1. Bank and Capital MarketsTax Institute SCorporationsMark Reis, Partner Moss Adams LLPRandy Churchill, Sr. Manager Moss Adams LLPColleen Delger AmericanWest Bank1

2. The material appearing in this presentation is for informational purposesonly and is not legal or accounting advice. Communication of thisinformation is not intended to create, and receipt does not constitute, alegal relationship, including, but not limited to, an accountant-clientrelationship. Although these materials may have been prepared byprofessionals, they should not be used as a substitute for professionalservices. If legal, accounting, or other professional advice is required, theservices of a professional should be sought.2 3. AGENDA S Corporation Overview Bank Specific/IRS Audit Issues Planning Current Issues 3 4. S CORPORATION OVERVIEW Introduction & Background Built-In Gains Material Participation Passive Activities Distributions4 5. INTRODUCTIONIncome Shifting: A Snapshot of RatesType of Federal Tax2011/122013%a) Income Ordinary 35%39.6%13.4% Dividends15%43.4%189.3% Capital Gains15%23.8%58.7%b) State: look at marginal rates; the main point is that income shifting will likely become more attractivec) Dont forget: Non-material participation planning for 2013 and beyond for pass-through entities5 6. INTRODUCTIONLooking back, looking forward:Transfer Tax Provisions Federal Only (States Vary) Estate TaxGift Tax GST Tax2010 Rates 0% or 35% $1 million 0%2010 ExemptionsUnlimited or $5 $1 million$5 million million2011-2012 Rates 35% 35%35%2011-2012 Exemptions $5 million$5 million$5 million2013+ Rates &55% and $1 55% and $155% and $1+Exemptions (scheduled) millionmillion million6 7. SOME HISTORICAL BACKGROUND Prior to 1981: for those of us who were alive, would youstill be alive if you advised an S Corp to a profitable Cowner? Common practices for Cs: All Assets In Between 1981 and 1985: educating the client and theprofession on double tax on income 1986: Tax law change turned thinking upside down forcorporationshow?7 8. HISTORY 101CONTINUED The big three in C Corps:o Double tax on income: federal & stateo Double tax on gains (no capital gain rate benefit)o Single tax (ordinary and capital gain) rates forindividuals corporate ratesWOW! 1986 scramble year: why? Repeal of GeneralUtilities; BIG and 10-year rule Why were people so slow to act? 8 9. HISTORY 101CONTINUEDThe top 5 reasons:5. General Utilities will be back4. We have too many other things to do3. Corporate and individual rates will return to historical levels and we will be right back where we started2. We will never sell assets and liquidate anyway; besides, we can always sell stock1. Give up a fiscal year? No way!9 10. HOW TIMES CHANGETodays reality:1. Corporate/individual ordinary rates are roughly the same but the 20% capital gain break is way too big to ignore2. Due to 197 and legal liability, most corporate transactions are asset sales or elected asset sales3. Many closely-held corporations have sold & liquidated, and this trend will likely continue via sale or restructuring to different entity forms10 11. A SIMPLE EXAMPLE OF THEDIFFERENCEASSET SALECapital Gain Asset SaleFederal Only; Zero StockBasis (2012 rates):Description C Corp S Corp*Sales price$10,000,000 $10,000,000Basis (2,000,000) (2,000,000)Gain$8,000,000$8,000,000Double tax$3,880,000n/aSingle tax$1,500,000Variance$2,380,000*since inception or for more than 10 years11 12. CHOICE OF ENTITY IS MOST CRUCIALWHEN PLANNING FOR WHAT?1. Asset Protection for the business and its owners2. Ease of business transition, whether inside or outside 12 13. TRANSITION IS INEVITABLE Retirement of primaryshareholder(s) Industry competition-forcedconsolidation Mergers & acquisitions Death or disability of an owner Company in financial difficulty Change in family circumstances(if family-controlled)13 14. CURRENT TAX STRUCTURES-Corps: Corporation still files a tax return but does not pay Federalincome tax (with exceptions) May pay incremental state tax (franchise, income, minimum,etc.) Only reasonable stockholder/employee wages are subject topayroll tax Can pay stockholder dividends, which stockholders can useto pay principal and interest on stock acquisition note Corporations taxable income reported to stockholders onSchedule K-1 to be reported on his/her own personalincome tax return14 15. CURRENT TAX STRUCTURES-Corp stockholders: Pay Federal income tax of up to 35% and state taxes up to11% on proportionate share of corporate taxable income Post S-Corp earnings distributed to stockholders are nottaxable Pass-through income less distributions increases basis incorporate stock Neither K-1 income nor dividends are subject toemployee Medicare tax Stockholder interest payments are deductible against K-1and salary income, not limited to investment income15 16. BENEFITS OF S CORP STATUS Eliminate double taxation on income and gains Capital gain availability on flow through gains Losses, deductions and credits flow through tostockholders Greater payroll tax certainty Deduction for interest expense paid by stockholders toacquire stock Potential for future tax-free distributions Ease of future ownership transfers Flexibility for future expansion and acquisition 16 17. S CORP TAX & BUSINESS RISKS Built-in gains tax Passive investment income tax Loss of S-election status Deferred income taxes not being recorded Inadequate stock or debt basis Alignment of buy/sell agreement, life insurance andestate planning No step-up in basis in corporate assets17 18. S CORP CONCERNSFuture income tax rates: combined individualFederal and state rates may be higher than combinedcorporate rate Does not take into account deduction for stockholderinterest payments as business interest vs. investmentinterest Does not take into account capital gain rates available toindividuals and not corporations Does not take into account income shifting overmultiple taxpayers in certain tax years 18 19. S CORP CONCERNS State income tax filing requirement: individual vs.composite Restrictions on stock ownership Alternative Minimum Tax: stockholders could besubject Regulatory limitations tax distributions19 20. BUILT-IN GAINS Net Unrealized Built-in Gaino Valuationo Measurement Period Small Business Jobs Act2010 and ARRAo Reduced Recognition Period not applicable for 2012 20 21. MATERIAL PARTICIPATION TESTS Material Participation in a trade or business activity tests: o You participated in the activity for more than 500 hours o Your participation was substantially all the participation in the activity of all individuals o You participated in the activity for more than 100 hours during the tax year and you participated at least as much as any other individual o The activity is a significant participation activity and you participated in all significant participation activities for more than 500 hours o Your materially participated in the activity for any 5 of 10 immediately preceding tax years o The activity is a personal service activity in which you participated in for any 3 preceding tax years o Based on all the facts and circumstances, you participated in the activity on a regular, continuous and substantial basis during the year21 22. GROUPING ACTIVITIES One or more trade or business activities orrental activities may be grouped as a singleactivity. o Benefits include meeting material participation requirements o Detriments include disposing of substantially all of one trade or business when attempting to deduct suspended losses22 23. S CORPORATION DISTRIBUTION RULES If S Corporation has Accumulate E&Po AAA = Tax-freeo PTI = Tax-freeo C Corporation Accumulated E&P = Taxed as Dividendso OAA = Cannot make non-dividend distriutionso Balance Tax-free return of Capital oro Balance Capital Gain 23 24. S CORPORATION DISTRIBUTIONS AAA is reduced by distributions, as well as lossesand deductions recognized during the year Lack of sufficient AAA can limit tax-freedistributions from AAA and may cause futuredistributions to be taxed as dividends from CCorporation AE&P S Corporations may elect to treat its distributionsof the year as being made first out of C CorporationAE&P The election is made on an annual basis and appliesto all distributions made during the year 24 25. S CORPORATION DISTRIBUTIONPLANNING The S Corporation can make an irrevocable electionto distribute part of its C Corporation AE&Pwithout having to actually distribute cash (deemeddividend) Deemed dividend is considered distributed andimmediately contributed to the S Corporation Deemed dividend cannot exceed the amount of theC Corporation AE&P at year end Considerations include shareholder losscarryovers, current year losses, deductions and taxrate changes.25 26. BANK SPECIFIC & IRS AUDIT ISSUESo Personal Holding Company Ruleso Bad Debtso Non-Accrual Interesto TEFRA Disallowance 26 27. PERSONAL HOLDING COMPANY Personal Holding Companyo IRC SEC 542(c)(6)o Notice 97-5 27 28. BANK SPECIFIC/IRS AUDIT ISSUES Bad Debtso IRC 585 Reserve Automatic Changeo Specific Charge-Offo Conformity Election 28 29. NON-ACCRUAL INTEREST Tier II Issue Non-Performing Loans Directive #1Directive Overview:The timing of when a regulated bank can stop accruing interest onnon-performing loans for tax purposes involves a difficult and timeconsuming loan-by-loan analysis, which was previously the subject ofa Coordinated Issue Paper. Factually, interest should only stopaccruing on non-performing loans for tax purposes when, at the timethe interest becomes due, that interest is determined to beuncollectible or the underlying loan is determined to be worthless. 29 30. NON-ACCRUAL INTEREST CONT.Directive Provides the Following:Rev. Rul. 2007-32 requires that an accrual method bank with a reasonableexpectancy of receiving future payments on a loan must include accruedinterest (determined under Treas. Reg. Sec. 1.446-2(a)(2)) in gross incomefor the taxable year in which the right to receive the interest becomes fixed,notwithstanding bank regulatory rules that prevent accrual of the interestfor regulatory purposes (i.e. loan placed in non-accrual status for regulatorypurposes). This ruling also states that when an income item is properlyaccrued and subsequently becomes uncollectible, a taxpayers remedy is byway of a bad debt deduction under section 166, rather than throughelimination (i.e. reversal) of the accrual. Furthermore, this tax rule isapplicable even when the item of income is accrued and becomesuncollectible during the same taxable year. Spring City Foundry Co. v.Commissioner, 292 U.S. 182 (1934). 30 31. TEFRA INTEREST EXPENSEDISALLOWANCE IRS will not apply Sec. 291 to a QSUB bank or S-Corp bank unless the bank (or any predecessor)was a C-Corp bank in the three immediatelypreceding taxable years. 31 32. TAX PLANNING Individual Rate Change Shareholder Considerations 32 33. INDIVIDUAL RATES FEDERAL ONLYIncome Type 2012 Tax RatesPost-2012 Tax RatesOrdinary35.0% 39.6%Dividends 15.0% 43.4%1Capital Gains 15.0% 23.8%11 Includes 3.8% Medicare tax on net investment income33 34. MEDICARE TAX Beginning in 2013, a 3.8% surtax is levied onthe lesser of net investment income or incomein excess of a defined threshold amount The threshold amount is $250,000 for a jointreturns, $125,000 for married filing separately,and $200,000 for all others The 3.8% surtax is levied on estates and trustson the lesser of undistributed net investmentincome or income in excess of the highest estateor trust tax bracket 34 35. TRANSFER TAX PROVISIONS FEDERALONLY (STATES VARY)Looking back, looking forward: Estate TaxGift TaxGST Tax2010 Rates 0% or 35%$1 million 0%2010 ExemptionsUnlimited or $5$1 million$5 million million2012 Rates35%35% 35%2012 Exemptions $5.12 million$5.12 million $5.12 million2013+ Rates & 55% and $1 55% and $155% and $1+Exemptions (scheduled)millionmillion million 35 36. THE PLANNING OPPORTUNITYTodays economy for valuations (estate, gift, BIG) Whats happened to: o Real estate values? Blue sky/intangibles? o Transactions slowing down? o The credit marketsa little tighter now? Bad economies always create more opportunities o State & local taxes o International taxes o Income, payroll, transfer taxes 36 37. ALIGNING COMMON STRATEGIES Dont kill the golden goose How to incorporate familiar strategies that make business planning sense Look at the big picture of applying the strategy o How does our business plan affect our estate plan if we implement this technique? Do we have the appropriate entity structure to cash flow the technique? o Have we adequately considered the parent personal financial planning and security needs before we implement an estate plan to reduce taxes? o If we are transferring ownership or control, does the future ownership and control put the business at risk? o If we are transferring control to the next generation, are they prepared to manage? o Has a sale been considered? 37 38. GIFTING AND TRUST SHAREHOLDERS The rules for trust shareholders arecomplicated Disqualified shareholders may cause aninadvertent termination of S election There are special relief provisions to correctthis problem S elections and trust agreements are a focusarea in due diligence 38 39. CURRENT TAX ISSUES Information Reporting Tangible Property Regulations BASEL III Proposals39 40. IRC 6045B REPORTING REQUIREMENTS Requires issuers of stock and securities to report actionsundertaken by the issuer that affect a holders per-sharebasis in such securities Reporting is made to the owners of the applicable securitiesand to the IRS Any organizational action that impacts the basis of thesecurities must be reported, including (but not limited to): o Mergers and tax-free reorganizations o Stock dividends o Stock splits o Non-dividend distributions The reporting must include identification of the affectedsecurities and a detailed description of the impact theorganizational action has on the basis of the securities. 40 41. IRC 6045B REPORTING REQUIREMENTS Separate reporting is required o Reporting to each holder of record by January 15th of the year following the calendar year in which the organizational action was executed; and o Reporting to the IRS within 45 days following the organizational action or, if earlier, January 15th of the year following the calendar year in which the organizational action was executed S Corporation rule Website reporting Penalties for non-compliance - $100 for each IRSreturn and each shareholder statement (K-1),subject to separate $1.5 million-per-year maximum41 42. TANGIBLE PROPERTY REGULATIONS - A BIT OF HISTORYDecMar 200420062008 2011 2012 TBD IRS Issues IRS Issues IRS IRS Issues IRS Issues Rev.IRS Issues ANRPM to ProposedWithdraws TemporaryProcs. 2012-Final AnnounceRegulations Initial Regulations,19 and 2012- RegulationsTPR ProjectProposedWithdrawing 20 and Issues under TPR(ShortlyRegulationsPriorField DirectiveAfter ReissuesProposedto Agents IntangibleProposedRegulationsRegulations RegulationsWere Issued)Temporary Regulations are Generally Effective for Tax Years Beginning after 201142 43. SCOPE OF NEW TEMPORARYREGULATIONS Acquisition of tangible propertyMaterial & supply De minimis ruleCapitalized acquisition costsImprovement of tangible property Unit of propertyRepair vs. improvement Routine maintenance Disposition of tangible property Structural componentsGeneral asset accounts43 44. WHAT ARE MATERIALS AND SUPPLIES?Tangible property used or consumed in the taxpayers business that is not inventory and that is:1) A component acquired to maintain, repair, or improve a unit of tangible property that is not acquired as part of any single unit of property;2) Fuel, lubricants, water, and similar items that are reasonably expected to be consumed within 12 months after use begins;3) A unit of property that has an economic life of 12 months or less after use begins; or o Useful life on AFS or from facts and circumstances4) A unit of property that has an acquisition cost of $100 or less.44 45. DE MINIMIS RULE: OVERVIEW Taxpayers may expense costs under the de minimis rule if: 1. Taxpayer has an applicable financial statement (AFS), 2. At beginning of year, taxpayer has written accounting policy forexpensing property costing less than a certain amount, 3. Taxpayer treats the amounts paid as an expense in its AFS duringthe year in accordance with written policy, AND 4. Total amount paid and not capitalized under the de minimis ruleis less than or equal to the greater of:A. .1% of the taxpayers gross receipts for the year on its federal return; ORB. 2% of the taxpayers total depreciation and amortization for the taxable year on its AFS.45 46. DE MINIMIS RULE Shared cap o A taxpayer can use the de minimis rule for amounts paid for: Materials and supplies (if elected) Acquisitions of tangible property Improvements to tangible property Cliff effect o Can elect to capitalize certain items to fall below cap Consolidated groups o Cap applied at entity level o AFS and written policy ok at consolidated level 46 47. ACQUISITION OF TANGIBLE PROPERTY: OVERVIEW General rule: Taxpayer must capitalize amounts paidto acquire or produce a unit of real or personalproperty. Costs required to be capitalized: 1) Invoice price 2) Facilitative transaction costs Amts paid to pursue or investigate transaction 11 inherently facilitative costs 3) Work performed prior to placing property in service 4) Defending or perfecting title to real or personal property Real property exception: whether and which test Employee comp and overhead deductible 47 48. UNIT OF PROPERTY FOR IMPROVEMENT STANDARDS: BUILDINGSBuilding structureBuilding systems Consists of the building1. HVAC systemand its structural2. Plumbing systemcomponents other than 3. Electrical systembuilding systems. 4. All escalators This includes: walls, floors, 5. All elevatorspartitions, ceilings, 6. Fire protection and alarm systemswindows, doors, etc.7. Security systems8. Gas distribution systems9. Other structural components identified in guidance 48 49. DISPOSITIONS OF MACRS PROPERTY A disposition is a transfer of ownership orpermanent withdrawal of an asset from a trade orbusinesso Same definition for SAA/MAA and GAA Includes:o Sale or exchangeo Retiremento Physical abandonmento Destructiono Retirement of a structural component of a building 49 50. WHY ELECT GAA? Interplay with Restoration Tests 1-3 o Loss recognized/basis adjusted = Restoration = Capitalized1. GAA Default: No loss, repair may possibly be deducted2. QD Election: Recognize loss, capitalize improvement SAA/MAA: Disposition of structural component requiresgain/loss recognition o What if you fail to recognize? Potential permanent effect (allowed vs. allowable) o Allocation of basis? Reasonable method. 50 51. METHOD CHANGES 19 automatic changes based on temporary regulations o Rev. Proc. 2012-19 applies to 162, 263(a) changes o Rev. Proc. 2012-20 applies to 167, 168 changes Effective for tax years beginning on or after January 1,2012 All scope limitations waived for first two years Mix of 481(a) and modified 481(a) 3115s can/should be combined Many necessitate proper capitalization for UNICAP Retroactive GAA election ONLY available for 1st 2 years 51 52. BASEL III The proposed Basel III capital rules have a number of dividendrestrictions. The new capital rules contain dividend restrictions if theorganization is not in full compliance with the requirement to maintainthe required capital conservation buffer: a requirement for bankingorganizations to maintain common equity Tier 1 capital equal of 2.5% oftotal risk-weighted assets in addition to the minimum risk-based capitalrequirements. If a banking organization does not maintain the full capital conservationbuffer, it becomes subject to restrictions on the payment of dividends andon payments of discretionary bonuses to executive officers. Theserestrictions increase as the organizations capital conservation bufferdecreases, and if the organization does not maintain a capital conservationbuffer of at least 1.25% of risk-weighted assets, it will be able to paydividends of no more than 20% of its eligible retained income individends, subject to receiving a waiver of these restrictions from itsregulators. Eligible retained income is defined as the organizations netincome for the previous four quarters, net of dividends and discretionarybonus payments to executive officers during that period.52 53. QUESTIONS53