Today's CPA July/August 2014 by The Warren Group

Today’sCPA JULY/AUGUST 2014

TE X AS SOCIETY OF

C E RT I F I E D P U B L I C AC C O U N TA N T S

The

PUZZLE SOLVER

TSCPA Chairman Mark Lee Reflects on His Chosen Profession, Family, and the Life and City He Loves

To Confirm or Not to Confirm … That is the Question Converting a Rental to a Principal Residence Prepaid Medical Expenses and Continuing-Care Facilities

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CONTENTS

CHAIRMAN Mark Lee, CPA

VOLUME 42, NUMBER 1 JULY/AUGUST 2014

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN

cover story

Winford Paschall, CPA

22 Puzzle Solver

Staff MANAGING EDITOR

society features

DeLynn Deakins ddeakins@tscpa.net 972-687-8550 800-428-0272, ext. 250

12 Spotlight on CPAs Eye on the Ball - Dallas CPA Brings European Roots to Work and Family

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu

19 Capitol Interest Best Bets

COLUMN EDITORS

technical articles

Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA C. William (Bill) Thomas, CPA, Ph.D.

27 To Confirm or Not to Confirm … That is the Question

WEB EDITOR Wayne Hardin whardin@tscpa.net

CONTRIBUTORS Ali Allie; Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Avery Elander; Donna Fritz; Wayne Hardin; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Judy Neathery; Catherine Raffetto; Dianne Rollin; Patty Wyatt

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton Design/Production/Advertising The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPAHouston; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPADallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas.

32 Converting a Rental to a Principal Residence 36 Prepaid Medical Expenses and Continuing-Care Facilities 40 CPE: Navigating Choppy Waters columns 4 Chairman’s Message Thinking Big 5 2014-2015 TSCPA Chapter Officers 6 Tax Topics Buildings, New Capitalization vs. Expense Rules 8 Business Perspectives Borrowing to Build 9 New Section: Tech Issues Get Found with Google Places 10 Accounting and Auditing Uniform Revenue Recognition Standard Finally Becoming Reality departments 14 Take Note 17 Leadership Nominations 46 Classifieds

© 2014, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

Today’sCPA July/August 2014

BIG

CHAIRMAN’S MESSAGE

THINKING

By Mark Lee | 2014-2015 TSCPA Chairman

Editor’s Note: In this first Today’s CPA issue of the Society’s new fiscal year, incoming TSCPA Chairman Mark Lee, CPA-Houston, discusses his theme and goals for the upcoming 2014-2015 year. Next issue, Lee and TSCPA Executive Director/CEO John Sharbaugh, CAE, will continue to provide a joint Chairman’s and Executive Director’s Message.

s TSCPA’s incoming chairman, I’ll be honest with you. I was a little concerned about following in the footsteps of my predecessors, who had inspiring messages at the outset, something that expressed their goals for their upcoming year of service. I wasn’t altogether certain where to start, so I gave some thought to the different ways they contributed to the Society. Willie Hornberger is so motivational and inspirational. Donna Wesling has all that energy and focus. Fred Timmons is such a gentleman, kind with a gentle sense of humor. (My sense of humor is more like I’m going to cough during your golf backswing to see if you miss the ball.) What was I going to offer in my year? One day, I was discussing this with TSCPA’s Executive Director and CEO John Sharbaugh, and we brainstormed the best answer for the question, “Why should I be a member of TSCPA?” What we kept coming back to is that you can be a part of something bigger than yourself. So, “Be a part of something bigger than yourself ” became my theme for the year. It resonates with most of us, who realize how difficult it is for someone alone to enact change. Yes, the saying that “one person can change the world” is true – at times – but it’s usually easier when you have thousands of others on your side. It’s actually very difficult for one person to get people to listen. It is typically very difficult for one person to go to a state legislator and say, “I want change” or “You’re hurting my profession.” But when you bring the power of a constituency of 27,000, their hearing seems to improve. You’ll see this concept reflected throughout the TSCPA Strategic Plan. “Something bigger” fosters lifelong involvement. “Something bigger” motivates people to stay with the Society, become involved with their community, and seek leadership opportunities. “Something bigger” is how we’re going to continue to build TSCPA. Mark Lee 4

To read more about TSCPA’s incoming 2014-2015 Chairman Mark Lee, please see the cover article in this issue of Today’s CPA magazine. So, number one – we have power in numbers. And two, it’s the fact that TSCPA provides you with the tools, support and networking to be the best professional you can be. Choosing to be a TSCPA member says: “I want to be competent. I want to have due diligence about my work. I want to provide leadership. I want to be an advocate for the accounting profession, to secure it and leave a legacy for the future. I’ve also always thought that TSCPA provides a lot more value than some people realize. They say, “Well, I’m a member of TSCPA because I’m a CPA.” They don’t always see the full value of TSCPA and the chapters. The benefits to me are, first of all, it helps you with your professional confidence. It is great to just be able to talk to someone who is in the same field as you, had some different experiences. You just bounce ideas off of them. That alone should be enough to make you want to be a member of TSCPA. But I think, even more important, is that you have this giant network around the state, and around your city, that you can call for many things – a client referral, question about a client or a management accounting issue. I have a friend who wants a job, or I need a job. That network is totally invaluable. “Be a part of something bigger than yourself ” encompasses all of that to me. And I hope you agree, because you’re going to be hearing me say it for a year. n

can be contacted at Mark.Lee@aglife.com. Today’sCPA

2014-2015 TSCPA CHAPTER OFFICERS Abilene Chapter

El Paso Chapter

Robert R. Womack, President

Sean M. Ihorn, President

Michelle A. Beaty, President-elect

Paul Meza, President-elect

Adelaide A. Odoteye, Vice President

James M. Caylor, Vice President

Gerald A. Reid, Secretary/Treasurer

Hugo Olivares-Acosta, Vice President

Austin Chapter Matthew G. Malcom, President Connie B. Clark, President-elect Jennifer Brown, Vice President

Terri Rutter, Vice President Joe F. Hernando, Secretary Julio C. Medina, Treasurer

Fort Worth Chapter

Kara Hamann, Vice President

Steven G. Newcom, President

Kristy K. Holmes-Hetzel, Vice President

Susan I. Adams, President-elect

Olivia Espinoza-Riley, Secretary/Treasurer

Brandon R. Booker, Vice President

Kimberly J. Chapman, Secretary/Treasurer-elect

Kelly R. Hein Jr., Vice President

Brazos Valley Chapter

Amanda F. Johnson, Vice President Gregory A. Kubes, Secretary/Vice President

James M. Larkin, President

Raymond H. Best, Treasurer

Amy N. Restivo, President-elect

Michaela J. Cromar, Treasurer-elect

Lauren Chapman, Secretary Jennifer Mabe, Treasurer

Central Texas Chapter Shelly R. Spinks, President Teri Lynn H. Meyers, President-elect Angela M. Ragan, Vice President Nancy G. Miller, Secretary Lindsey Skinner, Treasurer

Corpus Christi Chapter Amy W. Twardowski, President Jeffery Smith, President-elect Kellie J. Shipley, Vice President Johnna L. Jones, Secretary/Treasurer

Dallas Chapter Terri M. Hornberger, Chair Arthur M. Agulnek, Chair-elect Jeffrey P. Weyandt, Treasurer Jose L. Luna, Treasurer-elect

East Texas Chapter Randy L. Turner, President Michael S. Thomas, President-elect Kelly G. Noe, Vice President Royce E. Read, Secretary/Treasurer Todayâ&#x20AC;&#x2122;sCPA July/August 2014

Houston Chapter Carol G. Warley, President Gerrad Heep, President-elect Debra D. Seefeld, Vice President Gail S. Neely, Secretary Sheila A. Enriquez, Treasurer J. Ramsey Womack III, Treasurer-elect

Panhandle Chapter Alicia M. Pickens, President Selena R. Fogg, President-elect Christopher M. Pace, Vice President Shannon Brittain, Secretary Lani V. Hall, Treasurer

Permian Basin Chapter Jimmy Hudson, President Michael D. Dunlap, President-elect Aaron Estrella, Vice President Vacant, Vice President Doak R. Painter, Secretary/Treasurer

Rio Grande Valley Chapter Jose A. Garcia Jr., President Barbara J. Kremer, President-elect Maria G. Elizondo, Vice President Bill Ruppert, Secretary Carol B. Collinsworth, Treasurer

San Angelo Chapter Travis L. Garmon, President Vacant, President-elect Brianne Killam, Secretary Shane Wilson, Treasurer

San Antonio Chapter Martha C. Perez, President Mark J. Goldman, President-elect Charles T. Clark, Vice President Kimberly A. Nourie, Vice President Priscilla A. Soto, Vice President Kathleen Dvorak, Secretary Keni L. Rodgers, Treasurer Joe M. Guerra, Treasurer-elect

South Plains Chapter Linda C. Turnbough, President Gregory L. Freeman, President-elect Whitney S. Murley, Vice President Teresa G. Green, Secretary/Treasurer

Southeast Texas Chapter Kristin A. Mattingly, President Julia Hayes, President-elect Wendi C. Taber, Vice President Jane M. Whitfield, Vice President Melissa A. Staggs, Secretary Marylyn M. Byrd, Treasurer

Texarkana Chapter Sarah Berry, President Carolyn A. Wilder, President-elect Nikki Laing, Vice President Cynthia Young, Secretary/Treasurer

Victoria Chapter Diane R. Kliem, President Joshua K. Page, President-elect John H. Neukomm, President-elect Nominee Kyle W. Noack, Secretary/Treasurer

Wichita Falls Chapter Mark A. Anderson, President James K. Rowland, President-elect Shannon D. Adams, Vice President Monty Walker, Secretary Rosella Salinas, Treasurer 5

TAX TOPICS

Buildings, New Capitalization vs. Expense Rules By Greta Hicks, CPA | Column Editor

ny entity that purchases, repairs, improves or restores buildings needs to be aware of the new 263(a) regulations regarding when to capitalize, when to expense, and when a disposition occurs. The rules of the game have changed dramatically. Don’t let accounts payable or your computer make these decisions for you. When to capitalize and when to expense is a management decision. The first step is to know the definition of the terms improvement, restoration, betterment and replacement. Some of us remember the pre-1986 tax law where we divided the building into components. We are back to componentizing a building, but the terminology is now “units of property,” which includes the building structure plus eight units of property: • Heating, ventilation and air conditioning (VAC) systems (including motors, compressors, boilers, furnace, chillers, pipes, ducts and radiators); • Plumbing systems (including pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment); • Electrical systems (including wiring, outlets, junction boxes, lighting fixtures and associated connectors, and site utility equipment); • All escalators; • All elevators; • Fire-protection and alarm systems (including sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detection devices, fire escapes, fire doors, emergency exit lighting and signage, and fire-fighting equipment, such as extinguishers and hoses); • Security systems for the protection of the building and its occupants (including window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit); • Gas distribution system.

much of the unit of property” has been changed. Small changes would be expensed and larger changes capitalized. For example, replacing one window would be expensed, but replacing all windows would be capitalized (1.263(a)-3(e)(2). Refer to the regulations for excellent examples of materiality and units of property. A betterment to a unit of property must be capitalized. A betterment: • Ameliorates a material condition or defect that either existed prior to the taxpayer’s acquisition of the unit of property or arose during the production of the unit of property, regardless of whether the taxpayer was aware of the condition or defect at the time of acquisition or production; • Is for a material addition, including a physical enlargement, expansion, extension or addition of a major component … to the unit of property or a material increase in the capacity, including additional cubic or linear space, of the unit of property; or • Is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of the unit of property [§1.263(a)-3(j)(1)].

When deciding whether to expense or capitalize a change to the unit of property, we first determine if the unit of property has been improved. An improvement is defined as restoring the property, adapting the property to a new or different use (Reg. 1.263(a)-3(d), or the betterment of the unit of property. Regs. 1.263(a)-3(e) bring in the concept of materiality or “how

A material condition or defect that either existed prior to the taxpayer’s acquisition is discussed in 1.263(3)-3(i) et. al., which has one example of a building acquired with a defect, and correction of the defect is a capital expenditure. In a second example, the required cost of the correction of the taxpayer’s errors during construction could be deductible.

When deciding whether to expense or capitalize a change to the unit of property, we first determine if the unit of property has been improved.

Today’sCPA

Note 1: An increase in capacity must be material for the cost to be capitalized. To determine if an expenditure is a betterment or the reversal of normal wear and tear, refer to 1.263(a)-3(j)(2)(iv). One betterment test of a unit of property is made comparing the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure. One of the examples in this area is the replacement of all shingles on a roof (expense) versus replacing the decking and all other components of the roof (capitalize). Note 2: A “refresh” is not a betterment. When a company modernizes its building by painting walls, changing layout and reorganizing displays, the building is being “refreshed” and the costs can be expensed. Refer to 1.263(a)-3(j)(3). The cost of restoring property must be capitalized. Restoration: • Is for the replacement of a component of a unit of property for which the taxpayer has properly deducted a loss, other than a casualty loss under section 1.165-7; • Is for the replacement of a component of a unit of property for which the taxpayer has properly taken into account the adjusted basis in realizing gain or loss resulting from the sale or exchange of the component;

Greta Hicks, CPA

• Is for the restoration of damage to a unit of property for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165, or relating to a casualty event described in section 165, subject to the limitation in paragraph (k)(4) of this section; • Returns the unit of property to its ordinary efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use; • Results in rebuilding the unit of property to a like-new condition after the end of its class life, or • Is for the replacement of a part or a combination of parts that comprise a major component or a substantial structural part of a unit of property [§1.263(a)-3(k)(1)]. Note 3: The regulations also have a new safe harbour rule for small business taxpayers. See Reg. §1.263(a)-3(h)(1). Note 4: The preamble to the regulations indicate that the UNICAP rules (263(A)) override the new repair regulations. Note 5: Compliance to the new regulations may require changes to your current capitalization procedures manual and the filing of Form 3115, Application for Change in Accounting Method. See Revenue Procedures 2014-16 and 2011-14. n

is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com.

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Today’sCPA July/August 2014

BUSINESS PERSPECTIVES

Borrowing to Build

By Mano Mahadeva, CPA, MBA | Column Editor

ould you ever want to borrow money to fuel your company’s growth? Absolutely! For certain situations, it may be the perfect choice. Depending on your company’s size and motivations, you could look at private sources for debt, such as banks, pension funds or insurance companies, or at public financing, which uses investment bankers to sell securities to a large number of investors. Superficially, debt financing sounds simple, but it is a very complicated process. To evaluate their risk and lending decision, the lender looks at your company’s “four Cs” – credit, capacity, collateral and character. This process eats up plenty of unavailable time. The cost to borrow can be prohibitive, and it restricts some company actions to protect the lender. “Credit” refers to the company’s payment history; “capacity” refers to the company’s available resources that can be used to make payment; “collateral” refers to assets that can be secured against the debt; and “character” refers to the willingness to make payments as they come due. So if we look for debt through private sources, what do we need to do to prepare? First, you will need to find someone – a “facilitator” – who is proficient in private debt transactions. It would be a bonus to find someone who also has knowledge of your industry and your business, and knows lenders who work in this space. This individual could be a guide and make introductions along the way or be the facilitator of the transaction. A fee is paid to this individual, typically as a percent of total funds available to the borrower. The amount is agreed to upfront and paid at close. You will also need a law firm with similar traits – very proficient in debt financing, has a good understanding of your industry and has worked with many lenders. It would be wise to negotiate a capped fee with the attorneys so that the final fee paid to them is no more than the cap. The capped fee encourages the legal team to complete their work in a timely manner. Next is the preparation of a confidential information memorandum that contains public and private information about the company. In essence, this is your company’s story, which has to resonate with the underwriter and have financial performance to back it up. The memorandum has key sections, including: • An executive summary – who the company is, what it does, how it does it and key company highlights; • Industry and market dynamics – size of industry, geographic presence and the company’s position in that space; • Key company investment highlights – how the company makes money and its historical capital spend; • Company overview – milestones, board member composition, and management team; • The historical and projected financials – this area would include volume trends, EBITDA trends, key notes and assumptions, and a five-year quarterly forecast; Mano Mahadeva, CPA 8

• A transaction overview – what you seek from the lender and what you are looking for in a partner/lender; and • Appendices and references – a collection of supporting schedules and references to complement all major sections listed above. As you prepare the memorandum, you also need to prepare for the due diligence process. This means gathering, well in advance, all company critical documents that will be required by the lender for its underwriting process. Place all these items in a repository that can be accessed by the lender(s) at the appropriate time. As you prepare the memorandum and gather due diligence materials, the facilitator will be soliciting interested lenders either directly or with a “teaser.” To protect confidential information, all interested parties will have to sign a nondisclosure agreement to receive the completed memorandum. The next steps are the “road shows” with interested lenders. The road show presents an opportunity for the prospective lenders to meet with the CEO and CFO, hear their presentation and ask questions. Following these presentations, term sheets are requested to be submitted to the facilitator for final selection. After consultation with the borrower and negotiations with prospective finalists, the decision is made! The primary benefit of debt is a tax benefit as interest expenses are deductible. This benefit increases with the tax rate of the entity taking on the debt. A secondary benefit is that debt financing makes the managers more disciplined in their choices of the use of capital by increasing the costs of failure. It also helps that debt has a fixed life, its periodic payments are predictable and, in general, debtors are passive “managers.” Debt financing takes effort and consumes an inordinate amount of time from the C suite and the finance team. There is also considerable expense associated with it. However, the entire process gives us an opportunity to understand our business through the lender’s lens. It gives us a chance to clear up unfinished work and tie up loose ends. But, most of all, a successful debt financing means the lender considers us responsible managers of money and they help to re-affirm the company’s vision. n

is Chief Financial Officer with Solis Health in Addison, Texas. He serves on the Editorial Board for TSCPA. Mahadeva can be reached at mmahadeva@solishealth.com. Today’sCPA

TECH ISSUES This Tech Issues section replaces Emerging Issues

Get Found with Google Places

By Hugh Duffy | Guest Columnist

ould your practice use more customers? If so, think Google Places. Google reports that 97 percent of consumers today search for local businesses online, so having a virtual presence in our digital age is essential. Google Places brings potential customers and local businesses together first online, then in the real world. It’s a savvy way for businesses to be found in today’s competitive marketplace.

Put Your Best Foot Forward If you can find 15 minutes to spare in your day, you can gain visibility on Google Places. To get the most out of your listing, follow these guidelines to get started. Represent your practice exactly as it appears in the offline world. The business name field is just for that: providing the name of your practice. This is not the place to include your marketing tagline, phone number or website URL – unless they are truly part of your business name. You will allow for better searches if you stick to a concise name rather than trying to manipulate search results by adding extraneous keywords. Use a precise, accurate address to describe your practice’s physical location. One out of five searches on Google are related to location, so every Google Places business listing must have a mailing address. If you office out of your home, you can specify a “service area” during the sign-up process and choose to hide your physical address. If you specialize in multiple services, it’s best to create a single listing that highlights all of the specialties rather than creating multiple listings. Provide a phone number that connects to your individual practice location as directly as possible, and provide one website that best represents your practice location. This should be pretty straightforward (in any line of business). Be specific, but brief, in categorizing your practice. Say what your business is (Certified Public Accountant, Enrolled Agent) instead of what you offer (tax accounting). This information can be added in your description. Complete the registration fully. Provide Google Places with all relevant information, such as hours of operation, photos and appropriate logos. As part of their algorithm, Google measures the percent of completeness, so lightly completed Google Places pages are seldom visible. Verify your listing. Your Google Places account must be validated or verified just like a newly issued credit card. Verification is required to confirm that you are the business owner or an authorized representative of the business being listed. No validation, no exposure. Armed with this information, you should be ready to improve your practice’s visibility and customer base by using Google Places. Not only will you boost your ability to get found and build relationships, you will increase your ability to “go places” in your business. Why not be there when a customer is looking for you? n

Make It Easy to Get Found Did I mention that Google Places is free? If reducing marketing expenses isn’t enough to pique your interest in the online platform, consider this: a page on Google Places (your Place Page) provides consumers who are new to your area with an easy way to get to know you, read reviews of your services and take action. Sure, you have a website that works hard to give your practice visibility, but if you want to make sure your firm appears in Google search results, Google Places makes good sense. It’s a more direct way to advertise your practice than putting your dollars in Google Places brings newspaper ads, Yellow Pages or other local efforts. potential customers and local What’s more, iPhone and Android businesses together first users can find your business listing immediately while on-the-go. They online, then in the real world. don’t need to be in front of a computer to do a search or visit your website. As part of your free Google Places listing, you can add content and visuals to your Place Page, highlight special offers or services, and use the platform’s reporting tools to gain valuable insight about potential and existing customers. For example, the Google Places dashboard is especially useful for understanding how customers find your practice. The dashboard makes it easy to see how many times your listing appears as a result of a Google or a Google Maps search, and what keywords people are searching to get to you. It’s also useful for tracking effectiveness. Check the dashboard’s top search query results to see how many people found your listing when looking for an accounting firm. Google Places makes it much easier to measure online advertising effectiveness and determine how new business inquiries correlate to Web traffic than, say, a Yellow Pages ad – and it’s less expensive. With Google Places, you can make more informed decisions about how to be found on Google and interact with your customers. Hugh Duffy

is co-founder and chief marketing officer of Build Your Firm (BYF), an accounting marketing and accounting website development firm. BYF is the leading niche website design firm for accountants and has helped many firms improve the quality of their new client acquisition through niche development. He can be reached at 888-999-9800 x151, or at hugh@buildyourfirm.com.

Today’sCPA July/August 2014

ACCOUNTING & AUDITING

Uniform Revenue Recognition Standard Finally Becoming Reality

By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor

fter years of deliberations, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released a new revenue recognition standard in the second quarter of 2014 that will provide a uniform standard for revenue recognition under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The effective date for implementation of the new standard for public entities is periods beginning after Dec. 15, 2016. For nonpublic entities, implementation is delayed until periods beginning after Dec. 15, 2017. Although that is still a few years away, it is important for financial managers of affected entities to be aware of how the new standard will affect their financial reports. The new standard will eliminate the transaction- and industry-specific revenue guidance under current U.S. GAAP and replace it with a principles-based approach applicable to all entities. Under the new standard, revenue from customer contracts will be recognized using the now-familiar five-step model discussed in the next section. For affected companies, there are at least six areas that will be impacted by the new standard. First, changes will affect timing of revenue for purposes of measuring income for compensation and bonus plans. Second, tax 10

payments may be impacted by timing, because for many entities, revenue will now be recognized sooner than it has been in the past. Third, for entities with a substantial number of contracts, terms of those contracts may take on a new meaning. Fourth, some debt covenants based on customer contracts may need to be re-negotiated. Fifth, affected companies will probably need to update their current accounting software to capture new information. More processes and controls will need to be put into place as companies will have to make more estimates and disclosures. Finally, disclosure policies of some companies may need to be changed to comply with the new rules, requiring communicating the changes to investors and other stakeholders.

The Five-Step Model The steps in the now-familiar revenue recognition model are: 1. Identify contracts with customers. 2. Identify separate performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price among various performance obligations. 5. Recognize revenue as each performance obligation is satisfied. Todayâ&#x20AC;&#x2122;sCPA

Revenue is recognized as each performance obligation is satisfied, but only up to the amount that is probable of no significant reversal. The last step of the model is to recognize revenue when each performance obligation is satisfied, which means when the goods or services promised in the contract are transferred, and when the customer obtains control of the goods or benefits from the services. Each affected entity needs to know each step of the process and how it is applied uniquely to that entity’s business model.

products and services formerly grouped together will have to be separated out, requiring allocation of revenue according to standalone pricing. Finally, real estate companies will most likely record revenue earlier than in the past.

Preparing for Change To be prepared for the upcoming changes, it is a good idea for controllers and CFOs of affected entities to take continuing education courses focusing on the detailed provisions of the new standard and how to implement them Since a majority of their Industries Impacted Most properly. contracts deal with Although the new standard will There are also numerous “collateral affect all companies and industries, areas” affected by the new standard intellectual property, these there are four industries that will that accounting managers need to feel a major impact. The first is the consider. For example, compensation entities need to determine entertainment and media industry. plans should be reviewed, because they what type of licenses they are Since a majority of their contracts may be impacted by timing differences deal with intellectual property, these revenue recognition. In addition, going to use, because revenue infinancial entities need to determine what managers should review type of licenses they are going to use, is now recognized when those business models and debt agreements to because revenue is now recognized ensure that the terms and conditions are rights are transferred. when those rights are transferred. adaptable to the new standard. Systems, Software companies will also be processes and controls all need to be impacted greatly. Currently, certain assessed to make proper estimates and industries have operating rules that disclosures. formerly delayed revenue recognition, Also, it is a good idea for the financial but under the new standard, those management team to think about the rules no longer apply. As a result, terms of contracts will have to big picture, how the new standard impacts the entity’s measurement change. and reporting processes. For more information on final adoption of A third industry that is affected is telecommunications, in which the new standard, see related sections of www.fasb.org. n

“

C. William Thomas

is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu.

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SPOTLIGHT ON CPAS

Eye on the Ball Dallas CPA Brings European Roots to Work and Family By Anne McDonald Davis, ABC

udovic Gombos is like so many Texas CPAs. Born in Romania, became a national table tennis champion as a boy, moved to France in his 20s and continued his championship run … until he fell in love with a lovely American flight attendant, followed her to the United States, got married and became an accountant. Typical, really. OK, back to reality. How on Earth did a Romanian table tennis champion end up a CPA in the Lone Star State? Gombos explains: “Very soon after Andrea and I got married in September 2004, I was playing at a tournament in Portland, Oregon. There, I was recruited by Texas Wesleyan, the only university in the country that was offering table tennis scholarships.” But accounting? How did his life up to that juncture lead in that particular direction? Turns out that someone with the discipline to practice hours every day starting at 10 years of age, someone with the endurance to play all night until he won the Marseilles Open, has the basic tools to tackle an accelerated study program to get an MBA in a promising field – particularly once he finds out his first child is on the way. “Besides, I was always good with numbers,” smiles Gombos. “Actually, my father was an auditor in Romania … although I didn’t care for it then and never thought I’d be an accountant.” Become an accountant he did, however, tackling 18 to 27 hours per semester, graduating in three years and three months, then taking and passing the CPA exam. He muses: “I wanted school to be over with, so I could concentrate on my family and my career, enjoy my kids once they were here. Plus being an athlete makes you very competitive, so I wanted to be the best student. Also, perhaps being an older student was a sort of advantage – I was a little more mature and very serious about studying. I treasured the education experience.” Last year, Gombos settled with Goldman Sachs after exploring tax accounting in public practice – Whitely Penn and Burds, Reed and Mercer, respectively – as well as internal auditing for oil and gas firm XTO Energy. He is enthusiastic about his current path. “I love it,” he enthuses. “Great place, brilliant people. A company driven by very highly motivated people. It’s a place where in order to succeed, you need to have already succeeded in your mind.” The latter statement reflects a kind of European sensibility and philosophic attitude Today’sCPA

I wanted school to be over with, so I could concentrate on my family and my career, enjoy my kids once they were here. Plus being an athlete makes you very competitive, so I wanted to be the best student.” Ludovic Gombos that often surfaces in Gombos’ conversation. He acknowledges the nuance. “Moving to the United States … the norms here are different. Everyone is so busy. This is a pragmatic country, and business seems to be more important than family to many people. People in Europe live more; business is there to support their lives, instead of being their lives,” he says. Above all, the Dallas CPA is concerned about this affecting his young children. “Kids played in eastern Europe, where I grew up. There was time to be creative and imaginative. No constant school activities, always studying. This allowed me to develop emotionally, mentally, physically – to get to know myself as a person. I want my little kids to enjoy that, not to be pushed to learn too much too early. My philosophy is ‘let a kid be a kid.’ Don’t overwhelm them.” He’s also “not a big fan of video games and television. I want them to spend time with people, not things.” So how about when he’s busy, having pursued an ambitious and demanding profession? “Ah, my philosophy about working overtime. I do it when I need to. But as soon as busy season’s over, I’m ready to return

to my family and play. I want my life back. Business will always be here, but my children will each only have one childhood. We all will only have one life. Family, friends, human relationships are the most important.” He encourages others to find those “human relationships” in their profession by joining TSCPA, starting early on as student members. “My dean, Dr. Quintanilla, always encouraged us to attend monthly chapter meetings. If you want to grow and develop as an adult professional, this is how.” Once Gombos has “worked hard to play hard,” he enjoys traveling with his “beautiful and good” wife and his “active and happy” young sons: Hunter, seven, and Blake, five. They have trekked all over the world in order to meet people from different cultures. “This is what enriches us,” he asserts. From time to time, he has even found time to continue to compete. Ranked #19 in the United States during his college tenure, a couple of years ago he won the national championship for players over 30 years of age. He was also one of 12 finalists to qualify for the U.S. Olympic trials. But his greatest ambition remains to be a family man. n

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TAKE NOTE What’s New On the TSCPA Website

Renewing Your Membership If you haven’t already renewed your TSCPA membership, now is the time! TSCPA dues notices were sent out in April and paper statements were sent to members who had not yet renewed their dues by the end of May. You can access and update your records and pay your dues online at tscpa. org; don’t forget to consider our affiliate contributions, if applicable.

GR WTH

New this year: you have until Aug. 31 to pay your dues, and if you have not paid, your membership will be dropped on that date. For questions regarding your member dues, please contact Member Services at 800-428-0272, option 3. TSCPA looks forward to continuing to serve you. n

Go to tscpa.org to learn more about …

Today’s CPA magazine is online. You can access the magazine from the homepage on tscpa. It’s what CGMA stands for. org. The link is on the right-hand side of the homepage, just below News Alerts and the CPE Catalog. Today’s CPA is postedit’in a digital format, as well as .PDF files that can be Officially, of course, s Chartered Global Management Accountant. downloaded. A new designation representing accomplished professionals that drive and deliver business success, worldwide. You can now connect with TSCPA Find on Google+. The link is available on the right side of the out more at cgma.org homepage under Today’s CPA. n

CGMA Designation Exam Requirement Begins January 2015

TSCPA’s incoming 2014-2015 Chairman Mark D. Lee, CPA-Houston, is highlighted. Please see “Meet TSCPA Chairman Mark Lee” on the left side of the homepage.

TSCPA’s Accountants Confidential Assistance Network (ACAN) is a program dedicated to assisting Texas CPAs, CPA AICPA and the Chartered Institute of Management candidates and accounting students who may be addressing Accountants (CIMA) created the Chartered Global an alcohol, chemical dependency or mental health issue. The Management Accountant (CGMA) designation. It is a global Texas State Board of Public Accountancy has asked TSCPA designation that recognizes U.S. CPAs and CIMA members to assist a number of CPA candidates around the state as an who work in a range of management accounting roles. CGMA_ThirdPage_ADS_cobrand.indd 1 1/26/12 4:01 PM aspect of the ACAN program. If you are a friend of Bill Wilson The CGMA is available to qualifying AICPA members, and members of TSCPA who are also or wish to be a friend of our profession, this is an opportunity AICPA members receive a discount. AICPA and CIMA provide a variety of resources, research to help. Please contact Craig Nauta at cnauta@tscpa. information, and career tools for designation holders. net or by phone at 800-428-0272, ext. 238; 972687-8538 in Dallas. To learn more about the program, Have you considered the CGMA designation? By applying now, you will be exempt from the please go to TSCPA’s website at tscpa.org. Under the need to take a strategic case study exam that will be required for new applicants beginning Resource Center tab, scroll down and click on Accountants in January 2015. To find out more about the designation, the eligibility requirements, and to Confidential Assistance Network. n access the valuable resources, visit their website at CGMA.org. n

Submit an Article to Today’s CPA Would you like to see your name in print? The editors of Today’s CPA are practitioners. To submit an article for consideration or to learn more, please seeking article submissions for the magazine. Today’s CPA is a peer-reviewed contact managing editor DeLynn Deakins at ddeakins@tscpa.net or technical publication with an editorial board consisting of highly respected CPA editor Bill Thomas at Bill_Thomas@baylor.edu. n 14

Today’sCPA

TSCPA Recognizes 2014 Rising Stars TSCPA congratulates the 2014 Rising Stars honorees. The 20 honorees were selected by a TSCPA task force based on their contributions to the accounting profession and their communities. The 2014 Rising Stars include: Tracie Nobles, CPA-Austin; Rodney Horrell, CPA-Brazos Valley; Angela Ragan, CPA-Central Texas; Brinn Serbanic, CPA-Central Texas; Stephanie Braislin, CPA-Dallas; Jason Freeman, CPA-Dallas; Jennifer Sicking, CPADallas; Justin Watson, CPA-Dallas; John Wauson, CPA-Dallas; Amy Ott, CPA-Fort Worth; Brandon Booker, CPA-Fort Worth; Adam Lawyer, CPA-Fort Worth; Christy Cates, CPA-Fort Worth; Gregory Kubes, CPA-Fort Worth; Mark Rich, CPA-Fort Worth; Danielle Supkis Cheek, CPA-Houston; Thania Gonzalez, CPA-Houston; Eric Abati, CPA-San Antonio; Joshua LeBlanc, CPASoutheast Texas; and Sheri DelMage, CPA-Southeast Texas. These members will be featured in the September/ October issue of Today’s CPA. n

Members Expelled The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B)(1). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy.

The 2014 AICPA PCPS/TSCPA National MAP Survey is Open for Participation! Don’t miss your opportunity to participate in the country’s largest CPA firm practice management benchmarking survey. This survey is brought to you by AICPA’s Private Companies Practice Section (PCPS) and TSCPA, who are pleased to welcome back Aon Insurance Services as a survey sponsor. Targeted benchmarks will include billing rates, chargeability ratios, compensation and other key performance indicators. The value of these benchmarks depends on broad participation among CPA firms. The survey is open to all public accounting firms. You do not need to be a member of AICPA PCPS or TSCPA to participate. To sign up for the survey, go to www.aicpapcpsmapsurvey.com/Signup.aspx. You’ll be prompted for your information, and an email with personalized sign-on information will be sent to you at that time. Be sure to sign up now; the survey will close Thursday, July 31. For more information, please visit www.aicpa.org/ mapsurvey. n

2014 TAX PRACTITIONER WORKSHOPS

• Timothy C. Harper, Keller; • Scott Wayne Hatfield, Dallas; • Arty B. Smith, Richardson; • Joel Spira, Houston.

October, November and December

The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B)(2). This action was a result of their connection with a criminal prosecution.

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• John Edward Bean, Austin;

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Membership Suspension Walter Dean Davis III, Houston, entered into a settlement agreement under the Joint Ethics Enforcement Program in lieu of further investigation and proceedings of alleged violations of the Code of Professional Conduct of AICPA and the Texas Society of CPAs. Without admitting or denying any wrongdoing, Davis was suspended from membership in the Texas Society of CPAs for a period of one year, effective May 5, 2014. n Today’sCPA July/August 2014

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TAKE NOTE continued from previous page Seventh Annual Young CPAs and Emerging Professionals Conference The Young CPAs and Emerging Professionals Committee held its seventh annual Young CPAs Conference in Fort Worth on June 6. With a very successful turnout of students, candidates and CPAs from all over Texas, attendees listened to sessions on leadership, negotiation, fraud, the franchise tax and more. Some of the most popular sessions of the day were the practice development panel discussions, made up of young CPAs serving on the panels. There were two panel discussions that catered to two different groups of attendees. Young CPAs and Emerging Professionals Committee member Jennifer Thompson, CPA-Fort Worth, moderated a panel consisting of Justin Propp, CPA-Houston, Justin Watson, CPA-Dallas, and Sandra Hon, CPA-Dallas. The panel members shared their stories about becoming a CPA, talked about the variety of careers within the accounting profession and took questions from the audience. Committee member Jason Freeman, CPA-Dallas, moderated the other discussion. The panel included Mark Rich, CPA-Fort Worth, Mark Selking, CPA-Fort Worth, Emily Hebert, CPA-Fort Worth, and Gina DeHoyos, CPA-East Texas. The discussion was geared toward CPAs who have six or more years of experience, and the panelists covered career progression, struggles in balancing life and work, and the role of leadership in the workplace.

Conference speaker Richard Bowen shares his whistleblower experiences with Citigroup in 2006, during the conference’s general session on fraud.

The conference closed with Immediate-Past AICPA Chairman Richard Caturano, CPA, and an in-depth discussion about emerging issues in the profession. Caturano explored a number of trends, including diversity, technology, globalization, regulation and more. The committee plans to meet later this summer to begin planning for next year’s conference and other initiatives for engaging and involving the young CPA members in the Society year-round. n

Young CPAs and Emerging Professionals Committee members Jason Freeman, CPA-Dallas, Justin Watson, CPA-Dallas, and Mark Selking, CPA-Fort Worth, prepare for their panel discussions.

Young CPAs and Emerging Professionals Committee member Jennifer Thompson, CPA-Fort Worth, gets to know Merline Kurian, CPA-Panhandle, and conference speaker and AICPA’s Immediate-Past Chairman Richard Caturano, CPA.

TSCPA Chairman Mark Lee, CPA-Houston, and Young CPAs and Emerging Professionals Committee members Norm Robbins, CPA-Fort Worth, and Royce Read, CPA-East Texas, enjoy networking at the welcome mixer hosted by the Fort Worth Chapter the night before the conference. Today’sCPA

2015-2016 LEADERSHIP NOMINATIONS The nominations process is one of the most important activities affecting the success and future of the Texas Society of CPAs. Your input is vital! I urge you to complete this form and return it by August 1, 2014. The Nominations Committee members are: E. Leroy Bolt, Vice Chair, Matthew G. Malcom, Terri E. Hornberger, James M. Larkin, Susan I. Adams, Sally W. Wolfe, Benjamin C. Simiskey, Koshy Alexander, Martha C. Perez, Kym Anderson and Fred J. Timmons. They are not eligible for consideration for any positions for which they are nominating.

Please send your completed form to:

Nominated by:

Nominating Committee, TSCPA; 14651 Dallas Parkway, Suite 700, Dallas, TX 75254-7408; Attention: Ali Allie, Staff Liaison; or by e-mail at aallie@tscpa.net; or by fax: 972-687-8602. William H. Hornberger, Nominations Committee Chair

Chairman-Elect

2012-2013 William H. Hornberger Dallas 2013-14 Chairman

Treasurer-Elect

2012-2013 Jeannette P. Smith

Rio Grande Valley 2013-2014 Treasurer

Secretary

2012-2013 Brenda R. (Roxie) Samaniego El Paso

2013-2014 Mark D. Lee

TSCPA Position Statement on Campaigning: Organized letterwriting campaigns and/or other methods of electioneering are NOT encouraged. Communiques from the general membership should not be sent to individual members of the Nominating Committee, but rather to the chairman of the Nominating Committee, in care of the TSCPA office in Dallas.

Chapter: City/State: E-mail:

2014-2015 Allyson B. Baumeister

(2016-2017 Chairman)

2013-2014 James R. Oliver, Jr.

2014-2015 Roxie Samaniego

(2016-2017 Treasurer)

2013-2014 Susan S. Roberts

2014-2015 Melanie C. Geist

San Antonio 2014-2015 Treasurer

Fort Worth

El Paso 2015-2016 Treasurer

2012-2013 Elected

2013-2014 Elected

Austin

Central Texas

Michael L. Brown

(Three-year term ending 2014-15)

Lei D. Testa

Kathryn W. Kapka

(Three-year term ending 2013-14)

(Three-year term ending 2014-15)

Fort Worth

East Texas

Michael L. Brown

Christi Mondrik

(Three-year term ending 2014-15)

(Three-year term ending 2015-16)

2014-2015 Elected Christi Mondrik Austin

(Three-year term ending 2015-16)

Kathryn W. Kapka

Jerry D. Spence

Toni McBee Joyner

(Three-year term ending 2014-15)

(Three-year term ending 2015-16)

(Three-year term ending 2016-17)

Corpus Christi

2012-2013 Appointed

2013-2014 Appointed

Southeast Texas

Permian Basin

Charlotte M. Jungen

Ryan G. Bartholomee

2014-2015 Appointed David E. Colmenero Dallas Susan J. Spillios Houston

Michael W. Young

Joan E. Schwartz

William J. Kelley Permian Basin

Panhandle

Todayâ&#x20AC;&#x2122;sCPA July/August 2014

San Angelo

(Three-year term ending 2017-2018)

Brazos Valley

Kirby H. Jackson, Jr. Dallas

(Three-year term ending 2017-2018)

(Three-year term ending 2016-17)

Jacquelyn E. Kuciemba Brazos Valley

2015-2016

(Three-year term ending 2015-16)

Randy L. Crews Rio Grande Valley

East Texas

Fill in nominations below:

Jerry D. Spence Corpus Christi

Austin

Central Texas

(2015-2016 Secretary)

San Antonio

Includes six Executive Board members for staggered terms. Four current members have unexpired terms. Two members for three-year terms will be selected by the Nominations Committee. Three members will be appointed by Chairman-elect Allyson Baumeister for a one-year term, 2015-2016. The TSCPA Executive Director/CEO also serves as an Executive Board member.

(Three-year term ending 2013-14)

2015-2016

Fort Worth 2015-16 Chairman

Houston 2014-15 Chairman

Executive Board Members

Jesse Dominguez, Jr.

Fill in nominations below:

2015-2016 LEADERSHIP NOMINATIONS Directors-At-Large Terms Expiring 2015

Terms Expiring 2016

Terms Expiring 2017

Abilene

Austin

Brazos Valley

E. Leroy Bolt

Katy Avenson

Jennifer M. Fox

Bradley D. Brown

C. Wayne Barton

Michelle R. Downs

Sandra Kay F. Brown

Thania D. Gonzalez

Jason B. Freeman

Russell J. Chimeno

D.D. Holmes

Royce E. Read

Toni McBee Joyner

Charlotte M. Jungen

Jennifer Hennessey

Donna P. Tadlock

Larry May

Kelly R. Hein

Donna H. Hugly

Carol S. McIntosh

Benjamin C. Simiskey

Keith Reeger

Benjamin PeĂąa

Carol B. Collinsworth

Diane DeCou

Marshall K. Pitman

Blaise C. Bender

Jerome G. Kotzur

Joan E. Schwartz

Wendi C. Taber

William L. Patton

Tracy B. Stewart

Phillip C. Davis

Ryan G. Bartholomee

Michael W. Young

Sheri K. DelMage

Southeast Texas Brazos Valley

Central Texas Dallas

South Plains

Corpus Christi Victoria

San Antonio

Permian Basin

East Texas

Fort Worth

Dallas

East Texas

Houston Abilene

El Paso

Fort Worth

Central Texas

Rio Grande Valley

Houston

Rio Grande Valley

San Antonio San Angelo

San Antonio

Southeast Texas

Brazos Valley

Permian Basin

Southeast Texas

Nominations Committee Member

Members of the Committee on Nominations shall have been members of the Society for at least five years and may not serve two succeeding years. Terms Expiring 2014 Fred J. Timmons, Chair San Antonio Sandra Kay F. Brown, Vice Chair Brazos Valley Chris W. Busch Southeast Texas Michael L. Brown Central Texas Lorena Castillo Rio Grande Valley Michele M. Heyman Austin

Alyssa G. Martin Dallas Steven G. Newcom Fort Worth Brian C. Jones Houston Lynn S. Kupper San Antonio Susie Sullivan Corpus Christi C. Jeff Gregg Wichita Falls

Terms Expiring 2015 William Hornberger, Chair Dallas E. Leroy Bolt, Vice Chair Abilene James M. Larkin Brazos Valley Sally W. Wolfe Central Texas Koshy Alexander East Texas Kym Anderson El Paso

Matthew G. Malcom Austin Terri E. Hornberger Dallas Susan I. Adams Fort Worth Benjamin C. Simiskey Houston Martha C. Perez San Antonio Fred J. Timmons San Antonio

AICPA Council

Ten members represent Texas. Three-year terms plus one one-year designee. The current TSCPA chairman-elect automatically fills the one-year designee vacancy, and the current TSCPA chairman automatically fills one of the three-year vacancies for AICPA Council. Terms Expiring 2014 C. Jeff Gregg Wichita Falls James F. Reeves Fort Worth Carol A. Cantrell Houston William H. Hornberger Dallas (One-year designee)

Terms Expiring 2015 Jean M. Hobby Dallas (Board member) James A. Smith Dallas Tracy B. Stewart Brazos Valley Donna H. Wesling Austin David Jentho Houston (At-Large Member) Mark D. Lee Houston (One-year designee)

(Terms expiring 2018)

Central Texas

El Paso

Panhandle

Fill in nominations below:

Terms Expiring 2016 E. Leroy Bolt Abilene Dora J. Dyson Central Texas Stephen G. Parker Houston Fred J. Timmons San Antonio Allyson B. Baumeister Fort Worth (One-year designee)

Fill in nominations below: (One-year term)

(Terms expiring 2016)

Fill in nominations below: (Terms expiring 2018)

Terms Expiring 2017 William H. Hornberger Dallas Kenneth D. Sibley Dallas Lei D. Testa Fort Worth Permanent Member: B.Z. Lee Houston

Todayâ&#x20AC;&#x2122;sCPA

CAPITOL INTEREST

Best Bets

By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation

t’s summertime. I’m dreaming about a cool mountain retreat, or at least a dip in the pool. Who cares about politics, legislation or elections? You’d probably rather read about my adventures in Antarctica than the political landscape. After all, summer is the last respite from the universally despised political advertising. The negative political ads got so bad during the primary runoffs that my neighbor said she refused to vote for any of those, uh …well … she used a pejorative term. Based on the small voter turnout, lots of voters must have agreed with my neighbor! The advertising pause is because the primaries and runoffs are over and no one starts paying attention again until after Labor Day, if then. After all, the general election is not until November. The Republican primary runoff reminded me of my trip to Antarctica. In Antarctica, there were penguins everywhere – at every landing – thousands of them. You could smell them before you saw them. During the runoff, it seemed to me there were political ads everywhere – you just couldn’t get away from them. Millions of dollars were spent for the primary benefit of those who sell advertising space. Just like Antarctica, the stink was everywhere. Think about it; it took less than 500,000 votes to win a statewide Republican nomination (even less for Democrats); that’s out of a total of about 15 million Texas voters. All 25 million Texans (10 million Today’sCPA July/August 2014

aren’t eligible or don’t register to vote) had to endure ads that went from innuendo to outright lies. That’s why my neighbor didn’t vote. All those ads and the voters learned nothing enlightening about the positions of the candidates on the issues that matter. I wonder if all the other advertising I see is that misleading. Alas, this is not a travel column, so you’ll have to talk to me privately if you want to look at my 600 pictures of Antarctica. (Yes, I really took 600 pictures.) So here goes the column during the election doldrums for you diehard politicos. Maybe I’ll just make some predictions; what I might call my best bets! They are best bets on who will win the November elections, best bets on the political climate after the elections, best bets on the 84th Texas Legislature’s agenda. Odds are you won’t remember my predictions anyway, but as I always warn about my predictions, I’m frequently wrong. But if you must know what’s going to happen in the

political future, here are my best bets.

Who Wins in November? While that is a question, the answers are so obvious I wouldn’t take your money, even if we did make a bet. I predict a Republican sweep of continued on next page 19

CAPITOL INTEREST continued from previous page all the statewide races. Texas has always been a conservative state and it seems to be more conservative than ever in 2014. The conservative wing of the Republican Party is in charge and all their candidates claimed all the statewide Republican nominations. There are simply more Republican voters than Democratic voters. In that environment, a Democrat has virtually no chance for election absent some major individual scandal and even with a scandal, a conservative Republican might win. Some Democratic candidates have a good story to tell, good qualifications, good reputations, are business-friendly, and maybe even have some good ideas on how to address serious issues in Texas. It doesn’t matter; they are swimming upstream. While mainstream Republicans made a comeback in most other states during this primary season, the Texas Tea Party is thriving. It’s just more evidence of how conservative Texas voters seem to be. The best bet is for a Republican sweep of all statewide offices. For you Democrats, I am not being partisan; I’m just being realistic. I know Wendy Davis has had a lot of press, but so far it hasn’t turned into poll results; she’s still 12 points behind Greg Abbott as of the latest poll. I know Democrats say the nomination of Sen. Dan Patrick for lieutenant governor, an avowed Tea Party conservative with a take-noprisoners attitude, gives them something to contrast, and I know that Sen. Leticia Van de Putte is a quality candidate and a business-friendly Democrat. The lieutenant governor’s race is shaping up to be one of the hard-fought campaigns, likely bringing out all those terrible name calling political ads again; but when the votes are counted, Van de Putte will likely still be a state senator. I know that the Republican candidate for attorney general has been convicted of violating state securities laws and that fact will provide even more material for the media during the campaign. I know that the Democratic candidate for state comptroller is a CPA and TSCPA member with excellent credentials, is well spoken and would likely be the most professional comptroller ever. I know all those things, which will certainly provide fodder for many campaign sound bites, but the best bet is still for a Republican sweep. Legislative races are a little different. While the Republicans will undoubtedly maintain substantial majorities in both houses of the Legislature, Democrats will be elected; but the outcomes of the legislative races are equally predictable. Let’s start with the Senate.

Who Wins in the Senate? Fourteen senators are not up for re-election; eight Democrats and six Republicans. There are eight contested races; five will be won by Republicans and two by Democrats. That just leaves one Senate race where the outcome is not completely predictable. When Wendy Davis decided to run for governor, that left her Senate seat open for new challengers. That seat, Fort Worth’s Senate District 10, supposedly has about 4 percent more Republican voters than Democrats. Since Davis won that district twice as a Democrat, we can’t automatically put this one in the Republican column, but my best bet is that the Republican candidate, Konni Burton, wins. That leaves two Senate seats to be determined by special elections. Senate District 4 has already had a special election, but there was no outright winner. The runoff between Rep. Brandon Creighton (R-Conroe) and Rep. Steve Toth (R-The Woodlands) will be Aug. 5, 2014. The seat was vacated by Sen. Tommy Williams, CPA, late last year. Whoever wins will be a Republican. Best bet is on Creighton. Sen. Robert Duncan (R-Lubbock) has just accepted the position as 20

Texas Tech chancellor and has resigned his Senate seat. The date for a special election to fill his unexpired term had not yet been set by Gov. Rick Perry at my publication deadline. CPA and TSCPA member Rep. Charles Perry (R-Lubbock) has already announced plans to run in the Senate District 28 special election. I can’t say Perry will be the winner, but my best bet is the winner will be a Republican. Best bet for the Senate in 2015: 20 Republicans and 11 Democrats. That’s one more Republican and one less Democrat than last session. It’s still short of a two-thirds majority for Republicans. There will be eight new senators, and it’s likely that five of them will be more conservative than their predecessors and the other three newbies will be equally as conservative as the conservative senators they replace. Sen. Dan Patrick will likely be presiding as lieutenant governor, who gets the job by claiming to be much more conservative than Lt. Gov. David Dewhurst. The open question is, what does it mean to have a more conservative Senate? In the past, the House was considered the more conservative body. Patrick has threatened to eliminate or modify the Senate’s twothirds rule, which requires two-thirds of all senators to agree to bring a bill to the floor for a vote. He has also suggested he won’t appoint Democrats as committee chairs. If this happens, the Senate will become a partisan battleground that could threaten the passage of much legislation and change the typical collegial Senate into a more Washington-like body. Best bet is that Patrick will not lead the Senate into chaos, but will provide sufficient compromise (a few Democratic committee chairs) to allow the reasonable conduct of business. The Tea Party senators may relent on the two-thirds rule when they realize with that rule, they are in a position to block any legislation they don’t like, something they might consider if they don’t really trust those Republican senators who don’t drink tea.

Who Wins in the House? There are 150 House seats, all up for re-election; 60 Republicans and 45 Democrats have no general election opponents. That’s 105 races (over two-thirds) that have already been decided. There are 45 general election contests. Of those, 34 will be won by Republicans and seven will be won by Democrats. That leaves only five races that are up for grabs. (Some pundits say there are six undecided contests, but perhaps Today’sCPA

“

Best bet is the House will have 95 Republicans and 55 Democrats, the exact same number as last session. Even if the Democrats are able to win a few extra seats for currently unforeseen reasons, the Republicans will undoubtedly have the substantial majority in the House, at least 91 seats, but they won’t have a two-thirds or “super” majority.

their crystal ball is not as clear as mine.) Based on incumbency or who last held the seat, four races will probably provide one Republican and three Democrats. That leaves one normally Democratic seat for which the Republicans have an upset chance. Best bet is the House will have 95 Republicans and 55 Democrats, the exact same number as last session. Even if the Democrats are able to win a few extra seats for currently unforeseen reasons, the Republicans will undoubtedly have the substantial majority in the House, at least 91 seats, but they won’t have a two-thirds or “super” majority. Unlike the Senate, the House will not tilt to the right so much. There may be four or five new reps who fit the very conservative mold, but certainly not enough to tilt any balance or threaten Speaker Straus. There are about 30 Tea Party House members, and I expect the other Bob Owen, CPA

120 members will be voting for Straus. It only takes 76 to win. Just like last session, most of the legislative battles may be between the House and Senate rather than Republicans and Democrats; perhaps even more so if the Senate rules are changed. What’s Up for the Next Session? I know I promised, but maybe you can wait until September to hear what’s on the 2015 legislative agenda. Here’s a hint. The conservative tilt in the Senate means certain issues, especially restrictions on illegal immigrants, liberalization of gun rights (campus carry; open carry?), school vouchers (or school choice as some like to call it) and possibly more limits on abortions will be front and center. There will be much more; read the next issue’s column. Enjoy your summer vacation – hopefully, far away from politics. n

is TSCPA’s managing director of regulation and legislation. Contact him at bowen@tscpa.net.

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Today’sCPA July/August 2014

COVER ARTICLE

The

PUZZLE SOLVER

TSCPA Chairman Mark Lee

Reflects on His Chosen Profession, Family, and the Life and City He Loves

ncoming TSCPA Chairman Mark Lee, CPA-Houston, loves his profession, loves his job, loves his family and has never bought a television. Oh, he

By Anne McDonald Davis

has a number of televisions, except in his kids’ bedrooms, where they are not allowed. The thing is, he won them – all of them. One is still in the box.

Seems most every time he is pressed to buy a raffle ticket for some worthy cause, he wins the TV. It’s happened so often that the last time, he says, there were boos. However, nobody is booing about Lee’s energy and enthusiasm heading up the Society for the 2014-15 year. A recent recipient of the Asian American Bar Associations’ highest honor, the Impact Award, he took some time to sit down with Today’s CPA and tell us a little more about himself.

Today’sCPA

You work in the legal department of AIG Life & Retirement as a tax lawyer and CPA. Tell us about your career.

a lot of people, whether they were directly affiliated with Andersen or not. It was traumatic for the profession.

puzzles. You see a problem, think through it, consider various ways to approach it, and you provide a solution. It’s a fit for me.

A: I’m a graduate of the University of Texas A: Yes, especially since Enron was there (in Q: So, it’s a fit and you find it rewarding, at Austin, got my BBA in accounting, graduated from the University Law Center and became a lawyer. My career path has basically been as a tax lawyer throughout. Back when I started off, I worked for an oil and gas company as a tax lawyer. Then I worked for a boutique law firm for a while. I went to Arthur Andersen for a substantial period of time … right up to the end. Technically, I was with the D.C. Office of Federal Taxes, but they let me live in Houston; as a native Houstonian, I felt really good about that. Then as Andersen was going down, I moved over to AIG, basically as a tax lawyer again. Tried to put those bad memories out of my mind.

Q: Well that was a pretty shaky time for Today’sCPA July/August 2014

Houston) too. It was the epicenter of the accounting nightmare back then.

but there are probably challenging areas also?

Q: So, how did you decide, “I’m going to A: As I’ve moved up in my career, the chalbe an accountant – and I’m going to be a lawyer?”

A: I think it’s probably a personality fit. As

a kid, I was a little bit sickly and my mom really wanted me to do something while I was ill. So, I read a lot and loved board games – Monopoly, Risk, chess. See, I’m sort of a puzzle-solver, game-player type. My favorite television shows were detective stories and “Perry Mason.” Follow the trail, pick up on the clues, get the solution. That’s one reason I went into accounting and tax law, because I view those as sorts of

lenge has been management issues. Personnel issues. I tend to think that everybody is just like me … and I’m maybe not the most empathetic person in the world. [chuckles] My goal is to be a better mentor, a better listener, a better people manager. Now the technical stuff I love; I can do that all day. [laughs again]

Q: You’re kind of like one of those person-

al trainers who thinks just because he can pick up that huge dumbbell, you can, too? continued on next page 23

COVER ARTICLE continued from previous page A: Right. Q: I suppose in a way, that’s a compliment to the other person.

[laughs] Well, at practically every job I’ve ever had, I walk into a room with a half a dozen people working on a problem, and I see the answer relatively quickly … and I keep waiting and waiting for everybody else to get it. I have a tendency to be like, “Come on guys! Don’t you know yet?” I struggle with patience, but I’m working on it. People tell me I’m getting better. [chuckles]

Q: In addition to developing empathy and

patience, what other advice would you give a young person considering the accounting profession?

In the first place, I encourage students to really consider accounting as a possible career. I tell them the good aspects. It’s steady. It pays well. It’s challenging. Then I also tell them that the way you know if this is possibly for you is to go find out all about it. Find a mentor – someone you can chat with, someone who’s doing it. Join the student organizations of your school, your local CPA chapter, TSCPA. Because the CPA profession isn’t like it used to be – you plugged into one role and that’s what you were going to do. Now, you can really follow your passions; there are so many avenues you can pursue. If you’re interested in media, you can work for a media company in their finance department. If you’re interested in sports and you’re not a great athlete, you can work in a team’s financial division. Yes, it’s a challenging profession, but I think it’s very rewarding.

Speaking of challenging, what do you see as the most pressing issues facing the profession at present?

Number one, there’s really a war for talent. I see it at my firm and, given my role with the Houston Chapter and TSCPA, I’ve heard it all around the state. People are looking for good, young talent, and it’s getting very difficult to find. We are not producing enough CPAs right now. Plus, CPAs have so much opportunity that they can move from firm to firm – and 24

often do. I personally know an individual who has worked for all four Big Four firms and two regional firms in the span of about 15 years! It’s difficult to find someone, train them, and hope that they become a long-term part of your firm. Also, I think we’re facing a sort of generational challenge. We’ve all heard about how the boomers are retiring – 10,000 turn 65 every day and that will continue for the next 15 years. I see it in my office. The boomers are moving out and there’s not enough new talent in line for succession and leadership. So, I think that’s the big stress point in the accounting profession right now – figure out a way to move to the next generation and bring that new talent into leadership roles. I think that the next generation hasn’t had as much opportunity to get a lot of leadership training, and that’s kind of the need right now. At TSCPA, we are really making good strides at bringing in the next generation. We have our Leadership Development Institute; we make every effort to ensure that CPAs who join this organization can find a home in an area that interests them. Some want to focus on technical stuff while others are aiming to develop their soft skills or enter the leadership realm. We have something for pretty much everyone. I’m really a big proponent of joining TSCPA. Is that obvious? [laughs]

Q: Anything else on the profession’s plate? A: There is just regulatory overload. I don’t remember it ever being like this. It is a struggle to keep up. Personally, I think that’s part of the fun. I always like to know more than everyone else … or at least like to think I do. [laughs]

You’ve been involved with TSCPA and the Houston Chapter for a number of years, including as chapter president. Why did you become a volunteer?

A: It’s more than 20 years. I’ve been a CPA

since 1987, but for the first half a dozen years, I was just working.

I understand it’s still difficult sometimes, getting young people involved. They’re building their careers, putting in a lot of hours.

Plus, they’re also starting their families and they have other interests. However, you can find the time if you want.

Well how did you? When did you really start getting involved?

A: I have a story. You know, I have a million

of them [chuckles] … I’m not going to tell you all of them. But here’s one. In the early ’90s, I was running for Houston city controller, and I, of course, was looking for political support. So, I visited the Houston Chapter, the PAC, to pitch myself. “Hey,” I thought, “These are politically active CPAs and I am a CPA. They will support me.” Then I found out the PAC contributes only to statewide candidates; they don’t get involved in local races. Still, I chatted with everybody. I thought I made a good impression. I might have just been loud. [laughs] Editor’s Note: The TSCPA CPA-PAC contributes to statewide candidates, including all legislative races and races such as governor, lieutenant governor, comptroller, attorney general, etc. The CPA-PAC does not consider contributions to local city candidates. Anyway, I came in second in the race. The Houston Chapter president at that time, Pat Durio, waited an appropriate amount of time and then called me up and said, “Mark, you need to get involved in the CPA Society.” I said, “OK, what does that mean?” They put me on an investment committee, and it just sort of snowballed. I tend to talk a lot at meetings. I’m not shy about putting my opinion out there. [laughs] Anyway, I just got more and more involved – headed up some committees, did fundraising. We do this Charity Extravaganza in Houston. I think the year I chaired it, we raised $300,000, more than anybody else ever had. And I was nominated for chapter president. Then Steve Goodman, TSCPA chairman at the time and from Houston, started getting me more involved at the state level. I enjoy it. I am very much an advocate for the CPA profession and the Society.

How has your TSCPA service impacted your life? How do you view your involvement overall?

A: Let me start off by saying that my dad – Today’sCPA

he’s passed away now – was always a big fan and a big advocate of, look, if you’re given something, you need to give something back. So, I sort of think of that as my professional credo. I’ve always tried to be involved in professional organizations just because I think it’s important. I think I have had a very successful career, and people who have that need to bring other people up, not just pull up the ladder after you’re done at your end. I think that at TSCPA and your local chapter, you have an opportunity to develop skills that you don’t necessarily get to develop at work. The things you do at work are project oriented. You know the task. You have the technical ability. But that doesn’t typically get you ahead in a large organization or maybe any organization. You need to have those leadership skills, and that’s what TSCPA really can help you with. I’m a prime example. If you’re interested in developing your public speaking skills, your leadership skills, TSCPA and your chapter are ways to accomplish that in a safe environment. It’s your friends here. You make a mistake in leadership or public speaking and maybe your TSCPA friends will rib you a little [laughs], but it’s not like you’re doing it at work. The errors you make there are much more penal than the errors you make here. Plus, you have so much more of a support system here, other CPAs to advise and help you.

Q: Perhaps as business and the profession

have gotten more complex and often more compartmentalized, everyone mainly learns their piece. And it’s hard for companies not to just want you to be really, really good at your piece, and that’s it. They’re not developing you as a person. They don’t necessarily even have the time or the money to do that.

Yes. While I think that most corporations, at least at the top level, know that they need to work on developing their employee as a whole, there are these bottom-line considerations. To the extent that our organization can add value in that manner, I think we’ll have more willingness from corporate employers and public accounting firms to have their personnel be a member of our organization. And just from a self-interest point for our professionals, we are going to be able to allow them to develop their careers the way they want. Today’sCPA July/August 2014

Photographs © Scott Williams, ScottWilliamsPhotography.com.

I also think a big aspect nowadays is community service. I think CPAs are often viewed by others as kind of quieter, more math-oriented. However, not the CPAs I have seen and I have been associated with at TSCPA. They are all involved in some aspect of community service. Generally, nonprofit organizations seek them out because of their financial skills; they want them to be treasurer. But CPAs are really willing to give back to the community in a broader sense. At our strategic planning meetings, the idea of a CPA month of service was tossed around. I think that our members, particularly our younger members, are really interested in giving back to the community – not only being great professionals, but providing extra value to the communities where they live.

Q: Tell us a little about your other interests and your deep ties to the Houston area.

I was born at St. Luke’s Hospital and raised in Houston, a native son. You know, when people come to Houston, they say, “What a big city.” It is big. For me and many others who grew up there, though, it’s still a small town. Especially since when I was growing up, there weren’t all that many Asians. So, if I was getting in trouble or

making trouble – which I never did [laughs] – let me just say that my parents would have been immediately informed by one of their friends. After living there all my life, running for political office and being involved in the community, whenever I go to the store or to a restaurant, I see somebody I know. It’s probably because I’m a CPA that I got so involved in the community. I started out with environmental concerns like Buffalo Bayou Preservation and SPARK Park. I’m currently the chair of the SPARK Park organization.

Q: What’s that? A: It was started by the late Eleanor Tin-

sley, who was on the city council, and is dedicated to developing more green space around Houston. Her idea was to develop parks around city schools, mainly elementary schools. I must have been on this board longer than I’ve been a CPA almost. After Eleanor passed away, I think the board said, “Mark’s the loudest person on the board, so make him the chair.” [laughs] I’ve been actively involved in getting parks around Houston for a number of years. continued on next page 25

COVER ARTICLE continued from previous page Also, I currently serve as the chair of a United Way Agency called Career and Recovery Resources. Basically, it is an organization dedicated to helping individuals who have barriers to employment – all types of barriers. If you’re older, it’s harder to get a job. If you have a disability or are a veteran, if you have a drug problem, if you have a drinking problem, if you’re homeless – those types of individuals. I’ve been involved in children’s issues for a long time as well. For quite a while, I was a board member for an organization called Children at Risk, which lobbies the state on children’s issues, especially school performance. I’ve been involved in a number of political-type entities too. I used to serve on the Harris County-Houston Sports Authority, which was maybe the most fun thing I ever did because they were in charge of building Minute Maid, Reliant, Toyota Center and the new Dynamo Stadium.

And we have two young children – well, not that young. They’re both in high school. Eric is my 16-year-old. He’s bigger than I am already, and my daughter, Katherine, is 14. They’re going to Bellaire High School. Both are very smart and so are under the mandate never to bring home a B to this family. [laughs]

claimed that, “Mark, you have infected me with this political bug of yours,” because I think our first real date was when I took her to a political event. Oh brother. [laughs] She’s worked at City Hall in Houston for 10 years; now she’s the director of marketing and business development for the Greater Sharpstown Management District. These are small, independent taxing organizations that basically use that tax money to do public safety, beautification, sort of enhance an area of town.

in school. They’re active in sports. And I’ve been pushing them to have more leadershiptype activities at school as well. They said, “We don’t have enough time.” My answer? “I work. You have plenty of time.” [laughs] Our family’s activities mostly revolve around the children’s activities. Both of my kids love lacrosse. Lacrosse season, I don’t believe, ever ends. I guess I shouldn’t complain because I’m a golfer. There is so much gear with lacrosse! I mean, all these sticks, these uniforms, these helmets.

Q: That sounds like a nightmare. [laughs] A: Well, it used to be that when they were littler, I said, “OK, if you bring home a B, I’m going to take your Game Boy away.” Then the threat became, because they don’t really watch TV, “I will take away your laptop.” Now the big threat is, “I’ll take away your phone.”

Q: Ohhh. Their cell phones? A: Yes. Q: That’s brutal. A dire threat to a teen-

Q: You play golf ? A: I do play golf. That is my recreational

activity nowadays. My goal was to play once a week, but that never works out for me. [laughs]

Q: And you run? A: Yes, though I haven’t run in a while com-

petitively. I just run with my daughter now. I have run in 10 marathons. I think the last marathon really was probably in the early 2000s. I ran in New York’s and Houston’s, which was, I think, when I was in the best shape of my life. Now, not so much. [laughs] In fact, when I ran the New York Marathon, it must have been in 2001, because it was right after 9/11 and Alice was saying that I probably shouldn’t go. But it was amazing. Rudy Giuliani was out there on the Staten Island Bridge, sharpshooters and police everywhere. There were, like, 40,000 people running – it was quite intense.

ager. Q: Do you have a favorite story from your Q: And you’re a husband and father. years in the profession? A: Their response to that is, “Daaaaaaaad!” A: Yes, my wife’s name is Alice. She has But they’re very good children. They do well A: I was handling the audit for a Fortune 500

Anne Davis, ABC

company and the company decided to make a deposit to stop the running of their taxes. It was a $200 million deposit and they requested, “Mark, go give it to the IRS downtown.” So, I’m driving down there, $200 million check in my pocket and I’ve already told the IRS agent on the account to meet me at the teller window. Then I pull into the parking lot and there’s only one spot. And it’s metered. I didn’t have any change. I had $200 million dollars in my jacket, but not enough money to park. How about that? [laughs] n

is a freelance reporter, writer and editor in Dallas, Texas.

Today’sCPA

FEATURE

To Confirm or Not to Confirm … That is the Question By Patricia Z. Galletta, CPA, MBA

he Monroe Loan Society, a small consumer loan company with offices primarily in the New England and Mid Atlantic states, was organized in Delaware in 1927. The manager of the large Philadelphia branch created notes for nonexistent borrowers, collected the loan money and subsequently ensured the monthly note payments were made on time. Within a year, the manager had forged 2,000 out of the 2,800 outstanding notes receivables. From 1927 to 1937, the external auditors did not visit branch offices, did not examine loan notes or applications, and did not confirm branch office loans with the borrowers, thereby missing a $458,000 overstatement of assets due to the fictitious loans. The auditors of the Monroe Loan Society did not send out confirmations to/visit the branch offices because they were satisfied with the records from the home office. McKesson & Robbins sold milk of magnesia, cough syrup and quinine in the 1920s and grew to be a large pharmaceutical company under the direction of its owner, F. David Coster (aka Philip Musica, Frank D. Costa). One of Coster’s brothers ran operations at W. W. Smith & Co., a fictitious sales agency that mailed purchase orders to McKesson. Another brother was in charge of McKesson’s shipping department where he would forge shipping documents to show shipments being made to customers. The third brother was McKesson’s assistant treasurer, and he was responsible for showing cash payments for inventory and cash receipts to fictitious customers. The commission fees earned by W. W. Smith & Co. for arranging the “sales” were split amongst the four brothers. Musica and his brothers stole over $2.5 million from the company over a 12-year period. In 1937, the financial statement showed non-existent sales of over $18,000,000 (gross profit of over $1,800,000), non-existent accounts receivable of $9,100,000 and non-existent inventories of approximately $10,000,000. During the audits by Price Waterhouse & Co., the financial information was verified to the supporting documents and was never confirmed. The auditors relied on customer D&B reports (forged) and (false) invoices and receiving tickets all provided by McKesson management. During the time of Monroe Loan and McKesson & Robbins, auditors were governed by the Federal Reserve Bulletin (FRB) of 1917, and the revised Bulletins of 1929 and 1936. These three documents reflected the conflicting opinions at that time related to confirmations by recommending, but not requiring, confirmations in the audit of inventories and receivables. In the FRB of 1917, they addressed the confirmation of receivables by stating: “The best verification of an open balance is a confirmation by the customer; therefore, if time permits and the client does not object, it is advisable to circularize the customers. The auditor should personally see the circulars mailed after comparing them with the lists of outstanding accounts. The envelopes for replies sent with the circulars should be addressed direct to the auditor.” The FRB of 1936 revised the guidance by stating “such confirmation is not usually considered necessary in the case of companies having an adequate system of internal check.” Because of these and similar cases, the Statement on Auditing continued on next page

Today’sCPA July/August 2014

FEATURE continued from previous page Examples of “alternative procedures may include examination of subsequent cash receipts (including matching such receipts with the actual items being paid), shipping documents, or other client documentation to provide evidence for the existence assertion.”

Procedures (SAP) 1, Extensions of Auditing Procedures was created by the Committee on Auditing Procedures (Committee) within the American Institute of Accountants (AIA), which is the predecessor of the American Institute of CPAs (AICPA). With the publication of

the Extensions of Auditing Procedures in 1939, “confirmation of notes and accounts receivable by direct communication with the debtors shall be regarded as generally accepted auditing procedure.” Auditors were now recommended to confirm receivables and verify the existence of inventory. In addition, auditors were now required to review the auditee’s system of internal control to determine the extent to which it could be relied upon (Previts & Merino, 1998). This SAP was amended in 1942 with SAP 12, Amendment to Extensions of Auditing Procedure, which required disclosure in the audit report when auditors did not conform to the requirements in SAP 1. SAP 12 was later rescinded in 1974.

The committee issued 54 SAPs from 1939 to 1972 before it became the Auditing Standards Executive Committee and began issuing Statements on Auditing Standards (SAS). SAS 1, Codification of Auditing Standards and Procedures, summarized and superseded the 54 SAPs in 1973.

As Time Went On … COMPANY: United States Surgical Corporation (USCC) ACCOUNTANT: Ernst & Whinney (E&W) and Michael L. Ferrante, CPA YEAR: 1990 FACTS: USSC produces tools for use in surgery and at the time of the audit, a material amount of surgical instruments were held offsite. In the audits of 1979, 1981 and 1982, 25 confirmations were sent out to test the existence of these instruments in accordance with SAS 1 (AU331); in 1980, confirmations were sent for only eight instruments. Of the eight confirmations, two were never returned and one indicated the recipient was unable to confirm the existence of the units. Auditors were not able to resolve the differences. A material amount of molds and dies were also held offsite. In its audit of the 1981 financial statements, E&W selected nine vendors that held the significant portion of the company’s molds and dies, and sent them itemized confirmation letters of tools held in their possession. Of the nine confirmations, three were never returned and of the six returned, four contained exceptions. SAS 1 (AU331.08) states: “The auditor should employ such alternative procedures as are practicable to obtain adequate evidence necessary to satisfy himself as to those significant requests for which he receives no replies. These procedures may include examination of evidence of subsequent cash receipts, cash remittance advices, sales and shipping documents, and other records.” It was determined that 28

follow-up procedures by the auditors were either non-existent or inadequate. CONCLUSION: Ferrante was censured; the New York regional offices of E&W were barred from accepting new engagements for 45 days. Procedures related to receivable confirmations did not change until the issuance of SAS 67, The Confirmation Process in 1991. SAS 67 (AU330) breaks down what is meant by the confirmation process, discusses the relationship between confirmations and risk/financial statement assertions, and talks about when to use positive versus negative confirmations. Additionally, it stresses the importance of applying alterative procedures in cases of non response to positive confirmations and the need “to obtain the evidence necessary to reduce audit risk to an acceptably low level.” Examples of “alternative procedures may include examination of subsequent cash receipts (including matching such receipts with the actual items being paid), shipping documents, or other client documentation to provide evidence for the existence assertion.” COMPANY: California Micro Devices, Inc. (CMD) ACCOUNTANT: Michael J. Marrie, CPA, and Brian L. Berry, CPA YEAR: 2003 FACTS: Marrie and Berry were part of a team auditing California Micro Devices, Inc. (CMD), which sold semiconductors. In the prior year, CMD lost one of its largest customers. Although the company’s policy was to record revenue when the product was shipped, the auditors knew the policy was not always followed. Additionally in prior years, the auditors found it difficult to determine what goods had/had not been shipped to customers and noted that in prior years, CMD recognized revenues in the current year on products that were not shipped until the next year. The auditors determined their positive confirmation selection criteria during the planning phase of the audit by selecting all accounts receivable balances greater than or equal to $100,000 and randomly selected 20 additional balances under $100,000 to be confirmed for a total of 54 accounts receivable customers. This selection did not change even after the company proposed a $12 million accounts receivable write off during the planning stage. Of the 54 accounts, 25 balances (46 percent) were confirmed with 12 partially confirmed and 17 not confirmed by the customer. Alternative procedures were performed on those accounts not fully confirmed, but the Securities and Exchange Commission (SEC) challenged the adequacy of the procedures related to six of the accounts not fully confirmed in which: • Copies of purchase orders requested by the customers were not sent by the auditor. Today’sCPA

• There were unexplained differences in the auditor’s work papers. • Cash receipts were not matched to invoices. CONCLUSION: Marrie and Berry were denied the privilege of appearing or practicing before the Commission. According to AU 330, The Confirmation Process, auditors should apply alternative procedures if the confirmations are not received, such as examination of subsequent cash receipts (including matching such receipts with the actual items being paid) and shipping documents. There was no indication in the work papers of alternative procedures performed that would explain the confirmation discrepancies. Due to the client’s history and risk assessed with the receivables, the alternative procedures should have been more definitive. AU 330 was updated in 2007 (revised in 2008) through AU9330, which addressed the use of electronic confirmations.

And Now International Standards on Auditing (ISA) 505, External Confirmations, was created as part of the Clarity Project and is effective for audits beginning on or after Dec. 15, 2009. It is not significantly different than the current U.S. Clarified Statement on Auditing Standard AU-C Section 505, External Confirmations, which is effective for audits beginning on or after Dec. 15, 2012. Both agree that evidence is more reliable when obtained directly by the auditor, from independent sources and received in documentary form. Both agree that regardless of the confirmation format, the auditor should always maintain control over the confirmation requests and the responses. ISA 505 uses stronger wording by substituting the word “shall” where AU-C Section 505 uses “should” when applying these standards. AU-C Section 505 also offers more specific examples than the international standard and provides guidance on responses that are electronic, oral or contain restrictive language. The Public Company Accounting Oversight Board (PCAOB) still follows AU330, which does have some differences with ISA 505/AU-C Section 505. ISA 505/AU-C Section 505 spends more time discussing situations where management restricts the auditor’s

Today’sCPA July/August 2014

use of confirmations or when there are doubts as to the reliability of the response. This explanatory material is not contradictory to the spirit of AU 330. AU 330, however, includes “a presumption that the auditor will request the confirmation of accounts receivable,” which is recognized as important audit evidence, but is not explicitly required or recommended in the ISAs. In October 2010, PCAOB released a proposed update to AU330, which suggested several possible changes. NUMBER 1: Expand the scope of the confirmation requirement to include receivables from credit sales, loans or other transactions (as described in the 310-10-05-4 of the FASB codification), cash with financial institutions and other accounts that, if incorrect, could run a risk of creating materially misstated financial statements. Previously, receivables were defined as “the entity’s claims against customers that have arisen from the sale of goods or services in the normal course of business and financial institution’s loans” (AU330.34). In addition to expanding the definition of receivables, it is proposed that the words “should confirm” should also be added to the auditing standard. Currently within AU 330, “there is a presumption that the auditor will request the confirmation of accounts receivable.” The new, stronger wording establishes a “presumptively mandatory requirement” (PCAOB Standing Advisory Group unofficial transcript dated Oct. 14, 2010) for confirming receivables. According to PCAOB Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standards, this would mean the confirmation of receivables would be required unless other documented procedures are used to achieve the standard’s objective. INTERNATIONAL STANDARDS: Under AU-C Section 505, external confirmations of accounts receivable accounts are required unless the balance is immaterial, the confirmations would be ineffective or the risk of material misstatement is low and can be addressed using other procedures. ISA 505, however, does not specifically state the types of accounts or situations where a confirmation would be required; continued on next page

FEATURE continued from previous page ISA 330, The Auditor’s Response to Assessed Risks, though, emphasizes the importance of auditor judgment in determining whether external confirmations should be used as substantive audit procedures. ISA 330 also states external confirmations may be used to provide relevant evidence in response to the assessed risks of material misstatement for accounts receivable balances and terms, as well as other situations. The use of confirmations is not required in the international standards nor is it strongly recommended. Confirmations are listed as one of several audit procedures that include inspection, observation, recalculation, reperformance, inquiry and analytical procedures. ISA 500, Audit Evidence, requires auditors “to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.” NUMBER 2: Not specifically related to receivables, but another proposed change would be a requirement to confirm significant risks. This proposed change would suggest that the auditor consider risk and fraud potential when selecting, designing and planning the use of confirmation as part of their audit procedures. The proposed revision also changes the definition of a confirmation response to include responses received in mediums other than paper form, and addresses the risks and reliability involved in sending/ receiving electronic confirmation of account balances/transactions. INTERNATIONAL STANDARDS: ISA 330 and ISA 240, The Auditor’s Responsibilities Relating To Fraud In An Audit Of Financial Statements, discuss other situations where confirmations may provide evidence when assessing risk of material misstatement. ISA 330 suggests external confirmation procedures would help the auditor to obtain highly reliable evidence to respond to significant risks for material misstatements during the conduct of an audit. Auditors may use confirmations as additional corroborative support when addressing the assessed risk of material misstatement due to fraud. NUMBER 3: Provide additional guidance when confirmation responses are not clear and straightforward. If due to the language of the respondent, the response is not considered a valid response, then alternative procedures should be performed by the auditor to obtain adequate evidence or to assess its implications on the financial statements. Additionally, under certain circumstances, auditors may be able to directly access a confirming party’s electronic records to retrieve the information needed to be confirmed. INTERNATIONAL STANDARDS: According to ISA 505/AU-C Section 505, if the auditor has doubts on the reliability of the confirmation response, then further evidence would have to be collected to resolve the doubts and to evaluate the effect on the risk assessment. PCAOB is determining whether to finalize AU330 or resubmit the proposed standard for public comment. COMPANY: Satyam Computer Services ACCOUNTANT: PwC India and Affiliated Firms YEAR: 2011 FACTS: The management of Satyam, an information, technology and communications company, mailed out bank cash confirmations on behalf of PwC. PwC had no contact with the banks directly during the conduct of the audit. Confirmation differences were supported by fake deposit receipts and other supporting documentation received 30

from Satyam. In 2007, the review of Satyam revealed over 170 internal control deficiencies. In 2006-2007, the auditors prepared accounts receivable audit requests, but received few if any responses. Accounts receivable confirmations to seven of the 22 customers as part of the 2007 audit were later determined to be fictitious customers. In fiscal years where the auditors decided to use an alternative procedure of reviewing subsequent receipts instead of using confirmations, the alternative procedures were determined to be inadequate since they were not traced back to the specific outstanding receivable. Instead, the 2007 and 2008 year-end audits excluded confirmation of the yearend receivables balances. CONCLUSION: Auditors were censured and ordered to pay a $6 million penalty to the SEC. PwC did not exercise professional skepticism, which is defined by both AU 230, Due Professional Care in the Performance of Work, and ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, as having a questioning mind and making a critical assessment of audit evidence. They also did not obtain sufficient competent evidential matter to support cash and accounts receivable balances in accordance with AS No. 15, Audit Evidence and ISA 200. PwC depended on internally prepared documentation to support confirmation discrepancies. Due to the high number of receivable confirmations either not received or with differences, the auditors did not revise their audit plan to review the increased risk of material misstatement as required by AU 312, Audit Risk and Materiality in Conducting an Audit (which was superseded by AS 11, which supports this review) and ISA 550. They depended on internally prepared documents to corroborate any confirmation differences or confirmation responses not received. Additionally, in accordance with ISA 550 .7 and AU 330.28, confirmations should be sent out by the auditors and not by the company being audited. COMPANY: International Commercial Television (ICTV) ACCOUNTANT: Dohan + Company CPAs, Steven H. Dohan, CPA, Nancy L. Brown, CPA, and Erez Bahar, CA YEAR: January 11, 2011 FACTS: International Commercial Television sold a skin-care appliance through distributors. Ownership of all products was retained by ICTV until sold and the distributor could also return any product within 60 days after customer delivery. In many cases, ICTV recorded revenues based on the distributor’s order of the product, even though it was not sold. The company also did not account for the 60-day return period resulting in the reporting of net income when there were net losses. CONCLUSION: Due to many inadequacies pertaining to this audit, Dohan + Co was censured by the SEC. Dohan and Brown were denied the privilege of practicing before the SEC for a minimum of three years and were required to complete professional training. AS No. 15, Audit Evidence, requires the auditor to obtain sufficient appropriate audit evidence to provide a reasonable basis for his/her opinion. The auditor’s responsibility is “to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion” per ISA 500. In deciding on using confirmations, the auditors should apply Today’sCPA

Standards Cited in Article Standard # Standard Title

Status

FRB 1917 etal

Federal Reserve Bulletin

Superseded

SAP 1

Extensions of Auditing Procedures

Superseded

SAP 12

Amendment to Extensions of Auditing Procedure

Superseded

SAS 1

Codification of Auditing Standards and Procedures

Superseded

SAS 67 (AU 330)

The Confirmation Process

In effect-publicly traded companies

AU-C Section 330

Performing Audit Procedures in Response In effect to Assessed Risks and Evaluating the Audit Evidence Obtained

AU-C Section 505

External Confirmations

In effect

ISA 200

Overall Objectives

In effect

ISA 240

The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

In effect

ISA 330

The Auditor’s Response to Assessed Risks

In effect

ISA 505

External Confirmations

In effect

ISA 550

Related Parties

In effect

alternative procedures if the confirmations are not received according to AU 330. Per the SEC Administrative Proceeding (File No. 3-13997), the CPAs in this case (Dohan etal.) did not send out confirmations for accounts receivable and inventory or perform adequate alternative procedures, such as examining subsequent cash receipts or shipping documents, which was contrary to what was stated in the audit program. If the CPAs had followed the audit program, they could have found the inflation of the revenues. Expanding the Use of Confirmations Accounts receivable confirmations were an optional audit procedure in the United States and not widely used before 1938. Statement on Auditing Procedures (SAP) No. 1, Extensions of Auditing Procedure, recommended the confirmation of receivables. SAP No. 12, Amendment to Extensions of Auditing Procedure, required auditors to disclose when receivable confirmations were not performed, but was later rescinded. The proposed changes to the U.S. auditing standards is expanding the use of confirmations, while the international auditing standards are reiterating the importance of using properly designed confirmations as one of many procedures to obtain relevant and reliable audit evidence. Whether following the older procedures Patricia Z. Galletta, CPA, MBA Today’sCPA July/August 2014

or the most recent GAAS or international standards, the last two cases indicate the importance of not only choosing the best way of obtaining corroborating evidence, but to follow through with alternative procedures should the original auditing procedure result in any doubt as to the veracity of the financial information. Examples of alternative procedures per ISA 505, AU-C Section 505 and AU330 would be to examine subsequent cash receipts/ payments, shipping documents, and sales for receivables and payables, as well as other records. When deciding on the alternative procedures to be performed and the results of the test work, auditors must of course evaluate the effect on risk assessment. n

SEC Sources 1. www.sec.gov/about/annual_report/1939.pdf 2. www.sec.gov/news/speech/1939/062339kline.pdf 3. www.sec.gov/litigation/aljdec/1990/id19900628jks.pdf 4. www.sec.gov/litigation/opinions/34-48246.htm 5. www.sec.gov/Archives/edgar/data/1106056/000114554909000025/u00107exv99w2.htm 6. www.sec.gov/litigation/admin/2011/34-64184.pdf 7. www.sec.gov/litigation/admin/2011/34-63740.pdf

is assistant professor of Accounting at College of Staten Island. She may be reached at pzgalletta@gmail.com. 31

FEATURE

Converting a Rental to a Principal Residence

By George Frankel, CPA, MBA, JD, LL.M.

nder Code Section 121, an individual can exclude up to $250,000 ($500,000 on a joint return) of the gain on the sale of a home if he/she has owned and used it as his/her principal residence for at least two years out of the fiveyear period before the sale.1 Many taxpayers purchase a second home or a vacation home with the intention of later converting it to their principal residence. Prior to the enactment of Code Section 121(b)(4), a taxpayer could convert rental property or a vacation home to his/her personal residence and qualify for the full amount of the exclusion so long as he/ she met the two-year ownership-anduse test for the residence and had not claimed the exclusion within the last two years.2 Rules now apply that limit the use of the exclusion if property is converted from a vacation home or rental property to a personal residence. For sales and exchanges after Dec. 31, 2008, any gain allocated to “periods of nonqualified use” is not eligible for the $250,000/$500,000 exclusion and is included in the taxpayer’s gross income.3 Gain is allocated to periods of nonqualified use by multiplying the total amount of gain by a ratio determined by dividing the total periods of nonqualified use during the period the property was owned by the taxpayer4 by the period the property was owned by the taxpayer.5 A “period of nonqualified use” is defined as any period during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.6 Subject to certain exceptions, use of a property as a vacation home or a rental property is considered a period of nonqualified use. Leaving a residence unoccupied is also considered a period of nonqualified use. However, a period of nonqualified use does not include: 1. Any period before Jan. 1, 2009,7 2. Any portion of the five-year testing period that is after the last 32

date that the taxpayer (or his/her spouse) used the property as a principal residence;8 3. Any other period of temporary absence (not to exceed a total of two years) due to change of employment, health conditions or such other unforeseen circumstances that the IRS specifies;9 4. Any period (not to exceed a total of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty for the uniformed services, foreign service or intelligence community.10

Today’sCPA

Converting a rental property to a personal residence after 2009. If the taxpayer purchases a property after Dec. 31, 2008, and uses the house first as a vacation home or a rental property before converting it to his/her principal residence, he/she will be required to recognize gain on any portion of the gain allocable to the period of nonqualified use. Any taxable gain attributable to depreciation after May 6, 1997, is recognized before determining the amount of gain that is recognized with respect to periods of nonqualified use.11

after the last date the property was used as the principal residence is not considered a period of nonqualified use. However, any period of time before the date the taxpayers last lived in the residence is considered a period of non-qualified use.12

Example 3 Warren and Sarah Wopner, married taxpayers filing jointly, purchase a house on March 1, 2009, for $300,000. They occupy it as their principal residence until March 1, 2011. From March 1, 2011, to March 1, 2013, they rent it to tenants. They sell the house on March 1, 2013, for $900,000. During the period of rental, they claim $30,000 of depreciation deductions. The Wopners meet the ownership-and-use test, because they live in the residence for two years during the five-year testing period ending March 1, 2013.

Example 1 Paul Wellington, a single taxpayer, purchases a vacation home in Lake Tahoe, Nevada, on Feb. 1, 2009, for $400,000. On Feb. 1, 2013, he moves into the home and uses it as his principal residence. He sells the property on Feb. 1, 2015, for $1,000,000. The rental period from March Wellington qualifies for the Section 1, 2011, to March 1, 2013, is not 121 exclusion because he owns and uses considered a period of non-qualified the home as his principal residence for use, because it occurs after March two years during the five-year testing 1, 2011, the last date the property is period (Feb. 1, 2010 to Feb. 1, 2015). used by the Wopners as their principal The four-year period between Feb. 1, residence. The realized gain on sale is Theoretically, a taxpayer 2009, and Feb. 1, 2013, is considered a $630,000 ($900,000 amount realized period of non-qualified use, because it is less $270,000 adjusted basis). The could purchase a succession not used as his principal residence and recognized gain is $130,000: $30,000 of of houses, occupy each as is prior to his use of the property as a the gain attributable to the depreciation personal residence. is taxable as unrecaptured Section 1250 his/her principal residence The realized gain on the sale gain; of the remaining $600,000 gain, is $600,000 (amount realized of $500,000 is excluded under Section for two years, and sell each $1,000,000 less adjusted basis of 121 and $100,000 is a taxable longwithin five years of purchase $400,000). Wellington recognizes term capital gain. a $400,000 long-term capital gain: and qualify for the exclusion. Example 4 $400,000 [$600,000 x (four years of non-qualified use ÷ six years of William and Theresa Harrison, ownership)] allocable to the period of joint-filers, purchase a property in Palm nonqualified use. The remaining gain of Springs, Calif., on March 1, 2009. They $200,000 is not taxable because it does use it as rental property between March not exceed the $250,000 exclusion. 1, 2009, and March 1, 2011. Between Prior to the adoption of Section March 1, 2011, and March 1, 2013, 121(b)(4), Wellington would have they use it as their personal residence. qualified for the full amount and would have recognized a gain of On March 1, 2013, they move to Orlando, Fla., but continue to only $350,000 ($600,000 realized gain less $250,000 exclusion). use the house as a second home. On March 1, 2016, they sell the property. The Harrisons qualify for the Section 121 exclusion, Example 2 because the house is used as their principal residence for two years, The facts are the same as in Example 1 above, except that instead March 1, 2011, to March 1, 2013, out of the last five years, March 1, of using the property as a vacation home, Wellington rents the 2011, to March 1, 2016. property to tenants between Feb. 1, 2009, and Feb. 1, 2013. During Since the period between March 1, 2013, and March 1, 2016, that period, $20,000 of depreciation deductions are claimed. occurred after their last period of residence, it is not considered a The realized gain is $620,000 ($1,000,000 amount realized less period of non-qualified use. However, the two-year period between $380,000 adjusted basis). Wellington must recognize $20,000 of March 1, 2009, and March 1, 2011, is prior to their period of last gain attributable to the depreciation as unrecaptured Section 1250 residence and is considered a period of non-qualified use. The gain. As in Example 1 above, of the remaining $600,000 gain, he Harrisons owned the property a total of seven years. The Harrisons recognizes $400,000 as a long-term capital gain. recognize: 1) gain attributable to the depreciation deductions A period of use after the residence has been used as a principal claimed; 2) 2/7 (two years of non-qualified use divided by seven years residence is not a period of nonqualified use. For purchases after Dec. of ownership) of the gain allocated to the period of nonqualified 31, 2008, if the taxpayer or his/her spouse uses the property as his/ use; and 3) any amount exceeding the $500,000 exclusion of the her principal residence during the five-year testing period, any period continued on next page

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Today’sCPA July/August 2014

FEATURE continued from previous page remaining gain. Periods of use prior to Jan. 1, 2009, are not periods of non-qualified use. Periods of use prior to Jan. 1, 2009, are not considered periods of nonqualified use and are not included in the numerator of the fraction. However, the denominator does include periods of ownership prior to Jan. 1, 2009.13

Example 5 Jan Simmons purchases a vacation property on Jan. 1, 2005. On Jan. 1, 2011, she moves into the house and uses it as her principal residence until she sells it on Jan. 1, 2013. The four-year period between Jan. 1, 2005, and Dec. 31, 2008, is not a period of nonqualified use because it is prior to Jan. 1, 2009. The twoyear period between Jan. 1, 2009, and Jan. 1, 2011, is a period of non-qualified use, because it is not used as a personal residence and is after Dec. 31, 2008. Twenty-five percent (two years of nonqualified use divided by eight years of ownership) of any gain on sale is allocable to periods of non-qualified use and is taxable. Periods of temporary absence are not periods of nonqualified use. Periods of temporary absence not exceeding a total of two years due to a change of employment, health conditions, or any other unforeseen circumstances are also not considered periods of non-qualified use.14 Example 6 Celia Adams, a single taxpayer, purchases a house for $400,000 in San Francisco, Calif., on March 1, 2009. Between March 1, 2009, and March 1, 2012, she rents it to tenants and deducts $20,000 in depreciation. She moves in on March 1, 2012, and uses it as her principal residence. On March 1, 2013, her employer transfers her to Los Angeles, Calif. She uses the house as a second home until March 1, 2014, when she sells it for $1,000,000. The period between March 1, 2009, and March 1, 2012, is a period of non-qualified use, because it precedes the period she uses the property as a personal residence. The period between March 1, 2013, and March 1, 2014, is a period of temporary absence due to a change of employment, which is not a period of non-qualified use. Adams does not meet the two years of use test of Section 121(a), because she uses the property as her principal residence for only one year (March 1, 2012, to March 1, 2013) during the five years she owned the property (March 1, 2009, to March 1, 2014). However, because her move was due to a change of place of employment, Section 121(c)(2)(B) allows her a reduced exclusion of $125,000 ($250,000 x Â˝). Her realized gain is $620,000 ($1,000,000 amount realized less $380,000 adjusted basis). Adams must recognize gain of $495,000: $20,000 is unrecaptured Section 1250 gain attributable to depreciation and $475,000 is long-term capital gain [$360,000 relating to non-qualified use ($600,000 x 3/5 (3 years nonqualified use out of five years ownership) plus $115,000 of the remaining gain, which is not eligible for the exclusion ($600,000 - $360,000 - $125,000 reduced exclusion)]. Like-kind Exchange Special rules apply to converted rental property acquired in a like-kind exchange. Under the Section 1031 like-kind exchange 34

Todayâ&#x20AC;&#x2122;sCPA

“

If a taxpayer already owns a vacation home or a rental property, he/she should consider moving in and using it as his/her principal residence for two years. The benefit of establishing it as his/her principal residence is that any later use of the property will not be considered a period of nonqualified use and will reduce the amount of gain otherwise taxable.

rules, if a taxpayer owns a rental house he/she may exchange it for another house held for investment or for productive use in a trade or business and defer the recognition of gain until the time he/she sells the replacement property.15 An exchange of rental property for a personal residence does not qualify for deferral of gain under Section 1031.16 At the time of the exchange, the taxpayer must have the intent to hold the replacement property for productive use in a trade or business or investment. At some future time, the taxpayer may decide to move into the property and convert the property to his/her principal residence. Most tax advisors recommend that the taxpayer hold the replacement property for at least 12 months before converting the rental to a personal residence to demonstrate the intent to hold the replacement property for investment. A special rule applies to property acquired in a like-kind exchange: the taxpayer qualifies for the Section 121 exclusion of gain on sale of the replacement residence if he/she meets the two-year ownership- and-use test, but only if he/she holds the replacement property for a period of at least five years.17 Any gains attributable to prior depreciation deductions and gain allocated to periods of non-qualified use must be recognized. Currently, there is no guidance on whether the period during which the relinquished property was rented is “tacked on” to any periods of non-qualified use of the replacement residence.

Example 7 Warren West, a single taxpayer, purchases a rental house in Phoenix, Ariz., on April 1, 2009. On April 1, 2011, he exchanges it for another rental property in Sacramento, Calif., in a transaction that qualifies under Section 1031. On April 1, 2013, West moves into the Sacramento property and uses it as his principal residence. He sells the Sacramento property on April 1, 2015. West cannot exclude gain under Section 121, because he held the Sacramento property from April 1, 2011, to April 1, 2015, a period of less than five years. Example 8 The facts are the same as in Example 7 except that West sells the Sacramento residence on April 1, 2018. West qualifies for the Section 121 exclusion, because he uses the property as his principal residence for more than two years (April 1, 2013, to April 1, 2018) during the last five years of ownership (April 1, 2013, to April 1, 2018) and sells it more than five years after the date of acquisition George Frankel, CPA, MBA, JD, LL.M. Today’sCPA July/August 2014

(April 1, 2011, to April 1, 2018). The period during which West rents the Sacramento house, April 1, 2011, to April 1, 2013, is a period of non-qualified use. It is an unresolved issue whether the fraction that is applied to allocate the gain to non-qualified use is 2/7 or 4/9. Taking into account only the Sacramento house, 2/7 (two years of non-qualified use divided by seven years the Sacramento house is owned) of the gain is allocable to non-qualified use and is taxable. However, if the period West rents the Phoenix house is “tacked on” to the period of non-qualified use of the Sacramento house, West recognizes 4/9 (two years of renting the Phoenix house plus two years of renting the Sacramento house divided by nine years of ownership of both houses) of the gain as a result of periods of non-qualified use, plus gain attributable to depreciation, plus any remaining gain exceeding the $250,000 exclusion amount. Summary of Benefits of Establishing Principal Residence A taxpayer who purchases a house can exclude up to $250,000 ($500,000 on a joint return) of the gain on sale if he/she first establishes the home as his/her personal residence for two years and later rents it out for up to three years. Theoretically, a taxpayer could purchase a succession of houses, occupy each as his/her principal residence for two years, and sell each within five years of purchase and qualify for the exclusion. If a taxpayer already owns a vacation home or a rental property, he/she should consider moving in and using it as his/her principal residence for two years. The benefit of establishing it as his/her principal residence is that any later use of the property will not be considered a period of non-qualified use and will reduce the amount of gain otherwise taxable. n Footnotes 1. IRC § 121(a), (b)

10. IRC § 121(b)(4)(C)(II)(ii)

2. IRC § 121(b)(3)

11. IRC § 121(b)(4)(D)(i) and (ii)

3. IRC § 121(b)(4)(A)

12. Id at vii

4. IRC § 121(b)(4)(B)(i)

13. Id at vi

5. IRC § 121(b)(4)(B)(ii)

14. Id at viii

6. IRC § 121(b)(4)(C)

15. IRC §1031, Regs. § 1.1031(a)-(1)(a)(1)

7. IRC § 121(c)(1)

16. Rev. Proc. 2005-14, 2005-1 C.B. 528

8. IRC § 121(b)(4)(C)(II)(i)

17. IRC § 121(d)(10)

9. IRC § 121(b)(4)(C)(II)(iii)

is professor of Taxation at San Francisco State University, College of Business. 35

FEATURE

Prepaid Medical Expenses and Continuing-Care Facilities

By Scott R. Fouch, CPA, Ph.D.

n online Wall Street Journal article a few years back discussed the popularity of continuing-care retirement communities for older Americans (Greene). Continuing-care facilities will typically require residents to pay a onetime entrance fee and then pay monthly fees for the period in which they live in the facility. The entrance fee may be partially refundable if the resident dies or moves out of the facility. The entrance fee may range from $160,000 to $600,000 and the monthly fees may range from $2,500 to $5,400 per month. To the extent that the fees paid to the continuing-care facility relate to qualified medical care, a tax deduction may be allowed to the resident. 36

Statutory Framework Taxpayers are allowed a deduction for unreimbursed medical expenses paid during the taxable year (Code Section 213(a)). Medical care includes amounts paid for “the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body” (Code Section 213(d)(1)). Expenditures for care in institutions other than hospitals will qualify as medical costs as long as they are of the nature of medical care outlined in Code Section 213(d)(1) (Regulation Section 1.213-1(e)(1)(v)).

Today’sCPA

Prepayment of Medical Expenses A portion of the fees paid to a continuing-care facility are, in essence, a prepayment for future medical care. The tax treatment of prepaid medical expenses was first addressed by the courts in Bassett. Bassett had paid the hospital $4,126 in December 1950 for the care of his dependent mother who had become permanently disabled. The payment was credited as a payment in advance by the hospital. At the time of the payment, there was no discussion or special arrangements made with the hospital. It was the normal practice of the hospital to bill and collect charges for hospitalization for at least one week in advance. Payment was required to be made prior to the services being provided. The prepayment was sufficient to cover the mother’s medical expenses through January 1952 (13 months). The Internal Revenue Service (IRS) disallowed all but $126 of the payment as a medical expense deduction on the grounds that it did not constitute payment for medical care for the year 1950, but an advance payment or deposit for medical services to be rendered in subsequent years. In analyzing the predecessor statute to Code Section 213, the court stated that the intent of the statute was to allow a deduction for expenses that had been incurred for medical care and had been paid in the taxable year. Expenses are not incurred unless a legal obligation to pay has arisen. The court concluded that prepayments for medical expenses to be rendered in the following year are not deductible until the care has been provided.

The IRS ruled that the portion of the lump-sum life-care fee payment that was properly allocable to medical care was deductible as an expense for medical care in the year paid. The obligation to pay was incurred at the time of payment and was made in return for the retirement home’s promise to provide lifetime care. The payment was made to secure qualified medical services. The fact that the medical services would not be performed until a time in the future, if at all, did not disqualify the expense. If the contract was terminated, any refund of the life-care fee received by the member would be included in gross income to the extent that the deduction was allowed in a prior taxable year. The IRS noted that the facts in the ruling were distinguishable from those in Bassett. In Basset, there was a voluntary prepayment with no obligation to provide future services on the part of the hospital. In the current scenario, there was an obligation to pay a specified amount that was conditioned on the institution providing lifetime care. The taxpayer’s right to a refund was also conditional and subject to a penalty provision.

“

The IRS ruled that the portion of the lump-sum life-care fee payment that was properly allocable to medical care was deductible as an expense for medical care in the year paid.

Methods for Calculating the Medical Expense Deduction One issue that was not specifically addressed in the ruling was how to determine the amount or percent of the fee that is considered to be used to pay for qualified medical expenses. Based on judicial doctrine, there are two basic methods for calculating the medical deduction related to the entrance fees and monthly fees paid to a continuingcare facility: the percentage method and the actuarial method. Under the percentage method, the qualified medical expenses incurred are compared to the total cost of operating the facility. This percentage is then applied to fees paid by the residents to determine the amount of their medical deduction. The percentage method assumes that the medical care portion of entrance fees and monthly service fees is the same percentage as the facilities medical expenses to total costs because the sum of the fees over the resident’s lifetime is expected to cover the costs of care for the residents (Baker). Under the actuarial method, actuarial projections of longevity and health care utilization are used for estimating the deductible portion of fees paid by residents. Similar to the percentage method, expenses must be allocated between medical care and non-medical care. Assumptions about costs of services are combined with longevity projections to determine the lifetime total costs of care and the lifetime total medical care costs. These amounts are then applied to

“

Life-Care Facilities The IRS addressed the prepayment of medical expenses in a different context in Revenue Ruling 75-302. In the ruling, the taxpayer made a lumpsum payment to a retirement facility in exchange for the right to live in the retirement home and to receive lifetime care. The agreement further provided that in the event the membership was terminated, under certain circumstances, the member would be entitled to a refund of a portion of the life-care fee paid. Such refund would be computed in accordance with a specified formula that included a penalty provision. The fee paid by the taxpayer was determined without regard to any similar contracts with other patients at the institution and assured the taxpayer lifetime care at no additional cost and, therefore, was not medical insurance. Based on previous experience, the retirement home demonstrated that about 30 percent of the life-care budget was spent on qualified medical expenses. Today’sCPA July/August 2014

continued on next page 37

FEATURE continued from previous page the contract terms of the facility to determine the residentâ&#x20AC;&#x2122;s prepaid medical care costs (Baker). Prior to 2004, the IRS appeared to routinely accept the use of the percentage method. None of the rulings related to continuing-care facilities mentioned that an actuarial analysis was necessary (Revenue Ruling 67-185, Revenue Ruling 75-302, and Revenue Ruling 76481). However, in Baker, the IRS took the position that the actuarial method must be used in calculating the medical expense deduction for a continuing-care facility. In reviewing the prior rulings, the Tax Court concluded that there was no requirement that taxpayers engage in an actuarial analysis to determine the medical deduction. Since the prior rulings by the IRS implied that the percentage method was acceptable, the court found no reason to require the use of an actuarial method. Expenses to Be Included in the Analysis One of the issues addressed in Baker was which expenses should be included in the medical expense percentage calculation. The substantive difference between the position of the IRS and that of the taxpayer was that the taxpayer did not include interest expense, depreciation and amortization in the percentage calculation. In the Baker case, the continuing-care facility offered different levels of care depending on the needs of the residents. One of the options was full-time nursing care at a separate unit within the facility. Since neither the residence agreement nor the financial information submitted by Baker indicated whether the entrance fees or monthly service fees were allocated to specific costs, the court concluded that interest expense and depreciation and amortization should be included in both the numerator and the denominator of the calculation. Interest expense and depreciation would be included in the numerator to the extent that they related to the nursing facility.

Reliance on Information Provided by the Continuing-Care Facility Residents of continuing-care facilities will typically receive a letter from the facility administrator providing the potential medical expense deduction (based on either the percentage method or the actuarial method). However, as seen below, the taxpayer may not be able to simply rely on the information provided in calculating the medical expense deduction to be taken on the return. In Finzer, the taxpayers entered into a residency agreement with CC-Lake, Inc., which owned and operated Classic Residence by Hyatt at the Glen (Hyatt). The facility was a licensed continuingcare community that provided meals, upscale amenities and, if needed, assisted living and skilled nursing services. The agreement would remain in effect for the lives of the taxpayers. The Finzers could terminate the agreement by providing 60 days notice and CCLake could terminate for certain causes that were enumerated in the agreement. All residents of the facility were required to pay an entrance fee that differed based on the size of the unit selected. The entrance fees ranged from $723,800 for the largest unit to $275,000 for the smallest unit. Access to the assisted living and nursing care services was the same for all residents, regardless of the unit selected. If the residency agreement was terminated, including by death, the resident or their estate would be entitled to a refund equal to the greater of 90 percent of the entrance fee or the entrance fee less 2 percent for each month the resident was at the facility. The agreement included a promissory note for the preceding amount in the appendix. The promissory note stated that the entrance fee was intended to be a loan. However, no interest would be paid on the note unless there 38

Todayâ&#x20AC;&#x2122;sCPA

was a default by Hyatt. Under the residency agreement, the Finzers were also required to make monthly payments to cover the operating costs of the facility. The monthly fee was intended to cover all assisted living and skilled nursing expenses. The fee could be adjusted with 60 days written notice to the residents. The Finzers selected the largest unit available and paid the entrance fee of $723,800 in 2002. In February 2003, the Finzers received a letter from Hyatt regarding the potential tax deductibility of their entrance fee. The letter stated that 18.9 percent of the entrance fee may qualify for deduction as a medical expense. The 18.9 percent had been calculated using the historical medical costs paid by Hyatt. The Finzers, using the 18.9 percent, claimed a $136,798 medical deduction for their entrance fee payment on their 2002 return. After filing their return, the Finzers received another letter from Hyatt notifying them that a consulting firm had been hired to prepare an actuarial analysis of the facility’s medical costs. Based on the actuarial methodology, 41 percent of the entrance fee could qualify as a medical deduction. The letter stated that Hyatt was not taking any position on the potential tax deductibility of the entrance fee and that the taxpayers should contact their tax advisor. The Finzers filed an amended return for 2002 using the 41 percent in calculating their medical deductions. At trial, Hyatt’s CFO testified that depreciation, selling, administrative and general expenses were not included in the calculation of the 41 percent. The court first addressed the use of the $723,800 in calculating the medical expense. The entrance fee at the facility differed based on the size of the unit selected and not on the care provided to the residents. Therefore, at best, the medical expense deduction should have been based on the minimum entrance fee required, which was $275,000. However, the court noted that even if the entrance fee did not vary based on the size of the unit, the Finzers had not shown that any of the entrance fee was attributed to medical expenses. The Hyatt executive testified that the entrance fees have been used to repay the facility’s construction loan and to make distributions to Hyatt’s owners. All medical expenses had been paid from the monthly fees received from the residents. In addition, the residency agreement stated that the entrance fees were not to be used to provide services to the residents. The court noted that even if some portion of the entrance fee was deductible as a medical expense, the Finzers had not proven that 41 percent was an appropriate percentage. The 41 percent was derived without taking into account significant components of the facility’s cost structure. Hyatt did not include depreciation, the cost of acquiring new residency contracts, sales, general, or administrative expenses in the analysis. Without the inclusion of all appropriate costs, Hyatt could not justify their position that 41 percent of the entrance fee was attributable to medical costs. The taxpayer’s accountant testified that he used the figures provided by Hyatt in arriving at the medical deduction. He stated that he simply relied on the letter from Hyatt and did no separate analysis or research. The accountant did not explain why no further research or analysis was needed given the hedging regarding the deductibility of the medical costs that was contained in the letter.

fee may be refundable does not automatically preclude a medical deduction. As noted in Revenue Ruling 75-302, if an entrance fee relates to medical care to be provided, it is deductible even though a portion of the fee could be refunded under certain circumstances. If such a refund does occur, the amount that was deducted would have to be included in income. The District Court also addressed the impact of a potential refund of the entrance fee in the Finzer case. The court focused on two main issues. First, and perhaps most importantly, was the fact that the Finzers had not shown that any of the entrance fee was to be used for medical expenses. Second, the agreement specifically characterized the refundable portion of the entrance fee as a loan and the loan was evidenced by a promissory note. Both factors distinguished Finzer’s facts from those in Revenue Ruling 75-302. Although there was considerable discussion by the court of the characterization of the entrance fee as a loan in the contract with CC-Lake, Inc., it is not clear that the deduction would have been disallowed if Finzer had shown that a portion of the entrance fee was actually used for medical care. Nevertheless, characterizing a potential refund as a loan will weaken the taxpayer’s case for taking a medical deduction.

Refundable Entrance Fees In many cases, the entrance fee paid to a continuing-care facility may be partially refundable. However, the fact that an entrance

Revenue Ruling 67-185, 1967-1 CB 70. Print.

Scott R. Fouch, CPA, Ph.D. Today’sCPA July/August 2014

Summary and Recommendation The high costs of entrance and monthly fees to a continuingcare facility may be partially mitigated through a medical expense deduction on the tax return. To be deductible, the taxpayer must be able to prove that a portion of the fees will be used to provide qualified medical care. In arriving at this number, the courts have allowed continuing-care facilities to use either a percentage method or an actuarial method. Unfortunately, as was true in the Finzer case, it is very likely that any such calculation will be accompanied by a disclaimer as to the actual tax treatment of the fees paid by the resident. Given this disclaimer, the return preparer should be wary of simply including a medical expense deduction on the return that is solely based on the numbers provided by the continuing-care facility. At a minimum, the return preparer should review the residency contract to determine to what extent, if any, that the entrance and monthly fees could go to pay medical expenses. The terms and conditions of any potential refund of the entrance fee should also be examined. Although a preparer can generally rely on information from a third party without verification (AICPA), it would probably be prudent to make whatever inquiries are necessary to ensure that all appropriate costs were included in the care provider’s analysis. n Works Cited AICPA. Statement on Standards for Tax Services No. 3. 1 January 2010. Print.

Baker 122 TC 143. (2004). Print. Bassett 26 TC 619 (1956). Print. Finzer v. U.S. 2007-2 USTC Paragraph 50,592 (Dst. Ct. Ill., East Div, 2007). Print. Greene, Kelly. “Continuing-Care Retirement Communities: Weighing the Risks.” Wall Street

Journal. 7 August 2011. Web. Revenue Ruling 75-302, 1975-2 C.B. 86. Print. Revenue Ruling 76-481, 1976-2 C.B. 82. Print.

is a professor of Accounting at Truman State University in Kirksville, Missouri. He may be contacted at bu58@truman.edu. 39

CPE ARTICLE

Navigating Choppy Waters Guiding Clients Through State Tax Audits and Appeals Curriculum: Tax Level: Intermediate Designed For: Business and Industry, Public Practice and Tax Practitioners Objectives: To prepare CPAs for advising and assisting clients facing state tax audits and other tax controversy matters. Key Topics: State tax audits and appeals Prerequisites: None Advanced Preparation: None

By John Gamino, JD, LL.M., CPA and Rebecca L. Holt, JD

t goes without saying that state tax disputes can be financially and mentally draining for business taxpayers. It should be equally evident, however, that a CPA’s assistance can substantially lessen a client’s stress. Just as importantly, such guidance and representation can and should improve the client’s bottom-line financial results. A CPA assisting a client through any tax controversy process necessarily must manage client expectations, which calls for providing accurate advice from the outset. Communicating sound advice, in turn, hinges on a grounded understanding of how tax disputes proceed to resolution, as well as an ability to anticipate opportunities and potential pitfalls along the way. However, a CPA is not limited to an advisory role. As a client’s authorized representative and advocate, a CPA should actively be involved in any state tax audit. In many cases, taxpayers will retain a CPA only after adverse audit results are delivered. In either event, a competent and effective advocate is one who understands that a tax auditor’s conclusions are only the beginning of a multi-level 40

process, one that often is amenable to an early and mutually satisfying resolution.

Administrative Proceedings Disputes within the jurisdiction of the Texas Comptroller’s Office include those involving sales and use taxes, the franchise (margin) tax, and most of the other “Texas taxes” listed on its website.1 The Texas Administrative Code provides rules that govern both deficiency and refund cases, including administrative appeals, handled by the comptroller.2 Additionally, the Administrative Code has a separate set of rules that apply once a matter is docketed with the State Office of Administrative Hearings (SOAH).3 Initial Dealings with the Comptroller’s Office The “contested case” phase of any tax controversy normally begins with adverse audit results. State auditors routinely schedule and hold exit conferences with taxpayers to explain their results. If unsatisfied with an auditor’s tentative conclusions, a taxpayer may request a Today’sCPA

“reconciliation conference” with an Audit Division manager or supervisor. If issues still remain after that conference, a taxpayer may request an Independent Audit Review Conference (IARC), the last relatively informal opportunity for settlement. An IARC may be held either at the taxpayer’s place of business or at one of the comptroller’s satellite offices.4 The IARC brings a fresh perspective to the audit since the file is reviewed and the conference is conducted by an Independent Audit Reviewer (IAR) who is not an Audit Division employee. Only where a taxpayer has failed to produce any records or is objecting to a written determination made by the Tax Policy Division of the Comptroller’s Office is an IARC not available. In all other cases, this conference is a matter of right and should be requested. Regardless of outcome, the IAR will produce a written report, and the taxpayer is entitled to a copy. If issues remain unresolved following the IARC, a Texas Notification of Audit Results will be delivered to the taxpayer. This is the comptroller’s formal notice of a tax deficiency and explanation Today’sCPA July/August 2014

of how it was calculated. Protesting a deficiency finding generally requires filing a request for a redetermination hearing within 30 days of receipt of the notification. CPAs should work with their clients who wish to contest the deficiency to ensure that the hearing request and accompanying statement of grounds is received by the Comptroller’s Office – not merely mailed – on or before the deadline stated on the face of the notification. An attorney for the comptroller will review the statement of grounds and will issue a written Position Letter accepting or rejecting each contention of the taxpayer and making specific findings as to whether any contested transactions are exempt or subject to taxation.5 The taxpayer will be sent a form requiring it to signify acceptance or rejection of the Position Letter. Accepting the Position Letter will result in a final deficiency bill to be paid. A rejection must be accompanied by a written reply that details the taxpayer’s arguments and is supported by relevant documentary evidence. On submission of continued on next page 41

CPE ARTICLE continued from previous page a taxpayer’s reply, the matter is ready to proceed to the redetermination hearing process. As an alternative to requesting a redetermination, taxpayers with the wherewithal to do so may pay the asserted tax deficiency under protest to stop the further accrual of interest and any time-sensitive penalties, and then proceed with an administrative refund claim. A written protest must state “fully and in detail” each reason why a refund of the taxpayer’s protest payment is warranted, a statutory requirement backed up by a mandate that judicial review, should it become necessary, is limited only to those issues raised explicitly in the protest.6

opportunities, the parties will find their way to the courthouse. Controversies that proceed to litigation are subject to the Texas Rules of Civil Procedure and the Texas Rules of Evidence.10 Although CPAs must hand off control of a client’s case to counsel when a client wishes to litigate, CPAs may and often should team with the client’s attorney as subject-matter experts with respect to factual and compliancerelated issues.11 Tax litigation in Texas is commenced in the Travis County District Court, which has special jurisdiction over most state tax cases. 12 Tax deficiency actions begin with the filing of a petition by the attorney general on behalf of the state. The petition will generally include as an exhibit a certificate prepared by the Comptroller’s Office that provides the taxpayer’s identifying information, the tax periods involved, and the asserted tax deficiency. By statute, this certificate constitutes prima facie evidence of the amount of tax, penalties and interest owed, as well as the comptroller’s compliance with the law in determining those amounts.13 In the context of franchise and certain other taxes, a taxpayer must respond to a certificate-supported petition by filing a sworn denial identifying specific errors in the comptroller’s deficiency computations.14 A failure to file a detailed sworn denial will preclude the taxpayer from later contesting the contents of the certificate. In a suit for delinquent sales, use and excise taxes, however, the taxpayer may respond by filing a broadly worded denial of liability. If the taxpayer has elected to pay disputed taxes under protest, the taxpayer may initiate litigation by filing suit against the comptroller and the attorney general.15 The taxpayer must generally do so within 90 days of the date of the protest payment, attaching a copy of the protest to its petition.16 The court will hear and determine all issues “de novo” – that is, without regard to earlier conclusions reached by the comptroller – but the taxpayer remains responsible for producing “contemporaneous records and supporting documentation” in order to prevail.17 As the scope of any refund suit is confined to issues presented in the taxpayer’s written protest, strict adherence to statutory requirements governing protest payments is key to success.

SOAH Appeals SOAH, which operates independently of the Comptroller’s Office, hears appeals of tax disputes when cases are referred to it either by the comptroller directly or on the initiative of a taxpayer. SOAH proceedings are quasi-judicial in nature and more formal than those conducted within the Comptroller’s Office. Although CPAs, as well as attorneys, may represent As an alternative to taxpayers in proceedings before SOAH, the comptroller will always be requesting a redetermination, represented by an attorney.7 SOAH’s Tax Division includes taxpayers with the Administrative Law Judges (ALJs) wherewithal to do so may pay who are Texas-licensed attorneys with substantial experience in state tax the asserted tax deficiency matters. Like a judge in a nonjury civil trial, the ALJ conducts hearings in a under protest to stop the manner consistent with due process, further accrual of interest and considers the parties’ evidence, and makes factual and legal findings. The any time-sensitive penalties, taxpayer arguing his/her position to an ALJ bears the burden of presenting and then proceed with an “clear and convincing evidence” of administrative refund claim. those transactions he/she believes are tax-exempt; for a vast majority of other contested tax issues, the taxpayer must demonstrate only that his/her position is “more likely than not” correct.8 At the conclusion of the case, the ALJ will issue a Proposal For Decision (PFD) to both the comptroller and the taxpayer. The comptroller will then render a final decision, incorporating the ALJ’s findings and conclusions in whole or in part. SOAH proceedings occur in either of two ways. The more amenable to the lead of a CPA is by way of “written submission” in which a case is decided purely on the parties’ written statements and documentary evidence. In SOAH cases conducted (at the request of either party) Burden of Proof as live hearings, the comptroller will always be represented by an A taxpayer facing a deficiency suit should understand the formidable attorney. Thus, the CPA’s duty of professional competence strongly weight given the comptroller’s deficiency certificate. Its attachment to suggests that the client should be advised to retain counsel as well.9 a petition triggers a burden that the taxpayer produce in support of its position evidence “which would be so clear and positive it would be Judicial Proceedings unreasonable not to give effect to it as conclusive.”18 If a contested case is not resolved through the various administrative Unfortunately, it is not entirely clear what suffices as conclusive

“

Today’sCPA

evidence that overcomes the certificate. Case law, however, does shed some light on the obstacles that a taxpayer will face in court. For taxpayers claiming tax exemptions, comptroller-endorsed exemption certificates are, at least practically speaking, required to meet the conclusive evidence test. Courts have denied relief even to those taxpayers with plausible explanations for the absence of those certificates.19 The taxpayer’s testimony, or that of a spouse, bookkeeper or accountant, regarding the taxpayer’s business and business transactions, is generally not viewed as conclusive evidence.20 Similarly, presentation of partial records (invoices covering only a portion of a tax period, for example) is unlikely to foreclose judgment even if those records suggest that the comptroller’s deficiency calculation is incorrect.21 Moreover, an argument that the comptroller’s method of computing the tax deficiency is unreasonable or arbitrary is insufficient absent documentary evidence showing that the taxpayer owes no tax. The taxpayer’s obligation to satisfy its burden of proof may arise very early in the case by way of a motion for summary judgment filed by the attorney general. In general, the summary judgment procedure offers judges a mechanism to dispose of lawsuits in which there are no material factual issues and the application of the law is reasonably clear. When the case revolves around a factual dispute (rather than one concerning the proper interpretation of a law), Texas courts have traditionally viewed summary judgment as an efficient means to eliminate only the most obvious of meritless claims and defenses. The taxpayer will not be granted this relatively indulgent standard if the comptroller files a request for a summary judgment based on a deficiency certificate. Rather, the taxpayer will be obliged to provide a written response incorporating documentary evidence showing that its tax calculation is positively correct – not merely that the comptroller’s calculation is flawed.22 Even if summary judgment is not granted, the taxpayer will still be required to present “conclusive evidence” rebutting the deficiency certificate at trial.23 Thus, a litigating taxpayer who has not kept comprehensive records will face an uphill battle and should be advised of the potential implications of a deficiency judgment: liability for taxes, interest, penalties and the comptroller’s attorneys’ fees, not to mention the possible impact of the judgment on the taxpayer’s credit standing.

Appeals A final judgment issued by the Travis County District Court may be appealed by either the taxpayer or the comptroller to the Third Court of Appeals in Austin. The parties may request oral argument in conjunction with the appeal, but the panel of appellate judges selected to consider the case may elect to render a decision based only on the parties’ written briefs. Appellate courts will review a trial court’s conclusions of law de novo; however, the trial court’s or jury’s factual findings will be given substantial deference. Strict procedures that must be followed for submission of briefing and trial court records to the appellate court can make the appeals process a costly and lengthy one. It may take several months for a decision on an appeal to be rendered. If either party is dissatisfied with continued on next page Today’sCPA July/August 2014

COMMENCEMENT OF SUIT Deficiency Suit • Suit initiated against taxpayer by comptroller and AG. • Deficiency certificate may be attached to petition.

Refund Suit • Suit based on issues raised in detailed written protest accompanying “protest payment” of asserted tax deficiency. • Suit filed against comptroller and AG by taxpayer within 90 days of submitting protest. • Copy of protest must be attached to petition.

PROSECUTION OF SUIT Deficiency Suit • District court gives substantial deference to deficiency certificate. • Taxpayer must file a sworn denial identifying amounts not due and provide documentary support.

Refund Suit • Taxpayer entitled to “trial de novo.” • Issues in suit limited to those stated in written protest. • Taxpayer must produce adequate “records and supporting documentation.” • By counterclaim, state may seek to recover additional taxes for relevant period.

CONCLUSION OF SUIT Deficiency Suit • Case may be disposed of by motion, trial, or settlement. • If state prevails, it may obtain judgment against taxpayer for delinquent taxes, penalties, and interest.

Refund Suit • Case may be disposed of by motion, trial, or settlement. • If taxpayer prevails, it may obtain a credit against amounts due or a cash refund (plus applicable interest). 43

CPE ARTICLE continued from previous page the decision rendered by the Court of Appeals, it may seek review by the Texas Supreme Court, the last resort for relief. Supreme Court review is discretionary, however, and is often not granted in tax cases.

Concluding Thoughts CPAs assisting clients with developing strategies for handling tax disputes should not discount the strong statutory and judicially created advantage given to the comptroller’s position if and when a case reaches the courthouse. It may make good business sense – even for taxpayers who have a position that appears strong – to approach a tax dispute at its earliest stages with a willingness to settle or, at the very least, to take full advantage of all administrative appeal processes. Those processes have unique advantages including that, in some situations, a taxpayer John Gamino, JD, LL.M., CPA Rebecca L. Holt, JD

is assistant professor in the McCoy College of Business Administration, Texas State University.

is a tax associate in the Houston office of Grant Thornton, LLP. The authors acknowledge the assistance and valuable comments they received from John C. Adams, Esq., of the Texas Attorney General’s Office.

1. The comptroller’s website is located at www.window.state.tx.us/taxes. Not all state and local tax disputes are handled by the Comptroller’s Office, which has certain oversight authority, but not true administrative jurisdiction over property taxes and other distinctly local taxes and fees. 2. 34 Texas Administrative Code [TAC] §§ 1.1 et seq. 3. 1 TAC §§ 155.1 et seq. 4. The Comptroller’s Office includes 21 regional audit offices, including four located out of state. The IARC Conference process is similar to, and in lieu of, the former Dispute Resolution Conference process. 5. 34 TAC § 1.9(a). 6. Tex. Tax Code §§ 112.051(a), -(b), 112.053(b). 7. Tex. Gov’t Code § 2003.101(k)(3). 8. 34 TAC § 1.40. 9. 22 TAC § 501.74(a) (“A person shall not undertake any engagement for the performance of professional accounting services or professional accounting work which he cannot reasonably expect to complete with due professional competence … .”). 10. The Texas Rules of Civil Procedure and the Texas Rules of Evidence may be found at www.supreme.courts.state.tx.us/rules/trcphome.asp and www.courts.state.tx.us/rules/tre-toc.asp, respectively. 11. In certain circumstances, CPAs may assist counsel in a manner that protects the confidentiality of their discussions. See, e.g., Parker v. Carnahan, 772 S.W.2d 151, 157 (Tex. App.-Texarkana 1989) (“[A]n attorney may employ an accountant for the client’s benefit in order for communications from the client to qualify for the attorney-client privilege.”), citing United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the case that originated the so-called “Kovel doctrine.” 12. Tex. Tax Code §§ 111.010(c), 112.001. 13. Tex. Tax Code § 111.013(a). 14. Tex. Tax Code § 111.013(b). 15. Tex. Tax Code § 112.053(a). 16. Tex. Tax Code §§ 112.052(b), 112.053(c). 17. Tex. Tax Code §§ 112.054, 112.052(d). 18. Nu-Way Oil Co. v. Bullock, 546 S.W.2d 336, 339 (Tex. App. Austin 1976). Stated differently, the taxpayer facing a certificate must “in

may effectively represent himself/herself or be represented adequately by a CPA. However, the complex procedural rules and high burden of proof applicable to judicial actions will require retaining counsel if the matter is not resolved at the administrative level. Additionally, and perhaps most importantly, the administrative process is explicitly designed to encourage settlement of tax controversies.24 While Texas’ judicial system does implicitly recognize that a vast majority of cases are better resolved by agreement, the mechanics of prosecuting a lawsuit do not always facilitate the efficient flow of information between the parties, a necessary precursor to settlement. As a general rule, “early and often” should be the CPA’s guidepost for steering clients toward compromise resolution of audit issues. n

some way conclusively establish that he owes no tax.” Kawaja v. State, 2006 Tex. App. LEXIS 4974, *4-5 (Tex. App.-Austin 2006) (quoting State v. Glass, 723 S.W.2d 325, 327 (Tex. App.-Austin 1987)). The conclusive evidence standard also applies to taxpayer refund suits. See Baker v. Bullock, 529 S.W.2d 279 (Tex. App. Austin 1975). 19. See, e.g., Sundown Farms, Inc. v. State, 89 S.W.3d 291, 296-96 (Tex. App. Austin 2002) (upholding a tax deficiency judgment against taxpayer claiming that reclamation services were tax exempt despite (i) testimony that customers refused to supply exemption certificates, (ii) the production of invoices with descriptions of services rendered to each customer, and (iii) the existence of an advisory letter issued by the comptroller to another taxpayer indicating that reclamation services are not taxable). Similarly, in Kawaja, the appeals court held that a taxpayer whose records were destroyed by tropical storm Allison did not overcome the “presumption of correctness” attached to the deficiency certificate. See 2006 Tex. App. LEXIS 4979 at *2-3. 20. See, e.g., Kawaja, 2006 Tex. App. LEXIS 4974 at *5-6; Hylton v. State, 665 S.W.2d 571, 572 (Tex. App. Austin 1984). 21. The Texas Tax Code and accompanying administrative code provisions do require business taxpayers to maintain records of transactions impacting tax liability. See Tex. Tax Code § 151.025; 34 TAC § 3.281(b). For example, Texas retailers must keep documentation that shows their sales tax received or collected. While the Tax Code does not go so far as to require specific types of records, it does indicate that receipts, shipping manifests and invoices are satisfactory. 22. See Glass, 723 S.W.2d at 328; Hylton, 665 S.W.2d at 572. 23. See Ayeni v. State, 2013 Tex. App. LEXIS 1586, *23 (Tex. App. Austin 2013). In a concurring opinion in Ayeni, Justice Pemberton expressed concern about the fairness of requiring a taxpayer to produce conclusive evidence at the summary judgment stage of a suit, but seemed to hold no reservations about the imposition of this standard at trial. See also Nu-Way Oil Co., 546 S.W.2d at 337-38 (conclusive evidence standard applied in bench trial of refund claim for motor fuel taxes paid under protest). 24. 34 TAC § 1.22(a) (“It is the agency’s policy to encourage resolution and early settlement of all contested matters.”).

Today’sCPA

CPE QUIZ

By John Gamino and Rebecca L. Holt

Navigating Choppy Waters

Guiding Clients Through State Tax Audits and Appeals 1 Taxpayers facing adverse audit results may request both a “reconciliation conference” with an Audit Division manager and an Independent Audit Review Conference to resolve unagreed issues.

A. True B. False 2 A taxpayer who wishes to contest a tax deficiency asserted after audit

must file a request for a hearing and statement of grounds within __ days of receiving the Texas Notification of Audit Results. A. 15 B. 20

C. 30 D. 45

3 The deadline referenced in the preceding question is for the taxpayer’s

request for a hearing and statement of grounds to be: A. mailed to the Comptroller’s Office. B. received by the Comptroller’s Office.

4 Hearings within the Comptroller’s Office are conducted by:

A. B. C. D.

the comptroller herself. an Administrative Law Judge (ALJ). a hearings attorney who is an employee of the Comptroller’s Office. a hearings attorney who is not an employee of the Comptroller’s Office.

6 CPAs, as well as attorneys, are permitted to represent taxpayers in SOAH proceedings.

A. True B. False 7 All SOAH cases proceed to resolution exclusively by way of live oral hearings at which the taxpayer and the taxpayer’s representatives are required to appear.

A. True B. False 8 SOAH decisions are final and not subject to appeal through the Texas judicial system.

A. True B. False 9 The Comptroller’s Office always has the burden of proof in tax deficiency cases.

A. True B. False

5 The State Office of Administrative Appeals (SOAH) is a division of the State Comptroller’s Office.

10 The Comptroller’s Certificate establishes a presumption that the stated amount of tax, interest and penalties was correctly determined, and the taxpayer must produce “conclusive” evidence that those amounts are incorrect or unjustified in order to prevail in court.

A. True B. False

Today’s CPA offers the selfstudy exam above for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article. Mail the completed test by August 31, 2014, to TSCPA for grading. If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA.

PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5____ 4____ 3____ 2____ 1____. 2. The comprehensiveness of the article is: 5____ 4____ 3____ 2____ 1____. 3. The article and exam were well suited to my background, education and experience: 5___ 4___ 3___ 2___ 1__. 4. My overall rating of this self-study exam is: 5____ 4____ 3____ 2__ 1____. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________________ Company/Firm __________________________________________ Address (Where certificate should be mailed) _____________________________________________________________ City/State/ZIP_________________________________________________________________________________________ Enclosed is my check for: ___ $15 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________________________________________________________________________ TSCPA Membership No._______________________________________________________________________________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.

Answers to last issue’s self-study exam: 1. D 2. C 3. A 4. A 5. B 6. B 7. D 8. C 9. A 10. B Today’sCPA July/August 2014

CLASSIFIEDS Positions Available IN DALHART TEXAS JUNIOR/SENIOR ACCOUNTANT WITH 5 YEARS MINIMUM TAX EXPERIENCE. Salary starting at $75k depending on experience plus benefits with partnership opportunity after proven success. Email resumes to chad@gaskillpharis.com or mail to Gaskill, Pharis & Pharis, LLP. PO Box 1060, Dalhart, TX 79022.

AKINS PROFESSIONAL BROKERAGE: Successful transitions require experienced, confidential, professional services you can trust. This is what Akins Professional Brokerage provides. Specializing exclusively in the brokerage of CPA firms, we have no upfront fees. List your firm with a professional. Call David Akins, CPA, at 877277-0272. Visit our website at www.ProfessionalCPAbroker.com

LOCAL CPA FIRM IN CORPUS CHRISTI, TEXAS IS SEEKING AN ACCOUNTANT WITH 3-5 YEARS OF PUBLIC ACCOUNTING EXPERIENCE IN AUDIT AND TAX. CPA or CPA candidate required. Excellent partnership opportunity, as senior partner plans on retiring in the next 3-4 years and we are in need of the right individual to take over his client base. Salary starting at $50K for the 3-year experience level. Compensation package includes paid vacation time, employee health savings account and retirement plan match. If you meet these qualifications, please email your resume to dmorales@gowland-cpa.com.

SW HOUSTON TAX AND ACCOUNTING PRACTICE WITH SOLID CLIENTELE. 2013 gross billings were $445.000. Staff and office rent in place. Approximately 65% tax and 35% accounting. Good mix of business and individual clients. Healthy clients reflect the Houston economy. After 30 years, I wish to be acquired or merged into a practice. Willing to assist in transition. Please respond to: Texas Society of CPAs, File Box #5207, Attn: Donna Fritz, 14651 Dallas Parkway, Suite 700, Dallas TX 75254.

WACO, TEXAS SENIOR ACCOUNTANT CPA WITH 3 TO 5 YEARS TAX EXPERIENCE. Competitive salary depending on experience plus benefits with partnership opportunity after proven success. Email resume to frank@mts-cpa.com or mail to Metzgar, Traplena & Sullivan LLP, 4216 Franklin Avenue, Waco TX 76710-6944.

TEXAS PRACTICES CURRENTLY AVAILABLE THROUGH ACCOUNTING PRACTICE SALES: North America’s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.AccountingPracticeSales.com

CPA FIRM IN LITTLEFIELD, TX IS SEEKING CPA WITH 5-7 YEARS OF PUBLIC ACCOUNTING EXPERIENCE IN AUDIT AND TAX. Excellent partnership opportunity as a partner plans on retiring in the next 3-4 years. Please email your resume to rbwcpa@valornet.com.

Practices For Sale ACCOUNTING BROKER ACQUISITION GROUP 800-419-1223 ext. 21 | Accountingbroker.com Maximize Value When You Sell Your Firm

EL PASO CPA FIRM FOR SALE. Gross 2013 revenue $96K. 38% tax; 26% P/R & write up; 13% bookkeeping; 23% consulting and attestation. Strong growth and knowledgeable staff. Owner will help transition. Reply to: Texas Society of CPAs, File Box 5208, Attn: Donna Fritz, 14651 Dallas Parkway, Suite 700, Dallas TX 75254.

PLANNING TO SELL SOON? … BUYERS WAITING! Contact USA’s No. 1 accounting brokerage network for a FREE sales package with tips on getting your practice ready to sell. We provide financing so you can cash out at closing! Let our 30+ years of expert experience work for you! We only get paid for producing results! Confidential, prompt, professional.

Contact Leon Faris, CPA, at … PROFESSIONAL ACCOUNTING SALES 972-292-7172 | www.cpasales.com

RETIREMENT MINDED CPA seeks public CPA with billings of $40,000 or more for office cost sharing, part-time assistant and future buyout/ merger. Excellent street visible location in central Austin where public has called on CPA for 25 years. Tax and write-up. Sole proprietorship. $120,000 gross. Reply to lapcpa@att.net. 46

$225,000 GROSS. Austin. Profitable, turn-key CPA practice. Revenue mix 79% tax, 11% acctng svcs, 5% audit/reviews & 5% other svcs. TXC1051 $300,000 GROSS. Austin. Well-established CPA practice, comprised of 81% tax work, 15% accounting & 4% review. Turn-key opportunity. TXC1050 $860,000 GROSS. NW San Antonio Metro. Well-established, fullservice CPA firm with long-term staff and owner willing to assist in transition. TXC1047 $292,000 GROSS. Temple Metro Area. Well-established CPA practice. Tax prep 60% and acctng svcs 40% for good yearround cash flow. TXC1048 $360,000 GROSS. Parker Co (with DFW Clients) CPA practice. Highly profitable with loyal client base. Revenues nicely balanced 50/50 tax and acctng. TXN1347 $58,000 GROSS. East Fort Worth tax practice. Established business with loyal client base. Turn-key practice or nice addition to an existing firm. TXN1346 $93,000 GROSS. Abilene CPA practice. High-quality, loyal client base. Revenue mix 63% acctng and 27% tax to provide yearround income. TXN1348 $63,000 GROSS. Dallas (Love Field Area) CPA practice. Revenues consist of 80% tax work and 2/3rds are svcs for business clients. Strong fee structure. TXN1343

Today’sCPA

To request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201. All classified ads must be paid in advance. $576,000 GROSS. Fort Worth/Trinity Park Area CPA practice. Highquality client base, strong fee structure and highly profitable. Turn-key opportunity. TXN1345 $167,000 GROSS. East Texas practice. Well-established, profitable practice with strong cash flow to owner 60%. Good fee structure. TXN1231 $120,000 GROSS. Bridgeport. Well-established tax and acctng practice with solid reputation. Turn-key with knowledgeable staff in place. TXN1317 $241,000 GROSS. Coleman tax and accounting. Turn-key business with revenues derived primarily from profitable tax preparation svcs. TXN1337 $464,000 GROSS. Tyler/Longview Area. Well-established, rapidly growing CPA firm with loyal client base. Caters to govt. audit clients. TXN1305 $131,000 GROSS. Decatur Area. Tax and accounting. Solid fee structure and strong cash flow to owner of more than 50% of gross. TXN1329 $130,000 GROSS. East TX/Palestine Area. Well-established CPA practice with quality client base. Highly profitable with cash flow of 60%. TXN1328 $530,000 GROSS. East Texas. Well established practice with great cash flow to owner. Turn-key opportunity with tenured staff in place. TXN1249 $552,000 GROSS. Wichita Falls. Highly profitable, well-established CPA practice with a quality client base and balanced service mixture. TXN1315 $180,000 GROSS. Northwest Houston. Acctng (40%), tax (29%), payroll (21%), and other svcs (10%). Consistent growth and yearround revenue. TXS1132 $82,000 GROSS. West Houston. Franchise tax practice with approx. 500-650 individual tax returns. Staff in place and primed for new owner. TXS1137 $160,000 GROSS. West Houston tax practice comprised of about 500 individual returns. Staff in place to help in smooth transition. TXS1135 $67,000 GROSS. Manvel-Pearland Area audit practice. Owner looking to sell audit portion of practice. Loyal client base. TXS1141 ACCOUNTING PRACTICE SALES For more information call Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.AccountingPracticeSales.com

Today’sCPA July/August 2014

Practices Sought ACCOUNTING BROKER ACQUISITION GROUP “Maximize Value When You Sell Your Firm” A Local Texas Corporation You Sell Your Firm Only Once! Will You Leave Money on the Table? Free Report: “Discover the 12 Irreversible Fatal Errors You Must Avoid When You Sell Your Firm!” We sell small & large CPA firms … 100 percent of our acquisition brokers are “Ex-Big Four” CPAs! We are the only firm of our type in the nation that can make this claim! Call now for your Free Report! 800-419-1223 X101 or send a quick email to maximizevalue@accountingbroker.com

THINKING OF RETIREMENT? Naab Consulting has been assisting sellers of accounting and tax practices for over 17 years. We specialize in selling only accounting practices and understand the market. We offer no-obligation, confidential on-site personal consultations to discuss your situation. We offer a large database full of qualified buyers, financing for your buyer and confidentiality throughout the entire process. If you like the idea of an experienced professional to guide you through the selling process, please contact us today at 888-7266282 or Retire@NaabConsulting.com. Mention promo code #24 for additional incentives.

BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www.accountingpracticesales.com for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES, INC. North America’s Leader in Practice Sales

Software For Sale PROVEN OIL AND GAS ACCOUNTING SYSTEM keeps getting better. Developed for CPAs by a CPA. Over 2,400 users. G/L, A/P, depletion, document imaging, payroll, joint interest billing, revenue distribution and production management. WolfePak Software; 2901 S. First St., Abilene, TX 79605. 325-677-1543 or 800-299-1543. E-mail: sales@wolfepak.com. n 47

STRASBURGER & PRICE, LLP

2014 ANNUAL TAX SYMPOSIUM Offering a depth of knowledge in transactional tax and litigation AGENDA:

MONDAY, AUGUST 25

Westin Galleria Dallas 13340 Dallas Parkway Dallas, TX 75240 972.934.9494

10:45 a.m. Registration and Buffet Lunch

TUESDAY, AUGUST 26

11:15 a.m.

Welcome Remarks

11:25 a.m.

Texas Taxation Update

12:00 p.m. FATCA

Embassy Suites Houston Downtown 1515 Dallas Street Houston, TX 77010 713.739.9100

12:30 p.m. Criminal and Civil Tax Controversies 1:15 p.m. Affordable Care Act (“Obamacare”) Update: Phase-In of the Employer Mandate and the Final Reporting Rules 1:45 p.m. Taxation of Oil and Gas Interests

WEDNESDAY, AUGUST 27

Hyatt Regency San Antonio 123 Losoya Street San Antonio, TX 78205 210.222.1234

2:15 p.m. QUESTIONS & BREAK

The Symposium qualifies for 6.0 hours of CPE for Texas CPAs, 6.0 hours of MCLE for Texas attorneys, and 6.5 hours of CE for CFP Professionals.

3:30 p.m. Estate Planning in an Era of Increasing Estate and Gift Tax Exemptions

Time: 10:45 am - 5:30 pm (All Programs)

4:50 p.m. Update on Charitable/Tax-Exempt Organizations

2:30 p.m. Retirement Savings on Steroids – Cash Balance Pension Plans Under the IRS’s New Regulations 3:00 p.m. The 3.8% Medicare Contribution Tax

4:10 p.m. Income Tax Planning for Trusts

5:25 p.m. QUESTIONS

2014 ANNUAL TAX SYMPOSIUM

CUT HERE

PAYMENT & REGISTRATION DEADLINE: Monday, August 18. No Registrations accepted or refunds issued after August 18, 2014. FEE: $90/person (Includes cost of materials, food, and beverages). Please make checks payable to Strasburger & Price, LLP. No credit cards. LOCATION: Which symposium will you attend? Please check one. Dallas: Monday, August 25

Houston: Tuesday, August 26

RSVP Contact: Caitlin Cecil caitlin.cecil@strasburger.com | 214.651.2304 To ensure your symposium registration, please complete this form and return it with your payment by Monday, August 18 to FULL NAME TITLE & COMPANY

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San Antonio: Wednesday, August 27

Caitlin Cecil Strasburger Tax Symposium 901 Main Street, Suite 4400 Dallas, Texas 75202

ADDRESS CIT Y, STATE, ZIP E-MAIL PHONE

www.strasburger.com

Austin • Collin County • Dallas • Houston • New York • San Antonio • Washington, D.C. • Mexico City - Strasburger & Price, SC