Drop Positive Working Capital Rule From CPEO Regs, Firms Say

From: Levy, Rachel

Sent: Wednesday, August 24, 2016 5:07 PM

To: Mark Iwry; Neis Robert; Weiser Carol; Christa Bierma; Judson Victoria A; Cook Janine; Shepherd Neil D

Cc: Winters, Brigen; Eisler, Barry; Isberg, Pete; Wendy E. Wolf Esq.

Subject: Follow-up Re: ADP TotalSource Meeting

Dear Treasury and IRS Team,

We want to thank you again for taking the time to meet with us to discuss the CPEO application process earlier this month. We found the meeting to be extremely helpful, and hope that you found it useful as well.

During the meeting ADP TotalSource agreed to follow up in writing regarding our request to change the working capital requirements contained in the Temporary and Final Regulations (TD 9768) issued in May of 2016, and in Revenue Procedure 2016-33, released on June 4, 2016. Below is an outline of our requests with respect to working capital. Specifically, we request that:

Positive Working Capital Should Not Be Required for PEO Certification

ADP TotalSource does not read the statutory language of Internal Revenue Code sections 3511 and 7705 as requiring positive working capital for CPEOs or CPEO applicants. Moreover, ADP TotalSource does not believe that positive working capital is an effective proxy for financial soundness. Instead, the IRS's decision regarding whether or not to certify a PEO (or to maintain such certification) should be based on the CPEO applicant's overall financial situation, experience, and other factors indicative of whether the CPEO applicant will be able to meet its obligations with respect to employment taxes.

The failure to maintain positive working capital should not be mandatory grounds for rejecting, revoking, or suspending a PEO's certification. For business reasons entirely unrelated to the PEO certification process, financially sound institutions may choose not to maintain positive working capital on an entity by entity basis. Rather than simply focusing on whether an entity has positive working capital, the IRS should permit CPEO or CPEO applicants to provide evidence that the entity will present no material risk to the IRS's collection of employment taxes.

Positive Working Capital Should be Determined on a Controlled Group Basis

The Final and Temporary Regulations provide that the positive working capital requirements apply individually with respect to each CPEO entity. There is no ability to consolidate or combine CPEOs or CPEO applicants in the same controlled group for purposes of satisfying the working capital requirements, and any CPEO or CPEO applicant that does not maintain positive working capital (or meet the prescribed exception) will not be (or remain) certified. See 301.7705-2T(e), (f), and (h)

Many PEOs, including ADP TotalSource, have multiple related PEO entities (i.e., brother/sister and/or parent/subsidiary controlled group members) that maintain combined and/or consolidated financial statements. ADP TotalSource believes that even if the IRS retains positive working capital as a material factor in determining a PEO's certification, the controlled group should be permitted to demonstrate that the controlled group's financial strength on an aggregate basis would override any concerns raised by any individual CPEO's or CPEO applicant's negative net worth.

Transition Relief is Necessary

The Final and Temporary Regulations look back at past fiscal periods to determine whether the positive working capital requirement has been met. Certain PEOs that did not have positive working capital in the immediately prior fiscal period may be able to meet the positive working capital requirement for future fiscal periods by changing their financial practices or accounting methods. In order to facilitate fiscally sound PEOs applying for certification, the IRS should provide transition relief for at least the first year of the certification program. This relief could provide that the failure of a CPEO to have positive working capital for periods ending prior to submission of its initial CPEO application would not preclude certification, provided that the CPEO demonstrates positive working capital at the end of the two fiscal periods following the date of such application (whether in an audited financial statement or a quarterly statement of positive working capital).

We would be happy to provide more detail about our requests, or a more formal comment letter, if it would be helpful.