forcing me to pay tax on something that I never received and so it can't be a tax on income. What is it then? It's a tax effectively on my ownership of stock in this Indian company, and that is what we believe to be a direct tax on property. According to Article 1, Section 9 Clause 4, direct taxes have to be allocated among the states based on population. I know how weird that sounds but to understand if the Moores are correct in this argument, we honestly have to go back to the very birth of this nation and get a grip on how these two provisions of the Constitution evolved and then what subsequent court decision said that the Moores are ultimately relying on and so going back to the opening remarks here, that's why this works out so perfectly for us, because we would have been going through most of these cases anyway. Martin: That's right. It's fascinating because it seems like something like income, the income tax, direct tax, these would be defined things. But maybe as we often see, and this is why you said it's back to are going through the cases and whatnot it actually isn't clear and maybe that's exactly why we're talking about it now. Nitti: No, I think that's well said. We're going to get into an issue that I think has plagued the United States government for 200 years. This is a very meaningful piece of this country's history and to understand where it started, we truly have to go back to the constitutional convention in the late 1700s. Now, you were a music major, were you? Damien Martin: I was. Nitti: I'm guessing the extent of your familiarity with the Constitutional Convention is from your repeated viewings of the Broadway musical Hamilton. Martin: That definitely again, pop culture is what did you learn to write out. We're going to do a little Hamilton here, is that we're here to sing for us? Nitti: I will, but I would like to dispel a couple of myths about Hamilton. While undeniably entertaining, there are some historical inaccuracies. First of all, it turns out most of our founding fathers, not actually talented rappers. Nitti: You wouldn't know that, but that's the truth. But we're talking about that cast of characters here at the Constitutional Convention were talking about Hamilton and James Madison, William Paterson, they're all there and they're figuring out the road map for this new country. They recognize that they're going to have to generate revenue at some point, pay the bills, but they're particularly sensitive about the whole tax issue because of the whole relationship gone bad with England. They add a section to the Constitution, which the exact citation escapes me at the moment, but basically says, look, we can levy taxes, and then we also are going to look to primarily collected revenue from duties, excises and imports. The only requirement for things like duties, excises, and imports is that they've got to be assessed uniformly throughout the country. You can't have one rate on federal tax for something in New Jersey and a different rate in New York. Fair enough. But then there's that first part of that clause where they do have the ability in addition to duties, excises, and imports to collect taxes. What's that going to look like? They start to kick around what a tax regime may take shape as in this new government of ours, and right away, the southern states start to freak out a little bit. The reason they freak out is because that time in the country's history, what they thought would be the two most likely forms of tax, are one what we call a poll tax or just a tax per head or tax for being alive, being a person, so every person were going to have a tax or whatever, 50 bucks. Then the second most likely tax would be a tax on land. Just take acres of land and apply a rate per acre, and that's going to be your tax. To understand why both of those taxes scared the hell out of the South, it's probably best to take the second one first. Like this idea of a tax on acreage of land. The South relative to the North at that time and large swaths of relatively unpopulated land that wasn't highly productive, and so you had fewer landowners with more land and less income that would have to bear the burden of this tax on land if it were simply assessed based on acreage and the people on that acreage. Then, as far as why they were worried about a poll tax or tax per head, this is where you might say, Tony, and you just got done telling me that the South was more thinly populated than the North, so you would think that a tax per head would hurt the North more than the South, what the South was worried about was, when you're talking about tax per head, how would Congress view slaves? The South was very concerned that slaves would count in a poll tax. What the South did is they said, any other tax we're going to add here, that you might impose at some point in the future, we want a requirement that those taxes be allocated among the states based on population. That if Connecticut and Virginia have the same population, they will pay the same share of some national poll tax or national land tax. That seemed reasonable and the North was open to it. But the North said, even still, if we're going to allocate based on population, we would like to count all your slaves for your population for purposes of allocating this tax. The South said, if you're going to do that, then you got to count all our slaves for purposes of our representation in the House of Representatives, which the North wasn't nearly as keen on. What this led to is one of the darker moments of our country's history, but a compromise. You feel familiar with the 3/5 compromise Damien? Martin: I am. It came up in elementary school at some point, to your point about going back in history books here. Nitti: I only learned about it from a recent episode of It's Always Sunny in Philadelphia or Frank Reynolds was reading the Constitution on his phone to settle a dispute at the bar, but it is very much true and it is very much rooted in the tax law. The 3/5 compromise was when the North and South, looking at the way they did, at slaves and how they would count for purposes of the direct tax said, we're going to split the difference and slaves will count as 3/5 of a person for purposes of allocating these direct taxes. One of our darkest moments in our country's history is actually rooted in the tax law. Then what we're left with here is this provision. Article 1, Section 9, Clause 4, that says all direct taxes have to be allocated among the states based on population of free men and 3/5 of everyone else. It's all well and good, but here's the thing, buddy. It turns out, our forefathers were not altogether different than the people that you sit with in business meetings and the like. What I mean by that is you can't tell me it doesn't happen to you all the time. You're sitting in a meeting and people are using buzzwords and you're just going. I assume everyone else knows what these words mean, but I have no idea what they mean, and I'm just going to sit here and pretend that I do and nod my head. But it turns out that same thing man was happening at the Constitutional Convention, and we actually know this. Because here they are saying this very important term, direct taxes have to be allocated among the states based on population, but no one knew what a direct tax was. We know it because in James Madison's notes, he notes that Rufus King, the rep from New York, raised his hand and said, what exactly is a direct tax? In his notebook, it says, no one answered. We move forward with this unbelievably important term. Direct taxes have to be allocated among the states based on population and nobody has any clue what direct taxes are. A rough way to start our new country and its government, but we would not have to wait too long to get our first view of how the Supreme Court interpreted this direct tax law. Martin: It's actually fortuitous for our tax court conversation or tax case conversation here, because now you can get to a tax case here. Nitti: I think it's a case we would have gotten to anyway. The reason we would have gotten to it anyway is because we've already talked about what's at stake, depending on how the Moore case goes for existing law, but it also has implications for proposals into the future. When people think about things like a wealth tax, or even today I heard they're drafting up more language about a tax on unrealized appreciation for billionaires. That conversation and whether those types of taxes would be constitutional, would all start at this same origin. What is the direct tax? A couple of years after the Constitutional Convention, Congress decides to levy taxes on the ownership of carriages for the conveyance of persons. Instead, I guess, and then interpret that how you will you own a carriage, you've got one parked in the garage, you're going to pay a tax on it. There's this guy, Hylton, Daniel Hylton, H-Y-L-T-O-N, and he owned, I think it was 125 carriages, which struck me as being a bit excessive, but whatever reason he had 125 carriages. He's got a buck up on taxes for each of these carriages. Immediately he says, no, this isn't right because I shouldn't be bearing the burden of my carriage tax individually. This is a direct tax. It needs to be allocated among the states based on population and it lands in the Supreme Court. What's meaningful about that is, who are the dudes on the Supreme Court at this time in the country's history? The same dudes that we're just at the Constitutional Convention. We should get some pretty meaningful insight as to what they meant by direct taxes, and the court makes really quick work of this case. They say, look, we've got to look at this logic. It's requirement that direct taxes be allocated among the states based on population. The only things that could possibly be direct taxes are those things that can reasonably be allocated among the states and yield an equitable result. If we think about carriages. Let's just say for our sake that Connecticut and Georgia had identical population. They're going to pay the same share of this national carriage tax. But if there are 10 times more carriages in Connecticut than there are in Georgia, then the carriage owners in Connecticut are going to pay the tax at one 10th the rate as the carriage owners in Georgia. Because either way, both states are bucking up the same amount. If there's a lot more carriages to go around in Connecticut, the per carriage rate in Connecticut is going to be a whole lot less. The court said, no, this doesn't make sense. The only things that can be direct taxes are those that make sense to allocate among the states. Really that's going to be limited to a tax on people and a tax on land. Which reiterates what we gathered from the Constitutional Convention. It wasn't long decision made pretty quick work of it and for the next hundred years or so, nobody really questioned it and it really didn't come up as an issue again. But then we end up in the late 1800s and we need a temporary income tax. Congress enacts temporary income tax it doesn't look dissimilar from the one that we have today. Martin: Before that though, no income tax? Nitti: There may have been some brief moments, I don't know that they were income tax, I'm trying to remember. There was like an insurance tax that popped up for a couple of years. It's a bunch of different things, but they need this short-term income tax, so we got graduated rates, we got taxed on service income, doctors and lawyers, we gotten tax on rental income. Doesn't look very different than today. Of course, they start taxing income and a taxpayer called Farmers Trust says, once again, this is a direct tax, just like that carriage tax, it needs to be allocated among the states based on population. It's unconstitutional, I don't want to pay it. And it goes back to the Supreme Court. You would have thought, based on the precedent we just discovered in Hylton, that the Supreme Court would have made quick work of this too, because how can an income tax possibly be allocated reasonably among the states based on population? Go back to my example, Connecticut and Georgia, identical populations is going to pay the same amount of national income tax. Per capita income in Connecticut going to be a lot higher than per capita income in Georgia. The people in Connecticut are getting away with one because they're in total paying the same amount as people in Georgia, but they've got a lot more income to go around. It doesn't make sense. But in a case that's been, I don't want to use the word panned because it's the Supreme Court, but in a case that's gotten a lot of criticism, they find that this income tax is a direct tax and violates the Constitution because it's not being allocated based on population. The reason they did it was they said, look, we all agree that tax on the land itself, ownership of land is direct, so how's most income earned in late 1800s America? It's cultivating land, farming land, renting land, whatever it may be. What they ultimately said was that if we know that a tax on ownership of land is direct tax and it stands to reason that a tax on the income that flows from the ownership of land is also a direct tax. Now, here's where the relationship to the present day becomes very important, because what they could have done, as they could have said, we don't like all of these taxes on income from land. We're going to strip them out and say they're unconstitutional, but the tax is on the doctors and the lawyers, that can all remain behind. They didn't do that, they said we can't sever the part of this income tax bill that we don't like from the part that we do like, and so we're kicking the whole thing out. That's why we say the entire Tax Cuts and Jobs Act is potentially at stake because it is, depending on how the court would view things. Nitti: Because we're talking about one thing to your point 965. But if it's all inseverable, then that's how you lose the entirety of it. Nitti: There's your precedent for how that could happen from the Pollock v. Farmers Trust case where they said, "We don't like parts of this income tax law, so they all have to go." Now, the more interesting part of that case, if you people are ever inclined to read it, is the dissenting opinions because they go after the majority pretty harshly for the reasons we've talked about, just that it doesn't make much sense to think that an income tax could be allocated among the states. But nevertheless, it's gone and so that's, I don't know, 1895 or so. Congress is not going to take that lying down, they need their income tax. It takes them a while to get enough states on board, but they did something that would be unthinkable in modern times, they amend the Constitution. We get the 16th Amendment and what they could have done is just amend that previous Article 1, Section 9 Clause 4 about direct taxes and just do away with it or rewrite it in a meaningful way, but they leave that untouched and they create this third class of taxation. Now we've got rule 1 that you can have duties, imports, and excises as long as they're a uniform rate. We got rule 2, that says direct taxes have to be allocated among the states based on population. Now we get rule 3 which says, "Congress shall have the power to levy and collect taxes on income from whatever source derived without allocation among the states." We still have that direct tax provision, but in income tax isn't subject to that. That's what the 16th Amendment says and right now at this point you're probably going — The Moore’s argument is built on this concept, income has to be realized. Other than pointing at the language there that says from whatever source derived and saying it has to be derived from a source, which is the same as saying, realize, I don't know where their argument is coming from. We're going to find in a minute that it's coming from some case law. But now that the 16th Amendment is passed, 1913 rolls around, Congress adds the modern income tax like the one you and I apply our trade in day in and day out now. Just as we now have Section 61 which defines income, I think back then it was 22. But it did it in the same terms, a very catch-all that was meant to exert the full taxing power of Congress. It said, here's what's income and it lists out a bunch of stuff, interest, dividends, all that kind of thing, and then that catch-all at the end, or gains are profits from whatever source derived. Same language as the 16th Amendment and so it's meant to be very broad, at least it sounds like it. We've got our modern income tax and again, at this point, hard to argue that there is a realization requirement unless you're really reading into the construction of the 16th Amendment. But wouldn't take long, about nine years we end up back in the Supreme Court, a case we definitely would have been talking about today even without Moore and where this idea of a realization requirement comes from in Eisner v. Macomber. Martin: What happened in that case, what's the situation there? What's the setup? Nitti: Again, couldn't have a more simple set of facts. Taxpayer owns shares stock in a corporation and they get a stock dividend. Stock dividend, think about, simple, me and you. We each own one share in a corporation where the only shareholders, corporations worth 20 bucks so each of our shares worth $10. Corporation decides tomorrow, "I'm going to get Tony and Damien one more share each." Nitti: Company is no more or less valuable. We have, you and I more slices of pie, but the slices have gotten smaller. Instead of one share each valued at ten bucks, you and I now have two shares each value to five bucks, but nothing's changed. We just divvied-up the pie differently. The taxpayer here and Eisner v. Macomber gets a stock dividend, which we wouldn't think based on the logic I just relay there that it would be a taxable event. But the IRS they were still feeling things out and getting used to the new tax law. They say this is taxable to you. It ends up in the Supreme Court because taxpayers arguing that this stock dividend, how can this be income to me, I didn't really receive anything of value. So in Eisner v. Macomber they get the decision in the sense that it shouldn't have been taxable income. But in doing so, they did two things that are come under a lot of criticism in the 101 years that have followed. First, we've been talking about 16th Amendment income Section 22 from whatever source derived very broad definitions of income. Then Eisner v. Macomber comes along and says, income is gain or profit from labor or capital, or both combined. I know just hearing that off the top your head, you don't necessarily get a sense for how narrow and limiting that is. But when we get to Glenshaw Glass and a couple of minutes, we'll see just how narrow that is relative from whatever source derived concept. Eisner v. Macomber is saying, for something to be income, it's got to be derived from labor or an investment in capital or both combined. That's it. That's all. There's a lot of things that slipped through the cracks when you go with the definition that's that narrow. Not necessarily germane to this case, but still one of the major criticism of Eisner v. Macomber. The second thing they did, was they said in this case the reason the stock dividend is not income is because you have this investment in capital in a corporation. But getting the stock dividend, you have not extracted anything of separable value from the corporation itself, something that you can, like I said before putting your pocket and go spend as you want. You have gotten another share of stock and all it's done is reduce your per-share value, but you haven't actually extracted anything meaningful from the corporation. That's why this shouldn't be taxable. That has been what's always been pointed to as the birth of this realization required. Because in Eisner v. Macomber, they're saying you had investments stock. You didn't separate any value from that corporation in your individual capacity and so we shouldn't be taxing you on the receipt of a stock dividend. This is the big point the Moore's are building their case around that really the initial Supreme Court case after the birth of the modern income tax law interpreted the 16th Amendment is having a realization requirement and nothing that's happened after that should really change. But what's interesting about Eisner v. Macomber is pretty soon after it was decided, you started to see even lower courts chip away at it, which is unique when you have a Supreme Court defining something as important as income, but lower courts just saying, that definition of income was helpful for a stock dividend, but I don't know that it should apply to everything. It just got more and more distance from that concept. Then it all culminated in another case we absolutely would have been talking about anyway in 1955, Glenshaw Glass. Martin: Because of the significance. Nitti: It's the modern definition of income. But I will admit I teach Glenshaw Glass in my master's programs all the time. I do it as extra credit on my exams. What are the three components of income and Glenshaw Glass. But thinking about Moore has made me rethink what I've been telling people about Glenshaw Glass. Martin: While at the same time, I'm going to ask you whether or not you're also including Eisner v. Macomber and now we're just more of a Glenshaw Glass. Nitti: I always teach them Eisner v. Macomber. I was always down on the Eisner v. Macomber. But Glenshaw Glass, I think I was interpreting it in the way that the Moores do. I don't necessarily know that I think that's the right way to interpret. Another simple set of facts and Glenshaw Glass, you got a ccompany that's paying another company to manufacture equipment for them that they're going to use in their business. Deal goes bad, they sue, they win. In addition to whatever settlement they get punitive damages. Punitive damages are not designed to make anyone whole. They are designed to punish the offending party. If you're the receiving party, it's just a windfall. Glenshaw Glass gets a windfall, and I'm sure you or I would have done the same thing at that point in time where knowing the Eisner v. Macomber defined income as gains are profits from labor or capital. None of that stuff is present here. I've just got a windfall in the form of punitive damages. This shouldn't be taxable income to me. They believe it's not income. It ends up in the Supreme Court. This is where Glenshaw Glass really distanced itself from Eisner v. Macomber and said, Eisner v. Macomber was very helpful for determining if a stock dividend is taxable. But beyond that, it gave us the modern definition of income and says, hey, this is income here because one, it's session well, it's been two, clearly realized and three, over which the taxpayer has dominion and control. What's amazing about those three points right there is both the government and the Moores are looking at those three points to support their position about this case. The Moores are saying, look, it's said right there in problem Number 2, this is income clearly realized. Honestly, that's how I've always taught the modern definition of income. It has to be a session in wealth. It's clearly realized and over which you have control. But what the government is saying, which I think is the right interpretation for whatever that's worth. But what I think is the right interpretation is that saying that in this particular case, we have income because these punitive damages were clearly realized, is not the same thing as saying it had to have been clearly realized to be income. It's almost like they're just saying, we don't have to worry about realization here in this case because it's clearly been realized. But that's not the same thing as saying if it hadn't been clearly realized, you couldn't possibly be dealing with income here. You see that distinction. Both sides are pointing to that and supported their position, which is pretty fascinating. From the government's perspective, as you go from Glenshaw Glass and bridge the gap from there to now, what they're just saying is, it's hard to fathom that 965 is unconstitutional because there is this requirement that income be realized when we have half a dozen provisions that we can point to in the existing code where realization does not seem to be required. We already said, we have Subpart F that's existed since the 1950s. Let's say you own stock in a CFC that are in certain types of income, we're going to tax you on it even though it's not distributed. Yes, that's been pressure tested. All of these have except for 475, 1256 straddles that have an income recognition without realization has been pressured, tested in the courts and approved. Section 475, the mark-to-market regime for securities and dealers that hasn't been tested, but it was only recently enacted. One would think that would have been dealt with on committee level. Then of course, how do you marry it with flow through taxation. We know with partnerships or S corps doesn't matter if you get a distribution, if the entity generates income, your share of it is picked up on your tax return. What they're saying, and this is pretty fascinating when you think about it. The government is saying, we get that, by and large, we don't tax income until it's realize, but you know why we do that? Not because we are required to buy the 16th Amendment, but because it's a pain to tax income that hasn't been realized yet. It's simply a question of administrative convenience. If we wanted to tax Damien on his appreciation and is very substantial retirement portfolio every year we could. But it's just not easy. If we wanted to tax you every time your house value doubles, we could, but we'd rather wait for closed and complete a transaction. Not because we have to, but because it's easier to but if we ever need to divert from that, we can, case in point. Man, I don't remember the code section. It's up in the 800s I think we're I tried to stay out of, but if you flee the country. If you expatriate, you're treated on your last day as if you sold all of your belongings. You haven't sold them all, but you're treated as if you have on your way out the door, they collect their tax. No realization there. Now to the Moore's credit, they've tried to do some interesting things with their argument. Number 1, they've crafted in a way that they're not forcing the Supreme Court's hand to throw out, for example, the entire Tax Cuts and Jobs Act. They've crafted in a way where they really just focused in on 965 and not all of the Tax Cuts and Jobs Act. They're giving the Supreme Court a way out if the Supreme Court wants it to just say, hey, we're only going to focus our attention on 1965. The other thing that Moore's are doing is they're acknowledging that Subpart F exists and pass-through taxation exists and things like that. But in their brief, they're pointing out reasons why those might be constitutional, but 965 is not. For example, partnerships don't really exist. They're not a tax paying entity and S Corp, everybody affirmatively elects to be an S Corp. You get what you get what you ask for type of thing. They're saying that those are concept of what they call constructive realization. But with 965, there's none of that. We're just being forced to pick up income. I don't know that I necessarily agree with the distinction they try to draw between Subpart F in 965, but that's not for me to decide. But that's the big thrust of their argument. Whereas from a government's perspective, they're just saying that, listen, if you really want to get into the semantics here, we could argue that income has clearly been realized. It's just been realized by your corporation. There is nothing in 100 years of case law that prevents Congress from taxing shareholders on their piece of a corporation's income. You have all these different compelling arguments. Who knows how this is all going to play out, but what's at stake, we already talked about it. It's a third of the code is you said plus a whole batch of potential future cases. Martin: That's right. You just wound your way through history. You get Hamilton and I learned something new about the fact that all rapping…I guess at the time that they got the Constitutional Convention. But again, I always had a mentor that told me this really honest say, subscribe to the Wall Street Journal because whenever a tax story hits the Wall Street Journal, that's the day that you're going to get a bunch of calls from your clients. Now I'm sitting at my desk, Joe Client’s calling because of whatever article they've read winding through all of that, what do I tell him? Tony? How do I distill hundreds of years of everything you've just walked us through? Nitti: The big takeaways are just the fact that the Moores are suggesting that if you have income that has not been realized, it's not really income at all that's being taxed, it's property ownership and that falls under a different purview of the constitution. What really matters here is not whether 965 is going to go the way of the dodo, but what it would open up in terms of the potential for the rest of the code. Because as we said, you're talking about hundreds of billions of dollars at stake and 965 tax. Then people are going to want to know what does this mean that the next time I get a K1 from my S Corp and don't have a distribution that goes along with it? Can I sue that? It's unconstitutional. If I'm required to market my securities to market the end of every year in the 475, can I go in and sue and say that's unconstitutional? Does this mean, because I could tell you this, if Moore is decided in favor of the taxpayer, they can forget these proposals. They're kicking around for a wealth tax or like this billionaires tax on unrealized appreciation in assets under President Biden's proposal. They would fail this realization requirement, so it's a little case with huge implications. If you want to understand why we got to hop in the old way back machine and go back to the Constitutional Convention, and I'll take you through the evolution. But it's really interesting stuff and obviously the timing is perfect because all arguments start in just three weeks I think. I think you're right, I think everyone is going to be talking about it and I think to the extent that people who are listening to this podcast can feel like they understand what's at stake? Why the argument is what it is? Maybe have a few thoughts of their own on how the Supreme Court may look at this thing. The whole point is exactly what your mentor told you, which you don't want to have happen is somebody saying, we know about this Moore case and you look in with a blank stare and go. I'm too busy cranking out returns I don't know what you're talking about. It's very rare that tax law rises to the forefront of the public consciousness and when it does, we've got to be able to speak intelligently about whatever's being bandied about and that is about to happen next month I had no doubt about that. Martin: You want to be able to tell them more essentially is what you're saying. Yeah. I waited all this time but I guess that's ultimately why you say greatest tax cases of all time. How much bigger can you get in this concept of realization income? It's at the heart of what we do every day you and I. Nitti: Even just take a more simplistic view than that, there's a chance that if we were doing this same session next year more depending on how it's decided might be on a list of the most important tax cases of all time. We get a chance to deal with something in real time that I don’t think a lot of people are paying attention to now, but it could be all anybody's talking about in three or four months because no one knows how this is going to go. The Supreme Court has been, how should we say, unpredictable maybe a bit? Who knows what direction this goes? But we were not being overly dramatic at the intro about what is at stake here. Like you said it, Paul Ryan said it, maybe a third of the code potentially either be thrown out with the decision which I think is unlikely based on the way it's crafted, but absolutely opened up for attack. If it's true that the 16th Amendment requires realization, then yeah, there's a lot of, Subpart F, I don't get how that's any different. Nitti: When it opens up, although maybe it won't be the greatest case but there'll be like the greatest case that led to a lot of other cases, because you're talking about litigation that you're going to see if that happens. It's an interesting time and thinking about how all these pieces fit together. Even maybe the fact that I don't know if the thing that sticks with me, maybe as living in the individual, the human world. The fact that actually absent that they would've paid more taxes as an individual at the individual rate. It would have been paid like 49,000 instead of the 14,000, it's fascinating aspects to this to the international side. It touches basically everything so it truly is fascinating. Nitti: I know Annette Nellen said in her presentation today talked about how enjoyable it can be to actually read all these different briefs that have been filed and she's not lying. The arguments each one has their own interesting point and counterpoint. I know some people are arguing that the problem with the mentor repatriation tax is that it tax you on your share of the CFCs income 1986-2017, even if you only acquired the stock in 2016. I said, how can I be taxed on earnings that were accumulated before I became a shareholder? Allow me to introduce you to sub-chapter C because that's been happening for C corporations. If you and I buy stock in GE today and next month it makes a distribution out of income that was earned in 1914 doesn't change anything for us we have dividends income. That to me, that's again, something that's been pressured test it, so it's hard for me to understand that argument. It's going to be must-watch TV. Martin: It's a Super Bowl for us tax geeks I think in a lot of ways. Nitti: Like I said, this will extend beyond our little tax geek kingdom and go into the mainstream. Martin: Next year April, maybe we come back and we really evaluate was more what it was kept up to date. But thank you April for hanging with us here. Walker: I kept thinking that if Moore turns out a certain way then and the S Corp it goes away, then I don't know if Tony be employed next year. That's what I was thinking. Anyway, thanks Tony for the history lesson, thanks Damien for walking us through this was so fun for me to hear it. Hamilton's one of my favorites and the only thing missing a little bit of rapping. Maybe that'll happen next. Thanks again, you guys it was great. Again this is April Walker from the AICPA Tax Section. This community is your go to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and please follow us so you don't miss an episode. You can also find us at aicpa-cima.com/tax and find other Odyssey episodes. I think Tony sneaks in there on a couple of those, so you can go back and listen to some of those and get access to the resources mentioned during the episode. I guess once this airs we might have more information on the case, so we'll have to see how to follow along. Thanks everybody for listening and have a great day. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

The employee retention credit (ERC) continues to be a topic of conversation amongst taxpayers and their trusted advisers. Now that the IRS has placed an immediate moratorium on processing new claims to at least the end of 2023, additional considerations and challenges have manifested. Justin Elanjian, CPA, Managing Director — Disputes, Claims & Investigations, Stout, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, and shares best practices for navigating the current ERC environment. What you’ll learn in this episode Current ERC developments and how Justin is assisting his clients (0:50) Tips for taxpayers who have already claimed the ERC (4:55) How to advise clients contemplating withdrawing their claim (10:31) Advice for helping clients that have not yet filed for the ERC (16:22) Statute of limitation issues and recommendations to consider (19:50) Office of Professional Responsibilities (OPR) guidance around professional responsibilities around claims (26:23) What Justin is seeing in ERC examinations (33:05) Final thoughts (41:34) A page from Justin’s travel journal (43:45) Related resources  ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit. ERC suspended: What happens next | Tax Section Odyssey — October 16 has sunset. Tune in to this podcast to hear fellow CPA practitioner Brandon Lagarde’s experience with the 2023 extension season and what to expect in 2024. Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC. Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk. IRS resources IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing. IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news. ERC eligibility checklist: Help understanding this complex credit — IRS chart is used to help taxpayers figure out if they may be eligible for the credit. Use this chart if you are considering claiming the credit or have already submitted a claim to the IRS. Transcript April Walker: On today's podcast, listen to hear more about next steps with the ERC. Hi everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I realized that today is our 100th episode, so I'm pretty excited about that. I'm April Walker, a lead manager from the Tax Section. I'm here today with Justin Elanjian. He is at Stout, and he works as a managing director in disputes, claims and investigations. You can see where his angle might be coming from with the ERC. Welcome Justin. Let's talk today about the current landscape of ERC and how you're assisting businesses today in your current role. Justin Elanjian: Sure. Thank you, April, for the opportunity to be here and to the rest of the AICPA as well. It probably helps to start with the current landscape and setting the stage as it informs how we are assisting businesses and CPA firms in navigating the employee retention credit. As we've seen over the last several months and, in particular, over the last six weeks, there's been some significant changes to the program, particularly as it relates to the processing of claims. Six weeks ago, we had the moratorium on processing new ERC claims, which has produced a flurry of additional questions that may not have existed previously. Then, we also have the additional scrutiny that is being placed on service providers on taxpayers who were claiming the credit. That's coming through in the form of communications from the IRS, for example, when they announced the moratorium and issued a number of warnings over the last several months, but also notably through the increased level of enforcement in the form of independent claim exams. With all of this, there has been this delay in processing ERC returns that have been filed before the moratorium. Of course, we have the hold on processing claims submitted after the moratorium was announced on September 14th, that creates some additional challenges for taxpayers who are in need of the assistance with ERC refunds. With the concerns pertaining to promoters and aggressive tactics, the IRS has asked on multiple occasions at this point for tax professionals to step in and that's really where we're getting involved. When it comes to taxpayers or CPA firms — frankly it's both where we're providing opportunity and support, is we're evaluating a taxpayer's position as to whether or not they have a basis to submit a claim. So that upfront analysis and in particular as it relates to the full or partial suspension criteria. As we know, that's the subjective one and the increased level of diligence that's required. But what we’re also seeing here that’s not drastically different, are circumstances in which taxpayers, at their own will or at the direction of an adviser, are seeking a second opinion. Or perhaps they've submitted a claim and want to understand the adequacy of their claim documentation, the associated risks, the opportunities to augment the documentation, etc. Most recently, where we're spending the majority of our time is in providing audit support. That's coming through in the form of these taxpayers that are in receipt of an IDR (information document request) pertaining to one or more of the ERC claims that have been filed. For the CPA firms that have offered ERC services, there's a suite of risk mitigation services and risk management services that we offer to assist them in protecting both their firm and their clients that they may have assisted. Walker: Wonderful. Thanks, Justin. That's a great introduction into where we are and like you said, the landscape. You mentioned the moratorium and mentioned the scrutiny by the IRS. Let's talk first about taxpayers who have already claimed the credit. How are you advising them and what considerations do you think are really important for them to be considering as you are the CPA working with those types of businesses? Elanjian: Sure. Like many situations and this one not being drastically different, the first item to really focus on is assessing the current reality. When it comes to the employee retention credit, that's heavily focused on the basis for the claim that was filed. That's inclusive of the nature and extent of the documentation that has been produced to support that basis or substantiate that. Since the inception of the program and frankly, even since the issuance of the various notices throughout 2021, we've continued to see this evolution from the IRS. Frankly, we've seen it from the ERC market as a whole, and interpretations of the statute and changes to such. We've seen that through updates to the IRS FAQs. We’ve seen it through public comments by the IRS or press releases. And there may even be further extended into the supply chain general legal advice memorandum that was released in late July. It's further observed by the IRS’s approach and the positions that are being taken in these claim exams that I mentioned or audits. We'll use those terms likely interchangeably throughout the course of this discussion. I know we'll talk about that in further detail later. But when it comes to the taxpayers that have filed the claim, the first step is reviewing the nature of the agreement they have with whichever ERC service provider they sought assistance from. To understand the responsibilities of the taxpayer as well as those of the ERC service provider. Service providers have mainly consisted of your tax incentive firms, your law firms, accounting firms, consulting firms and payroll processors. The nature of services and the extent in which they're offered vary not only by the type of business, but even within the type of businesses, the scope of services may differ and likely does. It's a critical item to understand as we continue to see taxpayers that are operating under the assumption that the ERC service provider, whoever that was — I'm just referring to a third party that was engaged. That may have an assumption that the eligibility information and documentation to substantiate [ERC claim] was produced or evaluated by the ERC service provider. There are various third parties who rely on taxpayer attestation and that the taxpayer understands the rules of the program. They've made a determination that they're eligible for the credit. They have asserted to the fact that they've identified and maintain the relevant documentation to support their claim. It's a really important component to understand — where might this documentation come from and who was responsible for producing it — as we consider the substantiation requirements in [IRS] Notice 2021-20 and specifically Q&A 70. Then, once we understand where the information comes from, it's a matter of understanding the completeness of the documentation. We've continued to experience situations in which taxpayer has a narrative regarding our full or partial suspension of operations, but they don't have any supporting schedules, there's no details or evidence that corroborates the commentary. And during exams, the IRS is certainly seeking this information, as well as copies of the government orders that were determined to be relevant to causing the business' limitation or restriction or other modification of the taxpayers’ operations. Really getting hands around the documentation that exists, so then we can then move into the next step, which is understanding the reasonableness of the position. Now, short of very limited circumstances, the program, as we know it, is highly subjective and lack of case law and situations that some may perceive to be moving the goalpost. Insert supply chain glam here, only makes that more challenging. I know we'll probably talk more about the OPR Guidance and tax preparer responsibilities. I'll just briefly note that here, but we don't see this as necessitating or recreating the wheel or reperforming the analysis. But reviewing the documentation in the position to determine if there's a reasonable basis for the position, recognizing there's differences in interpretation of the guidance and applicability to the taxpayers’ factors and circumstances. That's really step one if you've claimed or you're working with a taxpayer who has already submitted a claim for the credit. Walker: Another set of clients, [we’ve talked those who have already] filed the claim. Now let's shift to how you're advising clients contemplating the withdrawal program. Also, we don't have the details yet about the settlement program, but just in thinking about what are their options and what are their considerations? Elanjian: It's a great question. I think this is where I would say the majority of taxpayers fall, is what do I do now? The number of communications, the phone calls, the emails that are prompted every time there's a release of something from the communication from the IRS, or somebody attends an industry conference. ERC continues to be a topic and as a result of each of these prompts further discussion and in many cases it's very much warranted. We have the point where we have understood our clients or if you're the taxpayer, your situation, the basis of your claim and the associated documentation. When we get to the point where we understand the reasonableness of the claim, we end up with this known unknown. We look at what are the options to consider and, April, as you mentioned, there's some that we have been informed of a process like the withdrawal program that was recently announced by the IRS or what we expect to come forward as it relates to the voluntary settlement program. When the adviser or the taxpayer is evaluating what to do next, that is coming from the perspective of “we understand our basis for eligibility. We understand the documentation that exists or perhaps what documentation doesn't exist or where it may be lacking.” It's the next stage of evaluation. What do we do about this? When we're looking at, whether it's the withdrawal process or a settlement program as being considerations, that's heavily dependent obviously on whether or not they've received their ERC refunds. As we know the withdrawal process provides an opportunity to effectively reverse a claim. Withdrawal of the claim if it has not been refunded but to the extent that it [hasn’t] been refunded, that's expected to be addressed with the details of the settlement program. I think when we're looking at all of this and before making any decision, it's recognizing what's coming forward. As we see some of the communications from the IRS and we look at the moratorium announcement, it makes reference to more information that may be requested. It shifted the [IRS] processing from 90 days to 180 days, but further indicated that if additional information is necessary, that it could be much longer. Then in light of the suspected fraud, abuse, or improper claims that have been filed, the IRS may seek more information. That's what I'm referring to now as maybe the more proactive type of information document request, which is the information document requests that comes before the refunds have been disbursed. That's an important consideration as we think about the communications from the IRS where they noted that they believe that many of the applications that are currently filed are likely ineligible. And that it's at least anecdotally noted that they're seeing instances where 95% or more of the claims coming in recent months are ineligible. [They] are attributing that to promoters that continue to aggressively push people to apply regardless of the rules. That was the communication that came forward with the announcement of the moratorium. What that presents itself is needing to understand their position and the documentation so they can determine whether or not they have an improper claim. Does that suggest that they may pursue the withdrawal process or wait for the details of the settlement program? Perhaps, but the subjectivity of the program and a lack of the historical case law also presents this alternative which I think is where we're [seeing] a majority of taxpayers falling. Whether we care to admit it or not, there's undoubtedly taxpayers who may review their position, may review the reasonableness of their position and recognize that it is highly subjective, and choose not to pursue the withdrawal program, this settlement program, and take more of a wait-and-see approach. It's known that the IRS will only have the manpower and the capital to audit so many of the claims and with more than 3.6 million claims filed. There's a possibility that taxpayer claims never get a second look from the Internal Revenue Service. That's probably the last bucket and I think it's probably the largest bucket that falls, is whether or not to take any action. In all cases, first step before reversing a claim, before returning funds to the IRS is make sure that you understand your current situation or if you're the adviser, understand your client's current situation so that there's an opportunity to have the relevant information in front of you to make informed decisions on the next step. Walker: I think those are great considerations. Certainly, we're not advocating for playing the audit lottery. That is not what Justin nor I are saying. But it is a fact of the matter that there may not be a clear decision, there might not be a clear yes or no. Wait and see, may be the best approach at this moment. There's another group of businesses that I'd like to talk about for a minute that actually haven't filed their claim yet. For whatever reason — hadn't gotten around to it — whatever the reason is. How are you approaching those conversations with those businesses? Elanjian: Everything we just spoke about pertains to taxpayers who have already claimed the credit. To your point, April, there's still businesses who are evaluating whether or not they should submit a claim. It's important to note as we've heard misinformation, as it relates to the moratorium, to clarify that the moratorium [does] not limit the ability of a taxpayer to file an ERC claim. It's simply noted that the IRS will not process any claims filed on or after September 14th until at least 2024. That opportunity does still exist. Some in the market may suggest that this is more of a timing consideration for a taxpayer. Considering claiming the credit in light of the heightened scrutiny and the IRS perception that the vast majority of claims recently filed are improper. However, the guidance to taxpayers considering claiming the credit remains substantially the same as it was prior to the moratorium. With or without the assistance of an ERC adviser, it’s important that the taxpayer understands the rules of the program and how they may apply to the taxpayers’ facts and circumstances so that they can make informed decisions pertaining to their basis for eligibility and if one exist, submitting a claim for refund. That's easier said than done as the moratorium certainly created some hesitation for taxpayers considering claiming the credit. But it shouldn't deter a taxpayer who believes they are rightfully entitled to the credit from submitting a claim. Where this really comes down to of what's new as we think about the moratorium, or what’s an increased focus in determining whether or not to file, or perhaps when to file is recognizing that the opportunity to claim 2020 employee retention credits will expire due to the statute of limitations come April 15th of 2024. If you’re working with a business that is evaluating claiming the credit, is unsure whether or not to submit or when to submit, once there's an appropriate basis to claim the credit. And of course, all the corresponding documentation and the calculations have been performed, go ahead and file. We want to ensure that taxpayers don't lose out on the opportunity to submit a proper claim before the expiration of the statute of limitations coming forward in approximately six months. Walker: Very good. Shifting gears a little bit. Hand in hand with the claim for ERC is the businesses' requirement to amend the corresponding income tax returns for the claim. Let's acknowledge we're not going to debate the fact [and] we agree that the IRS guidance requires amending the 2020 or 2021, obviously, depending on the year of the claim. That is a fact. But given the moratorium, the fact that we know the IRS has a backlog of claims, let's talk about some of those issues around statute of limitations for those income tax returns. At this point, nothing has happened to change the statute of limitations. What recommendations could practitioners consider? Elanjian: Sure. It's a great question. April, I will acknowledge what the IRS guidelines require as it relates to when to amend an income tax return. There's clear guidance from the IRS, we continue to hear and see income tax preparers look to address the ERC claim perhaps in a year in which the refund was received. Again, that is contrary to the guidance produced by the IRS, which illustrates that the income tax returns should be amended for the year in which the credit is determined, which was either 2020 or 2021. Now, with that being said, going back into your question here about statute of limitations and what that would mean, it's something we continue to see surface more regularly as we're nearing the income tax return statute of limitations as it relates to 2020, which is coming due here in the next few months. Frankly, it's a dilemma for the tax practitioners that the IRS really hasn't provided a definitive solution for, at least not yet. On one hand, we have a backlog of several hundred thousand ERC claims. It's unclear when the IRS will process them as we consider the fact that taxpayers can still submit amended returns to claim the credit. That's only further exaggerated by the fact that as we're observing the IRS continuing to audit these claims, including those that were previously processed for which refunds have been disbursed. The outcome of these audits, inclusive of IRS decisions, those that may be appealed or brought forward in tax court will not be fully resolved until after the statute of limitations on the 2020 income tax return has lapsed. That's for some unknown amount of taxpayers. It's just really more of a timing thing. That's in turn lies the challenge where taxpayers who have previously amended their end of 2021, but really our timing sensitivity is around 2020, income tax returns to reduce their wage deduction as instructed by the IRS and may end up in a situation that after the statute of limitations expires, a credit that was claimed may be disallowed in whole or in part. We've talked a little bit about protective claims and what we're hearing about that and that's protective claims for refund. Where that seems to fit and maybe where it doesn't pertain to this question is when it comes to the ERC claim, there may be a consideration to file a protective claim against the refund, which can occur when there's a contingent event. We really [mean] in this case is the resolution of an eligibility position taken perhaps, we're observing to see what happens with supply chain as those are brought forward and litigated and what that might that mean. That can provide an opportunity for the taxpayer to subsequently perfect the claim after the statute of limitation lapses provided that the basis for the claim is not materially different. But that's for the claim for refund which is facilitated through most commonly the filing of a Form 941-X. That's different than the income tax return issue that we're facing where we're not afforded that same opportunity. When we're amending our income tax return, we're reducing the wage deduction. We're not claiming a refund through the filing of the income tax return. What's been made available to us and what's been communicated to us through [IRS] Notice 2021-49 as it clarified, the income tax return implications, is that an amended return should be filed or administrative adjustment request. The administrative adjustment request still would seem like the appropriate option if the taxpayer is a partnership, even as we go, perhaps beyond this 2020 income tax return statute of limitations. But it doesn't solve all other tax entity types. That's the gap that continues to exist and where we sit today, the only reasonable answer at this point is that the IRS has to come forward and issue some further clarification. I've no doubt that the IRS is well aware of the issue and we'd expect to see some further communication. I know that doesn't fully solve the question that's being asked within the market other than wait and see, but unfortunately, that really is our current reality. Walker: I guess, mainly, we're speaking here to tax practitioners, communicating that to your clients that this is a real possibility is important because what you don't want them to come back and say, hey, you never told me x, y, z. I feel like that's important. Like you said, we at the AICPA have made them aware that this is an issue. I'm sure they know it's an issue. Hopefully, there will be some extension of the statute. I'm not sure how that actually is affected. But anyhow, for now, that's where we are. Elanjian: April, I love the comment about the communications with clients. In this market, and I know we're talking here as the comment was made about this income tax return dilemma that we may be faced with and likely will be is the just the misinformation about the ERC. Communication with clients so that they understand that you're here or they understand that you have the advice or can recommend someone who does, is clearly important in our role as trusted advisers to our clients. Where we can see things go awry is when there is no communication and our clients go out and seek help from someone else, they may not have a preexisting relationship [with] and may or may not provide the right advice. That client communication element to speak to, April, is critical. Walker: We're going to continue to talk about amended tax returns, but we're going to talk about the OPR (Office of Professional Responsibility) guidance around professional responsibilities on claims. Definitely another conversation topic, question topic on this issue. What is your perspective on this guidance and how practitioners might navigate this? Elanjian: This is a matter we deal with regularly and that's from all sides. When it's the CPA, it may be the service provider or maybe an attorney. What's the burden? What's the responsibility rather is perhaps the better way to say it as relates to the tax preparer. We recognize that the issuance of the OPR guidance or the IRS warnings and communications may prompt or require for that matter the CPAs to provide certain level of diligence. Some CPAs feel that they've been tasked with effectively performing some function of the IRS. At least they're acting in that particular manner as the last line of defense, if you will. The unfortunate piece of this is that it's caused a significant strain in CPA and client relationships. As we're aware of numerous situations in which CPA may have refused to file an income tax return over an inability to agree on a position taken by their client pertaining to the employee retention credit and unfortunately sever certain relationships. That's certainly not the outcome any of us are looking for. As we look at the OPR guidance, we look at the standards for tax professionals, we look at Circular 230. What it's speaking to is the reasonableness of the position taken by a taxpayer, the responsibilities of the tax preparer as it pertains to diligence and disclosures and how any associated penalties perhaps may come into play. That's really when it gets into this element of an unreasonable position. There's this process that a tax preparer they go through to determine is the position reasonable. I think it's important to consider what we see in [Sec.] 6694, which notes that a tax preparer may rely on advice furnished by another adviser, another tax preparer, or another party, and that the tax preparer is not required to audit or examine or review the books and records, the business operations, the documents or other evidence to verify independently the information that was provided by the [3rd party]. That being said, the tax return preparer may not ignore the implications of the information on the income tax return, and they make reasonable inquiries if the information furnished appears to be incorrect or incomplete. We're left with the understanding whether it's known or there's reasonable belief that the position taken is unreasonable or inaccurate. We need to figure that out to determine how far we are inquiring or evaluating the reasonableness of a position. We're hearing some CPAs taking the position that if their client claimed the ERC, then April as you noted earlier, they should amend the income tax return. We know if it's claimed that there's an income tax implication, therefore, just do it. Amend the income tax return, no further questions asked. Now, the other side of the equation, we're seeing CPAs and some of them who have decided not to provide ERC services for one reason or another, now being faced with this consideration of being the ERC advisor, and assessing the taxpayer situation and effectively re-performing the eligibility analysis, which may very well lead to a different outcome for any number of reasons than what the taxpayer acted upon. The appropriate position is likely somewhere in between the middle of those two bookends, and we're looking to comply with Circular 230 and certain relevant sections of the Internal Revenue Code as well as the [Statements on] Standards for Providing Tax Services. This really involves making reasonable inquiries pertaining to the taxpayer's position. Unless the facts and circumstances suggest that the position is unreasonable or inaccurate, you may stop there. Given the subjectivity of the program, it's highly common for two different parties to evaluate the same taxpayer's position and reach two different conclusions. That might be informed by their approach, their knowledge of the program, perhaps their risk tolerance. But what it does not necessarily mean is that one position is reasonable and the other one is not. As we discussed earlier, there's this lack of case law and applicable legislative history to actually know what a partial suspension is and what is an unreasonable position short of the known fraud and abuse. Accordingly, making the appropriate level of inquiry to understand the taxpayer's position, assessing if it's reasonable, would seem to satisfy the compliance requirements without full re-performance of the analysis to formulate an independent conclusion that maybe predicated upon the documentation the taxpayer has pertaining to their position. For example, if you're speaking with one of your clients and asking about their eligibility position for having claim the credit and all they can tell you is supply chain disruption with no further information, that likely is going to warrant some additional inquiry and further probing. However, if taxpayers provide a narrative that articulates their position, its alignment with the program requirements, that would seem to achieve the level of due diligence that's required by the taxpayer as having a reasonable basis for the claim that's been filed. Walker: I think [there are] no easy answers here, but a great way to think about it. Let's shift. We've alluded to it a couple of different times throughout our conversation, but let's shift to as you're helping CPA firms, their clients and defense of actual examinations that are currently ongoing. [Justin, could you] share some of the themes you're seeing from those exams. Elanjian: Sure. We recognize that CPA firms and law firms and certain ERC providers may not have the skills, knowledge, experience, or even the bandwidth to provide representation in the wake of an ERC claim exam. That's been a great opportunity for us to collaborate with the trusted advisers to mutually serve their clients best interests and having the opportunity to do so as it pertains to the audits of these ERC claims has certainly provided some insights. Some of which from our perspective maybe a bit concerning, but nonetheless informative. As it relates to what can be expected and where to focus our efforts in working with clients and what types of documentation to really dive in deeper on. I think it's important to start the conversation with the notion that the IRS Notices themselves or the Internal Revenue Services’ interpretation of the statute are not necessarily binding in nature. What is binding in nature is the statute itself, and that presents a much more broad definition of an eligible employer particularly as it relates to a full or partial suspension. If we look at the Cares Act, it states that an eligible employer is any employer for which the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to the coronavirus disease. Notably, there's no mention of a more than nominal portion or more than nominal effect among the various other limiting provisions that surface in the IRS notices and most notably IRS Notice [20]21-20. That notwithstanding, we're seeing some common themes or areas of focus from the IRS exam agents that provide even a more narrow or more limited view of an eligible employer than what may be present within IRS Notice 2021-20. Again, that's to inform advisers of how they may approach situations and engage in conversations with their clients to defend their position or be prepared for defense. In no particular order here, what we're seeing is significant emphasis on essential businesses, on government orders, the whole more than nominal concept and supporting documentation. Touch on each of these just briefly, just for some additional context. When it comes to essential businesses, the IRS is taking a narrow approach, and particularly as it relates to essential businesses that do not operate with a non-essential component. The exam agents are hyper-focused on the fact that essential businesses, by definition, were not required to shut down. Now, notably focused on the concept of shutdown, which is not the criteria in the statute, nor is it the criteria in the IRS guidance for being eligible. That has certainly presented some challenges for essential businesses whose trade or business operations may have been suspended by any number of factors, even though they were technically remained open for business. There's this extra level of diligence and communication that's seemingly necessary when dealing with claim exams. As expected, the government order aspect is relevant. The IRS is requesting copies of the government orders, actual copies of the orders that were determined to be a contributing factor or the causal factor to the suspension noted by the taxpayer. In some situations, the agents are specifically requesting that they be directed to the exact section within an order. Show me the terms, show me the article, show me the subsection within the order that's being cited. We've been pulled into situations after an IDR [information document request] and a disallowance occurred, where the basis of the disallowance was because the taxpayer had provided hyperlinks to URLs where the orders existed. The agent wanted the actual orders and therefore disallowed the claim because the orders themselves and the specific sections within were not cited. That's one part of this is the substantiation of the order. The other side of this is what is an order. We know that certain things like statements made at a press conference don't constitute an order. But what I'm talking about is the verbiage perhaps used within an order. The order uses words like recommends or encourages or something to that effect. The agent may not consider that to be a mandate, but rather a guideline. I can understand that in certain circumstances, but it certainly presents a challenge to get into that level of nuance and that level of detail for CPAs, ERC advisors, or the taxpayers themselves. But where this further extends into some challenges is, let's take a hospital for an example, or a long-term care facility whose financially reliant on their Medicaid contracts and therefore, in turn, compliance with CMS [Center for Medicare & Medicaid Services]. The IRS is not acknowledging that the CMS is, "guidelines" were not required to be followed. They don't rise to the level of a government order and a mandate. That in and of itself can present some challenges as taxpayers who are subject to following these guidelines could lose their whole Medicaid funding, which would cripple the business if they didn't comply. There's some debate here as to whether or not that should also be considered an order. I think the third item I mentioned was the more than nominal concept. This one is interesting for a number of reasons, despite the element of it not being present within the statute. The exam agents are very much looking for a calculation. Show me the numbers, show me the revenue, show me the employee hours. The approach is extremely formulaic. Not only that, but the application of some of the more than nominal criteria is being just simply misapplied. When we look at the more than nominal affect language in Q&A 18 out of [IRS] Notice 2021-20, it notes that Governmental order that results in a reduction in employer's ability to provide goods or services in the normal course of the employer's business operations of not less than 10% will be deemed to have more than a nominal effect. Unlike the more than nominal portion concept, this does not suggest it needs to be a factor of revenue or employee hours. Further, it does not state that it needs to be in relation to a comparable quarter in 2019. However, we're still seeing agents requesting a calculation for a reduction in revenue or reduction in employee hours of 10% to achieve the nominal effect criteria. That's just simply inaccurate. But nonetheless, it is something that we're continuing to see in the wake of IRS ERC claim exams. Walker: Great. That's helpful. Helpful to you as you're walking through the steps we've talked through earlier today. What is reasonable? What is not? At least considerations here's where the IRS is coming from and then you make your own professional judgment. Justin, thank you so much. This has been super helpful for me and hopefully for our listeners. Any final thoughts as we're wrapping up today? Elanjian: There's obviously a lot of unanswered questions and differences of opinion when it comes to the employee retention credit program and CPAs are receiving information that sends a sentiment that anyone who charges it continuous fee is bad or a substantial component of claims that have been filed that are improper. We go back to that comment made by the IRS that 95% or more of claims coming in recent months are ineligible. Probably somewhat of an overstatement. Obviously, 95% is clearly significant. Well, it's still probably not 95%, I think the intent of the message is probably not far off. It may not be that 95% or some significant percentage of claims are improper, but rather they don't contain the supporting documentation required, and in turn, therefore may be deemed as improper. It continues to drive home this element of documentation, I think biggest takeaway of all of this is the documentation, the preparation of such, whether it's to prepare an income tax return, preparing for a claim exam, determining the withdrawal program or whether or not to file a claim. Is there a position and can it be documented and what should not occur as businesses who are rightfully entitled to the credit, second-guessing their claims, or whether or not to even submit one for fear of penalties or interest or potential financial burden that they may face or their claims be subject to exam. At the end of the day, it's important we get back to the intent of the program, which was to provide funding to businesses who experienced challenges due to COVID and maintain their employees on payroll. We recognize that this adds more responsibilities to the CPAs as the trusted advisors to their clients, and that's where Stout is here to help and be a resource to you and providing guidance and advice to your clients to maintain the competence the clients have in you and manage your risk and their risk accordingly. Walker: Wonderful, thank you. We will, Justin, put your information on how to best contact you in our show notes if anyone is listening and thinks I need to talk to Justin a little bit further. In closing on these podcasts, I like to think about as Tax Section Odyssey we're taking a journey together toward a better profession. In doing so, I really like to get a glimpse of my guests, other journeys outside of when they're working on tax. Please share a page from your travel journal, Justin, either a bucket list trip or something you have on the horizon? Elanjian: Boy, that's a tough one. I don't know that I have one on the horizon as we've had the opportunity to do some travel recently. I'll speak to the recent travel instead of the upcoming. We had the opportunity to do a two-week safari in Africa. That was absolutely outstanding. If someone hasn't gone and it's not on your bucket list, you're making a mistake. Put it on a list. It is unbelievably worth it and an experience that you will never forget. Walker: Perfect. As we're accumulating these podcasts, I have added to my bucket list, and I think I'll have to add that as well. Thank you so much again, Justin again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. 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October 16 is in the rearview mirror. Brandon Lagarde, CPA, JD, LLM, Partner — EisnerAmper, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, to review what went well during the extension tax season and what to look forward to in 2024. What you’ll learn in this episode 2023 tax extension season highlights (0:58) Challenges and concerns to think about for 2024 (3:05) What’s keeping Brandon up at night (7:30) Sneak peek of the National Tax & Sophisticated Tax Conference (10:13) Final thoughts (14:24) A page from Brandon’s travel journal (15:35) Related resources AICPA & CIMA National Tax & Sophisticated Tax Conference 2023 — This premier conference provides tax experts with the latest updates and information on new regulations. Your team will hear from IRS executives on current challenges and opportunities. Use promo code NTA150 at checkout to save $150 (exclusions apply). Annual Tax Compliance Kit — Engagement letters, organizers, checklists and practice guides help you manage your tax season workflow and excel as a tax and financial planning adviser. Tax Season resource library — With constant changes to the tax landscape, being prepared for tax season is critical for success. Set yourself up for a smoother filing season by tapping into the wealth of AICPA and Tax Section resources. Transcript April Walker: On today's podcast, listen to hear more about a practitioner's extension season and learn about what you will hear about at National Tax. Hello everyone, and welcome to the AICPA Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager with the Tax Section, and I'm here today with Brandon Lagarde. Brandon is a partner at EisnerAmper in Baton Rouge, Louisiana. Welcome Brandon. Brandon Lagarde: Thanks for having me. April Walker: We're recording this today on October the 20th and earlier this week, Monday, October 16th, was the deadline for what we think of as the end of extended tax season. Brandon I thought we could talk a little bit about some lessons learned. Let's first start with a good; I like to do that. What are some things that went well for you during this extension season? Brandon Lagarde: This is always our busiest time of year — the extended busy season — largely because it involves more of our larger individual clients and even some of our larger pass-through clients. September 15th is a pretty busy day for us. September 30th is also a pretty busy day with fiduciaries and states being done, and then October 15th, again, of course, being, which is October 16th this year is a huge day for us. When we try to plan out our year, we'd certainly look at August as getting ramped back up. If I had anything good to to say about this year it is that we recently went through merger within the last few months — merged May 21st with EisnerAmper — and with that, we were able to get additional resources help. One of the good things that happened during this extension season was, again, the ability to have more people help us get returns done and get the work out. That's probably the biggest positive we had. I wish we would've started sooner. Seems like June and July was slow for us, and we're waiting and anticipating for the wave to occur. We tried to ride the wave as best we could, but I would say that it was still a pretty stressful time even with the additional help we could get. April Walker: I feel like when I think back to my days in public accounting, it's always hard to ramp back up, but the sooner that you can ramp back up after taking a little bit of a breath, that makes for a better September — October. That’s great that you had some additional staffing. Maybe we'll move to the lessons learned. What are some things that didn't go as wel,l and some things you'll try as you look towards the 2024 tax season? What are some things that you're going to implement and work on? Brandon Lagarde: One thing that we did during our regular tax season (and it never translates for us to extension tax season), and that is really trying to set some expectations with clients on when we expect them to get us information. When we get work done internally during regular busy season, that March–April timeframe, we're much more deliberate on getting that work in the door, telling clients we need your information by this date to get the work done. We are much more deliberate on scheduling that work during busy season because we are more focused on it. Then summertime comes and I think everyone, including our clients just get lazy when it comes to their taxes and getting work done. What we didn't do so well, and we've thought about this internally, is on the backend with the second busy season coming up in August, we really need to do a better job of pushing clients to get information and pushing ourselves to continue to work on stuff during the summertime. Just seeing that this year specifically, I don't know if it's still coming out of the COVID-19 pandemic work issues or just coming out of first summer where people did a lot of travel. Again, there definitely was a lull that we should have prepared for a little better. Certainly one big lesson learned is we really need to keep our foot on the gas through the extended busy season and really get started earlier because as I mentioned, one of the good things that happened to us this year was we did have additional help to get work done. Without that help, we would have been extremely backed up and not sure we would've gotten the job done. So really pushing that deliberateness that we took during the busy season in March and April. Really pushing that to the summer and staying on top of clients, staying on top of our people and just saying, “hey, we need to make sure that we're not pushing this back further than we need to,” that's a huge lesson that we'll take from this tax season. One of the challenges we face with our September 15th deadlines is when you have flow-through entities and we're getting K-1s on September 9th, 10th and 11th, that puts a huge strain on getting work done on the 15th. We try [for] clients that have that multi-tier, we at least try to back that up and try to get those out before [because] we know they're going to impact other clients we're dealing with. But that's just a huge backlog that happens. Again, I don't know how you incentivize clients because sometimes it's not in their hands. April Walker: Absolutely. But I think you can make sure you're communicating and make sure [maybe] it's getting the best draft information you can get [entered in the system] so that you're really truly just waiting on a few pieces of information and really pushing [clients]. I'm not trying to tell you what to do Brandon, but just some ideas like thrown out there and just making sure that your clients don't put you into a box where you're having to scramble. Brandon Lagarde: That's one big lesson is never too much communication with a client, especially if you're trying to get information from the client or really trying to push the client to get you the information. To some degree, it takes some deliberateness on everyone's part to say, let's sit down first week of June and go over what financial information we need from the client, get with the client and help them to put it together and even set up meetings with the client to make sure that they understand that we're waiting on them for something. I find that happens quite often is communication just falls apart and the client doesn’t realize we’re waiting on something or the client doesn't really understand what we're waiting on, even though we tell them waiting on something, so it certainly involves overcommunicating is going to be a huge solution for anything. April Walker: I think that sounds good. Just a final question as we're thinking about looking forward, what's keeping you up at night as you're thinking about its the middle of October tax season. Unfortunately, we will be here again. What's keeping you up at night thinking about that? Brandon Lagarde: We already had a meeting this morning with our partner group [and] our local group, and really starting to talk about what we need to be focused on [at] year-end and starting the process early on this communication with the clients and starting the process early on determining which clients we are going to continue to work with and which clients we may need to part ways with and getting engagement letters out and organizers. These things need to occur now and not wait [until] January — Is just getting those things done, just getting a process down to do that, that's what we've just taken off right now. Because I think it's going to be pretty quiet legislatively in the near term, but hopefully there's no major tax things we have to deal with. Again, it's a normal year. April Walker: But it's always thinking forward, thinking about 2024 presidential election [and] also thinking about sun- setting of TCJA — that's not until the end of 2025. But still just planning ahead, and again, you're talking about communication with clients is always a good thing. Brandon Lagarde: Making sure we're getting in front of the clients and remind them that bonus depreciation continues to go down and things that are changing and whether there's a fix to the R&D or not and keeping people abreast of whether employee retention credit claim is currently pending because we have a lot of those that we get calls every day from clients asking, “where's our money?” We tell them that it is sitting in Washington DC — so call their congressmen. But, as always, fun to talk to clients about and end of the year is at time and its extent that we can again have a full conversation with them, not just year-end planning, but also getting ready for the 2024 tax season, and go back to lessons learned from this year, just trying to get information earlier from clients. If we can get in front of them towards the end of the year and even beginning of the next year and help them clean up their books or help them with organizing their stuff before it gets too late into the tax season, that's a win for everybody. Really, that's going to be our focus in the next two months is really just some of the administrative stuff done. Let's refocus our efforts on those clients that we need to be focused on and work towards making sure over communication is integral to the process. April Walker: Brandon is a wonderful volunteer for the AICPA. He is the current chair of the Tax Practice Management Committee. He's also a first-year co-chair of the National Tax Conference, so I'd like to talk a little bit about that's upcoming really soon in the next couple of weeks. I heard yesterday, there is an additional promo code which I'll share in the show notes. Brandon, tell us, why should you come to the National Tax Conference besides getting to hang out with you and I? Brandon Lagarde: That would be the first thing, you get to hang out with April and myself, which is always a fun time. You could visit the O museum. This will be my sixth year attending and first year as a co-chair and I've been on the planning committee for the last couple of years. And it's always just a great conference I go to. It's in DC, you're around the IRS officials, the IRS Commissioner comes in and talks and this year we have a new Commissioner. So we get to hear from the new Commissioner and his vision for the IRS and with the $80 billion that they have to spend, what's their priorities? We hear from other IRS officials to get an idea of what their priorities are to in the coming year. It's a great place, not only just to learn from other practitioners, but also to learn from the IRS and the government officials that are there and again, you're in DC. This is a great conference this year and we're hoping to have some good discussions and good content around AI and how it's impacting the tax practice. The committee has spent a lot of time working through that issue and just trying to provide some good information and some good commentary. I heard just this morning that we're going to have a staffer from the Senate to also be a part of the AI discussion because Congress eventually is going to get involved with putting guardrails on artificial intelligence. I know they have a committee that they're working on, talking about what should their role be. And again, what better place to learn about all that in DC. It's a great conference and I think this year is by the [National] zoo, so we get to go to the zoo as well and go see the pandas. April Walker: Absolutely, the pandas are leaving. That's one thing I'm doing. If you'd like to join me, give me a shout out, I'm definitely going to the zoo on Sunday. But thank you for sharing about the [conference]. That's exciting. I always love the sessions and it's one of my favorite. It's one of my favorite times. You've talked about some of the sessions, but do you have any other specific sessions that you're looking forward to attending yourself? Or again, I like to always provide that there are some concurrent sessions happening. If there's a couple of things you would like to see at the same time, you can go back and watch them later. That's a definite benefit. But what are you looking forward to you the most? Brandon Lagarde: With this conference being at the end of the year, certainly you get the IRS officials and you get to hobnob with them and you get to meet them and get to hear from them. But also you get some really good year-end things to think about. Well, we're always, as I was saying earlier, the things that keep us up at night is making sure that we're talking to clients about things they need to be doing at the end of the year for tax planning. This conference gives a lot of tips, a lot of things to think about to bring back. We try to make it very practical — practical sessions that could be applicable to everybody. In this past year, we now are integrating the sophisticated tax planning conference as well, so again, you add a little more estate planning concepts and ideas in addition to just the income tax. It's a really well-rounded tax focused, and again, given time a year is perfect. You go to a conference, you hear a bunch of things and then two weeks later you forget about what you learned. Here, you can take what you learned and go bring it out to your clients immediately. Again, it was a very successful tax season for us. All returns are filed that needed to be filed. Everything went as smooth as it possibly could go. Definitely can go smoother, and every year you just have to look and see what went well, what didn't go well. One closing comment on that, we started doing this years ago was having a debriefing session for [the] tax group and for every level. Staff, managers, senior managers, partners get together and just have a debrief on what went well, what didn't go well. [We] get our admin team together, talk to them about what went well, what didn't go well, because what went well, in my mind, may have gone terribly for somebody else, but we just didn't see it at the time because people are just busy. Really sitting down with the team and just going through and [talking about] what we do here that went well, what went wrong and how can we improve and how can we fix? Because I'll say everyone can improve on something even if it's small. That's the good thing to do for the firm and good thing to do for your practice. April Walker: Absolutely. Thank you again so much, Brandon, and I appreciate you very much. You've been on this podcast before, so you know what's coming, but on these podcasts, I like to think about us taking a journey together. Like a journey towards a better profession. In doing that, I like to get a glimpse of my guess’ other journeys outside of tax, so what is a trip you'd like to share about? Either a trip you have planned or a trip you have recently been on? Brandon Lagarde: Yeah. I knew this was coming and I didn't have a thought until you asked this question. My wife and I are celebrating our 20th anniversary this year. April Walker: Wow, congrats. Brandon Lagarde: Yes. We were going to do a little bit longer of a trip, but we shortened it. We're going to Las Vegas in a couple of weeks, and been debating on this whole sphere thing and should we go to the U2 concert in it or not, but so far I think we're, we're not. But unless somebody convinces me, otherwise, we're not. But I think I'm just going to stand out in front of the sphere and take pictures of certain things, like everyone does. April Walker: Yes. I was hoping you were going to go check it out so we could possibly, when we're together in June, next June, we could see if whether it's worth it or not, I don't know. Think about it again. Brandon Lagarde: Yeah, we're definitely going to go check it out as don't know if we're going to go to anything inside of it. We may just go walk around outside. But Las Vegas is the fun place and we're going to hopefully have some fun, even though I don't gamble. April Walker: Lots of good shopping and lots of good food. Brandon Lagarde: Lots of eating. April Walker: Yes. Happy Anniversary. Brandon Lagarde: Thank you. April Walker: Again, this is April Walker from the AICPA Tax Section, this community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friends. You can also find our podcast at the AICPA-CIMA.com/tax and find our other episodes, as well as getting access to resources mentioned during the episode. Thanks everyone for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

The tax profession offers a myriad of potential paths to a successful, satisfying and rewarding career. On this episode, listen in as Will Weatherford, CPA, Managing Director — Transaction Advisory Services, Forvis, and Teri Hanson, Managing Director — Alvarez & Marsal Tax, LLC, share their perspectives of what it’s like to be in the mergers and acquisitions (M&A) tax niche from both a federal and state perspective. What you’ll learn in this episode A day in the life of an M&A tax professional (0:58) Steps when starting an engagement (4:20) Red flags and lessons learned (9:24) Saving the day (12:02) Reflections — past and future (16:31) Career drivers (17:14) Pages from Will and Teri’s travel journals (21:18) AICPA resources Salt Roadmap and Resource Center — Browse the reference library for the latest guidance and tools to address your state and local tax needs. Navigate to the interactive U.S. map to reference taxes imposed, tax rates, due dates, tax forms and more. View the SALT resources index for additional resources by topic. 2022 State Tax Nexus Guide — Learn about state tax nexus including the many types of nexus (affiliate, economic, click-through, cookie, etc.), the physical presence standard and more. 2022 State Tax Nexus Checklist — Access a comprehensive checklist about state tax nexus considerations involving income, franchise, sales and use taxes. 6 reasons an S corporation wouldn’t need a PLR | Tax Section Odyssey — On this podcast episode, Tony Nitti, CPA, Partner — National Tax, EY discusses Rev. Proc. 2022-19, which provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR. Wayfair Client Notification Letter — The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. opens the door for possible economic nexus issues. Use this letter to initiate client planning. Transcript April Walker: On today's podcast, listen to hear more about a day in the life of M&A tax professionals. Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager from the Tax Section, and today I'm excited to share our guests. They are Will Weatherford. He is a Managing Director of Transaction Advisory Services with FORVIS, and Teri Hansen, who's also a Managing Director with Alvarez & Marsal Tax. Just to kick us off, we hear so much about the CPA pipeline and how students and professionals entering the CPA profession don't see the excitement and don't see — all we do as tax professionals is just crank out tax returns. It might be fun to explore a day in your life, a day in the life of Will and Teri. They're going to tell us…Will, we'll start out with you. Tell us a little bit about your background, and your role, and M&A tax due diligence in general and then once you're done, Teri, go right ahead. Will Weatherford: Sure. Thanks, April. I'm a Managing Director with FORVIS as you said, and my job is really to lead our M&A tax engagements. I have a team that works for me, but I'm the one leading it — the one signing off at the end of the day. From an M&A tax perspective our work really breaks down into what I call the diligence, which I think we're probably start off talking about tax diligence in that, and then the structuring which I think will also get to. But from a tax due diligence perspective, that is really about when one company is buying another part of the process of acquiring…is doing diligence. It's really no different than for people who bought a house where you hire an inspector to come in and look around and see if there's any problems. It's really a similar concept and there'll be various service providers. I come in, the lawyers come in and do legal due diligence, and maybe other insurance advisor will come in and do an insurance diligence. We are brought in to really review the company's historical tax filings and the positions they have taken and really just understand what the company has done historically from a tax perspective and really to understand if there's any tax liabilities both from a federal-international perspective, which is what I focus on. We're really looking at the federal income taxes and to the extent that there's any cross-border activity, the foreign taxes, and we have local teams that do that…then, what Teri focuses on, and she'll get into is, the state and local tax perspective, any state taxes — both income and non-income. The goal is really to go in and get an understanding of the company's tax posture and again, really looking to understand if there's any historical liabilities that would be inherited by a buyer in connection with the acquisition. It's a bit of a fine line to walk because the goal is not to find 9,000 things the company did wrong. Nobody is going to be — given the nature of our tax system — no one's going to be 100% compliant all the time. Just like auditors when we operate with materiality threshold, but we really want to find those material tax exposures that would influence, or impact a person's decision-making, and then we want to understand them. We want to ring fence what that is, and then also part of it is working to see if there's ways that we can mitigate them either. There may be something that the selling company can do pre-closing to mitigate the issue or if it's something that our client has to deal with post-acquisition. That's what my role from a federal and international perspective. Teri, I'd love to hear about what you do from a state perspective. Hanson: We actually do pretty similar things, it's just a slightly different focus. As you mentioned, I focused on the state and local taxes, that's any state income tax, any non-income tax, that's sales and use, gross receipts, property tax, payroll tax, excise taxes, unclaimed property, though that really technically isn't a tax. We're also going in, we're looking at companies to make sure we understand their business and their profile, and then we're trying to help our clients make sure they're appropriately protected in the purchase agreement to the extent we do find those material issues. Walker: Great. Definitely, I think it's pretty obvious why due diligence is so important to a buyer. But maybe we'll start with Teri, maybe talk about the process, the steps you actually go through as you're starting an engagement, and how you actually make this happen. Hanson: Yeah. The first thing we really do, anytime we kick off a deal, we want to understand as much as we can about the target. Whether it's understanding what kind of structured it is, I'm sure we'll get into that. There's really different tax implications. If we're working with a C Corporation, or an S Corporation, or a partnership. We need to understand what the income tax profile looks like. From a state and local perspective it's very important to understand exactly what the company buys and sells. We tried to get all the information that we can to make sure we're advising our clients on the best way to approach something. Once that process gets kicked off, the next step is really a fact-gathering phase where we're requesting information to review. We're having conversations with the management team — whether it's the CEO or the CFO, the various tax advisers, and understanding exactly what they do, where we think they should be filing, and again, picking that apart to see where we might have some problems. Walker: I would imagine, especially in the state and local area. I'm sure we'll find lots of problems too, but I feel like I hear so much about trying to figure out where you have nexus and — just from a compliance standpoint — that I would feel like in a due diligence process…I'm sure that is a very challenging adventure in trying to figure out every client is compliant or not. Hanson: That is an understatement. Yeah. It's especially for some of these smaller companies with very small tax departments or maybe even non-existent tax departments. It's really challenging to understand every tax and every single state. Unfortunately, the rules are constantly changing, so we find the taxpayers just have a really difficult time keeping up. Walker: Now Will, what would you like to add to that from a process standpoint and how might it be the same or how might it be different? Weatherford: I will say that for us from a federal perspective, understanding the transaction structure is really critical, and there's quite a lot of misinformation out there. People think, oh, I'm purchasing assets, no tax liabilities come over. That's not true. We spend a lot of time explaining that concept of people, but from my perspective, again, understanding what type of legal entity are we buying? Are we buying a C corporation, or are we buying a S corporation? If you're buying a C corporation, I have to look at everything, right. All the tax liabilities will come over. S corporations are very interesting just only because S corporations don't really pay taxes other than in very specific circumstances. But to be in that position, you have to have a valid S selection, and those S selection rules are very arcane, hyper-technical, and we have to spend most of our time really diligently seeing the validity of that election and that involves some candid, very uncomfortable conversations because there's very specific rules around the types of shareholders and things like that. We have to get on the phone candidly and ask people, hey, what was your marital status? What's your residency status? If they have trusts, we have to ask to see this trust agreements, and a lot of times you read these trust agreements and just all the skeletons. You just follow the closet because you're reading all this stuff and people obviously get very sensitive about that. I can tell you, I've been called about every possible name you can think of. Most of it I can’t repeat on the air unless this is that kind of podcast, but I didn't think it was. Walker: No, not today unfortunately! Weatherford: People obviously get very sensitive about this, but that's what we have to do. You have to definitely need a thick skin to work in M&A because you will run into people who…and candidly you're going in, you're oftentimes dealing with a tax preparer, and you're reviewing their work and they obviously don't want to look bad in front of their client. But sometimes you just find problems and you find things they've done wrong and you have to have the very uncomfortable conversation because nobody wants to admit they were wrong, particularly if it becomes like an economic point in the deal. Walker: And, probably professionals that did things wrong, potentially. Weatherford: Oh yeah. It happens where there's someone who had a big miss or something and we have to raise it and there's implications for them on terms of them having to deal with that on the backend — from a diligence perspective, understanding the entity. It's a very similar process to what Teri outlined. There was a fact-finding phase, gathering the documents, reviewing the tax returns. We're not performing an audit. Not going in and ticking and tying every single number, but we certainly do look at the material things and we do have to rely quite a bit on what management is telling us. Obviously, if they're telling us something that's just doesn't reconcile with what we're seeing we need to investigate that. But we do try to make it a collaborative process. I always tell the management teams that were working with — that we understand they have day jobs. Our intent is not to create a second job for them, and we try to ask for documents and things that are off the shelf, things that can be readily provided. If something is not readily available, we have different ways of working with things. I always tell them I'm like, look guys, if you're working, I'm working. If you're dealing with this 11:00 o'clock at night and you got a question, just text me or whatever because our goal is not to. Walker: Make things harder. Yeah. Weatherford: Exactly. Walker: You brought it up. People loved to hear horror stories, protecting the innocent, of course. Tell us about a big miss you've seen as a business went through this process. Weatherford: I would say a lot of the big misses, again, there's always the quotidian stuff, I'll say that, which is just very everyday things, it’s not very material. I would say the big misses are really around prior acquisitions when a company previously went through a transaction and then was held and then our client is acquiring it. And, we generally have to go back and look at that prior acquisition and maybe they structured it to get a step up. Depending on how that waas structure if they did a 338(h)(10) election, that could potentially be invalid. I run into anti-turning more often than I would like. Especially if some of these very old founder companies that are, maybe they're finally exiting or they're exiting to a sponsor. I've definitely seen some issues where a company thought they've taken these large amortization deductions may go in and we say, hey, this was all subject to anti-churning. It can't amortize any of it. I've dealt with that. Walker: You are the enemy. Except you can also be the hero. It's not all about that. Weatherford: It's hard, right. Because with what we do, the best thing that we can tell our client is, hey, the company was doing everything it was supposed to, was complying with the law and paying its taxes. It's not often that we can come in and find…and be like, hey, look, sometimes we can find an opportunity where we can say, hey, look, the company is not taking advantage of this tax benefit. That does come up occasionally, but more often than not, we're just delivering either basically no news or delivering some bad news. Diligence is…it's a necessary process, but we'll get into the structuring aspect, but I think the structuring is more where we I think deliver the real value. Not that diligence isn't important process, but I think the real value to a lot of our clients is really around the structuring aspect of it. Walker: Perfect. Teri, I'II love if you have a horror story you'd like to share. Hanson: I find on the state and local tax side, sales tax is almost an issue on every single deal. And it's after the Supreme Court, Wayfair Supreme Court back in 2018, the sales tax rules just changed so drastically and it didn't change consistently, unfortunately. Every single state has got some different type of qualification as far as when you need to file. What you're selling is potentially taxable or not taxable. We just find that it's really difficult for taxpayers to stay on top of that with the inconsistencies. Once you start adding on pretty significant amounts of revenue that are going into these various states, the exposures add up very quickly. As Will said, my favorite deal is when we don't find anything at all. But unfortunately, it's just not the case; sales tax seems to bear it's ugly head more often than not. Walker: Circling back to you something you said, Will. Let's talk about when you can be the hero. Let's talk about when you can play a really important role as an adviser in M&A deals. Weatherford: I think part of our goal is one with the diligence like we've discussed. But and again, that's just if we find issues, we have to raise them. I think part of where we can add value is really, I think Teri said this earlier, is that helping our clients understand any exposures and how that can be mitigated. Sometimes the target can do something prior to the closing to clean up an issue and then that way it's just not dealt with. Otherwise, it's just about framing issues and ring-fencing them and then being able to appropriately addressthat in the agreement in terms of just contractual protections. That's, I think, one way that we can add value there to our clients is just really helping them understand these issues and just making sure that they're protected and that there's not any surprises later. Then I think the other part is the structuring element, which I've alluded to a few times. That's really all the work we do outside of diligence. Again, I think that's more we're advising on the transaction structure and telling our clients, hey, if you structure it this way, you can get a step-up in the transaction and that's a real cash tax benefit to a lot of our clients. Part of it is working with the attorneys to put together the transaction structure and the steps. Lot of times we're putting together PowerPoint decks and laying out each step and a lot of circles and triangles and squares and things like that, and arrows and things are moving around. I think to a lot of non-tax people, it doesn't make a lot of sense, but it definitely makes sense to tax people and the lawyers and whatnot. I think that's one area, and we can do that and it's really all the things around that. We'll review the purchase agreement, and provide comments on that. We work really closely with a lot of tax attorneys and very collaboratively with them in terms of helping them understand. Because they're very obviously…their main focus is getting the purchase agreement drafted correctly, but they need our input in terms of the issues that we're seeing and whatnot. We work very closely with the attorneys. A lot of times there's a lot of modeling involved. This job is very…you need to be pretty decent with Excel, we do a lot of modeling. A lot of our clients really liked the modeling and that's I think, a big value driver for them in terms of helping them to understand what the go-forward tax rate is or what's going to be their step-up or what taxes are they going to pay in the future. That's another area where we can add a lot of values to help our clients see the projections and what this is going to look like going forward. Then really just everything around that structuring is just the all encompassing everything other than diligence and we just get called upon to do. Really a lot of things end up in taxes’ wheelhouse, even though it may not necessarily be tax-related, as Teri said. There's some things that are like unclaimed property is not really a tax, but we just end up having to deal with it. There's a lot of things that we just tell pile onto our basket that we have to help address and tax for whatever reason — always just seems to go down to the wire on some of these deals. We're working right until the very end to try to get these deals closed. And, tax often becomes, once they got through some of the other business-level issues, people become very focused on the taxes. Walker: You always hear or I feel like I always hear, “Don't let the tail wag the dog.” But it seems [tax] definitely is a huge part. You all play a really important role. Weatherford: I think that's actually a really important point that you raise. It's just that I know I've been told throughout my career that don't change the business deal and our job is really to take the business deal and implement it. However, what's been agreed to as commercial matter and make the tax framework work within that. I think one of the worst things you can do as an M&A professional is to have to change the business deal because of something tax-related, unless that was contemplated beforehand. You just don't want to change that, but everyone just this is the business deal, this is what was agreed to and then people would react very negatively if a tax issue was changing the business deal in some way that affects one party or the other. I think the difference between a very successful M&A professional and one who's maybe not so successful as one who really understands that you need to implement the business deal and needed to implement what was agreed to commercially. That needs to wag the tax tail and not the tax tail wagging the business deal, dog analogy makes any sense whatsoever? Walker: I was struggling with it, too! Teri, do you have anything to add on that, or what role you can play helping businesses? Tei Hanson: One of the other areas that we really add a lot of value is when our clients are selling companies. We're going to try to help them get the absolute best deal price that they can. Whether that's identifying issues in advance and helping them clean that up before the company goes to market, or making sure that we fully appreciate the issues that we uncover and we can put a positive spin on that before potential buyers come in and ask for some pretty big concessions on the exit strategy. Walker: I feel like 2022 was like a boom of M&A activity, not sure where we are in 2023 and what you guys are thinking going forward. Hanson: For us, it seems like the markets, but a little bit softer in the first half of the year. Health care has been pretty consistent since COVID, which obviously makes a little bit of sense. But we're seeing a very big uptick in our bankruptcy work right now. That said, based on conversations we've been having with our clients and what we're seeing as far as new deals pop up, it seems like the back half of the year is probably going to be pretty busy compared to the prior years. Weatherford: I would say it's pretty consistent. 2023 has been a little choppy so far, but we're extremely busy right now, which is a high-class problem to have, obviously. Walker: It is. In closing, both of you, I'd love for you to share what keeps you energized and motivated to stay in this business. I'm sure you have some hectic times when deals are wrapping up. Share what you love about your job. Hopefully, you're having a good day and it’s good day to share that. Weatherford: For me, what keeps me coming back to M&A tax is just that you have to have a very broad knowledge and in working in M&A tax, you just gain a very broad knowledge of tech because you work on enough deals. You've seen everything after awhile and it's just amazing the most obscure topic can suddenly rise to the forefront and you're called upon to be the expert on it. That to me is always very interesting and I always tell people that M&A tax, we're the tip of the spear because we're the ones who get in first for a company and we have to go through everything, we see everything and then if that company becomes a compliance client of our firm, we're having to explain it all to the compliance team later on. We really are the first people to get in and see what's going on and particularly in deligence for me, I think it's very interesting to go in and just look at what different companies have been doing and the positions they'd been taking and you really get a sense for what's going on in the market in terms of the overall tax. Then, like I said from the structuring perspective, to me, I think someone I used to work with said that with structuring you're making history basically, and I like that because you really are getting in there and getting to put together a transaction structure and it's really interesting just going through and seeing all the moving pieces to that. The last piece I really like is we work with a lot of different attorneys. For me, I work with our state and local team at FORVIS. We work very closely with them. We need their input. For example, in structuring, we need the state and local input. I think it was Peter Riley, the guy who writes for Forbes, he said that a plan that doesn't include state and local tax isn't much of a plan and that really is true and frankly with the way the state taxes are going, it's important to get that kind of input. Hanson: From my perspective, I can honestly say that I'm never bored. I think you've alluded to this at the very beginning, but tax compliance as tax compliance, it can really only be so exciting. With M&A, I feel challenged every single day. Target companies that just completely run the gamut as far as industries and types of businesses and it's really impossible to know everything about every kind of tax. I feel that I'm constantly learning new things. I never know exactly what my day is going to entail and for me that keeps it very interesting. My first month doing M&A, I worked on a crime scene cleanup company and a roof manufacturer and a healthcare clinic and a restaurant tour. You just see so many different things and I really don't see many other areas in tax or accounting in general where you get that broad range. But I think the second thing, I think that really keeps me coming back every day, it's my team. M&A really provides an opportunity to work very closely with a large number of individuals. Like we side, we work very closely with our federal colleagues and with our financial colleagues and the team of people who are doing the M&A itself and it's very collaborative and it just it makes it fun. Weatherford: I think Teri makes a good point. The people that we work with, I've worked with some very highly intelligent, very smart people over the years. To me, I really like working for people who can teach me a lot and so that's the opportunity I get within tax. You work with other people from different law firms and things and a lot of very smart people there. It's a very small community. I always tell the people working for you, I'm like, doesn't pay to be (unkind) in M&A tax because it's just such a small field, you're going to run into people after awhile. You got to be nice to everybody. Walker: I say that, in general, I think the profession is small and I've told people through my whole career — people will circle back in a way that you cannot even imagine, so it does not pay to blow the doors off. Weatherford: I'll tell you, it's even smaller in M&A tax. You'd be surprised how often you run into the same people over and over again and some of them are really fun to work with and very smart and they have great perspective on things and some of them you just got to find a way to work with them. Walker: There you go. That is like life lessons. I have a fun question as we're wrapping up. The title of this podcast is Tax Section Odyssey, so I like to think of us as taking a journey toward a better profession. When doing so, I like to get a glimpse of my guest's other journeys outside tax. Sometimes those journeys probably add to my bucket list. Teri, share a page from your travel journal or bucket list place you would like to go? Hanson: That is a good question. I would really like to go back to South Africa. I was there a long time ago and I absolutely love it. Walker: Nice. What about you, Will? Weatherford: Well, people know me, I really like wine and I really enjoy going to the Willamette Valley right outside Portland in Oregon and they have some fantastic pinot noir there and try to get out there at least once a year or so and to me, it's just like Napa Valley, but 25 years ago. So it's not quite as touristy and commercial. Walker: I've never been to Oregon and it's been on the list for so many years anyway. I almost always add something to my list when I'm doing these podcasts. Thank you so much, Will and Teri. This has been fun. I hope everybody enjoyed listening. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find our podcast at the aicpa-cima.com/tax, and check out all of our other Odyssey episodes and get access to the resources mentioned. Thank you so much for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

On Sept. 14, 2023, in release IR-2023-169, the IRS suspended the processing of new ERC claims to combat the prevalent fraud occurring. These measures will help to protect small businesses and aim to stop fraud by promoters of ERC mills.  In this episode, Kris Esposito, Director — Tax Policy & Advocacy, AICPA & CIMA, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, to discuss this important news development and break down the details of the announcement. What you’ll learn in this episode Highlights of the announcement (1:24) How to find if submitted claims have been processed (3:53) When will recently submitted claims be processed? (4:41) Number of claims currently in the audit process (5:45) Client talking points (6:22) Available resources (7:38) Kris’ final thoughts (9:07) AICPA resources ERC guidance and resources — The rules to be eligible to take this refundable payroll tax credit are complex. This AICPA resource library will help you understand both the retroactive 2020 credit and the 2021 credit. Employee Retention Credit (ERC): Fact or Fiction? — Use this guide to educate yourself and others on common misconceptions surrounding the ERC. Employee Retention Credit Decision Tree — Download the ERC decision tree to help you with various decision points when working with clients to protect yourself/your firm from significant risk. IRS resources IR-2023-169 — IRS news release on Sept. 14, 2023, ordering the immediate stop to new ERC claim processing. IRS ERC resource center — IRS hub for ERC information, including links to guidance, FAQs and the latest news. Employee Retention Credit Eligibility Checklist: Help understanding this complex credit — This IRS question-and-answer chart is used to help taxpayers figure out if they may be eligible for the credit. Use this chart if you are considering claiming the credit or have already submitted a claim to the IRS. Transcript April Walker: Hello everyone and welcome to this special edition collaboration between the JofA podcast and the AICPA's Tax Section Odyssey podcast. I'm April Walker, host of the Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing profession. Today I'm here with Kris Esposito. She's a Director on the AICPA's Tax Policy & Advocacy team. And we're recording this on Thursday, September the 14th. You have likely seen some breaking news from the IRS about the employee retention credit. We wanted to hop on here and record, tell you the information we know, and let you know what our next steps are. We've been really closely monitoring this evolving issue of third-party ERC promoters over the past couple of years. We definitely been advocating to Treasury and the IRS. We've also been providing resources throughout the whole time of ERC since its inception with the CARES Act in March of 2020 to assist tax practitioners as well as taxpayers. Today, the IRS announced its latest initiative to support small businesses. Kris, I thought maybe you could walk us through the highlights of that announcement. Kris Esposito: Sure. I'm happy to. Well, due to the big surge of ERC claims and concerns from tax professionals, including the AICPA, and the aggressive marketing tactics by third parties, the IRS announced today a multi-pronged approach to taper this ERC fraud. They're immediately pausing the processing of additional claims. They said that will go at least through the end of the year. After September 14th, today, there will be no more processing of new claims. They will be further scrutinizing your ERC claims that they already have received and not processed yet. Then they're also going to offer taxpayers an opportunity to withdraw claims that have not been paid out and that the taxpayer feels they may have done erroneously. So they're offering that to taxpayers. There have been about 600,000 new claims that the IRS has received, and are awaiting processing. That 600,000, those folks, they're going to have the opportunity to withdraw their claims if they feel that they have put them in erroneously. But for those folks who have actually willfully filed fraudulent claims or if they conspired to file a fraudulent claim, withdrawing your claim is not going to exempt you from potential criminal investigation and prosecution. But the IRS has actually finalizing details on this withdrawal option. We don't have all the details yet, but there will be this option, it's just the IRS needs to finalize the fine print. Then they're also going to offer taxpayers a settlement process to come forward for claims that have already been processed, but may have been erroneous, but the taxpayer has received the funds. Again, IRS is working out some details and they're going to come out with that program soon as well. Walker: I think they said later in the fall, so we'll be monitoring that obviously. The opportunity to withdraw should come out soon, very soon. They will provide the details there. I will share that as well as the settlement process. You might have the question that I had when I saw this and was thinking about this — "Okay. I know I just helped my client file a claim for ERC. It's probably within that 600,000. How do I know if the claim has been processed or not?" Probably as they have been slowing down, they've been saying that for the last couple of months that they've been slowing down processes. But our best advice is if you're in that gray area where maybe it's been processed, maybe it hasn't, the best advice we have is to call the IRS and ask [them the status] as you're walking through it with your clients on what your next steps are. Alright Kris, what information did they provide about the timing? We’ve talked about how they're going to be slower, but what did they provided about when you can expect those claims to be processed, those 600,000? Esposito: They did say the 600,000 that were recently received, they're going to be reviewed more intensely. They're going to be put under the microscope. They [IRS] target 90 days [to process ] new claims. I know they don't hit that target all the time. But they're now targeting 180 days. Because they're thinking that [most of] the 600,000 don't qualify for the credit. They are really going to be looking at them, very closely and taking a longer time to do that. They may even ask taxpayers for more information so it's going to be a different ballgame now. Walker: But that's good from a communication standpoint to your clients, if they are a part of that group that has filed a claim. In this announcement, did the IRS say anything about how many claims are in the process of audit or anything around that topic? Esposito: Yeah, they have been auditing ERC and keep ramping up the audits of ERC because of the fraud. They did say they have thousands of claims in the audit process. They also have hundreds of criminal cases going on. They are definitely auditing the ERC and if a lot of these 600,000 are not withdrawn, a lot of them are going to go through audit as well. Walker: As our listeners are trying to absorb this notice and thinking about [it] with their clients, about this announcement, let's talk through a few good talking points for them. Esposito: You've wanted to throughout this process, have been in contact with your clients about the ERC. Whether it's because they qualified for the credit or they've been contacted by a third party provider, trying to influence them to apply for the credit. As you're hearing about this announcement, you want to remind your clients of your past discussions and assure them that you're available for them, you can assist them. Whether that assistance is with support during an audit of an already processed claim, or help with the decision to withdraw their claim or to participate in a settlement agreement once those details emerge. If they have claims that were filed erroneously, and if they filed an ERC claim that hasn't been paid out and they believe it's legitimate, you just want to let them know that, "Hey, you're processing times could be a lot slower and it may take even more time for them to get the money." Walker: Just definitely another good opportunity to remind them that you're here to help advise them every step of the way. You are here and available. Were there any other resources that the IRS provided along with this announcement? Esposito: Yeah. They sent out a decision tree, which gives businesses a very broad overview of when a business qualifies. Then they also have red flags associated with third party providers. If you want to go through this decision tree to figure out, "Do I really qualify or not?" —that's what that resource is there for. Walker: I just wanted to highlight, we've talked about these on some other episodes, and we talked about them on Town Hall. We've talked about our resources the AICPA have been putting together throughout these years of ERC. We've actually opened up…it's called employee retention credit fact or fiction, which is another good companion piece to the IRS [resource]. I don't know if they call it a decision tree, but it is like a decision tree, where it's walking through the checklist of how you qualify. But I think the [ERC] fact or fiction is another nice resource that you can help a client go, "Oh, wait a minute. This is what they told me about how I qualify and there's this resource that tells me that I need to think again." We will definitely put links to those resources in the show notes. We have other podcasts on this topic and we'll put those in there. Take a look if that's something you're trying to find more about. We wanted to have a quick episode today, but I'd love for you if you wanted to share anything that's on your mind, Kris, as we wrap up episode. Esposito: Well, for years the AICPA has been warning CPAs and taxpayers, as well as the IRS and Treasury of these dishonest [ERC] credit mills, attempting to take advantage of the ERC and businesses. Because we wanted to put a stop to this or put a pause on this. We appreciate that the IRS is sending this strong message with this announcement, to these unethical credit promoters. The announcement by the IRS today, it's made clear that meaningful relief is also going to be made available to small businesses that have been acting in good faith. I think those are important messages from the IRS. I think they did a good job with their latest announcements. Walker: Thank you so much, Kris, for popping on here with me to record for this breaking news episode. We appreciate your expertise. This is definitely not the last you will hear of us on this issue. As we know more, we will definitely share more. Thank you for listening. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed specially for CPA tax practitioners like you in mind. This is a podcast from AICPA & CIMA, together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcast, and we encourage you to follow us, so you don't miss an episode. You can also find us at the aicpa-cima.com/tax and check out our other Odyssey episodes and get access to all the resources mentioned, during this episode. Thank you for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode, Rudy Rudolph, Executive AICPA Risk Advisor — AON, and April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, discuss how data breaches can cause acute and lasting issues to victims. Small businesses are often easy targets for cyber criminals because they typically have less security in place than larger companies. A customized cybersecurity insurance policy can help mitigate risks and provide coverage in an evolving market to protect your organization. What you’ll learn in this episode Questions companies need to ask about cyber security insurance (0:59) The most common types of cyber attacks (3:56) Usual misconceptions about cybersecurity (6:14) Types of costs that cyber insurance covers (8:37)  Items not generally covered by cybersecurity insurance (11:12) Insurance consequences of not following your own cybersecurity policies (13:27) Rudy’s final thoughts (15:35) A page from Rudy’s travel journal (17:23) AICPA resources Best practices for data security and cybersecurity incident mitigation — Learn about general, preventative and reactive data security tips to implement to keep data protected from identity theft. Cyber insurance solutions | AON — AON’s brokerage team understands the risks and how to arrange coverage in an evolving market. It’s not one-size-fits-all, so AON teams with you to create a custom cyber insurance policy fit for your organization.   Cybersecurity Lab — Building a nimble cybersecurity response plan | Tax Section Odyssey — In this podcast, Ashley Grover, Cybersecurity Threat Intelligence Analyst — Sylint, discusses how the cyber threat landscape continues to change rapidly. Keeping up with the latest cybersecurity trends is vital to not fall victim to attacks and data theft. Gramm-Leach-Bliley Act (GLBA) Written Information Security Plan Template — The GLBA Act requires financial institutions to have a written information security plan. Use this template to document your firm’s policies. Identity Theft Checklist | Tax Identity Theft Toolkit — Provide this checklist to clients to help them appropriately and efficiently address identity theft issues and access additional resources. Transcript April Walker: On today's podcast, listen to hear more about cybersecurity insurance for CPA firms. Hi everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all the things tax facing the profession. I am April Walker, a lead manager from the Tax Section and I'm here today with Rudy Rudolph. Rudy is an executive risk adviser with AON and his role is helping to educate CPA firms on insurance coverage available through AON's AICPA program. Since that's his role, that's what we're going to do today. Specifically, we're going to delve into cyber insurance. What you need to know if you or your firm don't have this type of coverage or if you have it and you really want to understand what kind of coverage you have or know what questions to ask to be able to get more information about that. Rudy, let's start off with a company or a CPA firm that doesn't have this type of insurance. What questions will they have to answer during the application process for cyber insurance? Rudy Rudolph: One of the things I've learned is one of the great parts of the cyber application process is as much as it's filling out an application, it's also almost like a little checklist of helping the firm think of things that they want to implement or should be implementing or even just to have in mind just in general with how they deal with their own internal networks and systems. That's a great thing to look at the cyber application as is. It's also a guide to help you consider what should be in place, almost like a little checklist. But a lot of the things that they can expect to be answering is mostly encryption and how things are protected within their network and system. I think most people sometimes tend to overthink the encryption word and think it’s some sort of involved process when really it's just, can someone off the street walking into your office and access information without providing any type of login credentials and password, especially with thumb drives and emails and even external hard drives. But having those protected with passwords and encryptions, and it's easy to do, that they can expect to see on a cyber application a lot of things making sure that there's backups done weekly or however many and then also if they're retaining any type of payment card information or PCI or personally identifiable information, or PII, as well as the types of transactions, estimate number of transactions in any given year are some of the big things to consider, have in mind, and that they'll see and/or be answering on those applications. April Walker: I like the way you say it's a checklist of things that you should already be thinking about. You have probably heard me talk on this podcast before and we'll probably talk about it again about security plans and what are the requirements are for CPA firms, and it would seem like that those would go hand in hand. There are requirements to have a written information security plan. Hopefully you know that, if you don't, that's a takeaway from listing today. But as you're going through that plan, I would think that would be important information you're going to have as you're going through that application. This is just more of a curiosity question, but I know that until you're hurt, you think it can't happen to you. But then what you do, it's a very traumatic event. Can you talk to us a little bit about what type of cyber attacks are the most common, specifically for CPA firms as that's our topic for today. Rudy Rudolph: Absolutely. Especially since the COVID pandemic, it seemed like computer or cyber criminals who had nothing better to do, but to sit around and think of different ways to get easy money or an access. The biggest thing since the pandemic that's been on the rise has been ransomware attacks, which are in part more broadly categorized and they fall under the malware umbrella, I guess if you would, for cyber attacks. Basically, just hacking into or getting into accounting firms, networks and data and basically holding that information ransom until they pay a specified amount. When I think a lot of accounting firms that are under the mindset that they're too small to be attacked or come under a cyber attack when really cybercriminals target smaller firms because they believe that they're under that mindset that [they] are too small to and maybe don't have the resources and the security measures in place to keep them out. It's actually reported that it's 30% of all cyber attacks are focused on attacking small businesses because of that lack of cybersecurity measures. Malware and more specifically ransomware have been the number one cyberattacks especially since the COVID pandemic. April Walker: I feel like I've heard some horror stories of those happening to firms and it always seems to happen March the 3rd or something like that, sometime that’s not very convenient for when they're very busy. It's definitely something to be concerned about. Let's talk about misconceptions. What do you hear that people do not have right about cybersecurity, either people who have coverage or people who don't think they need coverage? Rudy Rudolph: The two biggest things I always hear when talking to firms is either one, are not big enough, I'm just a smaller shop that wouldn't have to worry about this now and come after me. That's one of the biggest misconceptions and really they're probably one of the bigger targets, actually, because of the potential lower security measures they have in place. They have so much data and records or their clients that they're preparing tax returns for and someone could get that information and that's easy identity theft, right there. You can get X amount of people, however many clients you have, you can get all of their names, date of birth, social security numbers, addresses. Right then and there, that's a huge risk and misconception that some of the smallest firms have. The second is a lot of firms always come to me, we don't have anything, we don't house any data or have any storage software on-premises. Everything is done third-party by Cloud. They handle that, so I don't really need to worry about it, which is not the case. They may be hosting your information and everything, but if that company gets hacked, now what do you do? If you can't get into anything and they're down and running, what happens then? Even if you are having a third party post your information, you should always have some sort of business continuity and disaster recovery plan in place for that type of scenario. Keep coming back to COVID. No one saw that coming. Now, we have the hindsight of, if something like this were to happen, now what do we do? I think of it like that, having a plan in place if the unthinkable were to happen, what are you going to do? You can't just sit there like a sitting duck and wait for something. You should have or at least I think you would want to have some sort of plan in place for contingency. April Walker: Makes a lot of sense. To find out a little bit more about cyber insurance and how it works, I know there's no way to describe every policy. Every policy is different as you're working with a firm, but let's talk generally about what types of costs that cyber insurance does cover and then almost more importantly, I think for people to hear is what costs are not covered. Rudy Rudolph: The first and foremost, what the cyber policies and cyber insurance covers is identifying any potentially affected individuals that may be affected or impacted by the breach of your network or system, and also the notification to those affected and credit monitoring for them for the next year. Those are all required by every state. Each state has different regulations, but those are required by all states. If you don't have an insurance policy in place, you're going to have to pay those costs out-of-pocket regardless because it's a state mandate and requirement to provide for it in the event of a breach. I think that's the biggest thing that the policies cover for most firms. The second biggest is the forensic analysis and identifying that breach, how it occurred and identifying that and making sure that that doesn't happen again. It also provides coverage for data restoration, getting your network backup and running to the condition it was in prior to any type of breach or a hack. Then depending on the policy, you can opt in for this, sometimes it's generally in a policy right off the bat, but business income or business interruption, so loss of revenue. I think about 200-300 days on average to identify and contain a cyber breach. Hopefully, they don't get there, but in that time period without your network, you're not really able to operate as you normally would, as if you were able to access all those files, your internet, your emails, getting stuff out to clients and everything like that. That's costing you. The policies tend to cover the cost of that. I think most of them have some calculation to determine that number until you're back up and running. April Walker: Got you. Then can you think of anything that is specifically not covered that you can think of? Rudy Rudolph: The biggest thing that we've actually been dealing with for the past few years has been social engineering. More importantly, when someone, we always refer to them as bad actors, using email address that is made to look like either a bank or one of the accounting firms email, but it's really not. The easiest way to do this is sometimes they'll use an uppercase I to replace an L just as an example in an email address. Then if they're posing as a bank, they'll email the firm. If they're posing as the firm, they'll email client saying, “Hey, you didn't send this amount of money or payment for the services”, whatever it may be, and asks you to send payment to a specified account. A lot of the times these aren't covered by cyber policies unless you have the specific endorsement coverage that covers four types of social engineering, it not being a breach, there's no breach that took place and the bad actor was using a legitimate email address. Now, while it wasn't the firm's, it was still a legitimate email address because they changed a letter or something in there to look like the firm or the bank's email address. There was again, no breach, no wrongdoing, so some cyber policies may not be able to provide coverage in that type of scenario. One of the big things that has come out of this is specific endorsements to provide coverage for social engineering or having firms also consider looking into separate crime coverage policies to cover any of those gray areas where cyber policy may or may not provide coverage for. April Walker: What about this scenario? I'm a firm, I have a security policy, I mostly abide by it, but I don't follow it to the letter. Is that a scenario where you might have trouble having your insurance claim paid? Rudy Rudolph: It's definitely possible. I highly recommend when you're going through either the renewal process or if you're getting a policy, a quote for a policy for the first time, definitely talking with your agent, your underwriter carrier, whoever you're dealing with, and making sure that you understand the policy requirements in terms of what are some of the standard requirements that you require your insureds to have in place. Usually they have either guides or expected basic security measures that they can send over that they expect their firms they have in place and implement it to ensure that they can provide coverage. Sometimes if you don't meet or don't have any of those standards in place, they could potentially deny coverage saying, hey, we sent you these standards so that you needed to have in place to be insured by us, because of this, you don't have these in place. This claim can't be covered because there was a certain level of expectation where we insured you that you would have in place and by not abiding by that, you're essentially voiding the coverage. Again, it depends. Each coverage or each policy is different. I would definitely recommend talking that through with your agent, your carrier, your underwriter to make sure that you're one, aware of any type of certain standards that you're required to have in place or should have in place, and making sure that you're meeting those requirements on a regular basis and reviewing that with them to make sure you're in compliance. April Walker: Perfect. Rudy, can you think of anything we haven't covered that you would like to make sure our listeners are aware of as they are considering and evaluating cyber insurance? Rudy Rudolph: This day and age, again, I feel like I'm being a dead horse and they keep coming back to the post-COVID reference, but everything has gone remote. Everyone's being able to work remote now, businesses that we didn't think would be be able to operate remotely were forced to change the way the entire world views working and how we operate nowadays and everything to an extent is relying on computers technology, being able to access information through a computer. I think you'd be naive to, one, not consider having this coverage in places of business, and two, not going forward and having at least some cyber coverage in place. The amount of cyber attacks have gone up exponentially since the pandemic, because everything has been forced to move to some hybrid or a digital format. I think this is one of those policies that is almost standard requirement for businesses moving forward these days, and it's definitely one thing to keep in the back of your mind is everything is still continuing to transition more and more to the cyber world as we operate, communicate everything like that. I think it's naive to think that this coverage is unnecessary. April Walker: Those are great thoughts and great closing. But as we close on this podcasts, I like to think about us taking a journey together towards a better profession. As we're learning more, we can do better. But in doing that, I like to get a glimpse of my guest other journeys outside of the tax world. Really I'd love for you to share a page from your travel journal, maybe a bucket lists, trip, you have, what you got for me? Rudy Rudolph: I'm a big golf fan and every year with the Masters Tournament and the Open Championship, there's always a ticket lottery that you can enter to potentially get an opportunity to get tickets to one of them. They don't just sell them like a normal sporting event, they're so exclusive. Actually just got an email the other day that I won the ticket lotteries for the Open Championship in Scotland next July. April Walker: Wow, that's cool. Rudy Rudolph: Pretty excited, just to finalize the ticket purchase. So I'll be headed now to Scotland next year for the Open Championship, and it's to be about there. April Walker: I love it. The US Open has been here or near here, North Carolina. It's been in Pinehurst a couple of times and I was able to get tickets somehow, not through the lottery, but Scotland sounds like an amazing place to watch golf and just to visit. I'm looking forward to hearing more about that. Thank you so much Rudy for giving people some food for thought on this really important topic. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA, together as the Association of International Certified Professional Accountants. You can find this wherever you happen to listen to your podcasts and we encourage you to follow us so you don't miss an episode. If you already follow us, thank you so much and feel free to share with a like-minded friends. You can also find us at aicpa-cima.com/tax, and find our other episodes and also get access to the resources mentioned during the episode. Thank you so much for listening. This content is designed to provide institute of information, this respect to the subject matter covered and does not represent an official opinion or position of the AICPA, the Association or CIMA. It is provided with the understanding that they are not engaged in offering legal accounting or other professional services. If such advice or expert assistance is required, the services of a competent professional person should be sought. The AICPA, the Association and CIMA make no representations, warranties, or guarantees as to and assume no responsibility for the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of reference to or reliance on such material. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.  

In this episode, Mike Whitmore, CPA, Shareholder — HMA CPA, a member of the AICPA Tax Practice Management Committee, chats with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, about a checklist of items to consider when in the market for acquiring a CPA firm. He highlights red flags to look out for and green lights that signal a firm is a “go” for acquisition, and what due diligence is needed to ensure the perfect fit. What you’ll learn in this episode The most crucial due diligence aspect when shopping for a CPA firm (2:08) Ideal time commitment you should dedicate to the due diligence stage (7:52) Red flags to watch out for (9:43) Green lights to follow (13:00) Lessons learned and a real-life example (16:07) A page from Mike’s travel journal (18:54) AICPA resources Practice Management & Professional Standards — The AICPA Tax Section provides the guidance and tools you need to manage a successful tax practice and maintain the highest level of ethical standards in tax. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode two members of the AICPA Virtual Currency and Digital Assets Tax Task Force (VCDATTF), Nik Fahrer, CPA, Senior Manager, National Tax Professional Standards Group — FORVIS, and Robert Tobey, CPA, Partner — REID CPAs, LLP, share their expertise with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, on how to vet potential clients with digital asset activities, including questions to ask, as well as how to gain more expertise in this evolving field. What you’ll learn in this episode Expertise tax practitioners need to be proficient in the digital asset field (0:55) Best places and ways to gain digital asset tax expertise (3:00) Examples of processes and procedures to set in place before accepting a client with digital asset activities (5:59) Record keeping responsibilities (14:05) Red flags (15:04) Highlights from Rev. Rul. 2023-14 (16:41) Current projects of the VCDATTF (18:36) Final thoughts (20:48) Related resources Frequently asked questions on virtual currency transactions — IRS webpage explaining virtual currency questions and answers. AICPA resources Digital assets and virtual currency tax guidance and resources — Sharpen your tax knowledge on digital assets and understand the tax complexities and strategies involved with virtual currency and cryptocurrency. This hub is your go-to library for AICPA guidance and resources as well as current legislative and IRS initiatives and projects the VCDATTF is monitoring. Crypto Loss Tax Reporting: Fact or Fiction — With the prevalence of recent virtual currency exchange bankruptcies and digital asset volatility, taxpayers may have misconceptions on reporting tax losses. Rev. Rul. 2023-14 — The ruling provides that cash-method taxpayers who stake cryptocurrency native to a proof-of-stake blockchain and receive additional units of cryptocurrency when validation occurs (i.e., validation rewards) must include the fair market value (FMV) of proof-of-stake validation rewards in their gross income for the tax year in which they gain dominion and control over the validation rewards. AICPA Comments on the IRS Draft 2023 Forms 1040, 1065, 1120, and 1120-S Digital Asset Question — The AICPA submitted comments on the digital asset question that is first appearing on the draft 2023 Forms 1065, U.S. Return of Partnership Income (version dated June 23, 2023); 1120, U.S. Corporation Income Tax Return (version dated June 2, 2023); and 1120-S, U.S. Income Tax Return for an S Corporation (version dated June 22, 2023). The AICPA also commented on the draft 2023 Form 1040, U.S. Individual Income Tax Return (version dated June 22, 2023), digital asset question. AICPA Comments on Non-Fungible Tokens – Notice 2023-27 — The AICPA submitted comments on Notice 2023-27 on the treatment of certain non-fungible tokens (NFTs) as collectibles. The AICPA is requesting that Treasury and the IRS provide further guidance on the issues suggested in our comments. Transcript April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager from the Tax Section, and I'm here today with Robert Tobey and Nik Fahrer to delve into how to interact with clients and potential clients that may have digital asset activity. Nik and Robert are on the AICPA's Virtual Currency and Digital Assets Tax Taskforce so I thought they would be perfect to share some thoughts with us today. Digital assets, virtual currency, there's so many different terms of art here. Cryptocurrency. It is such a unique and fast-moving field. Kick us off with what kind of expertise is needed to be able to be proficient in this area. Proficient is maybe a hard word, but at least to be able to practice in this area. Robert Tobey: First of all, you have to have a general understanding of the different types of digital assets that are out there. Right now, in particular, practitioners are probably dealing mostly with cryptocurrency, miners, traders, stakers, and non-fungible tokens which indicate a specific ownership interest (it's like a derivative of some type of underlying asset). You need to have an understanding of what each type of these assets are. Since the tax code treats them as property from each one of these activities. If you are a miner, that's generally self-employment income. If you're an investor, that is just buying and selling, that's long or short-term capital gains. If it's NFTs, that's treated generally as a collectible and that's taxed at 28% if it has a gain. That is ordinary income also, but the timing of recognizing that is still up for debate. Really unless you have an understanding, my feeling is if a client comes to you or if you have these types of assets, you should seek out council, an accountant, a lawyer that understands these types of assets. If you're a practitioner and a client comes to you and you're unsure, you should seek out help from the digital asset task force where we can answer some of your questions. But this is one of those areas because the rules are so different and the different types of assets have different attributes to them. If you're unsure, don't practice in this area unless you really know what you're doing. Walker: We're going to talk a little bit more about some of those questions a little bit later, but I like to think about it. It's a whole new vocabulary. It's a whole new vocabulary for understanding — what even is staking? You have to understand that stuff so that's a great way to kick us off. Nik, as you're trying to think about learning this, where have you found to be the best place to gain expertise in this area? Nik Fahrer: First of all, thank you April for having me on here today. Walker: Yes. Thank you for joining me. Fahrer: The first piece of advice that I would recommend is just dabble in this on your own. Find some insignificant amount of money, and just go out there and play around with it. I think the best way that you can learn something and the mechanics of how these things actually work is to sign up for an account on a centralized exchange, just to name a few in the US would be Coinbase, Kraken or Gemini. Put an insignificant amount of money in there. Buy, sell, but then take it even further. Don't just buy and sell on a decentralized exchange, send it to a non-custodial wallet and connect it to a decentralized application, like a decentralized exchange and play around with it on there. Stake some of your crypto to see how that works and just generally figure out the mechanics. I think that's generally the best way to understand what some of these words mean. It really feels like there's a entirely new vocabulary when you get into the space. When a client comes to you and they're like, “Hey, I just staked some Ethereum and earned X amount of dollars through staking.” You're probably wondering what the heck is staking? Doing it on your own with an insignificant amount of money is a really easy way to learn how this stuff works. But taking it a step further, if you want to learn how these applications within this new technology actually apply within the Internal Revenue Code, the AICPA has a really good webpage. IRS has an FAQ webpage. They also have a web page dedicated specifically to digital assets where you can go out and see all of their guidance that they've previously issued, both binding and unbinding guidance that they've issued out there. That's a really good resource as well. I would start there with those two things and then just be a critical thinker. Try to understand as you're working with your clients in this space, where are the risks and then also, what's the cost versus benefit analysis? If a client comes to you and says, “Hey, I did all these hundreds of thousands of transactions in crypto,” and they tried to turn over an Excel document to you to go through and calculate all of their basis and proceeds. That's going to be a huge time suck. Is that really worth the cost versus what may actually be captured on the client's tax return could end up being an overall net $1,000 gain? Use some common sense as well and just try to understand what are the risks, but also what's the cost versus benefit analysis here? Walker: I like that and thank you for bringing up the AICPA's page. We'll put a link to that in our show notes and as well as the IRS page. Robert, you are a partner at Reed Accountants and Advisers. Talk to us a little bit about is there any specific processes or procedures in place that you guys have before you either accept a client that has digital asset activities or how you're dealing with a client that might start dabbling in it? Also while you're at it, just talk to us a about advice you might have for those with smaller practices. Tobey: It's interesting if someone comes to us and is just a trader. Like they have a Merrill Lynch account for cryptocurrency. There's not a lot of risk in that type of account and it's easier for us to accept and understand because they're trading — it's like they’re trading stock. If they hold it, they can be a trader in the securities which allows them to deduct their expenses differently then if they're an investor. If they are an investor, they may be holding it for long-term gains, [but the trader is] going to have short-term capital gains and losses. That's easier to understand. If somebody comes to me and says, I'm a miner, and I'm working with a client right now, that's a miner. I go fine. What do you mean by you are a miner? What do you do? Where do you do it? What currencies are you working with? Where is your mining rig located? Because that has some state income tax implications with respect to it. This guy lives in Connecticut and his mining rig is in a facility that hosts it in Texas. When you mine, it's like you're self-employed and you're earning income. What do you do with that income once you earn it? You recognize it as ordinary income, you deduct your Sec. 162 ordinary necessary business expenses against this. But now you have cryptocurrency, that once you hold it in your hands, it is an investing type of asset. What do you do with it once you have it? Are you staking with it? Are you trading it? Are you holding it for investment? Because of the complexities of the subject matter, I go through a lot of questions. I have a checklist of questions I go through to ask people who were more than merely investors (like they hold stocks) in cryptocurrency before we choose to accept them. You [have] to make sure that there's not any risk with respect to this. Are they doing things offshore? Are they doing them in a manner where there's some subterfuge about what they're owning because they want to potentially hide their assets offshore? There's also firm risk that we have to take into consideration. Then once I talk to them, I determined what a fee might be because this is generally complicated stuff [more than for a] regular tax return. Our firm is really trying to get away from just doing standalone 1040, so we're talking to a lot of businesses. I'm talking to a cryptocurrency venture fund to figure out what they're doing and how I might be able to help them. That brings another level of complexity. I lived in Charlottesville, Virginia for 25 years and there are a lot of small practitioners down there that serve the community. They're more likely to see someone who's a trader. They really need to go to either the AICPA website or the IRS's website and become familiar with the rules regarding cryptocurrency of recognizing gains and losses and what types of gains and losses are there. Also they need to understand the fact that sometimes regular security rules don't come into play here because investing in cryptocurrency is not subject to the wash sale [rules]. There are some unique aspects to it that they really need to understand. Again if I'll go back and say what I said before. If you're unsure of it, don't put your toe in the water. If you're going to work in this area, at least get up to your knee, so you understand what's going on and you have some technical background with respect to it. Walker: I think that's great advice. Also, it's more than just asking the very simple question that you have to ask to be able to check the box on the 1040. I like that. You need to think about and ask what those different levels of deeper engagement questions are. Nik, what about you? You're at FORVIS, so a bigger firm. [Do you have] additional steps, or additional recommendations you have about when you're dealing with clients with digital asset activities? Fahrer: Absolutely. I can speak to that. The best piece of advice that I would say is, let's start with the basics first. Let's not complicate things before we get too far down the road, but let's first ask those basic questions of, one, do you have the competency to serve this client, or does someone in your firm have the competency to serve this client? Two, what is the reputation of the client and is this a client that you want to be connected with and work with? Maybe one that is not so obvious is can they pay your bill? Robert alluded to this a little bit earlier, but these are complex issues. Maybe the fees are a little bit higher than normal. Is this something where you need to be concerned about the volatility in the market and the client may be underwater in their investments and not as liquid in their cash position. Let's ask those basic questions first and then we can start to move into the more digital asset specific questions that need to be asked in that client acceptance. This isn't fully inclusive, but some of those could be how clean are their records? That's probably the biggest one that you want to ask is where are you keeping track of all your records, especially if the client gets off of a centralized exchange. I alluded to this earlier whenever I was talking about how to get expertise, or some experience and doing it on your own. Don't just stick to a centralized exchange. Send your crypto to a non-custodial wallet, play around with on-chain transactions, because more than likely that's what your clients are going to be doing that need your help. Then now that you have this experience on your own, you can relate to them and know what to look for when they come to you, and know what to expect in the recordkeeping as well. [For] on-chain transactions, there's a record of all of them on the blockchain, but there's no standard 1099 reporting, at least as of yet. We're waiting for some more guidance from the IRS here, or Treasury, one of the two, to understand what the standardized reporting is going to look like in the future. Because of that, there are software companies out there and I'll just name a few that can help automate the on-chain transaction reporting. [For example] CoinTracker, or Ledgible, or Cryptio, or a Bitwave are several of them out there. That's not all inclusive. There is more than just those. But they can basically connect their software to the clients wallets and exchanges and it will automate a vast majority of the transactions, and a lot of them will even raise red flags if they are unable to match cost basis, based on all of the wallets and exchanges that they've connected into that software. That's another thing that helps you as a practitioner know, hey, the client hasn't given me all their information. They say they've connected to all of their wallets, they say they connected all of their exchanges, but we're missing information for a lot of the cost basis of these transactions. It's a tool that you can have in your tool belt that'll really help you take this to the next level. Walker: I'm glad you brought up recordkeeping. That was actually one of my questions, but that's great. Thank you for the recommendations. I'll ask Robert if he has any also, because I feel like this could become a fire drill situation. When you got somebody coming in and they have all these crypto transactions, and then you have to go back and try to figure it out. Hopefully this is a proactive conversation. What do you recommend to your clients to help with recordkeeping, Robert? Tobey: I'm not recordkeeping for [them]. Walker: Absolutely. Tobey: Here's the deal. This isn't looking at a [Form] 1099-B where the column 15 [has all the information]. Most of the people that I deal with that are investing in, or dealing with crypto, have thousands of transactions. Unless they use Coinbase or some other [tracking software]. Fahrer: [Some options are] Ledgible, CoinTracker, Cryptio, Bitwave. Those are all just a few, just to name some. Tobey: Unless they use those and they bring us the records and we can tie them out, or they have a spreadsheet that they've done themselves. Our firm will not do that. We're running out of people just to do regular work and to sit there and to try to keep track of somebody's 10,000 crypto transactions in any one year that are not large dollar amounts in and of themselves. We just can't do that. It's a client responsibility and they wouldn't want to pay me to do it frankly. Walker: Absolutely. That's a red flag if you've got somebody coming in and they are just like, I got crypto transactions and I haven't done [anything with] it. That's a red flag. What are some other red flags that should send a signal up that this is may be not the best client for you? Fahrer: One question that we generally like to ask is, how did you acquire your digital assets? If they don't have a good answer to that question, that's generally a red flag. Tobey: And where are you holding it? Are you holding it in the U.S., outside of the U.S.? I'm really interested in the risk I'm going to have with somebody that's dealing with exchanges that are not U.S. exchanges and they should be reporting it, but they shouldn't necessarily be transacting on the exchange. I agree that if they can explain where they got it, if they can explain ins and outs of the transactions and they tell me that they're doing stuff offshore. The offshore ones have stopped me dead in the water. Fahrer: I think one thing that you can do as a practitioner to protect yourself and your firm is to get some sort of representation from your client that says, hey, I've provided you with all of my wallets, exchanges and transactions, and that there are no other ones out there that I haven't already provided to you. That protects you that the client is saying that they've given you everything. Tobey: We have that in general in our engagement letters. That we've told you everything, we've provided you everything you needed to prepare our tax return. Now that you say that, I actually might put an extra sentence in there about cryptocurrencies. Walker: We're all learning. We're going switch gears just a little bit and I want to talk about guidance the IRS recently released. Revenue Ruling 2023-14, talking about cryptocurrency, staking, and rewards. Robert, you want to give us a very high-level overview of that. I know that it can get really complicated, really fast. Just tell us what we need to know about that guidance. Tobey: This is a timing is everything revenue ruling. It was issued while a couple named the Jarretts are in the Sixth Circuit Court of Appeals, having their case heard with respect to a refund and that the IRS gave them with respect to how they reported their staking activities. The long and the short of it is the Jarretts take the position that staking activity is nothing more than a baker putting ingredients together, baking a cake and doesn't recognize the income from baking the cake until he sells the cake. That's the simple discussion of it. The IRS says okay if you stake, once you earn the income or have dominion and control over the rewards from staking, you need to recognize it as income. It's a very big deal. The IRS came out with this to put the stake in the sand with their position regarding the Jarretts. You got to follow it because it's a revenue ruling. If people have a feeling that they want to take the position that the Jarretts do, you're going to have to file a disclosure form with the IRS stating that you've taken a position contrary to the law. You can do that, but it'll give you the free pass to the IRS audit auditors. Walker: Yes, it will, okay, that's great. We'll link that in there so you can read it, and learn more and make sure that you're following that guidance. I mentioned that both of you were on the Virtual Currency Digital Asset Task Force. I want to say thank you for that. Thank you for your volunteer service. Nik, could you give us a quick rundown on just a few of your top priorities for the group or that the group is working on? Fahrer: Yeah, absolutely. Maybe I'll touch on a few that we just completed too. We actually just released a resource that is basically questions to ask your clients if they invest in crypto. We also recently released an FAQ on taxpayers taking losses. Specifically, taxpayers that may have had crypto tied up in a centralized exchange like FTX. Can they capture those losses in 2022 tax year? If not, how did they capture those in the future? We also, recently sent a letter on the new virtual currency question that's being added to our 1120-S, 1120-C corp, and then also, 1065 partnership returns. It's very similar to the 1040 question. We sent a letter to the IRS about that. Also sent a recent letter to the IRS about Notice 2023-27, which is guidance on NFTs as collectibles. As you can tell, we've been really busy, this year sending a lot of letters and working a lot of resources for you all. Upcoming, we're looking at responding to the Senate Finance Committee letter, that asks basically nine or ten different questions of, how does the ambiguity in the tax law apply to digital assets? Senators Lummis and Gillibrand also recently proposed a bill in the Senate [Lummis-Gillibrand Responsible Financial Innovation Act to create a comprehensive regulatory framework for crypto assets], and we're going to respond to that as well. Then this [ruling], 2023-[14], which talks about the timing of when to pick up staking income in gross income. Walker: Perfect. Yes, as you said, you've been very busy, and I'm sure will continue to be as there's seems like to me, as we learn more about virtual currency and digital assets, there's more to learn, is the way I feel about it. Thanks for helping get that guidance out there. Robert, as we're wrapping up just any final thoughts you want to share on this topic, or with our listeners about digital assets? Tobey: The loss issue with respect to FTX and some of the other digital exchanges is really problematic. It's a timing issue. A lot of times losses can only be taken as miscellaneous itemized deductions which are no longer allowed after the Tax Cuts and Jobs Act. It could be interesting to see what the IRS comes out or whether they come out with guidance that will allow some of these losses. There's a vibrant market today in the bankruptcy claims from FTX. How were those treated for tax purposes? Are there two different property rights there? Is there a bankruptcy claim property and there's a claim, but the underlying cryptocurrency? Even though you sell your bankruptcy claim, do you still own the underlying right to the cryptocurrency? I don't know. Neither does the IRS. We've asked for guidance from the IRS on this. Can you take a bad debt deduction with respect to cryptocurrency and I don't believe that's allowed because bad debts are only allowed with respect to cash. That's another area that we need some guidance from. When it [comes] from bankrupt exchanges and other things, it's unclear of when you can and whether you can claim any loss at all. The IRS is going to have to deal with this because, I read that there was another exchange that was near bankruptcy this week. This isn't going away. I will tell any practitioner that's listening to this. If you have someone who comes to you and says, here's the facts and circumstances of my losses with things. You need to stop and really look at several things. What was the underlying investment? What was the underlying cryptocurrency? When did the event occur? Claiming it currently in 2022, I think in a lot of cases would be problematic. Walker: That's super helpful. Thanks for bringing that really important topic. What about you, Nik, what [are] some final thoughts you have as we're wrapping up. Fahrer: One thing that I'll say is that I think this technology is really polarizing. We seem to have people on both sides of the aisle. We have people that just really love this new technology. We have people that, just haven't really bought into it and they don't see the benefit to it. The question I would pose though is, given the IRS is issuing a lot of new guidance on this new technology, given that it is a hot topic in DC, why would they regulate it if it's something that's going to go away? My personal opinion is, they probably wouldn't. I think it's going to be here to stay. It's probably going to be around for awhile and to just completely brush it off and ignore it completely is maybe a mistake as this continues to grow in adoption. Tobey: I'll tell you that they'll be some upheaval in it this year. The recent administrative law judgement decision that cryptocurrency that was bought by individuals on an exchange, is not a security where crypto assets bought by institutional investors are securities. That it'll be interesting and that's going to go, if it was by administrative law judge, I can see that going to the regular court system now because, I don't see how you can say it's a security for one type of investor and not for another. There's another court case, that the Supreme Court is going to hear next term. Similarly, about rulemaking by the SEC in general, that will have an effect on this. Because one thing, when you're dealing with crypto and dealing with all these other assets — for the IRS, its property. For the SEC, it's a security. For the CFTC, it's a commodity and in some countries, it's a currency. We're dealing with US tax law. We know what property is, but you've got to take into consideration,what it is in other jurisdictions and what it is to other rule-making bodies within the United States. Walker: Thank you so much, Robert and Nik. This is definitely not be the last time we talk on this podcast about virtual currency. But I think this gave our listeners, a lot of good topics to dig into and think about as you're dealing with your clients. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find this wherever you listen to your podcast and please follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with other like-minded friends. You can also find this in aicpa-cima.com/tax to check out our other Odyssey episodes and also to get access to all the resources that were mentioned during this episode. Thank you so much for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. 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In this episode, Tim O'Neill, CPA, Senior Tax Manager — Wipfli LLP, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to discuss the current environment for recruitment and retention of employees in tax and how to build deeper connections with staff to help them feel more invested in their organizations. What you’ll learn in this episode Strategies for employee retention and engagement (1:01) Differences between a “manager” and a “leader” (2:48) What it means to prioritize outcomes vs. outputs (5:04) The notion of no more timesheets (7:20) Final thoughts (8:05) A page from Tim’s travel journal (9:31) Related resources Practice Management & Professional Standards — The AICPA Tax Section provides the guidance and tools you need to manage a successful tax practice and maintain the highest level of ethical standards in tax. Reimagining your tax practice — Tackle today’s top practice management issues with insights and tips from pioneers in the tax community. The Reimagining Your Tax Practice webcast series will tackle these issues and more in a Q&A roundtable series with tax pioneers from the profession. Transcript April Walker: Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, Lead Manager from the Tax Section, and I'm here today with Tim O'Neill. He is a Senior Tax Manager with Wipli in St. Louis. Welcome, Tim. Tim O’Neill: Thank you. Thank you for having me. Walker: Yeah. We're here together today recording at the ENGAGE conference. O’Neill: That's all right live in person. Walker: Yeah and yesterday I attended Tim's session which was titled, “Recruit, Retain, Repeat.” Welcome Tim. I thought we could share some of your insights with our listeners from your session. O’Neill: I'd love to. Walker: I don't think it is a new concept for people listening today that recruitment and retention are a huge problem in tax and accounting profession, that sort of thing. I thought maybe from your perspective, you could share a few strategies that you have found that worked for you for employee retention and engagement. O’Neill: Yeah, absolutely. Like you mentioned, this is the million or $2 million question. Walker: Yeah, for sure. O’Neill: What can we do as leaders to try and increase our retention increase overall employee experience? Really there's no right or wrong answers — it's all very individualized. But what I found through my experience with AICPA committees, my experience within Wipfli, prior firms or organizations that I've worked with is being an effective leader and authentic is the best way to build these deeper connections with staff and employees that really makes them feel invested in the overall organization. I'm trying to think of some of the more important things that we've done, but it's just so individualized. It's difficult to an extent, but if you can get across the idea that we don’t need to put together these formal programs to help retention. It really doesn't come down to that. It's just about being transparent, authentic and empathetic is a big one that we've seen. With sessions here there is a lot of talk about being an empathetic leader. We've had tons of sessions on ideas about what can we do internally and externally to help retain employees. Obviously outside of maybe the psychology of the retention, recruiting and rewarding employees, maybe look at some of the action items, some low-cost solutions, mid cost solutions, high cost solutions, I'm happy to talk more about any of those. Walker: You mentioned some of these characteristics, but one thing you talked about yesterday that really resonated with me was talking about differences between a manager and a leader. I think we can all agree that there is a difference. O’Neill: There is a huge difference. Walker: Maybe talk about some of those differences and for those people who see themselves as a leader — How do they figure out like where they land on that spectrum? O’Neill: Yeah, and it's funny, you said — “some individuals see themselves as a leader” — we like to call those the heroes of their own stories. Is that a great leadership quality? Probably not. They might think that they're fantastic leaders, but they're not necessarily connected on that personal level with a lot of their employees or direct reports. Honestly, to me, the difference between a manager and a leader, it's mainly…we think about a manager is very work centric. They're more about how and when are we going to get the work done? They're very much more process focused than people focused. A leader on the other hand, they're more what and why? What are we doing? What can we do? Why are we doing this? Being transparent and showing the thought process behind all of it, and being able to communicate that to the individuals within their organization. That is, by far the largest difference between the two. As we have been talking about pipeline challenges, the leaders within organizations — and this is not just specific to accounting, but really every industry. We've had to evolve over the last, let's say, three years with COVID and everything that was fallout from that. We've had to evolve and say we need to be much more hands-on and personalized with our approach. Walker: You mentioned this, but I really liked when you talking about prioritizing outcome versus output. As I work with firms and members trying to help them with some of these issues and we've worked with a lot of small firms. You're from a bigger firm, but you may have experience with or some ideas and thinking about how that can work like shifting with limited resources. How or what does it mean? What does it mean to be prioritized outcome versus output? O’Neill: Sure. Even Wipfli, we're a top 20 CPA firm, but we do a very good job of operating as a collaborative group of smaller firms. We're in quite a few markets. But we do a very good job of still having that small firm feeling. The firm that I was with previously, we merged in with Wipfli. We're about 100 person firm in St. Louis. I have a little bit of experience at a, we'll call it a smaller firm and culturally we aligned really well. Both firms are obviously based out of the Midwest and so on a cultural level, we had the same identity. Again, it gets into the hands-on personalized leadership approach, outcome versus output. Billable hours — that's the driving force in public accounting. Let's get our billable hours up because this is where we make our money. But is that really where we make all of our money? Or do we have value in some of these hours that individuals are working? We like to call them impact hours. Is there value in these hours that maybe we can't charge the client for it, but we're definitely [either the staff or the client even to an extent] getting value from it. Think of CPE, performance coaching, mentoring, client relations. Those are all impact hours. What we've tried to do in both of my previous firm and Wipfli is we don't want to emphasize the billable hour as long as we're getting the outcome that we need and we're getting the client is first and foremost, served. At what point are we punishing efficiency? There are a lot of individuals that can get done in 20 hours while somebody else can get done in 40 hours. At what point are we punishing their efficiency and it's defeating to those individuals. Walker: You talked about and it's so true. How they're punished as they get more work, like they can do 20 hours. Thank you so much. Sir may I have some more? O’Neill: There was one brave lady in the audience, but that's exactly what I asked. I said what happens when you're good at your job and it was silent and she said, you get more work. Walker: It's true. Something else you've made me think about, have you gone to any sessions that we've have talked about the no time sheets thing? O’Neill: That's the rumbling. I've got a couple of people ask me, “Have you heard this idea of no more time sheets?” I said I haven't heard this idea. Walker: Yeah, I've known some people that have been able to do it, but it's fascinating. O’Neill: It's funny. We all know people that have been in public accounting and they've left, and I've got close friends that have moved into a new career paths within the CPA realm, but new career paths. I said, What do you enjoy the most? No time sheets. I don't have to keep track of every six minutes of my day. Walker: True, you never know, we're always evolving. O’Neill: Yeah, that's right. Walker: As we're wrapping up, do you have any other thoughts on whether there's a magic bullet to solve this problem? You've actually already answered that question. There's not a magic bullet, but do you have some closing thoughts for us as we're thinking about this important topic about recruiting and retaining good employees. O’Neill: Yeah, there really is no magic bullet. One of the slides that I had in my presentation talked about the employee value proposition. As an organization, we have to be competitive in some of the basic stuff. So think benefits, compensation, some of the well-being programs that we offer and flexibility. But really what it comes down to is there's no one-size-fits-all. There is no silver bullet because everybody is their own individual person and what I feel to be the most effective is taking this idea of being a human-centered leader and having the employee experience driven by the associate themselves. I want them to come to me and tell me what they want do. I need to be, again, genuine and saying, I'm here to help you. I want to help you. We've heard the old saying, people don't quit jobs, they quit people. Now they're not staying for jobs. They're staying for people who have evolved into that human centered leader. That's where we're going to build the strongest relationships and where we are going to see higher retention. Walker: Awesome. Tim, thanks for joining me. In closing, I'd like to do a little fun thing where we're taking a journey together towards a better profession. I like to get a glimpse of my guests other travel journeys. Tell us about a bucket list travel location you have on the books or something fun to share. O’Neill: Bucket lists and travel. I tell you June has been the traveling month for me. I was in Nashville for the Craft Brewers Conference, I have a lot of craft brewery clients. Walker: We will have to talk about that later. O’Neill: Then Vegas and then I'm shipping off with my family here in about three days to go to Key Biscane for a week or so. Then I'm in Dallas for another conference and so all over. But bucket list — I'm a big rugby fan. I'll preference this with saying huge Ireland rugby fan. That's all in the last name O'Neill. Walker: Got it. O’Neill: Definitely make it out to the Six Nations tournament over in Ireland for one of the home matches. That's a bucket list trip for me for sure. Walker: Very good. I'm actually headed to London on Sunday. Fun stuff. No rugby or anything. O’Neill: No, that's okay. From the desert to the rain. Walker: There you go. Thank you again. So again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.

In this episode Tony Nitti, CPA, Partner — National Tax, EY, joins April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, live from ENGAGE 2023 to discuss S corporations and Rev. Rul. 2008-18, delving into S corporation reorganizations. What you’ll learn in this episode Overview and applicability (1:56) Hypothetical example (3:14) Review of Rev. Proc. 2022-19 and fixes to prevent invalid S elections (8:58) The extra step when an S Corp owns 100% of a QSub (15:33) Relevant articles from The Tax Adviser (24:40) A page from Tony’s travel journal (24:56) Related resources Rev. Rul. 2008-18 — Postulates two situations in which an S corporation becomes a qualified subchapter S subsidiary (QSub) of a newly formed corporation that will qualify as an F reorganization. The ruling also provides new guidance on the proper employer identification number (EIN) to be used by the entities in each situation. Private equity and F reorganizations involving S corporations — The Tax Adviser, Sept. 1, 2020 6 reasons an S corporation wouldn’t need a PLR | Tax Section Odyssey —  Rev. Proc. 2022-19 provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR. April Walker: Listen today to learn more about S corps and Revenue Ruling 2008-18 F-Reorgs with Tony Nitti. Hi everyone and welcome to this collaboration between the JOA podcast, and the AICPA's Tax Section Odyssey podcast. I'm April Walker, a Lead Manager from the Tax Section. On the AICPA's Tax Section Odyssey podcast, we offer thought leadership on all things tax facing the profession. Today I'm here with Tony Nitti. Tony is a partner at EY National Tax. He is a frequent guest of the show. I'm even more excited to be recording this today because we are recording together in person at the ENGAGE conference. I asked Tony what he thought was important to talk about today. He brought up the topic that he is hearing a lot about, a lot of confusion about, a lot of misunderstandings about and that is an F reorg structure used in acquiring an S corporation in Revenue Ruling 2008-18. First of all, for those who might be listening, who went like me, help, I need an overview of what you're even, talking about Tony. Talk to us about how this might apply, when it might apply if you have clients who either might be the acquirer or the target. What are we talking about here? Tony Nitti: First things first, yes, it's good to be back together. It's become a bit of an annual tradition. Walker: It has. Nitti: Then, just before I came in here, I was surprised to learn that there's a trivia question where I was the first guest on an AICPA Town Hall. Is that right? I had no idea. Everything from 2020-2022 is a blur. What we're going to talk about today, when we call it either these F reorg or 2008-18 transactions, it is the most popular way in the current climate for someone to acquire an S corporation. We know that private equity is getting involved with acquiring everything and so oftentimes it is private equity that wants to acquire an S corporation. Obviously if they were to go out and acquire shares directly, the S election is going to terminate, and then you've got a C corp on your hands, there's whole bunch of other things going on. This has become the go-to transaction, and we'll talk through it step-by-step from both the buyer and seller perspective. But the reason I thought it was worth talking about today is just because something in the tax law has become very popular, does not mean that it's necessarily well understood. We've experienced that thing before, where the more you stop and actually think about this stuff, the more you go, why are we doing these steps that we're doing, or why is it a transaction that we use and sometimes we just follow what everyone else is doing and don't really think about what are we accomplishing, what are we not accomplishing and other things. I just thought it would be fun to come in, talk for about 30 minutes or maybe less about what this transaction does? What it does’'t do? When we want to consider it? When we do’'t then, that whole thing? Walker: Sounds great. Nitti: Let's start with the hypothetical. It’s going to be the best way to explain all this. Let’s keep it simple. We've got private equity, setup as a partnership, and they would like to acquire the business operated by a current S corp. Here at AICPA ENGAGE, anybody that's here on the tax side, they've got S corp clients. A lot of times we will be the ones representing the seller. It's important to understand what this transaction holds for the seller, but there's also going to be plenty of times where we represent a client that wants to buy an S corporation, so we got to think about those buyer considerations as well. Let's just say we've got this private equity partnership that wants to buy this S corporation, 99 times out of 100, and this is something I'll talk about tomorrow in my M&A class, a buyer is going to want to buy assets. They're going to want to buy assets because they're going to want to get a stepped up basis in those assets for depreciation and amortization purposes. But sometimes the buyer can't buy assets. Because maybe those assets are not transferable, maybe for a particular business reason they need to acquire the legal interests in an entity, so that the EIN stays alive. You know how M&A works — like something's going to force your hand. From a buyer's perspective here it's how can I accomplish both of these things? How can I acquire the legal interests in this S corp target, but yet get this stepped up basis and the underlying assets? For years, the way we tried to accomplish that is by having the buyer and the selling shareholders of S corporation jointly make an election under 338(h)(10) or more recently 336(e). That election was a magic bullet, but only for the buyer, and I'll explain that. Like for the buyer, you make that election and for legal purposes, you're treated as buying the stock because that's what you bought. But for tax purposes, this fiction is created where the target S corporation is deemed to have sold all of its assets to a newly formed corporation owned by the buyer, and that gives them the step-up in basis and assets that they want. It's win-win for the buyer. It's not win-win for the seller. The seller is giving something away because had they simply sold stock and not made a 338(h)(10) election, they get straight capital gains rates. But by making this election, they have to live with the deemed consequences of the S corp selling its assets, which means some of that gain may be converted to ordinary income if they have cash basis receivables or inventory or whatever it may be. This really is more of a fix from a buyer perspective than anything else. Now, there's something in it for the seller in the sense that the buyer is going to have to pay them for that incremental tax cost. But that's where we looked for a buyer to be able to get this best of both worlds — a step-up in basis, but keep the legal entity alive. It was always 338(h)(10), always 336(e). But there are limitations to those two types of transactions. For example, you have to acquire 80% of the stock of an S corp to make an 338(h)(10) or 336(e) and so if private equity only wants 50% of this business, that's off the table. Another thing is let's say you're not going to buy all of it, but you are going to buy more than 80%. It's not like the 10% interest that the shareholders of the target retain is going to be tax-free. The way a 338(h)(10) or 336(e) election works is if private equity comes in and buys 90%, the other 10% is still treated as if they sold their interests as well. They still have to deal with the consequences of the asset gains. You can't have any tax-free deferrals, there are limited types of entities that can be a purchaser in a 338(h)(10), and so private equity as a partnership cannot do it. It would have to set up a corporation. You get the idea. There's a bunch of potential limitations there. But the biggest limiting factor and really what's caused this change in this transaction type is the fact that there are a limited type of targets in a 338(h)(10). One is a subsidiary in a consolidated group. One is a subsidiary in an affiliated group that could file a consolidated but doesn't and the other is an S corporation. What you don't hear in those three types of eligible targets is a standalone C corporation. What that means is if someone is looking to buy, an S corporation and make a 338(h)(10) election or 336(e) election, they have to be sure that [the] S election is valid. Because if it's not valid, that's not an S corp you're buying, it's a C corp. If you buy the stock [of] a C corp, it's a standalone C Corp and the 338(h)(10)or 336(e)election isn't valid either. You just spent 30, 40, 50 million on something anticipating a step-up in basis in assets and if it turns out that S election was invalid and you just bought C corp stock, you don't have that step-up in basis. There's this disconnect I feel some times where 90% of the tax industry thinks that if somebody says [they’re] an S corp, they're an S corp but there's not going to be any problems there. Then the other 20% works enough in due diligence or it's just been around long enough to realize that there's some real truth to this saying that permeates what I do, chairing sub S for EY, and it said in jest, but like I said, there's some truth. You show me an S corp, I'll show you an invalid S corp. If you do enough due diligence, there's going to be things that arise that make you say, I don't think this is valid or I'm worried that it's not. The point is the second a buyer who's looking to spend significant cash on a business realizes that there could be a skeleton in the closet for that S election, you don't want to go forward with an (h)(10) or 336(e) because the risk is to you as the buyer. The risk is that you lose all of that step-up. Walker: Does that tie back to our previous time we were together and ways to cure an S election? Nitti: It does. You’re referencing Rev Proc 2022-19, which gives us an avenue in some respects to fix some of these problems that would cause an S election from being valid. But practically speaking, when the numbers are big enough and a buyer is looking to acquire company, the second they get an inkling that something is wrong with that S election, even if you tell them it can be cured, they say, I want to pivot to something else to make sure I get what I came after. What I came after is the step up. That's where this transaction came into vogue. Because how else if we're not going to do an (h)(10), if we're not going to do a 336(e), how else for example, can private equity go out and acquire some or all of the business of an S corp while one, keeping the legal entity alive and retaining the EIN. Two, getting a step-up in basis of the assets. Three, getting to continue to operate this business in flow through form. Because that wasn't available via an (h)(10) or something like that because, it would become a corporation because it'd be owned by another corporation. Four, being able to offer potential tax-free rollover to some of the sellers. Like where else can you get all those things and not having to acquire 80%? It really was a wasteland of options until this Rev Ruling 2008-18, came around and said, okay, there is a path forward here now to accomplish all of these things. Most importantly, is to still get our step-up as the buyer, even if this S election is invalid. It's not a complicated transaction at all. The reason I thought it was worth talking about today is that it's amazing- I've talked to some people who've done dozens of these but it's almost just because it's a formula they follow and they don't actually understand what each step does, or maybe more importantly doesn't accomplish. It would work like this. You would say to the seller, hey, we've got concerns about your S selection being valid, so I’m not buying your stock because I'm the one that gets stuck holding the bag if I just bought a C corporation and not an S corporation. I paid you for the step-up and I didn't get the step-up. I want you as the seller to undergo this pre-transaction restructuring. It's all on the seller side and it's not complicated at all. Step one, the sellers, and let's just say you and I are 50/50 shareholders at this S corp. I always like using you in my example. You and I are sellers of this S corporation. We form a brand new holding Corporation and we transfer our 50/50 interests in what I'll refer to now as the target S corporation into this new corporation. Then we immediately elect to treat that target as a qualified subchapter S subsidiary or a QSub. When an election is made to treat a subsidiary of an S corp as a QSub, it's treated as having liquidated into its parent S corporation, and it's just disregarded from any separate existence. Now, what you didn't hear there, which you may be curious about is, I said we formed a new corporation, transferred an S corp into it, made it QSub election for it. I didn't say that new corporation was formed as an S corporation. You can be like, how are you making a QSub election when the parent is not yet an S? But what this Rev Rule 2008-18 tells us, it builds off earlier principles from Rev Rule 64-250 and says that the combination of those steps, the formation of a new corporation, transfer of an S corp to that corporation, and then immediate QSub election for that former S corp, it all combines into what we call a tax-free reorganization under Sec. 368(a)(1)(f). What that means is it's a big fat tax zero. Nothing happens. Because nothing happened, that newco that we set up is just considered to be a continuation of the target. The reason we didn't have to make an S election for it is because the S election of the target carried over to this newco. If you are certain that the S election of the target is valid, and if you are, we're probably not doing this whole thing. But if you were certain, it's funny you'll find that there's no requirement to file a new S election for the parent. Instead, when you make the QSub election on the 8869, there's actually a box that was added that says this QSub election is being made in accordance with a Rev Ruling 2008-18 transaction, and that just notifies the IRS that the S election of this company now carries over to the new company. If we stop right there, like we haven't really accomplished anything. We’ve got a new company, a newco that's an S corp that owns a disregarded entity as a QSub. Now, if you're worried that the S election was bad and usually you are, you would probably make a protective new 2553 filing for the newco. But what this does, and I just want to point this out now, is eventually this newco S corp is going to be selling this business, selling this disregarded entity. What this doesn't do with this transaction and this is where a lot of confusion comes in, it doesn't do anything to cure the bad S election. If we think about it, if the company had been bad and sold its assets as a C Corp, there would have been corporate level tax. Going through these steps doesn't change that at all. Because if we form a new S and transfer the stock of what was a bad S to that new S and make it QSub election for it, effectively what we've just done is liquidate a C corp into an S. Without getting too into the weeds here, when you do that, the S corp just inherits what we call the built-in gains taint of that sub under Sec. 1374. When it turns around two or three days later, like it's going to in this transaction, sells those assets, 1374 is going to kick in anyway and make the seller pay corporate level tax. It's not doing anything to avoid a corporate level tax for these sellers and I think people should definitely understand that this doesn't fix a bad S election. You and I talked at great length about how you could fix a bad S election. This does not accomplish that. Because a bad S being contributed to a new S and made a QSub election for it simply means you liquidated a C into an S and you inherit all that built-in gains exposure. If we stop there for a moment, we're left with a structure where the S corp owns 100% of a QSub, which is a disregarded entity. But these transactions are almost always going to have an extra step. That extra step is you're then going to take that QSub and convert it under state law, typically, from a corporate entity to a single-member LLC. Once again, you're just going from disregarded entity to disregarded entity. It's meaningless. It doesn't cause any tax consequences at all. People have asked, why that? What's the point there? The point there is if you screwed up something in steps one and two, so that your QSub election is not respected, we have the same problem we would have had originally when the buyer comes in is you're going to see in the next step and purchases the interests in the disregarded entity. If we think we're buying the stock of a QSub and it's not really a QSub, we just bought the stock of a C corp again. The only way to really purge that corporate past is to do this extra step and after we've made the QSub election, convert that QSub under state law into a single member LLC. Because now, when those steps are all complete, we have an S corporation holdco owning a single member LLC. Just to keep things simple, if private equity wants to come in and buy 100% of that single member LLC, they get the best of both worlds. Because legally they're buying the entity, so the EIN stays alive. But from a tax perspective, when you buy the 100% interests of a single member LLC, you're treated as purchasing each underlying asset of that LLC. They're going to get that step-up in basis. By flipping it from a QSub to a single member LLC, all you're really accomplishing is fully guaranteeing that even if everything else goes to hell, the buyer is going to get their step-up, which is what they're paying me to do, if you represent the buyer. There's just been a lot of confusion about these steps and what they can accomplish and the order in which they have to be done. Order in this stuff matters. We have a letter ruling 200542013 that says, okay, if we contribute the stock of this S corp to the new S corp and then the next day convert it to an LLC, but then a month later, retroactively file the QSub election to be effective on the day of contribution, that QSub election is actually invalid because at the time you filed it, even though it was going to be effective earlier, at the time you filed it, it wasn't a corporate entity anymore. You'd already switched it over to an LLC. There's just these little nuances like that that are a pain in the butt. Then one of the things we at the AICPA asked the IRS to consider is maybe we don't need the intermediate step of making the QSub election. Like why can't we just contribute the S corp to the newco and then immediately convert that Sub into an LLC. The only reason right now we go through that intermediate step of making the QSub election is because that's what Rev Rule 2008-18 says will allow you to retain the EIN. There's enough there that worries us that we want to make sure we get the consequences the IRS says we get so we follow it to every step letter of the law. It just creates confusion. Sometimes it appears unnecessary. What will happen is the buyer will come in, and let's just say for starters, they buy 100% of a single member LLC interest. As we said, they'll get a step up. From the newco S corp perspective we set up, they're treated as selling each underlying asset of the single-member LLC. Just like with an 338(h)(10) they will be treated as if they sold the assets. There might be a mix of ordinary income, capital gain, and they should get compensated for that. As I mentioned to you before, if the S election truly were bad, then that corporate level tax may still be levied on the sale because you might have built-in gains issues. It's not really a magic potion for the seller, it's more for the buyer. Now the nice thing for the seller though, is let's say private equity only wants to buy 80%. If private equity buys 80% of the single member LLC interests, then we have a deemed partnership formation under [IRS Revenue Ruling] 99-5 where private equity is treated as buying 80% of the assets. They get their step-up, they're happy, and then private equity contributes their 80% up to a new partnership and the S corp contributes to the remaining 20% tax-free. There's an option here for seller to get tax-free rollover equity that doesn't exist in your typical 338(h)(10) or 336(e). There is something in it potentially for the seller. Particularly like I said, if you're going to retain some rollover equity, but the buyer still gets their step up and everybody's happy. There's still some unanswered questions. I think one of the most interesting unanswered questions is okay, wait a minute, you're telling me we're doing all this because we have concerns the target was a C corp for the last few years? We know we might pay C corp level tax on the sale of the assets if the IRS comes knocking and finds out the S election was invalid, but what about the three open years where it should have been a C and instead it was an S, who is on the hook for that? There's really no wonderful answer because remember, the buyer in this situation, private equity has acquired that legal entity. That legal entity changed from an S corp to a Q sub to a single member LLC, but all along, it kept its own EIN. If the tax liability for those previous open years attaches to that EIN, there's no guarantee the buyer is not potentially on the hook for that. That can make for some interesting negotiations, because if there's significant exposure for those open years, the buyer is going to want to build that into any type of agreement that they make in terms of an indemnity or hold back or something to make sure that they're not going to get called upon by the IRS to pay tax for the open years. But what makes the debate fascinating as we went through this F reorg and in an F reorg we said that this new holdco S corporation is truly treated as a continuation of the oldest corporation. From a practical perspective, if you're the IRS and you want to collect tax from prior open years, why would you necessarily go to the buyer when there's still this historical entity alive with its historical shareholders, and you can say — you're the ones who pocketed all the cash from those years so we're going to come looking for you? But that's something that I have that conversation maybe five times a week with people that are negotiating deals. Who's on the hook here for any corporate level taxes that weren't paid? No one's certain. I would plan as if the buyer is because you got the EIN, you've got the legal entity. That's it, that's all there really is to it. That's how it unfolds. But you can see why it's so advantageous because you can still get the step-up for the buyer even when the S selection is bad. Whereas if you try to do that being 338(h)(10) or 336(e), you're dead in the water and you just spent, who knows, it could be $200 or $300 million that you spent on a company and you paid for that step-up and then you don't get it. But there's confusion that sticks around with all of this. You can imagine the tax return filings get pretty confusing because with an S corp going through and F reorg — when I say an F reorg is treated as a tax nothing in the continuation, it truly is. Even though you might form your newco midway through the year, it's treated as stepping in the shoes of oldco, so you still file a full year return; one return, and that return is going to show the activity of the target for the beginning part of the year, and then it's going to have the activity for holdco for the last half of the year, which will include the sale of the target. Then if you're not selling 100% of the target, but only say 80%, then you're still going to get a K-1 from a new partnership now for the remaining 20%. People often get confused there as well, but it's just become an unbelievably powerful and popular method for selling an S corporation. For every one 338(h)(10) election, I see 49 of these. I'm just like why not talk about this? Walker: I'm glad you brought it up. Nitti: It's because like I said, if you dig deep enough, every S corp is going to cause you some concern. Everyone is going to make you go, hey, there's something here that makes me wonder if this is an S. It's usually not just one thing. You reference why can't we fix it with 2022-19? Sometimes you can fix one aspect — like the bad LLC operating agreement you and I talked about. But there could be other things out there. Half of my job April is explaining to people, I don't think this causes the S selection determinee, but I'm not the one spending $100 million to buy the company, you are, and so if you're worried about it, let's get out of this 338(h)(10) and let's pivot to this F reorg transaction that we just talked through. Walker: There's a couple of Tax Adviser articles that also go into some of this detail. If you maybe have to listen to this a couple of times to get some of the details. Nitti: I'm also going to be teaching that tomorrow. Walker: You can listen to the replay. We will wrap up. I like to take us on a journey together to the profession, but I'm going to ask you a very specific question. I want to hear about new adventures with your puppy, Ms. Maggie, and specifically whether she's going to New Jersey with you this summer. Nitti: Well, that's a big point of contention. Maggie, we adopted a new golden retriever pup about four or five weeks ago and my main responsibility is to remind her every morning and every night that she will never be what Macy was to me. That's my primary responsibilities. Tell her she'll never be the dog my previous dog was. But I'm kidding, she's growing on me quickly. The New Jersey thing, it's really tricky because traveling 30 hours with a pup and back is a lot. I'm also not going back to New Jersey for the whole summer because my son's playing travel baseball and basketball and so if I'm only going to be back there two, three weeks, do I want to spend six days in a car? I don't know, we're hoping she'd be small enough to fly, she's not small enough to fly. You can take her if you can come live in Aspen for the summer instead of the house. Walker: That sounds awesome. Thank you so much Tony. Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA & CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts. Please follow us so you don't miss an episode. If you already follow us, thank you so much and please feel free to share with a like-minded friend. You can also find us at aicpa-cima.com/tax to check out our other Odyssey episodes, as well as get access to the resources mentioned during the episode. Thank you for listening. Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices. This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.