OFFICIAL PUBLICATION OF THE NEBRASKA SOCIETY OF CPAs ISSUE 1, 2023 OPTIMIZING YOUR CLIENT’S FARM LEASE THE USE OF KOVEL LETTERS IN NEBRASKA
■ Corporate Taxation ■ Partnership/LLC/Sub-S Entities ■ Estate & Gift Taxation ■ State & Local Taxation ■ Mergers & Acquisitions ■ Bankruptcy, Reorganizations & Restructuring ■ Tax Protests, Disputes & Litigation ■ Real Estate ■ Individual Taxation ■ Charitable Planning ■ Nonprofit Organizations ■ Employee Benefits & Executive Compensation A partnership that gets everyone where they want to go. You help your clients plot out prudent tax decisions. We can help them navigate the potential pitfalls and opportunities of today’s complex tax environments. Together, we can map out their routes to success. Contact Us Today. 402.390.9500 | koleyjessen.com/services-tax Helping CPAs statewide, Koley Jessen can be your tax law navigator.
BOARD OF DIRECTORS LORRAINE A. EGGER CHAIRMAN (402) 965-0328 CyncHealth La Vista KELLY J. MARTINSON CHAIRMAN-ELECT (402) 827-2054 Lutz Omaha JODI M. ECKHOUT SECRETARY (308) 995-6151 Woods & Durham Chartered Holdrege DAVID E. SWAN TREASURER (402) 420-7758 SP Group, PC Lincoln GRANT H. BUCKLEY DIRECTOR (402) 444-1872 Buckley & Sitzman LLP Lincoln MEGAN C. HOLT DIRECTOR (402) 342-7600 Mutual of Omaha Insurance Co. Omaha BRIAN M. KLINTWORTH DIRECTOR (402) 423-4343 HBE LLP Lincoln SHARI A. MUNRO AICPA ELECTED REPRESENTATIVE (402) 963-4316 Frankel Zacharia LLC Omaha ERICA R. PARKS IMMEDIATE PAST CHAIRMAN (402) 431-9805 FORVIS LLP Omaha DR. THOMAS J. PURCELL, III DIRECTOR (402) 280-2062 Creighton University Omaha LINDA M. SCHOLTING DIRECTOR (402) 826-6777 Doane University Crete JESSICA L. WATTS DIRECTOR (402) 216-6116 Rehmann Omaha DANA J. WEBER WEST NEBRASKA CHAPTER PRESIDENT (308) 635-3008 Dana J. Weber, CPA Scottsbluff JONI SUNDQUIST NESCPA PRESIDENT & EXECUTIVE DIRECTOR joni@nescpa.org KELLY EBERT VICE PRESIDENT kelly@nescpa.org MICHELLE LYONS STAFF ACCOUNTANT & OFFICE MANAGER michelle@nescpa.org LORI VODICKA MEMBERSHIP & CPE ASSISTANT lori@nescpa.org OFFICERS BOARD MEMBERS NESCPA STAFF Our experienced estate planning pros are here to help you and your clients navigate the legal ins and outs of wealth transfer taxes. Wills,Trusts and Estates endacotttimmer.com 402-817-1000 Your wealth transfer tax professionals. 3 www.nescpa.org
20 16 C O N T E N T S 10 ©2023 Nebraska Society of Certified Public Accountants | The newsLINK Group, LLC. All rights reserved. The Nebraska CPA is published six times each year by The newsLINK Group, LLC for the Nebraska Society of Certified Public Accountants and is the official publication for this society. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the Nebraska Society of Certified Public Accountants, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. Nebraska CPA is a collective work and as such some articles are submitted by authors who are independent of the Nebraska Society of Certified Public Accountants. While the Nebraska CPA encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at: 855.747.4003. ISSUE 1, 2023 EDITORIAL: The Nebraska Society of CPAs seeks to reflect news and relevant information to Nebraska and other news and information of direct interest to members of the Nebraska Society of CPAs. Statement of fact and opinion are made on the responsibility of the authors alone and do not represent the opinion or endorsement of the Nebraska Society of CPAs. Articles may be reproduced with written permission only. ADVERTISEMENTS: The publication of advertisements does not necessarily represent endorsement of those products or services by the Nebraska Society of CPAs. The editor reserves the right to refuse any advertisement. SUBSCRIPTION: Subscription to the magazine, a bi-monthly publication, is included in membership fees to the Nebraska Society of CPAs. PRESIDENT’S MESSAGE 6 Advocacy Advances the Profession By Joni Sundquist, Nebraska Society of CPAs STATE BOARD REPORT 10 State Board Resets Fees to 2014 Levels By Dan Sweetwood, Nebraska Board of Public Accountancy COUNSELOR’S CORNER 12 Optimizing Your Client’s Farm Lease By Nate Patterson & Nicholas Bjornson, Koley Jessen 14 The Use of Kovel Letters in Nebraska By Hannah Fischer Frey’ Jesse Sitz & Mychal McAdoo, Baird Holm LLP 16 The New Split-Interest QCD Rule By Bryan P. Robertson, JD, CPA 18 Six SECURE Act 2.0 Changes to Know in 2023 By Daniel F. Rahill, CPA/PFS, JD, LLM, CGMA STATE TAX BRIEFING 20 How to Comply With Nebraska Supreme Court Rules on the Unauthorized Practice of Law in Your State Tax Practice By Nick Niemann & Matt Ottemann, McGrath North Law Firm 26 Bearing the Risk of Client Retention By Accounting Practice Sales 28 Plan Charitable Giving for the Greatest Impact By Donna Kush, President & CEO, Omaha Community Foundation 30 Members in the News 32 Firms in the News 34 Welcome New Society Members! 35 In Memoriam
PRESIDENT’S MESSAGE ADVOCACY ADVANCES THE PROFESSION THE NEBRASKA SOCIETY OF CPAS PLAYS A VITAL ROLE in advocacy—it’s one of the most important things we do. We spend a great deal of time getting to know legislators, building connections with the Nebraska Department of Revenue, cultivating our relationship with the team at the Nebraska Board of Public Accountancy, and engaging with leaders of other like-minded organizations. We also offer opportunities for you to build relationships with your state legislators. Relationships are critical to the legislative and political effectiveness of the CPA profession. For several decades now, the Nebraska Society has held its annual State Senators’ Reception and Dinner prior to the start of the Nebraska Legislature. The 2023 event was held Jan. 3 at The Cornhusker Marriott, Renaissance Room, in Lincoln, with more than 70 registrants, including 24 state senators—an excellent showing of both senators and our members. This long-standing tradition provides a welcome opportunity for CPAs to connect with state senators and for senators to reconnect with one another prior to the start of the legislative session the following day. You will see a few photos of the event in this article. Each year, numerous pieces of legislation are introduced in the Nebraska Legislature that can impact you, your profession, your organization, and your clients. At the end of day 10 of the first session of the 108th Legislature, senators had introduced 812 bills and several resolutions calling for constitutional amendments. BY JONI SUNDQUIST, NEBRASKA SOCIETY OF CPAS On Jan. 23, Society lobbyist Korby Gilbertson of Radcliffe, Gilbertson & Brady led a review at the Society office and via Zoom of proposed legislation of potential interest to the profession. Members of the Society Board, Political Education Committee, Legislation Committee, and Taxation Committee participated in the discussion to recommend the Society’s positions on 80-some bills. Committee hearings began the week of Jan. 23, with all-day hearings commencing the week of Jan. 30. Bills are now advancing from committee to the floor of the Legislature for debate. Over the past few years, we’ve seen very aggressive efforts across the U.S. to eliminate licenses for many occupations and professions. What most people don’t immediately recognize is that this type of legislation puts the CPA license at risk because anti-licensure proponents frequently do not consider the very technical, complex nature of the profession. The NESCPA monitors any proposed legislation that could impact our profession and leverages relationships with key legislators to ensure they understand the importance of the CPA license. During the last legislative session, the Society and our lobbying team worked alongside the State Board to educate the sponsor of a bill (LB 263) regarding the negative impacts this type of legislation would have on the CPA license. As a result, CPAs were excluded from the legislation, although it failed to pass. When a similar bill (LB 16) was introduced this legislative session, exclusion of the profession thankfully carried over. While the goal of the legislation—to reduce barriers to employment for people moving into the state—sounds positive on the surface, the bill would have weakened the experience and education requirements of the CPA profession and other learned professions in Nebraska had the exclusion not been included. The devil is in the details, as they say. We will continue to monitor LB 16, as it has not yet crossed the finish line. 6 Nebraska CPAs
The Society has provided input and suggested language on a number of tax-related bills this year, with the help of Taxation Committee members and our lobbyists. We’ve also offered formal support on bills that would allow taxpayers to opt in to receive notices from the tax commissioner by email and another that would change provisions relating to the taxation of partnerships. We remain opposed to any legislation that would impose a sales tax on accounting services, including the bill to adopt the EPIC Option Consumption Tax Act, which would be very damaging to our overall economy. Without the wisdom of our members who so freely volunteer their time and talents, we couldn’t do what we do in the legislative and political arena. As you know, Gov. Jim Pillen appointed former Gov. Pete Ricketts as Nebraska’s newest U.S. Senator in January. In all, 111 individuals applied for the seat. Nine candidates were interviewed. Of the nine finalists, two—Don Kluthe and Bryan Slone—are members of the Nebraska Society of CPAs. Kluthe is presently managing director of AmeriFirst, a division of First National Bank of Omaha. He is also a past chairman of the Nebraska Society and a past president of the Foundation of the Nebraska Society of CPAs. Slone is currently president of the Nebraska Chamber of Commerce & Industry and has previously served as tax counsel to a member of the U.S. House Ways and Means Committee and as legislative liaison to the IRS commissioner. He also is a frequent speaker at Society conferences and courses. Thanks to both Don and Bryan for their willingness to serve and put themselves out there, and for their ongoing commitment to make a difference in our state. Know that your work and efforts do not go unnoticed, and we appreciate you! Another Society member who should be recognized for his service is Ryan Parker. He was recently elected chairman of the Nebraska Chamber of Commerce and is president and CEO of Endicott Clay Products in Fairbury, Neb. Parker is also a past chairman of the Nebraska Society. Congratulations to Ryan on this achievement. We know your dedication and leadership will serve the Chamber and the state of Nebraska well! Building the Next Generation of CPAs Addressing CPA pipeline issues is another priority— both at the state and national level. Those who are involved with the profession are well aware of the ongoing accounting workforce shortage. Stakeholders including the American Institute of CPAs (AICPA), the National Association of State Boards of Accountancy (NASBA), state societies, state boards, firms, high school and university faculty, and individual CPAs are all working to address various aspects of the problem. ABOVE: (Left to Right) Society member and Nebraska Chamber President Bryan Slone, Gov. Jim Pillen, and Society Past Chairman and Nebraska Chamber Chairman Ryan Parker RIGHT: Society Past Chairman Don Kluthe During the 2019-2020 academic year, the number of accounting graduates decreased by 2.8% at the bachelor’s level and by 8.4% at the master’s level, according to the AICPA 2021 Trends report. (View the report at www.aicpa.org/professional-insights/download/2021-trends-report). Total hiring of new accounting graduates in 2020 decreased by 10%, and the number of candidates who passed the CPA Exam decreased 5.5% between 2020 and 2021. The Nebraska Society and State Board plan to form a joint task force this year in an attempt to address some of the potential barriers to entry into the profession. At the national level, the AICPA has put together an “eightpoint plan” that includes, among other things, an integrated education and experience program to help bridge the gap between education and practice and offer an alternative for students to earn up to 30 hours of credit. Also being considered is extending the 18-month exam window for CPA candidates to pass all four sections of the exam, creating accounting AP courses to provide college credit while in high school, urging the passage of federal legislation to include accounting in STEM, and shifting the AICPA Foundation strategy to focus on scholarships to students with a financial need and greater collaboration with firms on scholarships and internships. We are not going to solve the CPA pipeline problems overnight, but we can find ways to tackle these challenges and advance the profession together. Thank you for your membership and involvement in the Nebraska Society of CPAs as we welcome a new year and new adventures! Joni Sundquist is president and executive director of the Nebraska Society of CPAs. You may contact her at (402) 476‑8482 or joni@nescpa.org. 7 www.nescpa.org
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HBE ANNOUNCES THE PROMOTION OF ASHLEY S. BELL AS FIRM PARTNER HBE LLP is pleased to announce that Ashley S. Bell, CPA has been promoted to partner, effective January 1, 2023. Bell graduated from Nebraska Wesleyan University in 2012 with a Bachelor of Science in Accounting and a minor in Finance. Upon completing her degree, Bell worked for a national firm as a Senior Audit Associate II and for a local bank as a Chief Operations Officer and Comptroller. She joined HBE in 2018 as a Senior Accountant and most recently held the title of Assurance Director. Bell has been instrumental in growing the firm’s practice within commercial industries, including Employee Benefit Plan specialized services. “Ashley is a wonderful asset to the firm. She brings a wealth of expertise and professionalism in serving clients in both the private sector as well as the not-for-profit industry,” said Scott Becker, Managing Partner. “Ashley has demonstrated a high level of commitment to our clients and the entire HBE team through her role as an assurance leader. We are pleased to welcome Ashley into our partnership and look forward to her ongoing leadership.” www. hbecpa.com NESCPA - Half Page Ad.indd 1 10/26/21 4:33 PM 9 www.nescpa.org
STATE BOARD REPORT RESETS FEES TO 2014 LEVELS THE NEBRASKA BOARD OF PUBLIC Accountancy, at its Sept. 9, 2022, meeting, approved a recommendation from its Executive Committee that permit and registration fees be returned to 2014 levels. The Executive Committee’s recommendation to return fees to 2014 levels, and the State Board’s subsequent approval, was based on information provided by staff, including projections regarding current revenues and projected expenses. Areas of focus include future expenditures for the recent engagement of a new database provider and the need to fairly compensate and retain current staff. The ability for the State Board to operate for nearly 10 years on a fee structure based on lowered fees from 2014 levels demonstrates the fiscally conservative nature of the current and past boards. Spending has remained relatively flat, if not decreasing at times, over the years but projections revealed it was time to return to 2014 fee levels. In accordance with regulations within Nebraska Administrative Code Title 288/Chapter 4, the State Board sets permit and registration fees annually. In addition, at its Nov. 10, 2022, meeting, the State Board clarified that the return in fees to 2014 levels begin Jan. 1, 2023. 2023 Fees SERVICE CURRENT FEE RESTORED FEE RESTORED FEE Initial Permits $100/$175 $125/$200 Active Biennial Permit Renewal $ 175 $ 200 Inactive Biennial Permits $ 70 $ 90 Reinstatement $ 175 $ 200 Certificate of Reciprocity $ 200 $ 400 Office Registration $ 25 $ 50 PC Permit to Practice $ 50 $ 100 LLC Permit to Practice $ 50 $ 100 LLP Permit to Practice $ 50 $ 100 Partnership Firm Permit $ 50 $ 100 Sole Proprietor Renewals $ 25 $ 50 LLC Certificate of Registration $ 25 $ 30 PC Certificate of Registration $ 25 $ 30 BY DAN SWEETWOOD, NEBRASKA BOARD OF PUBLIC ACCOUNTANCY STATE BOARD 10 Nebraska CPAs
Gone But Not Forgotten Two former State Board members passed away recently. William C. “Bill” Nuckolls, 93, died Dec. 18, 2022. Nuckolls served as a public member on the State Board, fulfilling two terms from 1999-2007. He was a newspaper man from Fairbury, Neb., and loved to tell stories. We enjoyed attending a few Husker baseball games together. Nuckolls was always proud of his family and was an interesting person, as you can see from his obituary at www.gerdesmeyerfh.com/obituary/william-bill-nuckolls. He really enjoyed attending NASBA events, meeting other public members, and interacting with NASBA leadership. Terry G. Ellinger, CPA, 78, died Jan. 5, 2023. Ellinger served one term on the State Board from 1998-2003 and was a member of the board when I arrived. A real Western Nebraska CPA/cowboy with a deadpan wit, he did not really appreciate long, drawn-out discussions, preferring to get to the point! He looked at me during one of my first meetings, leaned over, and said, “What the heck are you doing here?” … then smiled. He was a great guy! You’ll find his obituary at www.mccookgazette.com/story/2978602.html. Please join me in thinking of Bill and Terry’s families as we remember these two great public servants. The Nebraska Board of Public Accountancy administers public accountancy law in Nebraska. Six of the eight board members are certified public accountants with active permits to practice and two are members of the public. Dan Sweetwood is executive director of the Nebraska Board of Public Accountancy. For more information, contact him at (402) 471-3595 or dan.sweetwood@nebraska.gov. You may also contact State Board Administrator Kristen VanWinkle at kristen.vanwinkle@nebraska.gov or State Board Business Manager Heather Myers at heather.myers@nebraska.gov. CLASSIFIED AD Nebraska Practices for Sale: Gross Shown • Lincoln, NE CPA $500K • Columbus, NE CPA $525K • Central Nebraska Tax and Accounting $1.05M New listings coming soon! For more information, call (800) 397-0249 or visit www.APS.net. THINKING OF SELLING? Accounting Practice Sales is the leading marketer of accounting and tax practices in North America. To learn more about our risk-free & confidential services, call Trent Holmes at (800) 397-0249 or email trent@apsholmesgroup.com. Ad space available. Contact us today to get your spot. 801.676.9722 | 855.747.4003 thenewslinkgroup.org sales@thenewslinkgroup.com 11 www.nescpa.org
THROUGHOUT THE LIFE CYCLE OF FARM AND RANCH operations, it is important to examine the business structures and tools used to meet owner objectives. When owners of closely held farms and ranches objectives adjust, their role in the operations may shift to other family members or to outside individuals taking over the day-to-day operation. This can often take the form of new or modified lease arrangements of farm and ranchland. These leases come in several different forms and, depending on the type of leasing structure used, can have unforeseen tax consequences. By taking a proactive approach to these leases, Nebraska advisors can help their farm and ranch clients optimize their lease arrangements and meet their business, succession, and tax objectives. Three primary leasing arrangements are used in the agricultural industry: cash, livestock/crop share, and a range of hybrid leases falling somewhere in between. A typical cash lease involves a fixed dollar amount or a per acre/head rate that does not fluctuate with production. Livestock/crop-share leases involve the lessor receiving a portion of the commodities produced and sharing in the expenses of production. Lease structures are used to allocate the risk of production among the lessor and farmer/rancher with the lessor having minimal risk in fixed cash leases and completely sharing in the risk in livestock/crop-share leases. Hybrid leases can come in many forms, but often use a rent formula with a fixed and variable component based on production, changing the risk taken on by the lessor. Aside from risk allocation, there are several areas to consider when reviewing and advising clients on agricultural leases: (1) income tax, (2) self-employment tax, (3) estate tax, and (4) USDA program payments. Whether the lessor is treated as “materially participating” in the farm or ranch operation is another component that can affect the treatment of these areas. IRS guidance provides specific tests to help determine whether a lessor is materially participating in a lease, but it would generally include activities that would show significant involvement in the production of the farm/ranch commodities. Income Tax Advisors must consider how the different lease forms affect the deductibility of certain land-related expenses. Some major items may or may not be deductible by the lessor depending on the lease form used: Interest Expense – Interest expense is generally fully deductible under both cash and livestock/crop-share leases. Soil Fertility Expenses – Lime and other fertilizers may only be deducted if the lessor is materially participating in the lease, meaning these expenses are generally not deductible under cash leases and may or may not be under livestock/crop-share leases depending upon the lease terms. COUNSELOR’S CORNER OPTIMIZING YOUR CLIENT’S FARM LEASE BY NATE PATTERSON & NICHOLAS BJORNSON, KOLEY JESSEN 12 Nebraska CPAs
Conservation Expenses – Soil and water conservation expenses are similar to soil fertility expenses except, if the lessor is materially participating in the operation, the expenses may be deducted immediately; otherwise, they must be capitalized into the cost of the land. Other items such as income averaging and the exclusion of certain USDA payments may also only be available under livestock/cropshare leases, depending on whether the lessor is considered to be materially participating. Self-Employment Tax Self-employment tax may also be imposed when the lessor is materially participating in the lease. For passive rental activities, such as under a cash lease, rental payments are generally selfemployment-tax free. However, under livestock/crop-share leases, the lessor may or may not be materially participating in the operations depending on the requirements of the lease and the lessor’s activities. These leases must be structured properly to ensure self-employment tax is not imposed, especially if those rental payments are made from a related entity to the lessor in which an exception to the general rule may be triggered. Additionally, the leasing of farm and ranch equipment usually triggers self-employment tax for the rents received. However, through proper planning and structure, these rental payments may be able to be tied to the lease of farm or ranch land and not be subject to self-employment tax. Estate Tax If your client is likely to have estate tax issues at death, a landowner client may be able to utilize the special use valuation election at the time of the client’s death to reduce the value of certain qualifying farm or ranch real estate up to $1,310,000, depending on valuation methods used. Several requirements must be met to make the special-use valuation election, one of which is that the lessor must have materially participated in the operation in which the land was used for five of the last eight years before retirement, disability, or death. For this reason, it is important for advisors to closely analyze lease arrangements used by farm or ranch clients close to retirement or death. While this can reduce estate tax consequences, the necessary leasing arrangement may have the inverse effects related to self-employment tax and overall business objectives. Agricultural Program Payment The leasing arrangement used may also have effects on the lessor’s ability to receive certain USDA program payments. Among other limitations, an individual must be considered to be “actively engaged in farming” to be eligible to receive many USDA program benefits. Cash lease lessors are specifically treated as not being actively engaged, while lessors under livestock/crop-share leases may meet the actively engaged requirements if the rents received are tied to the actual production of the operation. The USDA payment limitation rules can be somewhat complex and must be navigated carefully to ensure the leasing structure chosen does not run afoul of these rules. Periodically reviewing current leasing structures and client objectives will help ensure your client maintains leasing arrangements best suited to achieve their objectives in a taxefficient manner. By taking a proactive approach, advisors can add value to the client’s business and reduce unforeseen consequences in the next phase of its life cycle. Nate Patterson is an attorney in the Estate, Business Succession, and Tax Department at Koley Jessen. Patterson works closely with each client and their team of advisors to implement estate, business succession, and wealth and tax planning to ensure each client accomplishes their personal and financial objectives and leaves a lasting legacy. With hands-on experience operating and managing a family farm, he also provides “boots on the ground” expertise to agriculture clients and family businesses on planning matters specific to the ag industry. He can be reached at nathan.patterson@koleyjessen.com. Nicholas Bjornson is an attorney in the Tax Department at Koley Jessen. His experience in dealing with tax issues and implementing business strategies provide members of the agricultural community efficient solutions to achieve optimal tax benefits and economic consequences. He also represents taxpayers in disputes with the Internal Revenue Service, the Nebraska Department of Revenue, and other state and local taxing authorities. He can be reached at nicholas.bjornson@koleyjessen.com. Periodically reviewing current leasing structures and client objectives will help ensure your client maintains leasing arrangements best suited to achieve their objectives in a tax-efficient manner. 13 www.nescpa.org
AN ATTORNEY MAY NEED AN ACCOUNTANT’S HELP TO understand certain financial or tax problems that impact legal advice to a client. However, clients should be cautious when they seek the opinions of outside accounting experts if they hope to preserve the attorney-client privilege. Federal common law does not recognize an accountant-client privilege that protects communications disclosed between a client and an accountant. Thus, if counsel needs an accounting firm’s assistance in providing legal advice, they must follow the Kovel doctrine to protect the accountant’s work and communications among the attorney, accountant, and client as privileged and confidential. A. The Kovel Doctrine In United States v. Kovel, a defendant’s accountant refused to answer questions concerning his work for the clients of the law firm that employed him and was held in contempt.1 Because the accountant was frequently included in conversations between the firm’s lawyers 1 United States v. Kovel, 296 F.2d 918, 919 (2d Cir. 1961). and its clients, the court believed the accountant possessed relevant information to the grand jury regarding one of the firm’s clients. The accountant asserted the attorney-client privilege in refusing to answer questions for the grand jury and the district court ruled that the accountant had no right to assert privilege even though he was an employee of the law firm. However, the Second Circuit rejected the district court’s view asserting that the privilege must include all persons who act as the attorney’s agents, such as a foreign language translator. In describing an accountant as a translator who assists an attorney in understanding complex accounting and tax matters relating to the representation of the attorney’s client, the court emphasized that communications involving an accountant may be protected by the privilege so long as the purpose of the communication is for the client to receive legal advice from the lawyer rather than to obtain accounting or other advice from the accountant. The Kovel doctrine, while not recognized by all courts, has been acknowledged and adopted in the Eighth Circuit,2 and has been implicated in Nebraska statutory law.3 The doctrine applies when counsel—and not the client—retain the accountant to interpret and analyze information so that counsel can provide legal advice to the client. In considering whether the Kovel doctrine applies, courts will consider six factors. 1. WHETHER THE THIRD PARTY ASSISTED THE ATTORNEY IN PROVIDING LEGAL ADVICE. In determining whether the thirdparty accountant assisted an attorney in providing legal advice, the court will examine the specific facts of the case. For example, in United States v. Cote, the Eighth Circuit held that the attorney-client privilege protected an accountant’s work-product prepared at the behest of an attorney to assist in advising a taxpaying client in anticipation of an IRS investigation.4 The attorney hired the 2 In re Bieter Co., 16 F.3d 929, 940 (8th Cir. 1994). 3 Neb. Rev. Stat. Ann. § 27-503 (West). 4 United States v. Cote, 456 F.2d 142, 143 (8th Cir. 1972). BY HANNAH FISCHER FREY’ JESSE SITZ & MYCHAL MCADOO, BAIRD HOLM LLP THE USE OF KOVEL LETTERS IN NEBRASKA 14 Nebraska CPAs
accountant to audit the taxpayer’s books and records, then used the accountant’s work-product to support his conclusion that the taxpayer should file amended returns disclosing an increase in taxable income. Because the accountant’s work-product was prepared for the purpose of assisting the attorney in providing legal advice, the Eighth Circuit considered the work-product protected by the attorney-client privilege. 2. WHETHER THE THIRD PARTY PROVIDED ADVICE DIRECTLY TO THE CLIENT. Courts have ruled that the Kovel doctrine does not apply when the accountant is providing legal advice to a client rather than to an attorney.5 In United States v. Adlman, the Second Circuit held that the district court did not abuse its discretion in concluding that the corporation failed to demonstrate that it came within the principle of Kovel when the facts supported a finding that the corporation consulted an accounting firm for tax advice, rather than the corporation’s counsel consulted the tax firm for support in reaching a better understanding to provide legal advice to the corporation. 3. WHETHER THE COMMUNICATIONS INVOLVING THE THIRD PARTY WERE FOR THE PURPOSE OF TAX RETURN PREPARATION. Communications involving accountants are not ordinarily considered privileged under the Kovel doctrine if they relate to the preparation or filing of tax returns because the Kovel doctrine requires that the information seeking to be protected is intended to be confidential. Further, an accountant preparing a client’s tax return will not likely be considered analogous to a translator or interpreter, but rather such preparation is an accounting service and not generally subject to privilege.6 4. WHETHER THE THIRD PARTY SERVED AS A TRANSLATOR OR MERELY PROVIDED FACTS. As noted above, an accountant serving as an agent to an attorney to provide explanation or interpretation will generally be subject to privilege in its communications. 5. WHETHER THE ATTORNEY DIRECTED THE ACTIONS OF THE THIRD PARTY. An attorney who retains an accountant to assist them in understanding their client’s problems and directs the actions of the accountant will be treated more favorably on a claim of privilege under Kovel.7 On the other hand, when the accountant is acting at the direction of the client, courts will be less likely to consider the communications privileged.8 6. WHETHER THE ATTORNEY HAD AN INDEPENDENT UNDERSTANDING OF THE THIRD PARTY’S AREA OF EXPERTISE. If an attorney is capable of advising its client sufficiently without the help of an accountant, courts may consider the communications involving the accountant to be not privileged. Thus, if an attorney has subject-matter expertise in a particular field, courts may be less willing to apply the Kovel doctrine to communications provided by a third party in the same field.9 5 See United States v. Adlman, 68 F.3d 1495, 1500 (2d Cir. 1995). 6 See United States v. El Paso Co., 682 F.2d 530, 539 (5th Cir. 1982). 7 See Bauer v. Orser, 258 F. Supp. 338 (D.N.D. 1966) (accountant’s paperwork determined to be protected by privilege because the attorney directed actions of the accountant); see also Golden Trade, S.r.L v. Lee Apparel Co, 143 F.R.D. 514, 518 (S.D.N.Y. 1992) (agent working under the direction of the attorney and performing tasks relevant to client obtaining legal advice from the attorney was subject to its communications being protected by the attorney-client privilege). 8 See United States v. Brown, 478 F.2d 1038, 1040 (7th Cir. 1973) (communications held to not be privileged where accountant was directed to attend meetings by client as opposed to the attorney). 9 See United States v. Chevron Texaco Corp., 241 F. Supp. 2d 1065 (N.D. Cal, 2002) (tax counsel had significant expertise requiring no assistance in understanding communications by Chevron or Chevron’s financial situation). B. The Kovel Letter In asserting privilege under the Kovel doctrine, the attorney, client, and third-party accountant should memorialize their relationship in an engagement letter—known as a Kovel letter—to establish the privileged nature of the communications with the third party. Among other things, the Kovel letter should include: 1. a provision for payment of the accountant by the attorney; 2. a provision clarifying that the attorney is hiring the accountant to assist the attorney in providing legal advice; 3. a determination of the scope of the accountant’s duties as an agent to the attorney; 4. a determination that the work produced by the accountant will be the sole property of the attorney; and 5. a determination that upon execution of the accountant’s duties, all work produced will be delivered to and retained by the attorney—not the accountant. A Kovel letter in isolation will not ensure privilege. In order to best ensure the Kovel letter establishes privilege, the conduct of the attorney, client, and third party should satisfy the elements of the Kovel doctrine above, in addition to conduct that demonstrates the communications are confidential. Any time a client needs assistance with a tax controversy or other issue that could potentially lead to litigation, accountants and other advisors should consider whether a Kovel arrangement would be wise. If the situation warrants it, practitioners should work closely with counsel to put a Kovel arrangement in place and to conduct themselves accordingly. Hannah Fischer Frey and Jesse Sitz are partners at Baird Holm LLP, focusing their law practices in the areas of federal and state income tax law and business succession planning. Fischer Frey and Sitz work closely with other tax practitioners and preparers to document and structure deals for their clients in a tax-efficient manner. Mychal McAdoo participated in the firm’s 2022 summer associate program and is a JD candidate at Howard University School of Law. For more information, you may contact Fischer Frey or Sitz at hfrey@bairdholm.com or jsitz@bairdholm.com, respectively. 15 www.nescpa.org
ONE OF THE MORE INTRIGUING PROVISIONS OF THE Consolidated Appropriations Act (which was signed into law by President Biden on Dec. 29, 2022) is one that allows, for the first time,1 Qualified Charitable Distribution (QCD) treatment2 for IRA distributions that are made to certain split-interest trusts. Beginning in 2023, as a result of that provision, taxpayers may elect to treat as a QCD a distribution of up to $50,000 from an IRA to a charitable remainder trust.3 Scale, administrative cost, and income characterization limitations should be considered. The one-time qualifying distribution balance cannot exceed $50,000; the trust will include set-up and ongoing administrative costs; and distributions made by the trust to the settlor during the period the trust remains outstanding must be treated by the settlor as ordinary income. In spite of its limitations, the provision might be of interest to certain customers.4 To facilitate client conversations and to quantify sample outcomes—based upon 1) the January § 7520 rate, 2) the maximum $50,000 contribution balance, and 3) certain assumptions regarding payout rate, total return, trust term, payment timing, and payment interval—the following schedule demonstrates the various computations related to a fixed-term charitable remainder unitrust (CRUT) including the total payments received by the settlor, the residual value of the trust assets at the termination of the trust, and the charitable contribution deduction amount. 1 Insofar as I am aware. 2 Qualified Charitable Distribution treatment, generally, allows a taxpayer aged 70.5 or older to exclude from taxable income an IRA distribution (that would otherwise have been taxable) made directly to a qualifying charitable organization. A consequence of that income exclusion is that the donation is not deductible as an itemized deduction from AGI. The parallel scenarios are to either “include and deduct” or, instead, “exclude and not deduct.” QCD treatment enables the second scenario. 3 Charitable remainder trusts (i.e., Charitable Remainder Unitrusts (CRUTs) or Charitable Remainder Annuity Trusts (CRATs)), generally, provide an income stream to the settlor for some period (which might be a fixed number of years or, instead, be a period tied to the life of the settlor). At the end of that period, the trust terminates and the property of the trust is transferred to a charitable organization. 4 For example, those with relatively modest charitable priorities, those with higher administrative cost tolerances, those seeking to minimize taxable income, and those looking for an opportunity to “kick the tires” on a split-interest trust arrangement. THE NEW SPLITINTEREST QCD RULE BY BRYAN P. ROBERTSON, JD, CPA 16 Nebraska CPAs
Split-Interest Trust QCD Example Using a Fixed-Term CRUT Assumptions Value of Contribution 50,000 Unitrust Payout Rate 4.5% Contribution Growth Rate 6.0% Section 7520 Rate 4.6% Trust Term (Years) 20 Payment Timing Period End Payment Period Annual Payment and Residual Value Computation ENDING BALANCE BEGINNING BALANCE PAYMENT AMOUNT BEFORE PAYMENT AFTER PAYMENT 1 50,000 2,250 53,000 50,750 2 50,750 2,284 53,795 51,511 3 51,511 2,318 54,602 52,284 4 52,284 2,353 55,421 53,068 5 53,068 2,388 56,252 53,864 6 53,864 2,424 57,096 54,672 7 54,672 2,460 57,952 55,492 8 55,492 2,497 58,822 56,325 9 56,325 2,535 59,704 57,169 10 57,169 2,573 60,600 58,027 11 58,027 2,611 61,509 58,897 12 58,897 2,650 62,431 59,781 13 59,781 2,690 63,368 60,678 14 60,678 2,730 64,318 61,588 15 61,588 2,771 65,283 62,512 16 62,512 2,813 66,262 63,449 17 63,449 2,855 67,256 64,401 18 64,401 2,898 68,265 65,367 19 65,367 2,942 69,289 66,348 20 66,348 2,986 70,328 67,343 52,028 Charitable Contribution Deduction Computation Unadjusted Unitrust Payout Rate 4.500000 Payout Factor for § 7520 Rate 0.956023 Adjusted Unitrust Payout Rate 4.302104 Remainder Factor 4.2% 0.423946 0.423946 Remainder Factor 4.4% 0.406591 Difference 0.017355 Interpolation Relationship (4.32104-4.2) = x (4.4-4.2) 0.017355 x 0.008860 Indicated Interpolated Remainder Factor 0.415086 Initial Trust Corpus Value 50,000 Present Value of Remainder Interest 20,754 Based upon the example computations, the following table demonstrates selected outcomes related to an IRA-based funding source both with and without the QCD treatment election. Note that the settlor in each funding case is expected to receive total payments from the trust of $52,028 and that the charitable organization is expected to receive assets from the trust worth $67,343. Note too that, as compared to the non-electing settlor, the electing settlor forgoes a potential $20,754 charitable contribution deduction in exchange for excluding $50,000 of taxable income.5 Similarly, note that the electing settlor may sacrifice the benefit of favorable alternative rates that might otherwise apply to the income of the trust. DESCRIPTION IRA Dollars as CRUT Funding Source Without QCD Treatment Election With QCD Treatment Election Taxable Income $50,000 N/A Charitable Contribution Deduction $20,754 N/A Cumulative Payments Received by the Settlor $52,028A $52,028B Residual Value of Assets Transferred to Charity $67,343 $67,343 A Taxed as distributions of the trust’s income and gains (some portion of which might be capital in character). B Taxed as ordinary income. Customers might benefit from a conversation about the new split-interest trust QCD rule, even with its limitations. It’s an easily demonstrated discussion that can seamlessly accompany annual client conversations regarding qualified charitable distribution planning. Bryan P. Robertson, JD, CPA provides trust and estate planning services for his wealth management clients. He also teaches the individual and corporate income tax courses at Nebraska Wesleyan University. For more information, contact him at broberts@nebrwesleyan.edu. 5 That’s a good trade. Even if the deduction is fully allowed (which is certainly not a given today), the tax savings on the net $29,246 decrease in taxable income might help fund a substantial portion of the resulting administrative costs related to creation and operation of the trust. 17 www.nescpa.org
SECURE ACT 2.0 CHANGES Countless retirement provisions will take effect in the coming years because of the act. Here are the ones to take note of during your 2023 planning. BY DANIEL F. RAHILL, CPA/PFS, JD, LLM, CGMA THREE YEARS AFTER THE SETTING EVERY COMMUNITY UP for Retirement Enhancement (SECURE) Act was enacted, SECURE Act 2.0 is now law, with the goal of “securing” American workers’ retirement options well into the future. With the act containing upward of nearly 100 new retirement provisions, here are six of the most notable changes taking effect this year. 1. RMD Age Increased Individuals saving for retirement via individual retirement accounts (IRAs) and most employer-sponsored retirement accounts must begin taking required minimum distributions (RMDs) when they hit a certain age. This age limit increases to age 73 in 2023 and age 75 in 2033. Increasing the age of when RMDs must begin benefits savers who don’t need the money for current living expenses, as it prolongs their investment timeframe, pushes out the income tax deferral on their account balances, and allows a longer window to consider and complete Roth IRA conversions. 2. RMD Excise Tax Reduced Prior law required those who failed to take their full RMD amount by the deadline to pay a tax of 50% of the amount not taken. SECURE Act 2.0 reduces this tax to 25% in 2023. The act further drops the tax to 10% of the amount not taken if account holders take the full RMD amount and report the tax by the end of the second year after it was initially due and before the IRS demands payment. 3. Qualified Charitable Distribution Rules Eased The new rule for qualified charitable distributions (QCD) from IRAs expands the types of “charities” that can receive the gift. Beginning in 2023, individuals can make a one-time gift of up to $50,000 (adjusted annually for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. Previously, distributions had to go to charities with a 501(c)(3) status. However, disbursements to private foundations or donor-advised funds still aren’t allowed. Charitable remainder trusts and gift annuities provide income to a beneficiary during the grantor’s life; when the beneficiary dies, what’s left in the trust goes to a charitable cause. Unlike a direct charitable contribution, contributions to a split-interest entity benefit not only the charity but also the individual IRA owner. The overall economic impact is that a portion of what’s transferred goes to charity and up to 90% of the economic value of what’s transferred Six TO KNOW IN 2023 18 Nebraska CPAs
(up to approximately $45,000 under the new rule) can be paid to the individual IRA owner over a selected term of years (not exceeding 20 years). The key benefit of a QCD, which must be made from a taxable IRA by year’s end, is that it counts toward a taxpayer’s annual RMD. While no deduction materializes, the disbursement keeps an RMD from moving a donor into a higher tax bracket. Whether to a traditional charity or to a trust or gift annuity, the distribution also counts toward the $100,000 that can be gifted annually. The act indexes the $100,000 annual exclusion limit for inflation beginning in 2024 and provides a second option to take advantage of the exclusion beginning in 2023 for taxpayers who’ve reached age 70½ and are required to take minimum distributions. (See more details on the new split-interest QCD rule on pages 16-17 of this issue.) 4. Longevity Annuity Contract Limits Lifted The act raises the ceiling for how much retirement savers can put into a qualified longevity annuity contract (QLAC), a type of deferred annuity that’s funded from a retirement account and is exempt from RMDs until distributions are taken (up to age 85), to provide a source for guaranteed income in later years. The prior limit was the lesser of 25% of the value of the qualified retirement account or $135,000. SECURE Act 2.0 eliminates the 25% limit and increases the amount that can be put into a QLAC to $200,000 (indexed for inflation). 5. Roth Treatment Allowed for Matching or Non-Elective Contributions Participants in employer-sponsored 401(k), 403(b), and 457(b) plans can now designate some or all matching contributions and non-elective contributions as Roth contributions. Previously, employer matches had to go into an employee’s pre-tax account. This applies only to the extent that a participant is fully vested in these contributions. While this provision takes effect immediately, it may take some time for employers to amend their plans to include this feature. 6. Credits Increased for Small-Employer Retirement Plans Beginning in 2023, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100% of the administrative costs for establishing a workplace retirement plan. This is an increase from 50% of administrative costs up to $5,000. Also beginning in 2023, eligible employers might be entitled to a tax credit based on their employee matching or profit-sharing contributions. This credit caps at 100% of applicable employer contributions, up to $1,000 per employee, and phases down gradually over five years: 100% in the first and second tax years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. The credit phases out for employers with 51 to 100 employees, and no credit is allowed for employer contributions on behalf of an employee who makes more than $100,000 (adjusted for inflation after 2023). This is effective for retirement plan years beginning after Dec. 31, 2022. With SECURE Act 2.0 containing nearly 100 new retirement provisions that go into effect at different times over the coming years, there’s much left to unpack from this massive act aimed at improving the retirements and livelihoods of American workers. Retirement savers and employers alike should speak with their CPAs to discuss all that’s to come because of SECURE Act 2.0 and ensure they’re taking advantage of all the provisions that pertain to them. Daniel F. Rahill, CPA/PFS, JD, LLM, CGMA, is a managing director at Wintrust Wealth Management in Chicago. He is also a former chairman of the Illinois CPA Society Board of Directors and a current board member of the American Academy of Attorney-CPAs. This information may answer some questions but isn’t intended to be a comprehensive analysis of the topic. In addition, such information shouldn’t be relied upon as the only source of information; professional tax and legal advice should always be obtained. Reprinted with permission of the Illinois CPA Society. 19 www.nescpa.org
STATE TAX BRIEFING HOW TO COMPLY WITH WE HAVE BEEN ASKED BY CPAS IN PRIVATE PRACTICE IF they can prepare protests to Notices of Proposed Deficiency Determinations issued by the Nebraska Department of Revenue and represent taxpayers in those protests regarding income taxes, sales taxes, and tax incentives. This article details our answer to those inquiring CPAs and taxpayers, and explains why this matter should be of interest to CPAs who work in the area of state tax in Nebraska. What’s the Issue? The questions normally go like this: We’ve been told we can represent taxpayers up until we actively move to a formal hearing. Is this correct? As long as the Nebraska Department of Revenue staff does not object, we’re ok, right? This concerns taxes and CPAs know taxes. That’s the real question, right? A Likely Source of Confusion A likely source of confusion on this question stems from the Nebraska Department of Revenue information guide, “How to Protest a Notice of Deficiency Determination or Proposed Assessment.” The protest of a Notice of Proposed Deficiency may, after the filing of a protest, involve an informal conference, a pre-hearing conference, a formal hearing, and a final order of the tax commissioner. This information guide states: “Once a formal hearing is set for the protest, taxpayers can either appear on their own behalf or be represented by an attorney.” [Emphasis added.] The information guide also states: “If the case proceeds to a formal hearing, briefs, motions, or procedures are typically required. In these cases, taxpayers must either appear on their own behalf or be represented by an attorney.” On their face, these statements may lead one to believe that nonattorneys or CPAs can represent taxpayers during the informal conference stage—before the case actively moves to the formal hearing stage. These sentences, however, do not actually state that a non-attorney or CPA can represent a taxpayer during the informal conference stage. The key is when a formal hearing is “set” for the protest. When read in context with the governing regulation (as the guide must be), a formal hearing is “set” for the protest once a formal hearing is requested in the initial or amended protest (i.e., in the petition). Nebraska Statutes & Nebraska Supreme Court Rules A Nebraska Department of Revenue information guide is simply an advisory guidance document. It does not actually constitute the law. Instead, we must first look to the governing statute and then to case law and regulations. Neb. Rev. Stat. § 7-101 states the following: “[N]o person shall practice as an attorney or counselor at law, or commence, conduct, or defend any action or proceeding to which he is not a party … unless he has been previously admitted to the bar by order of the Supreme Court of this state. … Any person who shall violate any of the provisions of this section shall be guilty of a Class III misdemeanor. …” NEBRASKA SUPREME COURT RULES ON THE UNAUTHORIZED PRACTICE OF LAW IN YOUR STATE TAX PRACTICE BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM 20 Nebraska CPAs
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