Transcript Available of IRS Hearing on Passthrough Deduction

PUBLIC HEARING ON PROPOSED REGULATIONS
"QUALIFIED BUSINESS INCOME DEDUCTION"

[REG 107892-18]

UNITED STATES DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

Washington, D.C.

Tuesday, October 16, 2018

PARTICIPANTS:

For IRS:

For U.S. Department of Treasury:

Speaker:

PROCEEDINGS

(10:00 a.m.)

MS. KRIBELL: Good morning, everyone. It's 10:00 o'clock, so we're going to go ahead and get started.

First, I'd like to thank everyone for coming today. We're here at the Public Hearing regarding the Proposed Regulations under Section 199A the Qualified Business Income Deduction, and enacted by the Tax Cut and Jobs Act of 2017, and amended by the Consolidated Appropriations Act of 2018.

I'd like to start by having the Panel Members introduce themselves.

I'm Wendy Kribell, Assistant to the Branch Chief in Branch 1 of the Office of Associate Chief Counsel for Passthroughs & Special Industries. And starting with my far left?

MR. WARREN: Clifford Warren, Senior Level Counsel in the Passthroughs, in the Chief Counsel Office.

MS. PFALZGRAF: Amy Pfalzgraf, Income Tax and Accounting, Special Counsel.

MS. ELLIS: Audrey Ellis, Attorney Advisor, Department of Treasury.

MR. FISHER: I'm Frank Fisher, Docket Attorney in Passthroughs of Chief Counsel.

MS. KRIBELL: Thank you. Our schedule today includes 24 speakers who have requested in advance to speak. Each speaker will have 10 minutes to present. There's a timer at the podium that will countdown from 10 minutes to alert the speaker of how much time remains. The Panel Members will then post questions to the speaker.

To the extent that time permits, additional persons here today may also be permitted to make oral comments. To do so, if you're not on the agenda and you would like to speak, please notify the IRS employee who is outside of the entrance, as soon as possible.

As one other procedural note before we begin, we will be taking 30-minute recess around 1:00 o'clock, if you'd like to be in the hearing room before, during the recess, please ask one of the IRS employees located at the entrance of the room to escort you.

So with that, let's get started; and our first speaker today David Dvorak of Dvorak CPA.

MR. DVORAK: No pressure going first. Good morning. Hi. My name is David Dvorak. I'm a Certified Public Accountant from Tampa, Florida. Today I'm here representing myself, my own business, David Dvorak CPA, and my clients, both of which are going to be affected by this new Qualified Business Income Deduction.

There are many issues I can talk about today, but the issue I want to address is Section 199A, Subsection (c), paragraph 4: the treatment of reasonable compensation and guaranteed payments.

It's a very important provision because it's going to affect most of my clients. I was very excited when the regulations came out. I poured over them because I believe this is going to be a major area when I'm doing tax planning for my clients and where I can assist them in computing this new deduction.

There are two interpretations, I believe, of this provision, the treatment of reasonable compensation and guarantee payments. I'd like to read just here, the provision says, "Qualified business income shall not include reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered, with respect to the trade or business. Any guaranteed payment described in Section 707C paid to a partner for services rendered with respect to the trade or business."

Now, there are two basic interpretations, the one I think is contained in the background to the regulations which states, "The rule for reasonable compensation is merely a clarification, that even if an S corporation fails to pay a reasonable wage to its shareholder employees, the shareholder employees are nonetheless prevented from including an amount equal to reasonable compensation in QBI."

The language for guaranteed payments is similar. In other words, it's telling you that in order to arrive at QBI you have to take a deduction for reasonable compensation or guaranteed payments.

Now, my interpretation of this is that Section 199A, subsection (c), paragraph 4, which I'm just going to refer to as the provision here, is the disallowance of the deduction for reasonable compensation or guaranteed payments at the entity level.

In other words, it's an add-back provision in determining four or five business income from a particular business. I'm going to make three points in support of that.

First off, the structure of Section 199A, subsection (c) defines qualified business income as the net amount of qualified items of income gained, deduction and loss, with respect to any qualified trade or business of the taxpayer.

The next question is there: how do we define qualified trade or business? For this definition you'll actually have to go to the next subsection, subsection (d) which states, "The term qualified trade or business means any trade or business other than a specified service trade or business, or the trade or business of performing services as an employee."

So, what's a trade or business? Well, I'm going to go into that, but the short definition is: an activity conducted with continuity and regularity and with a primary purpose of earning income or making a profit.

And why would I say all this? Well, it's just to say this, subsection (d) entitled, Qualified Trade or Business, already rules out W-2 income as a trade or business. And I've never heard it argued that a partner receiving a guaranteed payment is conducting a trade or business by the act of receiving said payments.

My point is, W-2 wages and guaranteed payments are already ruled out as qualified business income at the individual level, just by the definition of qualified business income as coming from a qualified trade or business.

Therefore, when officer compensation and guaranteed payments are discussed in subsection (c) paragraph 4, the treatment of reasonable compensation and guarantee payments, these items should be treated in the context of how they apply at the entity level.

Now the phrase, "Qualified business income shall not include, when applied to an item of deduction results in the disallowance of that deduction, or the adding back of that deduction to arrive at QBI." It would be same as if I said, net ordinary income shall not include office or life insurance premiums.

If you were computing net ordinary income using the office or life insurance premiums as an expense, and I said it shall not include that, you would add it back. That's point number one. I believe the structure of the law as written supports this as an add-back provision.

Point number two, incentives and consequences: Now it would be great if Congress had told us, what this provision means, but in the explanatory statement of the Committee of Conference they didn't help except to just restate this provision almost word-for-word from the Bill.

They said, "Qualified business income does not include any amount paid by S corporation that is treated as reasonable compensation to the taxpayer. Similarly, qualified business income does not include any guarantee payment for services rendered, but with respect to the trade or business."

Thank you very much, Congress. That doesn't help a whole lot.

So as Congress has not explicitly given direction on what they want this to mean, I think it we'll have to examine this provision from the perspectives of the incentives it provides with respect to both interpretations.

First off, S corporation shareholders currently have an incentive to pay less than reasonable compensation, because as the reasonable compensation to the shareholder goes up, so will the payroll taxes. That's why a lot of S corporations will structure their shareholders' compensation as a mixture of W-2 wages and distributions.

Treating shareholder compensation as a deduction to arrive at QBI will result in S corporation's shareholders having a second incentive to skirt the reasonable compensation requirement. In essence, you would be penalizing those who attempt to follow the Reasonable Compensation Rule. I think the goal should be to not penalize those who try to follow the rules.

Now, partnership income and guarantee payments are both subject to self-employment tax, so there's no incentive there related to self-employment tax, but if guaranteed payments reduced QBI and partnerships have the incentive to, instead, structure their partner compensation while specifically allocating income and matching that income with distributions, bypassing guaranteed payments entirely; because if you report guaranteed payments like you're supposed to, you get penalized for it.

Thirdly, sole proprietorships have an unfair advantage over S corporations because they have low mechanism for delineating payments to owners, thus all of a sole proprietor's income would be QBI under the current interpretation.

This gives sole proprietors a distinct advantage over S corporations and partnerships and the calculation of QBI simply because of their filing method.

If you treat Section 199A, subsection (c) paragraph as an add-back provision it would eliminate both the undesirable incentives for shareholders and partners to minimize their compensation either via W-2 wages or guarantee payments to maximize their QBI deductions, and it would eliminate the unfair advantage given to sole proprietors simply because they have no mechanism for delineating their payments to owners.

Treating Section 199A, the provision, here, as an add-back provision would put S corporation partnerships and sole proprietorships on the same level playing field, and would not give S corporations any additional incentives beyond self-employment taxes to manipulate their owner compensation for the lower end.

Now, point number three, and then I'll be finished here.

Who is the qualified business income deduction really meant to help? Well, we've been told that this is a deduction for small businesses as opposed to those large C corporations which get a reduction in their corporate tax rates.

Large businesses that have multiple employees generally can leverage those employees to create ordinary income in excess of owner compensation. Those businesses are going to benefit greatly from the current interpretation of how owner compensation is treated, because they can pay themselves a reasonable wage and then have a large amount of ordinary income which deals as QBI.

It's the smaller S Corporations and the small partnerships, two to three partners; those are the people who often have very little ordinary income left after owner compensation and guarantee payments.

Those people are going to be at a distinct disadvantage over the larger businesses. Most of my clients are in small the businesses, which is the reason why I'm here today, because I want to speak for them.

So, in essence, and I'll finish here, I have 40 seconds. In conclusion I think the logical flow of how Section 199A is written supports adding back the deduction of reasonable compensation or guarantee payments to arrive at qualified business income. I think adding back guaranteed payments or reasonable compensation eliminates the undesired incentives and the undesired consequences of the current interpretation.

And finally, I believe that it puts businesses of all sizes on a level playing field which would follow the spirit of law. Thank you very much.

MS. KRIBELL: Thank you. Are there any questions? Okay. Thank you.

Our next speaker today is Mark Gerson, on behalf of American Staffing Association.

MR. GERSON: Good morning. My name is Mark Gerson, and I'm the Chairman of the law firm Miller & Chevalier in Washington, D.C.

It is my honor today to appear before you to present testimony on behalf of the American Staffing Association, popularly known as ASA, regarding the application of the proposed Section 199A Regulations to the Staffing Industry.

ASA has previously submitted written comments to the proposed regulations and my testimony today is consistent with those comments. ASA is the National Trade Association and a leading voice at the U.S. staffing and recruiting industry.

It is the largest trade association for the staffing industry, representing over 1,500 staffing firms that operate in nearly 18,000 offices throughout the United States.

ASA appreciates the tremendous time and effort of the Treasury Department and the IRS have dedicated to the development of the proposed regulations, including the opportunity for interested parties, such as ASA, to submit written comments and present testimony here today at this public hearing.

My comments today are focused on the application to the staffing industry of proposed Regulation Section 199A-5, which relates to the definition of a specified service trade or business for SSTBs.

As you are aware, income associated with an SSTB is generally not eligible for the Section 199A deduction.

As I will summarize, the proposed regulations may appear that staffing is not an SSTB. In determining whether staffing would be classified as an SSTB under the proposed regulations, it is important to understand staffing and the services that staffing firms provide.

Staffing firm's function as intermediaries that employ workers to augment the work forces of their clients for using the clients' trade or business, staffing firms find and screen qualified candidates and assign them to clients to work in various positions as needed, under Section 199A(d)2A, and SSTB includes two types of trades to businesses, which I will refer to in my testimony as enumerated SSTBs, and reputation for skilled SSTBs.

Enumerated SSTBs include any trade or business involving the performance of services in certain enumerated fields such as health, law or accounting.

Reputation or skilled SSTBs include any trade or business where the principal assets such trade or business is the reputation or skill of one or more of its employees or owners.

Section 199A(d)2A does not list staffing services as an enumerated SSTB. Further, the proposed regulations confirm that provision of staffing services to an enumerated SSTB does not itself constitute an enumerated SSTB.

In this regard the definition used by the proposed regulations with respect to each of the enumerated SSTB field, provides that a taxpayer will be engaged in an enumerated SSTB only when it directly provides services in the relevant field, not when it provides services to another taxpayer as engaged in the direct provision services in that relevant field.

Thus, for example, the staffing provision provides temporary employees such as nurses and medical technicians to doctor's medical practice would not itself be engaged in enumerated SSTB, because the staffing firm is not directly providing medical services.

Under the proposed regulations, a business that provides services to an SSTB will itself be treated as an SSTB only where there is common ownership between the two businesses. Generally, staffing firms do not have an ownership interest in their clients.

The proposed regulations also interpret the reputation or skill SSTB Rule in a manner that does not include staffing firms.

Under proposed regulations Section 199A-5(b)2, a business will be a reputation or skill SSTB only where it consists of a person who receives income from endorsements, assets associated with an individual's identity, or media appearances.

Staffing firms derive income from charges made to clients for the provision of temporary of temporary employees. They do not derive income from endorsements, assets associated with any individual's identity or media appearances, hence they are not reputation or skilled SSTBs under Section 199A(b)2(a).

It is important to note that an example in the proposed regs confirms that staffing is not an SSTB by distinguishing consulting which is an enumerated SSTB from staffing which as detailed above, is not an SSTB.

In example three to proposed Regulation Section 199A-5(b)3, the taxpayer is, "In the business of providing services that assist unrelated businesses in making their personnel structure more efficient." As part of this business the taxpayer, "Makes recommendations and provide advice to its clients regarding possible changes in the client's personnel structure including the use of temporary workers."

Because proposed Section 199A-5(b)2 states that the provision of services in the field of consulting means the provision of advice and counsel to clients to assist the client in achieving goals and solving problems, the example concludes that the taxpayers providing consulting services and therefore is engaged in an enumerated SSTB.

Thus the example clearly distinguishes between the business of, (1) making recommendations and providing advice that could include the use of temporary workers which would be consulting, and therefore an enumerated SSTB; and (2) actually providing temporary employees which would not be in SSTB as detailed above.

But ASA believes that the great majority of staffing firms, do not provide consulting services as described in example three, we recognize that any firms that do provide such services in addition to their primary service of providing temporary employees to clients, will need to consider if their consulting activities cause them to be enumerated SSTBs.

In that regard we note that proposed Regulation Section 199A-5(c)1, provides the rule for determining when a business that provides income both from SSTB activities, and non-SSTB activities will be treated as an SSTB.

Thank you for the opportunity to present this testimony on behalf of ASA. ASA looks forward to continuing to work with Treasury and the IRS as you move forward to finalize the proposed regulations, and I will be happy to answer any questions you may have.

MS. KRIBELL: Okay. Thank you.

MR. GERSON: Thank you.

MS. KRIBELL: Okay. Our next speaker is Troy Lewis on behalf of the AICPA.

MR. LEWIS: Good morning. My name is Troy Lewis, I'm a Sole Tax Practitioner, I'm also an Associate Teaching Professor at Brigham Young University in Provo, Utah.

I'm testifying today on behalf of the AICPA Task Force on QBI. Before I start, let me just say thank you. Thank you for the hard work you put in. We fully appreciate it. It's not lost on me that this is a high priority and you did amazing work to get this out so quickly and we, as practitioners have a lot of gratitude, so thank you. They asked CPS submitted a letter on the proposed regulations and my testimony today highlights some of the key issues from our written comments.

First, let's talk about the qualification of rental real estate is a trader business. The preamble of the proposed regulations to find the trader business according to Section 162(a). However, no uniform definition exists. The term trader business is not defined in the code, regulations or other administrative guidance. Taxpayers are left to determine trader business status on a case-by-case basis, sometimes with discrepancies even within the same industry. The courts have also struggled for a long time withdrawing definitive lines on what constitutes a trader business. This lack of clarity on the qualification of rental real estate will undoubtedly lead to inconsistent treatment. To promote clarity and certainty in the rules, we recommend that rental real estate activity is considered a trader business. Guidance could clarify whether there are special circumstances in which rental real estate activities would not generate QBI. Otherwise, taxpayers will be left to pursue their own interpretation of the rules and the IRS will be left inevitably to face unnecessary and time consuming challenges in enforcement.

Our second key issue relates to the -5C2 regs, unspecified service businesses. The anti-abuse rules are designed to prevent the splitting of your revenue between related businesses. To qualify some of the groups' income for the deduction administration and other support functions could be performed by a related entity with the appropriate compensation being paid back to the non-SSDB. An example of this is where a non-specified business performs the administrative functions like, payroll.

There are two roles, one dealing with situations where 80 percent or more of related party revenue is provided to the SSTB and one dealing with situations where the revenue is less than 80 percent. The 80 percent or more threshold is overreaching and just simply not necessary. It should be eliminated in the final guidance. Generally, if a business provides property or services to an SSTB, it apportions the qualified and non-qualified income. In some cases, the regulations do not allow a payroll processor to take a QBI deduction for services provided to outside clients. If a payroll processor provides 80 percent or more of its services to an SSTB, the otherwise qualified entity is automatically treated 100 percent as an SSTB as well.

We agree with the need for anti-abuse rules and having to separate the SSTB income from the non-SSTB income. However, income from non-SSTB should not be unfairly recharacterized. Related party transactions should not qualify for QBI to be clear, but it shouldn't also take any outside income either. The 80 percent or more rule that automatically recharacterizes all the income limits the effectiveness of the QBI deduction. In the final regs, we recommend removing the 80 percent threshold clip roll and allowing the proration rule to determine these transactions.

We also asked for clarification on the -5C2 regs that they only apply to common owners that comprise the greater than 50 percent ownership test. As is now, the operation rule appears to penalize the unrelated owners have a separate business. The income of unrelated owners from otherwise qualified business is recharacterized even though they have no interest in the SSTB itself.

Okay, so now let's talk about when a business has both SSTB and non-SSTB lines of business. The regulations provided incidental role when a business has a small amount of SSTB income. We appreciate the Treasury and the IRS recognized the need to minimize administrative burdens. However, the regulations are unclear as to what happens when the nonqualified income exceeds the incidental amount. The regulations should allow businesses to separate their net income between qualified and SSTB activities.

Applying a cliff effect to taxpayers who see the threshold would be unfair.

It would also discourage natural business growth. We could easily apply to Section 199 Small Business Simplified Overall Method. This method which practitioners already use would enable taxpayers to ratably apportion their costs and deductions between different types of activities. A law provides a taxpayers must calculate the QBI deduction based on each separate trade or business. The regulations interpret this to mean that the books and records must be separable. We appreciate Treasury and the IRS's recognition of how businesses are formed and operate in the real world.

Okay. Let's switch gears and talk about the aggregation rules for when taxpayers may treat multiple businesses as a single business. Our first issue concerns siblings. Specifically, we recommend that businesses use existing attribution rules under Sections 267 and 707, rather than creating a new family attribution rules. Congress intended Section 199 Cap Rate to benefit businesses that are not organized as C corporations. Many of these businesses are family-owned and there is no reason to treat businesses owned primarily by the first generation and their children any different from the business owned by the children after the parents have transferred ownership. There's no reason to adopt a new family attribution standard and arbitrarily disadvantaged businesses that are owned by siblings.

Our second ask involves multitier pass roots referred to as RPEs in the regs. We recommend that aggregation be available at the RPE level. Allowing RPEs to aggregate the lower tier businesses together would simplify its reporting process and result in a significant reduction in compliance costs.

Finally, I want to stress the importance of the details of how to calculate QBI. For example, the Irish should confirm that certain deductions do not reduce a taxpayer's TBI, including the self-employment health insurance deduction. The 50 percent deductible portion of the self-employment tax and a self-employed taxpayers qualified plan — retirement plan contributions. These are details CPAs care and need in order to properly calculate QBI. As I mentioned earlier, we submitted a detailed comment letter that includes many issues I've shared with you in addition to several others. We hope you find our comments helpful as you work through finalizing the regulations and again, thank you for your hard work to this point and allowing us to testify today. Thank you.

MR. FISHER: Thank you.

MR. WARREN: Okay, thank you. Our next speaker is Donald Williamson with American University.

MR. WILLIAMSON: Good morning. Thank you for permitting me to testify today on a separate proposed regulations that I believe are the most significant rules impacting the sole proprietors and small partnerships since passage of the passive activity rules in 1986. My name is Don Williamson and I am the chair of the Department of Accounting and Taxation and the Kogod School of Business at American University. At AU, I also serve as executive director of the Kogod Tax Policy Center. It seeks to increase understanding of our nation's tax law, focusing upon the challenges of tax compliance and planning for average Americans and their small businesses.

First, commend the drafters of the regulations for the comprehensive can be filled prescription of the rules governing the qualified business income deduction. I especially want to applaud the reference in setting up the many examples in the regulations illustrating the computation of the deduction. As they say a picture is worth a thousand words and in the context of describing rules as subtle and as complex as those of the qualified business income deduction, each example — each example — each example is in the proposed regulations is indeed worth a thousand words. They will enable sole proprietors and partners, as company shareholders in small businesses to have to understand the law and properly prepare their returns. Thank you very much.

That's it. I and the Kogod Tax Policy Center wish to offer a targeted safe harbor aimed at average Americans engaging in real estate rental activities. As you know, the Section 199 Cap A deduction may only be claimed against qualified business income, which in turn requires a qualified trades business. Like the Section 1411 regulations describing the 3.8 percent tax on net investment income, the proposed Section 199 Cap A regulations also looked at the case law and administrative pronouncements under Section 162 to determine if a taxpayer's activity constitutes a trade or business. While such a cross-reference may be appropriate in connection with a tax, that only applies to the AGI of individuals that exceed $200,000. More specific guidance is appropriate for deduction aimed at Americans with taxable income of less than $157,500. This need is especially acute for Americans who may rent residential or commercial real estate, but are not considered dealers for purposes of a self-employment tax. These individuals will be challenged if ascertained if their relationship with the rented property is sufficiently considerable, continuous and regular, so as to qualify as a trader business under Section 162 and therefore, under Section one 199 capital A.

In fact, an examination of the law and literature under Section 162 indicates that whether rental real estate can ever be a trader business is an issue that confounds the IRS, courts and tax law scholars alike. Therefore, to provide guidance whether income from rental real estate constitutes a trade or business without promulgating a more comprehensive rule that the IRS may have either the time nor resources to draft and ultimately administer. We recommend a targeted safe harbor providing an individual whose taxable income does not exceed the threshold amount of Section 199 Cap AB2 is deemed conducting a trader business with respect to any real property rental of which the individual owns at least 10 percent and in which the individual actively participates within the meaning of that term. In Section 469(i). Such a provision aimed at middle income Americans investing directly in real estate is neither unprecedented nor even unusual.

For example, the repair regulations provide a safe harbor targeted at taxpayers with gross receipts of $10,000,000 or less, allowing them to expense otherwise capital improvements to buildings with a cost basis of $1,000,000 or less. In short, offering a safe harbor, to the definition of what constitutes a trader business in arriving at QBI for an individual only a closely held residential or commercial property and having taxable income of less than $157,500 is reasonable, administrable and simply good tax policy that fulfills the intent of Congress to offer the qualified business income deduction for middle class Americans. I want to, again, thank you for the opportunity to speak. I would welcome your questions and will respond to any inquiries you may have as you complete this important project. Thank you.

MR. WARREN: Okay, thank you. We're trying to cool it off a bit in here. (Applause) Thank you. Okay, in the interim, our next speaker is going to be the Donald Kozusko of the American — on behalf or the American College of Trust and Interstate Council.

MR. KOZUSKO: Well, I'm glad I'm not responsible for the temperature, but thank you for that correction. I'm here on behalf of what is known properly as ACTEC. We have many members who have considerable experience in advising for tax and trust matters, clients who own closely held business interest, particularly family businesses. We have an entire section of ACTEC called Business Planning Committee and that committee plus the fiduciary tax committee put together — was primarily responsible for the comments that will be submitted. Not surprisingly, I will talk about the trusts and estates. We are particularly concerned about the multiple trust rule, both the one that's general and the one that applies to 199 pay in particular.

We are concerned about the general rule in that it sets up a presumption that given significant tax savings from having multiple trusts, there will be presumed to be a principal purpose of tax avoidance. If over and less, there are other purposes that could not have been accomplished by other means. While we appreciate why this presumption was put together, we would suggest instead a much simpler test, which is multiple tests. Multiple trusts will be disregarded if they would not have been established, but for the tax savings that they are intended to achieve at the time of funding or at the formation of the trust. In other words, a simple but for tests which was much more easily understood than new terms to the tax law like significant this and insignificant that.

Let me give you an example. If a business owner years ago, established a trust for the next generation in order to have people take part in the family business, the children, as they grow older and then are faced with the question of what to do with voting stock, the owner might be advised by their current counsel to create a trust in another jurisdiction that has a new trust law more amenable to holding business interests in trust; more amenable to protecting the trustee as holding an undiversified portfolio.

And indeed there may be no discussion whatsoever about any possible tax savings from holding that business interest in trust and in fact at the time the shavings may be unpredictable. As we understand the proposed rule, at some future time, if there is a tax saving, there would be a reason under the proposed rule to call for an examination as to whether there are significant other purposes in establishing that second trust and whether those purposes could be accomplished by other means. So we're literally, as tax advisors being called upon to identify solely for this purpose significant other reasons for that second trust. Now, ordinarily that's not difficult because there are multiple reasons to establish another trust in our experience.

Nevertheless, it's just an additional hurdle to advise the client about that when returns are filed, there is some uncertainty as to whether the second trust will be respected. We believe instead, that the but for puts the proper focus — not but suggested but word test puts the proper focus on what was the purpose of the second trust and that it was not to accomplish tax savings. This is particularly true in connection with the purpose, excuse me, with the — yes, with the purpose test that applies to the 199(a) in particular. It doesn't even establish a principle purpose. It's enough that there are significant tax savings as being a purpose.

What we're concerned about is that our clients' general way of setting up trusts process and their advisors general way of setting up trusts is not being appreciated by these new rules. Clients, in fact, don't like to have a lot of trusts. Lawyers may like to discuss having an additional trust because they love drafting trusts, but it's not something that clients reach out through to do. The tax savings from the 199 deduction, the additional threshold is not insignificant, but it's just not that big a deal that a client is going to come rushing into the office to establish a second trust. Income varies in businesses and the effects of that additional threshold are unpredictable. It's actually very difficult to find trustees today who will take on the liability of holding a business interest in trust, giving their proliferation of litigation and the risk of an undiversified holding. So, we submit that you shouldn't be quite so worried about people setting up trusts for tax purposes.

And we don't think another test is warranted. Let me move on to attribution. We generally subscribe to the comments that are made on attribution by the AICPA and the ABA. We apologize for example six and our comments. We tried to come up with a sophisticated example and maybe what we demonstrated by that obtuse example is that one of our proposed tests is really too complicated. So, we do fortunately have a fall back test on attribution from trust in our comments.

So on the question of whether interest-owned intro should be attributed to the beneficiaries, we would highly recommend there are simpler tests, which is similar to the AICPA and ABA proposal. Generally speaking, what we're seeing is most trusts, 95 percent of the trusts are considered family trusts. The remote beneficiaries in the event of a premature death are not the intended purpose of the trust. It would be very easy with 95 percent of the trusts to just look at them and immediately see that it's essentially a trust set aside for family. And we therefore propose that a 50 percent of the interest are in effect, assignable to family, that the entire interest owned by the trust should be attributed to that family. We also heavily subscribe to the idea that siblings are part of the family for these purposes, just as they are under section 267, 1239, 1031, etc., etc.

I have two more comments. One is that we don't understand why the taxable income of a trust in testing whether it meets or exceeds the threshold should be calculated without being reduced by the distribution deduction. Maybe we misunderstand the proposal, but as we understand it, if a trust has 300,000 dollars of income and distributes half of that to the beneficiaries, that 300,000 dollars of income is nevertheless counted against the threshold of the trust. It seems to me that that necessarily leads the double counting.

Finally, not to neglect estates, we want to point out that in the preamble, there's a reference to saying that fair market value in death, the sort of classic step up or step down in death, will be the new value for UBIA purposes. We don't find that provision in the proposed regulations themselves. That 10-14 new basis is now the UBIA of that asset. We also don't find any provision that says that a transfer at death will start a new depreciation period, but we think that would be suitable so that everything runs consistent with the income tax reporting for other purposes. Thank you.

MS. KRIBELL: Thank you. Okay. Our next speaker is Damien Martin of Beacon AD. Okay. We'll get him back. How about Roger Harris of the Padgett Business Services?

MR. HARRIS: Good morning. And thank you for the opportunity to be here. To give you a little background, Padgett Business Services has provided accounting and tax services to small businesses across the country for over 50 years. The majority of those businesses would fall under what is described as the threshold amount. So it's from that perspective that I offer my comments today. We submitted some written comments that covered a lot of areas and many of those have already been addressed and will be addressed, particularly at the need for help (inaudible) to be qualified for a business deduction.

I think we need some sort of right line or a fallback position that we can sit and honestly look in the face of one taxpayer and say if you qualify. And look at the eyes of another one and say if you qualify. And right now, I'm not sure we can do that comfortably.

But the area that I want to spend most of my time on, and if I don't use it all, I'm sure no one here will be angry, is the issue of reasonable compensation. When this law was passed, the service to their credit held some round tables. When we went to those round tables, we raised the issue of reasonable compensation at that time. Because primarily until that time, it was a payroll tax issue. And this would be reasonable compensation on a much bigger issue for obvious reasons, because in addition to payroll tax, now we have the potential of a 20 percent deduction. And as you prepare returns, when the regulations are issued, we found ourselves in potentially a much more serious and difficult position.

The regulations as we read them, and I think we're accurate in our reading, puts the individual preparer of a shareholder's return in a difficult position in that they would have to determine the reasonable compensation if they differed with what was done at the entity level. And in many instances, that's particularly challenging because we may have no bearing on any of the entities at work. We may not know who they are. And if you are going to put our responsibility at that level, we really echo our asking for a safe harbor. Something where we can go and find a place of comfort for both us and our clients.

We have some guidance there in that the House has passed a tax reform bill, and has suggested a 70/30 safe harbor. And they were faced with political challenges that caused them to have to back away from that, for it did not make it in the final bill. You fortunately are not faced with those political challenges. Because if we are not given the safe harbor, we then face a numerous list of challenges.

Number one, we can accept the information that we were given from the prepared entity return and if we're proved wrong, we can be subjected to penalties. But if we determine that we cannot accept that for whatever reason, how do we report that? How do we disclose that individual return in such a way that you recognize that the difference from what was done at the entity level and what we had done at the individual return level? So we have a disclosure issue.

What impact would our actions, assuming that we're not the older shareholder of this company, what impact would our actions have number one on the entity return and its preparer or other shareholders who are going to numerous other preparers and having their own individual discussion? If we change something that was not deductible at the entity return and the distribution to deductible wages on the return that we prepare, are the other shareholders entitled to their share of that deduction? Do we have to notify other shareholders and the entity? Are we required to go back to the entity and insist on payroll taxes being paid?

So, if you are going to force us at the individual level to make these types of decisions, we need your help. We need to know exactly what it is you want us to do, how you want us to report it, and what impact we have. If we make a change on one return, have we disadvantaged every other shareholder that has similar situations?

So, I appreciate that you didn't ask for this problem. You were handed it. But I think we have to realize that in the real world, we are not all going to be faced with the perfect scenario where we control both the entity return and the shareholder return and we can get consistent treatment. So we really need some help there. And I think the best suggestion is a safe harbor. We can argue whether it's 70/30, 80/20, and we would suggest that perhaps this only be available to people who qualify for cash accounting, so we focus it on the smaller companies if we don't open up a can of worms for larger companies. So we would suggest a safe harbor primarily focused on the smaller companies whether you use cash accounting below the threshold. Again, we understand that.

That's the main reason that I'm here today, but I do want to comment on a couple of other things and I know others are going to speak. As I mentioned, the rental property issue is the second most common issue that we're hearing about. It's really difficult to use a somewhat arbitrary set of guidelines portraying our business in this arm where rental fits. And a lot of the other rules and regulations that were written for rental activity were never written in contemplation of this law. So while they may fit, they may need to be modified, but we just need a baseline. We really need to be able to look at that person who is retiring that has 10 rental properties, and that's all they do, they don't have another job.

How do we know if their efforts meet the standard for the 20 percent deduction? I certainly support some of the suggestions here today of again, a safe harbor for below the threshold, but we need help. We just need some guidance.

I'm going to get back to this group, because I know it's getting hot in here, my three minutes, and if you have any questions. But again, thank you for your efforts and we do want to compliment you on what you have done. I think you were given a Herculean task and you have done a wonderful job and we appreciate your efforts. If you have any questions, I'll be able to answer them now.

MR. WARREN: Do you have any suggestions for like you said (inaudible)?

MR. HARRIS: Actually, what Don Williamson said, if you benefit him, you're going to keep it down to the lower income people, below the threshold. The assumption that perhaps they are business are absent in some other set of facts. The other one would be, you could apply some material participation rules. We just need a baseline to start with. Somewhere where we could say, "You've got to at least cover this first." And once you get over that, this many facts and circumstances will come into play. But at this point, we don't even have a starting point. It's all subjective. So either I would love to have the assumption that it is trader business. You can't do that and then something's wrong with the trader participation, somewhere where we could say you've got to meet this threshold.

MS. KRIBELL: Okay, thank you. Michael Brady?

MR. BRADY: Good morning Department of Treasury Internal Revenue Service officials.

Thank you for holding this public hearing and I appreciate the opportunity to comment on behalf of LPL Financial on proposed rules to implement internal revenue code section 199A as enacted by the Tax Cousin Jobs Act. Specifically, we ask that the internal revenue service clarify that independent contractors, including broker dealers and investment advisors, shall qualify as qualified trades for businesses and shall not be considered specified service trades for businesses under code section 199A.

A little bit about LPL, LPL is one of the country's largest independent broker dealer firms and provides brokerage and advisory services to over 16,000 financial advisors and over 700 diverse financial institutions. LPL further serves as a trusted partner to many of the country's retirement plans, any market participants for technology, custodial, and consulting services. The majority of our advisors are entrepreneurial, independent contractors who are primarily located in rural and suburban areas and as such, are viewed as local providers of independent advice. Many of our advisors operate under their own business name and we may assist these advisors with their own branding, marketing and promotion, and regulatory review.

Our advisors are a community of diverse, entrepreneurial financial service professionals who employ taxpayers throughout the country. They provide critical assistance to hardworking American citizens in all 50 states and support approximately 4.8 million client accounts. They've built long-term relationships with their clients by guiding them through the complexities of investment decisions, retirement solutions, financial planning, and wealth management.

Because of our independent contractor model, our advisors may be distinguished from news wealth managers, financial planners, and retirement advisors who are employed by the traditional employee model broker dealers. LPL financial advisors are small business entrepreneurs and drivers of the American economy.

The proposed modification to definition of specified service trades or businesses, a key provision under the TCJA creates a 20 percent deduction for qualified business income for owners or shareholders of past businesses such as S Corporations, partnerships, and sole proprietorships. A significant number of financial advisors associated with LPL are organized as past due entities and independent contractors and we believe it is sound policy to allow these hardworking business owners to benefit from this new deduction in whole.

We understand that the Treasury Department and the IRS have received comments requesting guidance on the meaning and scope of the definition of specified service trades or businesses, SSTB. In the MPRM, the Treasury Department and the IRS noted that section 199A is a new code provision intended to benefit a wide range of businesses and taxpayers need certainty in determining whether their trader business generates income that is eligible for the 199A deduction.

We appreciate the efforts made by Treasury Department and the IRS to clarify the definition of SSTB in the MPRM, however we are concerned that this definition unfairly and unintentionally disadvantages independent contractors such as financial advisors associated with LPL. It diminishes their ability to invest and build their businesses. As described above, LPL financial advisors are small business owners and entrepreneurs. They employ workers and serve as community leaders in towns and cities across our nation. The significant contributions made to the economy by financial advisors, stock brokers, and insurance brokers are similar in nature. It is therefore unclear why the tax code should advantage one group to the detriment of another.

We ask that you interpret the definition of SSTB in accordance with Congress' clear and broad intent to promote economic growth among the small businesses that drive our economy. This broad intent would clearly permit LPL financial advisors who operate under the Independent Contractor model to fully benefit from the 20 percent deduction. To make this clear in a definition, we suggest that it be revised to reflect that SSTB includes services provided by financial advisors, investment bankers, wealth planners, and retirement advisors and other similar professionals performing services in their capacity as such, but does not include such services should they be provided by an independent contractor financial advisor.

So how would independent contractor financial advisors respond to this deduction? As a business owner, I feel personally responsible for the wellbeing of my three full-time employees and their families. This deduction would free up some revenue to further enhance their compensation as well as provide a pool of money to upgrade our office's technology. That's what a typical entrepreneur does in these situations. Finds a way to make use of the additional capital to move their business forward.

In a recent survey of a selection of our financial advisors, we asked current owners of past ruined entities how they would respond if they were able to take full advantage of the 20 percent deduction. Their responses are below. An overwhelming number of responses indicated that they would be very likely or somewhat likely to use the tax savings to invest in their business. Most of the increased spending would directly benefit existing employees through increased wages, retirement benefits, and/or hiring new workers.

In conclusion, LPL believes that Congress did not intend to limit small business owners like our independent contractor financial advisors from receiving the full benefits of the past deduction. LPL Financial advisors employ thousands of individuals across the US and are community leaders supporting millions of clients. Excluding our advisors from the full benefits of the past deduction would be contrary to Congress' public policy goal of growing the economy, creating jobs, and providing our small business owners with some much needed tax relief. For these reasons, we believe the United States Treasury and the IRS should revise its guidings to clarify that financial advisors who perform services like ours, under our independent contractor construct should not be considered specified service trades or businesses. Thank you again for your attention to this important issue. We look forward to serving as a resource to you as you continue your work on regulations to implement the TCJA. Please do not hesitate to contact us if we can provide any further information. Thank you.

MS. KRIBELL: Thank you. Next we have Joseph Magyar on behalf of the National Automobile Dealers Association.

MR. MAGYAR: Thank you for the opportunity to speak before you today. My name is Joe Magyar and I am a CPA and partner with Crow LLP. I am speaking on behalf of the NADA, the National Automobile Dealers Association. NADA represents over 16,000 franchise dealers located in all 50 states who sell, finance and service new and used vehicles. The members of NADA employ over 1.1 million people nationwide and most members are small businesses under the small business administration's definition. These verbal comments are a supplement to our written comments regarding proposed regulations under Section 199A. NADA and its members fully support the tax saving provisions of Section 191A. Also the proposed regulations provide guidance that is very helpful.

I would like to focus on two of the concerns that we addressed in our written submission, management entity issues and issues arising from the sale of a business early in a taxable year. We recommend that the regulations include a provision stating that automobile dealerships and related management entities are allowed to be treated either as part of the same trade or business or that the management entities are excluded from treatment as specified services, trades or business.

It is important to understand how dealership management entities are structured and how they interact with their related dealerships. These management entities generally provide services only through related dealerships and ancillary businesses. Their sole source of management revenue is normally from entities with (inaudible) ownership and control.

Most individual dealership franchises are operated within separate legal entities. A number of significant business considerations may drive this structure. Separate entities allow the dealer to better separate and manage risk. Often the manufacturer will require in its franchise agreement that the dealership under their nameplate not be held in the same entity with the name plate of another manufacturer. Sales tax and other state specific regulations and reporting may be simplified by the dealership and operating in only on state. For these and other important business reasons, the individual stores and a group of dealerships are frequently operated through a number of different individual entities.

It is very common for large multi dealership organizations that have many dealership entities within separate management company. These larger dealership enterprises may have management companies that fall into one of two categories. One category includes dealership groups with decentralized management. The dealerships in these groups generally have onsite executives that manage the daily operations. Additionally they may have separate management entity that includes a CEO owner and possibly a few top executives that provide overall high level enterprise wise supervision.

The second category includes dealership groups with centralized organizational structures. These management entities typically provide comprehensive services including accounting, legal, human resources and other specialties that support multiple dealerships in different locations and possibly in different states.

Frequently the management functions are organized for prudent business reasons and an entity that is separate from but related to the dealership operations. The management entity and dealership operations generally have common but not necessarily identical ownership.

Management entities generally charge the dealership operations a monthly management fee for the services provided. These services are usually based on a formula what may include several factors. For example the fees often include a fixed amount along with variable components that may be based on criteria such as number of vehicles sold or profitability. The services provide by the management entities are vital to the successful operation of the dealerships.

For purposes of determining the 20 percent deduction under section 199A, a dealer may wish to aggregate the management entity with the dealership operations. If the management function is a separate entity and considered to be a specified services, trade or business the proposed regulations would not allow it to be aggregated with the dealership operations. The management entity of the dealership operations could be combined even though they are separate entities if the two entities could be a single trade or business or if the management entity is not classified as a specified trade or business.

The preamble to the 199A proposed regulations provides an overview of proposed reg section 199-4 concerning the aggregation rules and states that a taxpayer can have more than one trade or business but in most cases a trade or business cannot be conducted through more than one entity. The preamble does not promote — provide support for this conclusion and the actual proposed regulations do not mention this conclusion. The wording in most cases indicates that there may be cases where a trade or business could be deducted through more than one entity.

Example two of proposed regulation 199A-4D concludes the four equal owners of a restaurant and catering business could each treat the catering business and the restaurant as a single trade or business even though they would be filing two separate entities. While it is possible that the intent was to say that the entities could be aggregated, the conclusion does not utilize the word aggregated.

We urge Treasury to clarify that the related dealerships and their management entities as I have previously described may be treated as a single trade or business. If they cannot be treated as single trade or business then we urge Treasury to provide clarification that the management entity should not be treated as a specified services trade or business for the reasons that follow. All the management services performed by the management entity are for the related dealership enterprise and no management services are provided to unrelated entities.

Proposed regulation 199A-5B includes examples that help explain what constitutes a specified services, trade or business. Several of these examples describe businesses that perform services but those services are not sold to customers. Example 4, a software developer. Example 7, a bicycle sales and repair business and example 8, a chef who owns restaurants.

Similar to these examples, dealership management entities do not have any unrelated customers. The services of the management entity are performed only for related dealerships and that sell and service vehicles. This is very much like Example 7, a bicycle business. For these reasons, we urge Treasury to provide that even if the management entity must be treated as a separate trade or business, the management entity should not be treated as a specified services, trade or business because the management entity is providing services only to the related dealership operations. These management services do not qualify as specified services nor should they be so categorized.

Most of my automobile dealership clients use the LIFO inventory method. Data from the NADA and dealership (inaudible) at other firms indicates a broad and significant use of the LIFO method by dealers. In times of inflation, this method essentially allows taxpayers to deduct the cost of inflation for the inventory and carry the inventory at a cost that is significantly below the current replacement costs. The LIFO method matches current vehicle cost to the current sales price.

If a dealer that uses LIFO sells the assets of a dealership the sale of the inventory will generate significant gains because of the low basis of the inventory. The average dealer utilizes the LIFO method has a reserve of 1.2 million dollars. Accordingly, this may be a very significant taxable component of an asset sale. Likewise, dealers that sell the assets of a dealership may have significant gain from recapturing depreciation.

The income generated from LIFO recapture may be 5 to [sic] times the income from depreciation recapture. If such a sale occurs at the end of the year, the dealerships 199A deduction limitation will be calculated based on a full years' worth of wages. If the sale occurs earlier in the year, the wages for purposes of the limitation would only be a fraction of the yearly wages. Thus dealers that have dealership asset sales early in the year will be severely affected by a reduced 199A deduction that is limited because of the low wages. It is unlikely that the intent of the 199A was to penalize dealers that have an asset sale earlier in the beginning of the year rather than at the end of the year.

We urge Treasury to provide taxpayers with LIFO and depreciation recapture from the sale of or other transaction that triggers recapture income from the disposition of a business segment that they may utilize the wages of that business segment during the 12 months prior to the transaction for purposes of the wage based limitation. Thank you for listening and I hope you will be able to address these concerns.

MS. KRIBELL: In a typical structure, where are the W2 wage employees located?

MR. MAGYAR: In the dealership entity.

MS. KRIBELL: Okay.

MR. MAGYAR: There would be wages for the functions of individuals that are in the management company.

MS. KRIBELL: Okay, thank you. Okay. Our next speaker is Larry Gray of the National Association of Tax Professionals.

MR. GRAY: Good morning. Thank you for this opportunity and all the hard work you have done. Need to give a little background on my issues because they're from being out in the real world and speaking. So again my name is Larry Gray. I'm a CPA and partner in a local firm in the Ozarks, from the Show-Me State. 42 years of practice. I started out as a teacher's assistant with the University of Missouri and I teach nationally. I have been on the commissioner's advisory board, ETAC, URSAC, URPAC. I'm currently on the commissioner's security summit advisory group. So I try to do my time of the system and I think that is what we are here to do is to make this a better system. Again, I appreciate all the effort you all have done.

I represent the National Association of Tax Professionals — this mic is quite low for me. But anyway, I am the government liaison with the IRS here in D.C. and so I am involved on a weekly basis. I represent or NATP represents 23,000 members, impacts over 8 million taxpayers but I think more importantly, since January I have spoken over 30 times on this issue nationwide. At all the IRS tax forums, each one of them, I have spoken twice.

IRS has accommodated the need of the tax profession because at each one of them, they have allowed my discussion QBI 199 cap pay. That's the only issue I discuss to the largest room at the forum. So what I represent here today is not only 23,000 members but I represent a huge majority of those that attended the tax forums. So out of that, what I want to do today is talk about the three major issues that I have heard on the road and actually they have been talked to before a couple of AICPA, Roger from Paget Business, so I think there is a common theme here.

So what I like to do is get to the very first issue and that's rental and definition of trade or business. You know, there is no clear trade or business definition. There — it's all based on facts and circumstance and especially in the rental activity period. Case law is not clear. We can find almost identical facts and circumstances or at different circuits, come up with different answers. And I don't believe that the taxpayer community, everything from self-prepared to small firms to large firms needs that taxpayer burden and I think it is important that the better we can do guidance up front, the more compliance there are and less enforcement.

So when I start out in January, I looked at what would be the law and there was a big debate whether it would be 162 or 469. I started and I looked at this topic as a 162 because 199, the DPAT was replaced in 199A came in. The other point is that I appreciate regulations because as I speak over the or spoken over the years, so many times my answer was in the regulations so I love regulations. I don't mean that that way. I love the examples in the regulations. (Laughter)

So I want to look at one examples and, Mr. Fisher, I mentioned this one to you earlier today and what I want to read and that's why I have this book, I didn't bring this up to answer questions. But I want to go to proposed reg 1.199A, it's in the material that we provided. 1D4. The Example 1. It says D, an unmarried individual own several process of land that he manages and which are leased to several suburban airports for parking lots. The business generates a million dollars of QBI in 2018. The business paid no wage and the property was not qualified property because it was depreciable, not depreciable. That means land.

Then it goes on and says that this person's taxable income exceeds the threshold and says because of that there is no wages, no qualified property so the answer there is no QBI. Well, most of the people I speak to are below the threshold and so what happens, what I want to do here is I want to substitute the word D with Larry. You are looking at him. Okay. Larry, unmarried individual, owns several parcels of land. Larry manages of which is manages and which the properties are leased to several billboards, cell phone towers, microwave towers. See, I live in a rural area of Missouri. I'm in the Ozarks. I fit this case. But I also have rental houses.

So if I take this example I am identical to this example except I'm not above the threshold. So when we raise the issue of no guidance and I'm not presenting this because I actually presented it to San Diego the day that they were announced. When I look at this example I found my answer and my conclusion is almost all rental properties are a trade or business because, see, I also have three rental houses. This week I had a renter to move out. I got to replace one room of carpet. I have got to paint a room. I have got to wash the house. I signed the contracts. I can tell you that that is much more onerous than parcels of land and I have several of both.

The next issue is definition of taxable income. And there what I would like to go to is the frequently asked question, number four. And it says because the reason why is when we see the word taxable income, people think 1040. But I want to go to this frequently asked question and it says QBI is a (inaudible) amount of qualified items of income gain, deduction and losses from any trade or business. Only items included in taxable income are counted. Only items of taxable income are counted. That's referring to taxable income of the entity. So what I'm asking for is guidance and part of this AICPA referred to but is it determined at the entity level only or is it also determined by some adjustment items at the 1040?

If I'm the IRS right now they are working on worksheets for QBI. Those worksheets are what we are really talking about today. Two areas, one would be flow through items. 179, you and I could be partners. You get to utilize the 19 flow though, I don't, it's suspended for various reasons. Then a couple years later we dispose of that. That is a 1245 recapture to you but not to me because it never impacted income. So how do you doing a flow through entity, how do you know what happens before it gets there? Or a 4797? It's a 1231 gain on a flow through but that's not true yet. That's a net 1231 gain. If that flows through and on that 1040 I have recap or a look back rule, line 8, 4797. I have to look back five years and if I have utilized that 1231 loss I have to re-characterize the 1231 not as a gain but I have to re characterize it as a loss on part 1. So how do you know that when you're doing the flow through entity?

The other area is the 1040 adjustments. AICPA referred, Troy did earlier. We don't believe that Congress had the intent that those adjustments, retirement, self-employment health insurance, and what have the self-employment tax should be impacted. But if it is, please let us know so we can have compliance up front.

And the final item I have is due diligence regarding to regional (inaudible). Paget Business spoke to this a little bit earlier but see, if I'm not the payroll company and I'm not the one doing the 1120-S and let's say there is four shareholders, four W2's, four K1's, I'm not — I'm just one person doing one W2 and one K1. My question is what is the due diligence for the individuals doing the 1040 only? See, they don't get to see the books and records. They weren't part of the decision making process. How do we read, there may be things outlined that we don't know.

And finally, if I am the 1040 preparer, and I think wages run that are not reasonable, give guidance on what I can do to adjust that but as Roger referred to earlier, we now could have in this example up to six different opinions and you know how that works. Based on facts and circumstance at the time you are preparing the return.

So with that I want to thank you for the time again, and again, these are the three top issues of practitioners across United States and we are getting ready to go into filing season and again we applaud the guidance but hopefully you can help us for this filing season. Thank you.

MS. KRIBELL: Okay thank you. Can we go back to Damien Martin at BKD. He has made it through security.

MR. MARTIN: Thank you. Again, sorry to be a little late there. Good morning. I want to thank you for the opportunity to speak today on the proposed regulations regarding the qualified business income deduction under section 199 cap a. My name is Damien Martin and I'm the national tax assistant director at BKD for one of the largest CPA advisory firms in the US and research tens of thousands of taxpayers, closely held businesses and across a wide range of industries. So, we kind of have that perspective to things.

First, I just want to say that we recognize that developing regulations for a new section of internal revenue code is quite a significant undertaking. I want to acknowledge the authors and the co-authors for the regulations through a comprehensive approach that was provided. We made a number of requests for clarifications, modifications in our comment letter that was dated September 28th. I'd like to quickly highlight and provide a little more context around four of those requests today.

First, I'd say our primary concern or one I want to talk about is that we believe that there is a significant need for clarification on what constitutes a separate trade or business within the same entity for purposes of section 199 cap a. While we appreciate the challenge of creating a bright line around what constitutes a trade or business and we want to commend the IRS and Treasury for seeking to provide administrative roles to define a trade or business by looking to existing 162 a. We believe that there is not only a need for further clarity around the aspects of what constitutes a trade or business, which some of the commenters have mentioned already this morning, but also a need for guidance around the edges of what constitutes a trade or business.

Because as the preamble to the proposed regulation state, a taxpayer can have more than one trade or business.

So, we feel a reasonable approach would be for the final regulations to clarify a taxpayer would have more than one trade or business per entity provided. That such trades or businesses are separate and distinct, they have a complete and separable set of books and records that are kept and maintained for each trade or business and any shared income and expenses are allocated at arm's length which is consistent with the approach that provided for in regulation section 1.446-1d. We believe that incorporating this approach into the definition of trade or business that that is provided into the proposed regulations in -1b13 as well as the definition for a relative pass through entity or RPE under -1b9 would reduce compliance costs, burden and administrative complexity given the experience that taxpayers already have with this definition.

We feel it also would help alleviate some of the concerns that were raised by commenters regarding the so-called cliff effect related to the de minimis role of the proposed regulation section 1.199 cap a-5c1. So, to help clarify the application's approach and to illustrate the interplay between the de minimis role we provided an example in our comment letter and I'll read it now.

Which is that, S1 is an S corporation that provides banking services which include taking deposits and making loans. S1 owns 100 percent of S2 which is a qualified subchapter S subsidiary or a Q sub and it provides financial planning services to customers. Since S2 is a Q sub of S1 it is treated as a disregarded entity for federal income tax purposes. However, S1 and S2 each maintain a complete and separable set of books and records and any shared income or expenses are reasonably allocated at an arms-length standard. Based on these facts, we believe S1 and S2 should be considered two separate trades of businesses for purposes of section 199 cap a. Accordingly, the de minimis role under -5c1 and the (inaudible) role under -5c2 are applied separately to S1 and S2.

So, kind of keeping with the subject of the de minimis role there a secondary area I wanted to highlight this morning is our belief that taxpayers with gross receipts from specified service trades or businesses or SSTB's in excess of the prescribed thresholds should not be penalized for their entire qualified business income or QBI for having SSTB income that is, in some cases, only as little as a dollar over the de minimis threshold. This result rather is based on the perceived interpretation that the threshold acts as a cliff. So, once gross receipts from an SSTB exceed the threshold amounts than that would kind of kick that out.

Our view is that the final regulations should allow taxpayers to use any reasonable method to allocate expenses against SSTB and non-SSTB income to calculate QBI. And we recommend applying the cost allocation methods available under regulation section 1.199-4 which applied to the now repealed domestic production activities deduction.

A third area that we would respectfully request to receive consideration relates to section 1231 gains and losses. So, section 199 ac3b1i excludes capital gains and losses from the definition of QBI. While the proposed regulations provide that the gain or loss that is treated as a capital gain or loss under section 1231 is not QBI, we believe that the mechanical ramifications of taking this approach will cause unnecessary mathematical complexity. Excluding these gains and losses from QBI not only creates an additional layer of calculations to properly determine whether gain or loss is characterized as capital gain or ordinary loss under section 1231. But it also adds complexity due to the lookback recapture role required when a taxpayer has taken a 1231 loss in the previous five taxable years.

So, to avoid these computational complexities, our view is that the final regulations should not exclude section 1231 gains and losses from the definition of QBI. This position is consistent with the definition of the term section 1231 gain as provided under section 1231a and the regulation section 1.1231-1. Which provide that such amounts include any recognized gain on the sale or exchange or property used in a trade or business or held in connection with the transaction entered into for a profit.

Our recommendation to include section 1231 gains or losses in QBI would provide a simple approach to calculating QBI. At the same time, it would not affect the overall limitation that restricts a taxpayer's reduction to 20 percent if the excess of taxable income is over net capital gain.

A final area I want to kind of focus on is that we believe to reduce an unnecessary burden on taxpayers. We request in our comment letter, a rule accepting an RPE from reporting requirements under the proposed regulation section 1.199a-6b3 when certain criteria are met. Using the grant of authority under section 199af4a, we recommend that the final regulations provide an exception to the requirement to report the information provided under proposed regulation section -6b if any are the following criteria are met.

First, the RPE does not have gross receipts that constitute QBI. Second, none of the owners of the RPE are non-corporate taxpayers. Third, none of the owners of the RPE have taxable income above the threshold amount under section 199ae2 and the following two requirements are met. So, one would be that within 120 days of filing the RPE's tax return, the RPE received, reviewed and will maintain a copy of either all the owner of the RPE's tax returns for the taxable year that the RPE elects to use this exemption. Or have reviewed and received and will maintain a written statement under penalties of perjury providing, among other things, taxable income from all the owners of the RPE for all open tax years.

The second piece of that would be that the RPE then would file a written statement containing a declaration that each owner of the RPE does not have taxable income above the threshold amount. With the RPE's original income tax return for each taxable year in which none of the owners of the RPE have taxable income above the threshold.

A final recommendation along those lines is that we would also suggest a reduced reporting option in which an RPE would only need to report the amount of W2 wages for a qualified trade or business when it's clear the amount determined is based on 50 percent of wages with respect to a qualified trade or business would result in a larger amount. So, basically when it's clear that the W2 limitation applies then we wouldn't have to put the UVIA of qualified property in the reporting.

So, to summarize, we believe the clarifications and modifications that I just discussed here this morning as well as those in our comment letter are needed in the final regulations under section 199a. To reduce compliance costs, the burden of complying with the proposed collection of information and in the administration of the complexity for taxpayers. Again, I want to thank you for the opportunity to express our thoughts related to the proposed regulations. I'd be happy to address any questions or comments that you might have. Thank you.

MS. KRIBELL: Okay thank you very much. Next, we have Nick Passini with RSM US.

MR. PASSINI: Thank you very much. My name is Nick Passini, I am with RSM, the fifth largest tax audit and consulting firm in the U.S. I am today, however, speaking on my personal behalf, speaking as an individual. Today, I am speaking specifically on the lending industry. Just for the sake of time, however, if given the opportunity we do serve many, many different industries, we would likely echo many comments we've heard about trade or business designation, aggregation at the entity level and when we have businesses that have service and non-service components.

Going more specifically though to our comments on the lending industry, we wanted to take a moment and discuss the way we see lending work in (inaudible). Really out there when we have retailers and other businesses that are offering financing and offering when we have a customer that is purchasing furniture, when we have a customer that is purchasing a car. The financing you're seeing offered by the retailer is because a contract exists between the retailer and a lending company. But when the sale is made, the sale is made and the contract is made with that retailer and is then immediately sold, days later sold, weeks later sold, under a contract to a lender.

So, when we look at it from the lender's perspective, we have a lender that consider themselves a lender. We look at the rules, we look at the code, we look at the regulations we're talking about today. Seems fairly clear that those in the lending industry should qualify. We've seen that they're not a financial services, we've seen that this income does, in fact, qualify. But for these lenders, we're just asking for clarification because as written, there is some concern that these lenders who purchase 100 percent of their loans from a retailer may, in fact, fall into treatment as a dealer in securities under 475 given the way that these regulations were written.

If we read the 475 rules right next to these rules we get some comfort. Because 475 says buy or sell whereas these rules say buy and sell. So, if I look at the two of those together I get some comfort. But if I don't then I just look at these regulations I do have some concern that someone who purchases 100 percent of the loans they're servicing may be consider a dealer even though they never sell. Or if their sales are not in the ordinary course of business and that is really where our second concern comes in. These regulations do talk about lenders who originate loans but sell less than a certain amount. These are not originators though, at least not given the exact definition of that term. Maybe they can be considered the originator because a contract exists where they are already standing ready to service this loan but by the direct terms of these contracts they are not actually the originator.

So, we would like some clarity for a few points. We would like to make certain that these lenders who purchase these and service these loans in the ordinary course of business of lending they do not intend to sell these, they do not hold these as inventory. They are lenders servicing loans will in fact qualify and will not be considered dealers.

Second, to the extent they do sell, again in their ordinary course of business not holding these inventory items out but because they need to adjust their credit risk profile. Because maybe there is a branch in a certain part in of the country that they're shutting down and they need to sell off a portfolio but not in the fact that the ordinary business is selling these loans. But more in the ordinary course of business of lending they would need to sell these, that these would not also put them into a dealer capacity.

If we cannot get there, if there still is some concern that these lenders who are just lending may somehow still be considered dealers we would like to ask at the very least that they get the same treatment as the originators under law. But if the very next day they're going to purchase the loan, they should at the very least be afforded the same protections that are already there on the regulations where if I don't sell over certain amounts I'm not going to trip into dealer status. But we don't believe we should get there because again, this is the trader business of lending, these are not securities dealers, this is a contract that exists that allows small retailers, local businesses to offer financing to their customers. Thank you.

MS. ELLIS: I'm sorry can I ask a quick question?

MR. PASSINI: Yes.

MS. ELLIS: So, to the extent if you were treated as the originator then you would fall within the negligible sales exception?

MR. PASSINI: Correct, correct. Yes, so we don't necessarily think we would need to go that far because again, this is the trade or business of lending. But if we can't get there at the very least we would ask to be treated as the originator when we are under contract picking up these loans shortly after origination.

MS. ELLIS: Thank you.

MS. KRIBELL: Thank you. Next, we have Arthur Davis on behalf of the American Escrow Association.

MR. DAVIS: Thank you. I will be under ten minutes. I'll be similar to Nick with kind of walking you through the logic of why we commented as we did. First of all, thanks for holding the hearing. Our most recent experience with federal regulatory requirements has been the Bureau of Consumer Financial Protection and they do not hold public hearings even on major regs. So, the most recent regulation effect is the (inaudible) integrated disclosure. It took about five years, the last piece of it took effect this year. So, I think there is great value in these public hearings and I know it is part of the tradition of the service and the Treasury but thanks for holding it.

I want to walk through the logic of our comments. We thought carefully, do we really want to raise the question about whether a real estate settlement agent, which is what the membership of the American Escrow Association consists of, is in the field of accounting. It doesn't seem logical to raise it but I want to explain it this way. Real estate settlement agents actually appear and actually do a fair amount of accounting. So, you have to get in the question of how incidental is it and then how much do you have to work both of definitional provisions plus the De Minimis test. If everyone out there has to run through the De Minimis test then it appears to be contrary to some of the announced purposes of the guidance in the preamble.

So, let me start it this way to walk through the logic of why we've commented the way we have. First of all, this is a legislative regulation. To us, that means two distinct things. It has to be APA compliant and there is a great deal of deference that would be granted by the courts on litigation to determinations of Treasury and the IRS. F4 under 199a seems to us to not only cover NI abuse rules and addressing tiering but also the general rules of the road. And that plays out in some of the preamble already published. For example, it has already been referred to, whether relying on definitional guidance, prior guidance under 4481202, the preamble says that the goal is clear and distinct guidance governing what constitutes an SSTB under section 199a. That's definitional.

Furthermore, and separate under the De Minimis analysis there is the statement that there is an objective of the IRS and the Treasury Department not to have everybody out there get involved administrability of calculating how much of a specified service activity might be considered covered. So, for us what it amounts to is when you look at all those pieces together, is the correct answer if the rule isn't changed that everybody has to go through a De Minimis calculation and therefore it runs contrary to the wording that the goal is to avoid that. Wouldn't it be better to clarify that since functional activity of a settlement agent does involve accounting but that's not the core functional activity of a settlement agent. They follow instructions of others. They do accounting because all their trust fund dollars, which is how the money runs through the real estate settlement firm, generally in a pool trust account, has to be available to the penny similar to an estate administrator in Virginia reporting to the Commissioner of Accounts to the state.

So, you do have to have accounting records balance to the penny. Settlement agents do prepare and make available to the customers, balance disbursement sheets basically a source and use of funds. And the federal disclosure requirement, as I said, used to be the HUD 1 now it's the closing disclosure. It's essentially a combination of the cost of obtaining credit, the cost of closing on credit and the cost of closing on a real estate transaction which consists of what looks like a balance sheet and an inflow and outflow analysis.

So, to us the answer is why don't you distinguish between what is functional activity that's not accounting which is everything they do that accounting is incidental through the term core services. Now the only problem and I'll admit to it at the outset is that the term core services I could not find elsewise in Title 26. It is in Title 12 under RESBA. It was used by HUD back from the nineties to distinguish what is allowable and disallowable compensation for referred business based on what is core title. Now title in RESBA generally means, it's not just legal title transferring deeds, title insurance, it is all the functional activities of selling a real estate transaction includes what you would normally call closing functions. If you were to qualify in the rulemaking given that this is a legislative regulation and you have the authority to do it, that type of incidental accounting is not covered. Then at the definitional level it is answered.

So, it would be similar to saying it as the preamble doves the field of accounting does not include payment processing and billing analysis. As a matter of fact, real estate, some agents do a lot of payment processing.

The other way to deal with it would be, because of fact core services isn't, to my knowledge otherwise found in 26, Title 26, is you can simply add in another example in addition to payment processing and billing analysis.

But again, the thrust of our recommendation is based on the fact the service seems to already have gone down the road using that great grant of legislative authority to solve problems at the definitional, SSTB level, and not simply say well, a lot of you guys out there have to run the de minimis calculations.

And even if some of my members don't think they have to, by their own reading, my guest is their tax return preparers will require them to do so; and, frankly, the threshold — even though a lot of them will be under the dollar threshold — our working assumption is that can always change my statute, and it's not really the way to analyze this, whether or not they fit the threshold.

So, any questions? Thanks again for doing the public hearing. Like I said, other agencies, sometimes, don't do hearings.

MS. KRIBELL: Thank you very much.

MR. DAVIS: Thank you.

MS. KRIELL: Okay. Our next speaker is, I believe, Tony Edwards, Catherine Barre, or Dara Bernstein of Navy. Cathy?

MS. BARRE: Thank you for the opportunity to testify regarding the proposed Section 199A Regulations. My name is Catherine Barre, and I'm Senior Vice President of Policy and Politics for Nareit — speaking today in place of Tony Edwards.

Nareit is the worldwide representative voice for real estate investment trusts and publicly-traded real estate companies with an interest in U.S. real estate and capital markets.

REITs of all types collectively own more than $3 trillion in gross assets across the U.S., with stock exchange-listed REITs earning approximately $2 trillion in assets. U.S. listed REITs have an equity market cap of more than a trillion dollars. Congress created rates in 1960 to allow taxpayers of moderate means to derive the benefits of investing in commercial real estate. The same way wealthy investors have done for years through partnerships.

Today, most retail investors benefit from professional management and diversification by investing in publicly-traded enterprises through regulated investment companies, otherwise known as mutual funds, including exchange-traded funds. Investment in publicly-traded REITs is no exception. Of the approximately 80 million Americans that own REITs through their retirement savings and other investment funds, we estimate that approximately 40 percent of REIT shares are held by mutual funds.

Nareit supported Congress' efforts to enact tax reform that would spur growth, create jobs, and increase parity between lower corporate tax rates, and the tax rates of middle-income taxpayers. Nareit commends the IRS and Treasury Department for addressing many attributive issues in the proposed Section 199A Regulations.

However, the proposed regulations do not address the request raised by Nareit in its June 14th letter that the IRS and Treasury Department confirm that Section 191(a) — Deduction for Qualified REIT Dividends — is available to both direct REIT shareholders and shareholders of REITs through mutual funds.

The new Section 199A includes qualified REIT dividends and a taxpayer's qualified business income amount, and grants a deduction, subject to certain limits, to taxpayers in an amount equal to 20 percent of the taxpayer's qualified REIT dividends.

Nareit believes the statutory language of Section 199A evidences an intent that the 20 percent deduction per qualified REIT dividends, applies to investors that own REITs through their ownership of mutual fund shares.

The statutory definition of qualified REIT dividend under Section 199A is very broad. The text defines it as any dividend from a real estate investment trust that is not a capital gain dividend or a qualified-dividend income.

Congress could have inserted, directly, before from a REIT, but it chose not to do so. REIT dividends received by a mutual fund are in turn distributed to its shareholders as Congress intended. Moreover, the taxpayer, with respect to the REIT dividend distributed through the mutual fund, is the mutual fund shareholder and the statute grants the deduction to the taxpayer — which, again, is mutual fund shareholder.

The Treasury Department clearly has authority to speak to this issue, both because of the general authority, in Section 199A(f)4, as well as the specific authority provided in 199A(f)4(a)regarding tiered entities; and this is the type of issues for which Treasury has exercised its statutorily granted authority in the past, such as with Notice 9764 that applied the reduced holding period and capital gain tax rates of the Taxpayer Relief Act of 1997 to the capital dividends of mutual funds.

If REIT dividends received through a mutual fund do not qualify for the 20 percent deduction when distributed to the mutual fund shareholders, taxable shareholders of mutual funds owning REIT shares would be incentivized to sell their mutual fund investment and buy their same REIT shares directly to obtain their 20 percent deduction.

This rational economic behavior would serve no good tax policy purpose and would lead to economic inefficiency. Nareit estimates that this issue impacts 15 million shareholders who owned stock in mutual funds that, in turn, owned stock in REITs. With the 1099 filing season only a few months away, and with the time needed for mutual funds and brokers to program their systems, we ask that the Treasury Department and IRS expeditiously issue guidance confirming congressional intent that Section 199A deduction applies to REIT dividends regardless of whether the shares are held directly or through a mutual fund. I'd be pleased to answer any questions. Thanks.

MS. KRIBELL: Okay; thank you very much. Next, we have Arlene Schwartz or Brian Cove for Financial Executives International.

MS. SCHWARTZ: Thank you for the opportunity to comment on these proposed regs. My name is Arlene Schwartz, and I'm from Financial Executives International, also known as FEI, where I serve as chair of the committee on private companies. I'm joined by my colleague today, Todd Horsager, who's also an active member of FEI, as well a business owner and manager.

FEI is made up of over 10,000 chief financial officers, vice presidents of finance, and other senior financial executives from more than 70 chapters in the United States.

Nearly 60 percent of our members work for private companies and are from a wide-range of industries. My committee focuses on issues that affect private companies; representing many of our members that operate as pass-through entities and therefore have a direct interest in these rules.

The private business community appreciates that the intention of the tax legislation was to provide a lower effective tax rate for business enterprises. We recognize that the objective of 199A was to provide most pass throughs with a proportional, statutory rate reduction as was given to C Corporations, thus not widening the gap on effective rates — solely due to form of ownership.

We appreciate your efforts to provide guidance as taxpayers are seeking to comply with the new rules; and we understand the amount of effort that must have been undertaken to get these rules pushed out with such depth and in such short period of time. Thank you.

The legislation was meant to reduce taxes for pass through, rather than to create administrative burdens or impose cost-prohibitive compliance requirements that would preclude owners of small businesses from getting the benefit of these lower statutory tax rates.

We'll be commenting on three specific areas. I'll be speaking to the first; and then Todd will continue on, and conclude our testimony.

The first item we want to address is the actual computation of the QBI deduction for relevant pass-through entities or RPEs. We believe this is the legislative means by which pass throughs get lower rates on the RPE level. While the tax deduction is taken at the individual level on their own 1040, the process to compute the deduction requires many items of information available only to the RPE. Not only is it difficult for individual shareholders or partners to obtain the data needed to compute these deductions; but we also think the calculation is quite complex, and requires an in depth understanding of many new definitions, rules, and concepts. Many individuals do not have the knowledge, nor the resources to compute these deductions, especially if they own a small business — they have limited resources.

We recommend a novel approach. In order to simplify and streamline the deductions for some business owners, we suggest that Treasury permit an option for an RPE to compute the computation of the QBI deduction at the entity level; and then to report it out to each owner their share of allocable QBI, perhaps on the K-1 form. This way, individuals could choose whether to take the amount of the QBI deduction reported to them, or to perform their own calculations.

Such predetermined computation of QBI at the RPE level, we think, would take into account the statutory limitations, such as W-2 wages, UBIA, and specified service/trader business; but the taxpayer could then decide whether they wanted to do their own computation.

We believe this would provide a much simpler option for a small business owner. Under this approach, aggregation of other trades or businesses owned by the RPE would also be performed at the RPE level; thereby providing both individuals and the service a more straightforward and less cumbersome option to compute and determine the deduction by individual owners of small businesses.

There's both authority and presence for allowing the computation of a partner's QUI deduction on the entity level. Section 199A is based on many concepts that were applicable in the old 199 rules. The old 199 rules were also taken at the partner/shareholder level and were applicable to production activities. But we note that Treasury permitted an election to be made at the entity level under old 199; and it was then allocated out to the individuals, and reported the respective K-1s. We're suggesting a similar approach here.

Both new 199A and prior 199 deductions require detailed information of an RPE's income, expenses, underlying ownership, as well as a limitation based on W-2 wages that was paid by the RPE. Many of these pieces of information are not readily available to individuals.

We also suggest that 199A follow the old 199 rules with regard to permitting aggregation at the RPE entity level — which we'll talk about next.

Our recommendation is for an election for the computation and reporting at the RPE level provides a more streamlined solution for both taxpayers and the service.

MR. HORSAGER: Thank you, Arlene. Our second point is on aggregation. We agree with the Treasury and the IRS that taxpayers should be able to group multiple trades or businesses together when determining their QBI deduction under Section 199A. We appreciate the proposed regulations permit an election to be made to aggregate for purposes of Section 199A because in our experience, individuals who are owners of one pass-through business are likely to have interest in other pass throughs as well.

Without aggregation, taxpayers could be forced to incur cost to restructure solely for tax purposes to be able to claim the QBI deduction for multiplied qualifying entities with W-2 wages, and only one common (inaudible) entity.

However, based on feedback from our members, we believe that many business owners would be unable to aggregate their multiple businesses under the proposed rules because (1) the requirements are restrictive; and (2) the necessary information required to aggregate may be available to an individual. It would be extremely complex for the average individual to obtain the necessary information to meet these requirements, especially in a tiered-entity structure; and many of our members believe that it'd be too cumbersome for them to complete the calculations.

To address these concerns, we recommend the final regulations relax or eliminate some or all of the requirements that must be met. First, we request that Treasury delete the 50 percent ownership test, which requires that the taxpayer own directly, or indirectly, 50 percent or more of each trade or business to be aggregated. There are many situations where partner or shareholder may have a minority stake, in which they're paying W-2 wages, and/or investing in qualified business assets, and should be able to aggregate.

While we do not know the drivers or reasons behind all six of these conditions, we believe there are inherent anti-abuse rules contained within the statute itself, which requires that each partner's or shareholder's share of allocable W-2 wages, or UBIA — for purposes of the QBI deduction — must be determined in the same manner as it is determining its allocable share of wage or depreciation expense.

In addition, the substantial economic effect rules can be relied upon to ensure the alignment of economic costs with the tax benefits. Small companies engage capital and higher employees to run their business efficiently and, generally, would not acquire assets or pay unnecessary wages to achieve higher limitations for the Section 199A deduction.

As I alluded before, we also suggest that the final regulations permit aggregation either at the individual level or entity level on an annual basis, which is also aligned with the old Section 199 Rules and Regulations.

This solution would reduce the complexity of a consolidated QBI, determination by the individual taxpayers; and would help in the IRS-audit process allowing the service to focus at the business entity-level from the calculation versus, possibly, a significant number of partners or investors in large or pass-through organizations.

We also think aggregation should be permitted which would reduce the IRS field audit effort, as well as the underlying shareholders or partners. Aggregation rules should be liberal as to the attribution properties given the legislative intent to reduce effective rates for pass throughs (inaudible) to C-corporations, and recognizing that structures and affiliations with pass throughs tend to be inherently more complex than C-corporation structures.

The final item I want to comment on is the classification of the QBI deduction. We suggest the final regulations clarify that the deduction allowed for purposes of 199A is not a deduction as paid or incurred for purposes of 162, or a deduction for any other purposes of the Code. To be treated as a trade or business under 162, ordinary and necessary expenses must be incurred during the taxable year in carrying on any trade or business. This is also true under 461H of the Code in meeting the economic performance standard.

The 199A deduction is not generated by the payment of cash or incurring of a liability, nor does it reflect an item of specific business expense; rather it is computed based on the QBI of a business, including elements of both income and expense netted together and applying the statutorily-determined computation of 20 percent. It does not reflect an actual expense that has been paid or incurred.

Given these factors 199 is not intended to be a deduction for an item paid or incurred under Section 162A, or for any other purposes of the Code. We believe 199A is an essential component of the statutory rate structure in the computation of tax for qualified pass-through entities and, specifically, request that the final regulations reflect this.

MR. FISHER: In conclusion, we thank the IRS for the time and the rapid development of these regulations.

MS. KRIBELL: Thank you very much.

Next, we have the National Grain and Feed Association. Do we have Larry Callahan, (inaudible), Randy Gordon?

MR. HESSE: Good morning. My name is Chris Hesse, and I'm a Principal at National Tax Office of CLA; and I appear today on behalf of the National Grain and Feed Association of which our firm is an associate member. With me is the NGFA President, Randy Gordon.

My primary goal is to reiterate and reinforce issues raised in NGFA's written comments submitted October 1, and answer any questions that you may have. NGFA's principal focus and concern with the proposed rule is with respect to -5B2XXXIIIB which addresses dealing in commodities as a specified service trade or business, an SSTB.

Treasury proposes to define the performance of services that consists of dealing in commodities as regularly purchasing commodities from, and selling commodities to, customers in the ordinary course of a trade or business, or regularly offering to enter into assumed, offset, assigned, or otherwise terminate positions in commodities with customers in the ordinary course of a trade or business.

Commodities, as that term is used here, are described in Section 475E(2) as including any commodity which is actively traded within the meaning of Section 1092D(1). This is in reference to personal property of a type which is actively traded. The term actively-traded personal property is defined at the Treasury 199D-1A as including any personal property for which there is an established financial market. That term is further defined under that regulation in term of included the Domestic Board of Trade designated as a contract market by the CFTC.

We are confident that a business that processes the commodity into a different product, is not considered the dealer under the proposed rule. Thus our concern is with respect to purchases and sales that are not manufacturing, namely, taxpayers who buy and sell commodities, which are traded on commodity exchanges.

For the agricultural sector, this raises concerns for private entities that purchase, take possession of, and sell various commodities traded on such exchanges, which include wheat, corn, oats, soybean and milk, but does not include barley, sorghum, hay, and many other crops grown in the U.S.

Plus there's a potential disparity in tax treatment for agricultural businesses based upon whether a particular commodity meets the test of being actively traded on an exchange.

But related concern is that some members of our industry dealing in commodities that are actively traded, and commodities that are not actively traded on an exchange, and under proposed Reg. 1.199A-5(c), those businesses having more than 25 million in gross receipts with more than 5 percent gross receipts from actively-traded commodities will be treated as SSTBs even tough nearly 95 percent of their business is with non-traded commodities.

Left unchanged this would create a substantial distortion in these firms' business model, and the agricultural market place apparently requiring a business to reorganize into two separate legal entities so as to not have the purchase and sale of barley from a minimal activity lumped in with exchange-traded wheat, corn, and soybeans. That's not the proper result.

Further, the U.S. grain, feed and processing industry comprises businesses that act as intermediaries between farmers and end users of the commodities they grow. These intermediaries take delivery in store or otherwise perform a process on the commodity as part of their ordinary course of business to improve, preserve, or enhance the value of the product to downstream customers.

These activities customarily include drying, cleaning, aerating, fumigating and blending to enhance or aid in the preserving the quality and the value of the grain. However, these processes don't rise to the level of manufacturing, in that they do not change the physical form of the commodity.

The product purchased and received by the businesses essentially in the same raw state as the product it subsequently sells and ships. Examples of these intermediaries include private grain elevators, transport businesses and repacking facilities.

The businesses invest capital to perform a vital function to not only match buyers and sellers, but store and maintain the quality of the perishable product until the commodity is purchased and the buyer is ready to take possession.

At that point, the intermediary then frequently arranges and pace for transportation to move the product to the buyer, in many cases though intermediaries performing these functions, have purchased and sold the commodity, seemingly meeting the definition of dealing if the commodity is one that is actively traded on an exchange.

Thus, we respectfully submit that was not the intent of the legislation. Many grain and oil seed storage businesses also take ownership and possession of the commodity. They minimize risk of price fluctuations, however, by immediately selling the commodity to be delivered in the future or otherwise engaging hedging transactions.

The proposed Reg-5(b)2(xii), acknowledges that engaging in a hedging transaction as part of the trade or business of manufacturing or farming, is not considered engaging the trade or business of trading in commodities, a position with which we agree.

For MGFA members hedging eliminates that flat price risk of owning the commodity, removing the speculative holding risk that is, the hallmark of trading or investing activity, the risk has been minimized through this hedging arrangement which itself is not an SSTB activity, the business has substantial investment in the storage and transportation infrastructure and in handling equipment.

Beyond buying and selling, the business profits from receiving, storing, and performing other activities, on the commodity which is not a specified service activity, if these facilities were speculating on price fluctuations, they would have no need to take the physical possession.

The Congressional Committee Report for Public Law 115-97 informs as to the meaning of specified service activities. The reports references associated with such activities, however, always associated with stock, securities and partnership interests, and are usually tied to futures, options and forward contracts indicating financial instruments or derivatives.

The physical possession of the underlying commodity is not the intended target. Many agricultural and horticultural products are purchased and sold, but only those crops sold on national exchanges seemingly are tainted with this SSTB status under the Treasury's proposal.

Final regulations should acknowledge that the SSTB provision applies only to be dealing in financial instruments, not taking physical possession, representing ownership as specified commodities.

Finally, Congress spends substantial resources to resolve the so-called grain glitch. The issue of dealing in commodities as an SSTB wasn't identified prior to this grain glitch fix, which is a very strong indication that Congress never intended grain dealers to be treated as SSTBs and had Congress thought otherwise, surely the parties would have clarified the statute to ensure that taking physical possession of commodities was not covered as an SSTB.

As stated previously, taking physical possession involves much more than merely passing paper ownership between parties speculating on price changes. Our members businesses take physical possession from operating businesses and sell to other operating businesses.

Value-added activities performed by our industry sector which are key to the proper functioning of markets, also are performed. Our members earn profits from the capital that's invested in such value-added activities.

Our members provide non-specified services, such as storage, handling, cleaning, sorting, fumigating, and transporting, and no other businesses engaging in similar activities is classified as an SSTB, and for these reasons, the NGFA urges the Treasury, modify the proposed Reg. at -5B2(xiii) to clarify and confirm that taking physical possession of the commodities is expressly excluded from the definition of dealing in commodities, and firms so engaged are not considered to be SSTBs.

And we'll be happy to take your questions.

MS. KRIBELL: Okay. Thank you very much.

MR. HESSE: Thank you.

MS. KRIBELL: Okay. And next we have Tom Nichols of the S Corporation Association.

MR. NICHOLS: Thank you very much. Appreciate the opportunity to comment and provide oral testimony on Regulations under 199A; 199A is an important provision.

Prior to the Tax Cuts and Jobs Act, the vast majority of taxable income for closely-held businesses, was reported essentially through the Passthrough system, S Corporations' partnerships, sole proprietorships and it's a single tax system and it works well.

In fact the Passthrough system accounts for over 95 percent of the business entities in the United States covering 150 percent of the income in the United States, majority of the private sector employees. So it's obviously an important sector of the American economy.

The Tax Cut and Jobs Act dramatically reduced the C Corporation rate which obviously is one of the Passthrough system, lowering the rate from 35 percent down to 21 percent, and it provided only modest tax relief for S Corporations and other Passthrough entities.

The 199A serves the absolutely critical function of not essentially forcing closely-held business entities to essentially move from the single tax system, and out of the single-tax system into the double-tax system, that actually is an important tax policy, the single tax system is generally recognized — in fact, almost universally recognized, it's far more simple, and frankly just as importantly, it's most disruptive to economic activity.

So, the Regs, it's important then of course the 199A is interpreted broadly in order to accomplish that purposed, the proposed Regs have gone a long way toward accomplishing that, and the S Corporation Association certainly appreciates the work that Treasury and the IRS have done in that regard; and are commenting, and should be interpreted as our attempt to help you work and assist you in the process of accomplishing those purposes.

There are some other written comments, I'm going to have a chance to focus on three of the items that are mentioned in our written comments. And just for purposes of those presentations, at least our focus is primarily on both businesses that are subject to the temp rates, because that's where our — most of the distortion from the macroeconomic basis can occur.

The first topic to be covered is irrigation and I'm going to recognize that for aggregation there are really three aspects of aggregation, one is that for purposes of 199A, you are required to essentially aggregate for purposes of calculating losses. That is to say, that I've you've got two trades or businesses, one trade or business is generating loss, another trade or business is generating income.

The (inaudible) of the loss generating business essentially reduces, or potentially reduces the deduction for the profit-making, trade or business. That is not true for the other two components of Rule 199A deduction, that is to say that for purposes of the W-2 limitation, and for purposes of the UBIA deduction, those are not, if you've got UBIA or W-Wages that are really, in a business or trader business, unless there's aggregation, and with the requirements of other aggregation, you cannot use that excess UBIA in that excess W-Wages, you can't use that in another trade or business in order to essentially maximize, your deduction for the group of trades or businesses as a whole.

Essentially the aggregation, whereas for losses, it's automatic, regardless, no requirements, it's essentially is automatic, and it's something what is, it's clear from a legislative history, it's less so from a statutory language.

So, for losses, aggregations are automatic for W-2 wages, and UBI, it is not automatic, you essentially are required to run the gamut of five different requirements, and you'll want to go through those one by one, and that the first one is a common control requirement.

But before I get to that one of the things to keep in mind is that the opportunity or need, or for gains, planning, and abuse, is not all that prevalent. It's not all that present in the 199A deduction, especially with respect to the W-2 UBIA requirements, and that's because nobody is going to incur, I (inaudible) some wrong numbers here, nobody is going to incur $100,000 of wages and be out-of-pocket $100,000 in order to get a tax benefit of (inaudible) percent W-2 Rule, in order to get a tax benefit of $18,500, if they're spending a lot of money, that doesn't make economic sense.

And so as a consequence the likelihood of you meeting the rule of our people having excess wages, or mobilizing excess wages, is to not that rampant, it's not — there's not a huge or base potential here. And the only thing that is worth doing, and it is worth doing and that is to make sure that the same person has both benefited and burdened by the both the W-2, just to use that as an example, in the 199A deduction.

Once you do that, and I think, and (inaudible) citation I'm going to use here, but if you take a look at the rule in 1.199A-2B(iv) that may very well and it could beefed up a little bit, but that could — you may not need more than that to prevent or do this, it's essentially what you're doing trying to or you should try to do is prevent somebody from essentially taking a deduction, or having the W-2 wages not being in the same — the person is not experiencing the loss from incurring the W-2 wages, not being the same person to get that deduction.

In year — given that we take the combination requirement, it should sufficient, it should be fairly clear that that should be a situation where we could (inaudible) aggregation. It may not need more than that, the situations kind of control whether the same person has annual interest, let's say, in 10 or 100 different hotels, but it's obviously a (inaudible) business to managing all 10 or 100 hotels in that setting, it makes sense, to be able to treat that as a (inaudible) business. Similarly, what is related with its requirement, that requires two out of three of the — two out of three factors to be present in order to allow aggregation, this is on top of the common ownership requirement.

In that setting probably one out of three of those requirements would be necessary especially if you've delivered enough in regulations to require the same person to be essentially very burdened with the W-2 wages as well as (inaudible) taxable — of the 199A deduction. There are also taxable (inaudible) requirements in the five factor test, or the five condition test, both of those taxable requirement, to be honest, I'm not sure exactly why they didn't necessarily wanted to prevent (inaudible) realistically, and now that the changes in control occur (inaudible) this is very frequently without a great deal of consideration.

And essentially requiring you to apply different rules, rather than a variety of implement changes in control, doesn't strike me — does not appear to be something that you need to necessarily prevent somebody from making 444 Election, especially, as a matter of fact that they have to make a deposit to make up for the deferred income.

Similarly, for entities, also means (inaudible) from the relevant taxable annuities to be in position of that. If they can make the determination that aggregation should occur, the other one is to give access to all of the information, with the (inaudible) that they would — you know, if they are in position to do so, and once they aggregate, it's (inaudible) recognize that since loss indications automatic for losses, and not only — and only for purposes of W-2 and other in the UBIA, is it not necessary, is it not automatic.

So, the important (inaudible) that almost everybody is going to want to aggregate, so that not allowing aggregation at the output (inaudible) level is going to require then the possibility potentially of all the information with respect to all five factors, including a three-factor related in this test, with each of those three factors have two sub-factors.

Passing through all that information for the company for not (inaudible) the choice of businesses is not, at the end of the day, and it's extremely compliance heavy, especially in light of the fact that everybody is going to aggregate at the end of the (inaudible) level anyway, because it's taxpayer-favorable to do so.

So, thank you (inaudible), and if any questions, I'll be happy to take, or will follow up later.

MS. KRIBELL: Okay. Thank you very much. Okay, next we have Courtney Brooks of the National Federation in Independent Business.

MS. BROOKS: The ability of Americans to own, operate and grow their businesses, with respect to the implementation of the Tax Cuts and Jobs Act, NFIB and its members have a substantial interest in minimizing to the extent consistent with the law, the burdens of taxation and administration that inhibit business growth and job creation. The small business pass through deduction is critical to provide tax relief to small business across the country.

Since enactment of the Tax Cuts and Jobs Act, small business owners have been remarkably optimistic about the economy. The NFIB small business optimism index continued its historic 23 month positive trend with a reading of 107.9 in September, the third highest reading in the surveys 45 year history. In the small business half of the economy, 2018 has produced 45 year record high measures of job openings, hiring plans, actual job creation, compensation increases, actual and planned, profit growth and inventory investment. The September survey showed that actual capital spending in the past few months rose significantly. Owners bulked up inventories and compensation increases set a new record.

NFIB appreciates that the NPRM provides guidance with a reputation or skill qualification, the minimist exceptions from the specified service trade or business rules, aggregation criteria and QBI calculations. When considering SSTB's, the scope of the reputation or skill qualification as described in statute is ambiguous. NFIB is pleased that the NPRM addresses this issue by narrowly interpreting the phrase any trade or business for the principal asset is a reputation or skill of one or more of its employees or owners. NFIB supports this role and encourages the Treasury Department to codify this narrow interpretation.

The NPRM provides two general de minimis exceptions from the SSTB rules. While NFIB supports de minimis exceptions and encourages the treasury department to keep and expand as appropriate both exceptions in the final rule, NFIB requests that the Treasury Department further clarifies what attributable to means in this context.

The NPRM provides rules to identify an SSTB which I know we are all very familiar with. NFIB requires that the SSTB rules fully adhere to congressional intent. The Tax Cuts and Jobs Act and legislative history incorporate references to preexisting statutes. Section 1202 and 448 to provide guidance on identifying SSTB criteria with respect to section 199A.

When examining the NPRM's for post rules of SSTB's against the Section 199A text and legislative history as well as the existing interpretations and guidance of the reference statues it appears that the Treasury Department may have exceeded its statutory authority in definition the fields of health and performing arts. For the final rule making NFIB requests the Treasury Department follows the tax of section 199A to implement the SSTB provision. The Treasury Department stated that as is consistent with ordinary rules of statutory construction, the Treasury Department would apply as a statement of managers indicated it should apply to relevant exiting interpretation and guidance under sections 1202 and 448.

As NFIB continues to pursue pro-growth policies to support small businesses, NFIB is encouraged by the enactment of Section 199A and this NPRM. For planning purposes, NFIB is pleased that the NPRM states that taxpayers may rely on this proposed regulation until the final regulations are published.

In implementing the Tax Cuts and Jobs Act, the Treasury Department should make every effort within the law to use the burdens that taxes and the filing of tax returns impose on small businesses. This NPRM is a step in the right direction.

We would like to also echo the commenters earlier. Thank you so much for your hard work on this. We deeply appreciate it. And thank you.

MS. KRIBELL: Okay, thank you very much. Okay. Next up we have Kent Mason of Tech Serve Alliance.

MR. MASON: Thank you. Hang in there. (Laughter) Including me there are just seven witnesses left so you are doing a great job. My name is Kent Mason. I'm with the law firm of Davison Harmon. I'm here as you mentioned on behalf of Tech Serve Alliance and like other witnesses, I think we would like to thank you for the hard work, the excellent product, the timely result and the opportunity to testify here today.

Tech Serve Alliance is the national trade association representing IT and engineering staffing firms dedicated to advancing excellence and ethics. Tech Serve Alliance represents hundreds of member companies and serves as the voice of the industry before policy makers. Most of our members operate as sole proprietorships, LLC's, partnerships, or S corporations with less than 20 million dollars in annual revenue.

Based on our review of the proposed regulations, we conclude that IT and engineering staffing firms are not SSTB's. So I think really our ask here is rather than sort of any sort of surgery, really just a little bit of clarification that I'm going to get to. And before getting to that clarification, let me just sort of review sort of how we conclude — how we analyzed the proposed regs to conclude that IT and engineering staffing firms are not SSTB's.

First, very clearly, staffing firms are not within the fields identified in either the statute or the proposed regulation. Second, under the I think and again echoing what others have said, the very appropriate definition of the principle asset rule we don't fit within that principle asset rule. In addition, I think the regulations, the proposed regulations do a very good job of clarifying that simply the fact that you provide services to an SSTB doesn't make you an SSTB.

So for example, with respect to a law firm, provision of printing services or delivery services to a law firm. They don't make you an SSTB. The version of staffing services simulate to a law firm or other SSTB so that does not make you a — excuse me, I get choked up on all of this.

(Laughter) Does not make you an SSTB. So let me just turn to the area where I think there is a little bit — where there is a touch of clarity needed and that's the definition of consulting. The definition, the initial definition is appropriately very broad. The — it means the provision of professional advice and counsel to clients — to assist the client in achieving goals and solving problems. Well, on its face that sweeps everybody in. But there is also a very critical exception and I think a very well done exception. It takes out of th at consulting services embedded in or ancillary to the sale of goods or performance of services if there is no separate payment for the consulting services. And this makes tremendous sense and it fits us very well.

We may in the course of providing temporary workers consult with our clients to say that this, you know, this is how your personnel structure works today, here is how I think our temporary workers may enhance that so we may provide that sort of advice and counsel. But we are not paid for it. We are paid only for the provision of temporary workers. And so I think we fit very squarely within that exception, that very appropriate exception to the consulting definition.

So with all this why am I here? Well, rhetorical question. (Laughter) So it — I think we think that clarity is very important. What is clear to us today may not be clear in three years or five years, may not be clear to an agent in the field so I think there is much clarity that we can achieve would be helpful. So we have two specific suggestions on achieving a little greater clarity.

First there is a specific example in the regulations identified in our written comments which says that advice regarding personnel structure including the use of temporary workers is an SSTB. And I can understand that, I just think that the example is missing facts. In other words, the example does not say whether that business provides temporary workers or not. It simply says if you provide advice with respect to temporary works you are an SSTB. Well, we may provide advice but we provide — we don't get paid for that advice and we provide the temporary workers. So if you are just — for that example, we are simply clarified to say that in that example the business is getting paid for the provision of the advice and is not providing temporary workers that which I think is entirely consistent with what I think the intent of the example that would really go a long way to helping us.

And I think second, I think it is helpful that if there is going to be an example in the regs that says providing advice regarding temporary workers is an SSTB it would be very helpful to provide the converse also. Just to provide an example that shows that if you are providing advice with respect to the use of temporary workers but you are not paid for that, and you're paid actually only for the provision of temporary workers, that that is not an SSTB and we provided a, you know, verbatim, sort of our suggested example in our written comments which is drawn very, very closely from the related 448 regulation.

So that's really it. I think, you know, we think there was a sort of again echoing everyone else, an excellent job of pulling this together in a very quick way. It avoided a lot of harm and a lot — avoided a lot of pitfalls and excellent job and we hope that these clarifications can be made and I would be happy to answer questions or give you back 3 minutes and 12 seconds.

MS. KRIBELL: Okay. Thank you very much.

MR. MASON: Thank you very much.

MS. KRIBELL: Okay. Next we have Charles Thurston of the International Franchise Association.

MRS. THURSTON: Well, good morning, good afternoon. We are Charles and Caroline Thurston and I am the CEO and founder of Wisdom Senior Care and this is Charles Thurston, he is the COO of Wisdom Senior Care. We are based in Durham, North Carolina and our growing business currently has two franchise locations. We are here on the behalf of the International Franchise Association who have submitted comments last month.

We believe from your proposed rules that we are intended to be included in the tax relief. However, we are asking today that the final rule should add a franchise example. To the examples used by the prosed regulations that define specified service, trade or business. As mentioned, IFA has already submitted a draft franchising example in our letter last month.

A franchise example would be very helpful to not just our growth plans but the growth plans of the 700,000 franchise business across the United States. That's because we are not accountants who are trained to navigate the tax code and we are not doctors who provide medical care or services. We are small business owners. As the franchisors we are the brand. We sell franchises which essentially a license for an individual to operate as part of Wisdom Senior Care brand.

Our income comes from two sources. A new business owner first pays for their license to operate under our name brand and then we receive income from monthly royalties. Our business is growing, businesses not providing healthcare.

MR. THURSTON: Thank you, Caroline. I would like, as Caroline said, everything that when we started our business came out of our own pocket. I mean from zero to the present and all we put all of our earnings back into our business because that's the passion. We know what we are doing. Through our business we have created over 100 plus jobs. We support the tax reform from the beginning and businesses like ours, they like the tax law. It is designed to help.

We have sent our bookkeeper to multiple seminars to try to get a hold on the tax law. And we still unclear and we just ask for some clarity consistent with this because unfortunately we can't afford to keep sending her to these seminars. (Laughter) And again, we respectfully ask that we including the franchise in an example in the final rule that was provided by the IFA to help ensure franchise business can take full advantage of the new tax law.

And like I said we are just passionate and we are excited about what we are doing for businesses, small business across the country. Thank you for your time and we can answer any questions that you have.

MS. KRIBELL: Okay. Thank you very much. Okay. Next we have Iona Harrison from the National Association of Realtors.

MS. HARRISON: Good afternoon. My name is Iona Harrison and I'm a real estate professional working in Upper Marlboro, Maryland. I have been in the real estate business my entire adult life and I have served the real estate industry at the local, state and national levels for many years in a variety of capacities.

Today, I am here representing the more than 1.3 million members of the National Association of Realtors. Our members are engaged in many activities including real estate sales and brokerage, property management, residential and commercial leasing and appraisals. NAR is grateful for all the hard work that Treasury and the IRS have invested in producing helpful guidance for taxpayers in dealing with the new 20 percent deduction for business income and I am happy to have this opportunity to speak at this hearing today.

I want to start out by emphasizing that unlike many who speak at this hearing, I as the Thurston's, I am not a tax expert. Far from it. Rather, I'm just a regular realtor and an owner of rental real estate much like the 10 million or so other Americans who report income from rental homes or apartments on their tax returns each year.

In fact, my main point today is that people like me really need guidance on the new tax deduction that is simple and easy to understand and apply. You might be interested to know that about 40 percent of all NAR members own rental real property and collectively we have millions of clients and customers who are also rental property owners. These range from single family houses that were once the home of an owner, I call them accidental landlords and to four plexes to apartment buildings with dozens or even hundreds of units. According to IRS data, more than 80 percent of these owners have incomes below $200,000 a year. And the average amount of rent income for those who don't report a loss is about $10,000. Thus, these owners of rental real estate are by and large going to fall under the income thresholds that Congress has set for the simpler calculations for the 20 percent business income deduction.

When it comes to rental income and the 20 percent deduction, the biggest problem we see with proposed regulations is that they require the owner to have specialized tax knowledge in order for them to determine whether their particular rental property should be considered a trade or business. Specifically the proposed regulations say it must be a trade or business under Section 162 in order to qualify for the deduction.

Now, I'm reasonably well informed and educated but when I read this requirement I'm already confused. And I can tell you that the vast majority of my fellow property owners are also going to think this is unclear. It is a big comforting to know that I'm not alone in this confusion but based on my deductions — discussions with some people who are tax experts, even many seasoned professionals did not understand the tax law distinction between a trade or business and real estate that is held for productive investment.

As I understand the proposed regulations they are asking rental owners to refer to the large body of existing case law and administrative guidance to interpret the meaning of trade or business. From the practical point of view of a non-tax expert this is very problematic. First off, being able to assess the body of case law and IRS guidance is daunting.

Will we find the case, these cases and rulings and the instructions for the form of which the 20 percent deduction is claimed? Will there be a page on the IRS website offering a list of these cases along with the facts and their decisions? Will a call to the Internal Revenue Service likely shed any light on this question?

All of the uncertainty surrounding this question will probably cause the IRS to be inundated with questions from taxpayers. This could add a great deal to the services burden especially during the filing season. And even if such information is provided, is it really feasible that average taxpayers can pour through the cases and rulings and find a situation similar to their own, enabling them to come to a reasonable conclusion that they either qualify for the deduction or not? The way I see it, (inaudible) requires rental property owners to wade through the mire of confusion for the deduction or not. The way I see it, guidance that requires rental property owners to wade through the mire of confusing and sometimes conflicting cases and rulings to discover if they quality for the new deduction when most likely will end up one of two ways. Either they will be hopelessly confused from the start and just turn the question over to tax professional or it will just forget the case law and rulings and take the deduction anyway. If it is the former, the value of the new deduction will be diminished significantly by the fee paid to counsel or lawyers and in the latter case some will be right and some will be wrong and claiming deductions which will cost similarly situated taxpayers can be treated differently.

And in some few instances, there will be an IRS examination which will lead to more expense and confusion for the taxpayer and burden on the IRS. As outlined in our comment letter, we believe that there is ample evidence that Congress intended the 20 percent deduction to be relatively simple, at least for the vast majority of filers whose same company is below the threshold. After all, statute provides that those below $157,500 to $315,000, do not have to worry about more complex computations that exist for those with higher incomes. Nor do they need to be concerned about whether they fall into one of the very perplexing specified service businesses.

Therefore, it seems that Congress went out of its way to try and ensure that non-high-income lay persons without specialized tax knowledge would be able to fairly easily understand the requirements for the deduction and be eligible to claim.

In conclusion, we urge the Treasury Department and the Internal Revenue Service to consider making the final regulations for the 20 percent deduction much simpler to honor real rental real estate. This can and should be done. I simply believe that such rental real property is trader business for purposes of Section 199 Cap A of the Internal Revenue Code.

Doing so would vastly simplify the deduction for millions of owners of rental property with incomes below the threshold which Congress intended. This move would also greatly simplify the administration of this part of the law or the IRS. Further, we believe that such a change to the final regulations would be entirely consistent with both the statute and with the proposed rules released in August. The statute grants the 20 percent deduction to shareholders of real estate investment trusts or rates. It's hard to see how ownership in such an investment that constitute a trader business under even most liberal reading of the case law or rulings and we note that the proposed regulations, I've already made the move to exempt the rental of tangible property from the Section 162 trader business requirements in cases where the parties are commonly controlled. Great progress has already been made in providing sensible than straight forward guidance in relation to the 20 percent deduction. We urge you now take this extra step and make this provision even more accessible, understandable and useful for millions of those it was designed to benefit. Thank you and, of course, I'll take any questions.

MS. KRIBELL: Thank you. Thank you very much. Okay, do we have Thomas Wells on behalf of First American Bank?

MR. WELLS: Good afternoon and thank you for providing me the opportunity to speak to you about the proposed 199(a) rules that would disqualify some S-Corporation banks from 20 percent QBI deduction. My name is Tom Wells and I'm the CEO of First American Bank. We're a privately held $4.9 billion community bank serving Chicago and Miami markets through 53 branch locations in Illinois, Wisconsin and Florida. Our revenues today are greater than $25 million and our trust in mortgage origination represent about 7 percent of total revenues. Because our revenues are mostly a function of interest rates, an increase of less than 2 percent would restore our QBI deductions were your proposed regulations to be implemented. Put that in context, rates rose in the past year 1 percent. So a very, very modest change would whip us back and forth between eligibility and ineligibility and are beyond our control. Our ownership is controlled by our one extended family with executives owning another 5 percent and an ESOP covered about 550 employees owning almost 9 percent.

We elected to take tax as an S-Corporation in 2006. This ownership structure closely aligned shareholders and employees with our clients. Our customer base is comprised of almost 10,000 closely held family businesses. The sales from a million to $100 million and over 86,000 consumers. We have a trust department that has $2.5 billion in assets under management. We provide retirement plan services to our commercial accounts and wealth management services to their owners. It is a closely integrated function with our commercial lending business. For the nine months ended September 30th, we originate 357 mortgages, totaling $86.5 million to local homeowners. This is an important function of our duties under CRA Community Reinvestment Act, the activity in mortgage lending is a core component of that measurement to route — to regard it as outside of a key banking function goes in the face of other regulatory interpretations.

Three hundred six of these were sold to Fannie Mae, Freddie Mac and FHA as well as some private lenders. Most of the loans sold had servicing retained, meaning the customer could make payments at their local bank and could deal in person with the mortgage lender should matters arise down the road that require in-person interaction. We service for ourselves and others about 3,300 mortgages, totaling almost $500 million. Were we unable to sell longer duration loans like the 30-year mortgages, we would cease most mortgage originations. We, like banks generally, would offer only shorter term loans like ARMS and the consumer would find their financing choices severely constrained. Their ability to deal locally and in-person would be removed.

We also purchase automobile paper that I echo the comments made earlier by the gentleman from RSM that's the source of loans. We don't sell them again, their purchase, their book, their amortized and those customers, local customers all are able to continue to deal with their local bank. The ESOP is a critical element of First American's success. It provides a vehicle for employees to become substantial owners of their employer. It more closely links to their personal financial success to the success of the institution. One of an ESOP's key features it is that its yields a substantially enhanced by the tax distributions made by the S-Corp. This critical benefit ripped about 28.5 percent of the bank's earnings to those to the members would be lost were the company to convert to a C-Corp.

We appreciate your recognition in the proposed rule that Congress clearly attended the banks and their holding companies that have made the S selection eligible for the 20 percent QBI deduction. Some have suggested that a bank's eligibility might be tainted by certain of its activities that could be considered to be specified service trades or businesses. We urge you to clarify that all bank income is eligible for the QBI deduction. Specifically, fiduciary activities and loan sale activities. Our reasoning follows: The taking of deposits; origination of loans; and the exercise of fiduciary powers are all closely integrated into the banking relationship of a bank like ours. The IRC — the Internal Revenue Code acknowledges this in 26 USC 581, which states, "the term bank means a bank or trust company incorporated and doing business under the laws of the United States, including laws related to the District of Columbia or any state. A substantial part of the business of which consists in the receiving deposits and making loans and discounts, or of exercising fiduciary powers, similar to those permitted to national banks under the authority of the comptroller and which is subject by law of supervision and examination by state or federal authority having supervision over banking institutions." This definition explicitly includes fiduciary activities and does not limit the making of loans to the making and holding of loans.

In addition, we are advised by our counsel that the Internal Revenue Code makes a further distinction in regard to a bank's origination and sale loans which clearly justifies different treatment than a non-bank originator and seller of loans. That distinction is that gross receipts or gains from the loan sales by a bank are treated as ordinary income or loss while a non-bank sale of loans is treated as the sale of a capital asset. Further, it is clear from the definition of a bank under Section 581 of the Code, a substantial part of a bank's business is making loans. An integral function of being able to make loans is being able to sell loans. We would argue that since this is such an integral part of a bank's business, the function of selling a loan is not a separate trader business of a bank.

We analyzed our actual numbers for the eight months ended this past August. Our institution and its shareholders actually performed slightly better organized as a C-Corp, but considering the effect on dividends, presuming our 25 percent payout, the income is about equal. We had chosen to remain an S-Corp because of the value to our ESOP members. How one treats one's employees is important to one's success. Were we to lose the 20 percent QBI deduction, our shareholders in the aggregate would clearly be better off were we to revert to a C-Corp. Even recognizing what that meant to our S-Corp members.

Curious, and this is really — curiously, the receipts flowing into the Treasury would decline about 19 percent if we were a C-Corp. State tax receipts would rise, but federal receipts would fall 19 percent. We'd be pleased to share with you the detail of that analysis if you should wish.

In conclusion, we urge you to clarify so I've asked banks full eligibility for the QBI deduction and we suggest adopting a specific recommendation of the ABA and the ICBA and Subchapter S Bank Association that they made in their recently filed comment letter. If you implement the proposed rule as originally published, the uncertainty of eligibility and cost of increased taxes would likely cause us to revert to a C-Corp harming our ESOP members, harming the Treasury, benefiting the state of Illinois while leaving our shareholders personally in affect.

One has to ask why. Any questions?

MS. KRIBELL: Okay. Thank you very much.

MR. WELLS: Thank you.

MS. KRIBELL: Okay. What we would like to do, I know we said at the beginning that we were going to have a 1:00 recess, but I think we only have four speakers left so we would like if — to just kind of power through, but we're going to take a five minute break first, if that's okay and then we'll get started again. Sorry about that and thank you. Thank you very much for your patience. Okay, so we'll be back in about five minutes.

(Recess)

MS. KRIBELL: Okay thank you. Can we go back to Damien Martin at BKD. He has made it through security.

MR. MARTIN: Thank you. Again, sorry to be a little late there. Good morning. I want to thank you for the opportunity to speak today on the proposed regulations regarding the qualified business income deduction under section 199 cap a. My name is Damien Martin and I'm the national tax assistant director at BKD for one of the largest CPA advisory firms in the US and research tens of thousands of taxpayers, closely held businesses and across a wide range of industries. So, we kind of have that perspective to things.

First, I just want to say that we recognize that developing regulations for a new section of internal revenue code is quite a significant undertaking. I want to acknowledge the authors and the co-authors for the regulations through a comprehensive approach that was provided. We made a number of requests for clarifications, modifications in our comment letter that was dated September 28th. I'd like to quickly highlight and provide a little more context around four of those requests today.

First, I'd say our primary concern or one I want to talk about is that we believe that there is a significant need for clarification on what constitutes a separate trade or business within the same entity for purposes of section 199 cap a. While we appreciate the challenge of creating a bright line around what constitutes a trade or business and we want to commend the IRS and Treasury for seeking to provide administrative roles to define a trade or business by looking to existing 162 a. We believe that there is not only a need for further clarity around the aspects of what constitutes a trade or business, which some of the commenters have mentioned already this morning, but also a need for guidance around the edges of what constitutes a trade or business. Because as the preamble to the proposed regulation state, a taxpayer can have more than one trade or business.

So, we feel a reasonable approach would be for the final regulations to clarify a taxpayer would have more than one trade or business per entity provided. That such trades or businesses are separate and distinct, they have a complete and separable set of books and records that are kept and maintained for each trade or business and any shared income and expenses are allocated at arm's length which is consistent with the approach that provided for in regulation section 1.446-1d. We believe that incorporating this approach into the definition of trade or business that that is provided into the proposed regulations in -1b13 as well as the definition for a relative pass through entity or RPE under -1b9 would reduce compliance costs, burden and administrative complexity given the experience that taxpayers already have with this definition.

We feel it also would help alleviate some of the concerns that were raised by commenters regarding the so-called cliff effect related to the de minimis role of the proposed regulation section 1.199 cap a-5c1. So, to help clarify the application's approach and to illustrate the interplay between the de minimis role we provided an example in our comment letter and I'll read it now.

Which is that, S1 is an S corporation that provides banking services which include taking deposits and making loans. S1 owns 100 percent of S2 which is a qualified subchapter S subsidiary or a Q sub and it provides financial planning services to customers. Since S2 is a Q sub of S1 it is treated as a disregarded entity for federal income tax purposes. However, S1 and S2 each maintain a complete and separable set of books and records and any shared income or expenses are reasonably allocated at an arms-length standard. Based on these facts, we believe S1 and S2 should be considered two separate trades of businesses for purposes of section 199 cap a. Accordingly, the de minimis role under -5c1 and the (inaudible) role under -5c2 are applied separately to S1 and S2.

So, kind of keeping with the subject of the de minimis role there a secondary area I wanted to highlight this morning is our belief that taxpayers with gross receipts from specified service trades or businesses or SSTB's in excess of the prescribed thresholds should not be penalized for their entire qualified business income or QBI for having SSTB income that is, in some cases, only as little as a dollar over the de minimis threshold. This result rather is based on the perceived interpretation that the threshold acts as a cliff. So, once gross receipts from an SSTB exceed the threshold amounts than that would kind of kick that out.

Our view is that the final regulations should allow taxpayers to use any reasonable method to allocate expenses against SSTB and non-SSTB income to calculate QBI. And we recommend applying the cost allocation methods available under regulation section 1.199-4 which applied to the now repealed domestic production activities deduction.

A third area that we would respectfully request to receive consideration relates to section 1231 gains and losses. So, section 199 ac3b1i excludes capital gains and losses from the definition of QBI. While the proposed regulations provide that the gain or loss that is treated as a capital gain or loss under section 1231 is not QBI, we believe that the mechanical ramifications of taking this approach will cause unnecessary mathematical complexity. Excluding these gains and losses from QBI not only creates an additional layer of calculations to properly determine whether gain or loss is characterized as capital gain or ordinary loss under section 1231. But it also adds complexity due to the lookback recapture role required when a taxpayer has taken a 1231 loss in the previous five taxable years.

So, to avoid these computational complexities, our view is that the final regulations should not exclude section 1231 gains and losses from the definition of QBI. This position is consistent with the definition of the term section 1231 gain as provided under section 1231a and the regulation section 1.1231-1. Which provide that such amounts include any recognized gain on the sale or exchange or property used in a trade or business or held in connection with the transaction entered into for a profit.

Our recommendation to include section 1231 gains or losses in QBI would provide a simple approach to calculating QBI. At the same time, it would not affect the overall limitation that restricts a taxpayer's reduction to 20 percent if the excess of taxable income is over net capital gain.

A final area I want to kind of focus on is that we believe to reduce an unnecessary burden on taxpayers. We request in our comment letter, a rule accepting an RPE from reporting requirements under the proposed regulation section 1.199a-6b3 when certain criteria are met. Using the grant of authority under section 199af4a, we recommend that the final regulations provide an exception to the requirement to report the information provided under proposed regulation section -6b if any are the following criteria are met.

First, the RPE does not have gross receipts that constitute QBI. Second, none of the owners of the RPE are non-corporate taxpayers. Third, none of the owners of the RPE have taxable income above the threshold amount under section 199ae2 and the following two requirements are met. So, one would be that within 120 days of filing the RPE's tax return, the RPE received, reviewed and will maintain a copy of either all the owner of the RPE's tax returns for the taxable year that the RPE elects to use this exemption. Or have reviewed and received and will maintain a written statement under penalties of perjury providing, among other things, taxable income from all the owners of the RPE for all open tax years.

The second piece of that would be that the RPE then would file a written statement containing a declaration that each owner of the RPE does not have taxable income above the threshold amount. With the RPE's original income tax return for each taxable year in which none of the owners of the RPE have taxable income above the threshold.

A final recommendation along those lines is that we would also suggest a reduced reporting option in which an RPE would only need to report the amount of W2 wages for a qualified trade or business when it's clear the amount determined is based on 50 percent of wages with respect to a qualified trade or business would result in a larger amount. So, basically when it's clear that the W2 limitation applies then we wouldn't have to put the UVIA of qualified property in the reporting.

So, to summarize, we believe the clarifications and modifications that I just discussed here this morning as well as those in our comment letter are needed in the final regulations under section 199a. To reduce compliance costs, the burden of complying with the proposed collection of information and in the administration of the complexity for taxpayers.

Again, I want to thank you for the opportunity to express our thoughts related to the proposed regulations. I'd be happy to address any questions or comments that you might have. Thank you.

MS. KRIBELL: Okay thank you very much. Next, we have Nick Passini with RSM US.

MR. PASSINI: Thank you very much. My name is Nick Passini, I am with RSM, the fifth largest tax audit and consulting firm in the U.S. I am today, however, speaking on my personal behalf, speaking as an individual. Today, I am speaking specifically on the lending industry. Just for the sake of time, however, if given the opportunity we do serve many, many different industries, we would likely echo many comments we've heard about trade or business designation, aggregation at the entity level and when we have businesses that have service and non-service components.

Going more specifically though to our comments on the lending industry, we wanted to take a moment and discuss the way we see lending work in (inaudible). Really out there when we have retailers and other businesses that are offering financing and offering when we have a customer that is purchasing furniture, when we have a customer that is purchasing a car. The financing you're seeing offered by the retailer is because a contract exists between the retailer and a lending company. But when the sale is made, the sale is made and the contract is made with that retailer and is then immediately sold, days later sold, weeks later sold, under a contract to a lender.

So, when we look at it from the lender's perspective, we have a lender that consider themselves a lender. We look at the rules, we look at the code, we look at the regulations we're talking about today. Seems fairly clear that those in the lending industry should qualify.

We've seen that they're not a financial services, we've seen that this income does, in fact, qualify. But for these lenders, we're just asking for clarification because as written, there is some concern that these lenders who purchase 100 percent of their loans from a retailer may, in fact, fall into treatment as a dealer in securities under 475 given the way that these regulations were written.

If we read the 475 rules right next to these rules we get some comfort. Because 475 says buy or sell whereas these rules say buy and sell. So, if I look at the two of those together I get some comfort. But if I don't then I just look at these regulations I do have some concern that someone who purchases 100 percent of the loans they're servicing may be consider a dealer even though they never sell. Or if their sales are not in the ordinary course of business and that is really where our second concern comes in. These regulations do talk about lenders who originate loans but sell less than a certain amount. These are not originators though, at least not given the exact definition of that term. Maybe they can be considered the originator because a contract exists where they are already standing ready to service this loan but by the direct terms of these contracts they are not actually the originator.

So, we would like some clarity for a few points. We would like to make certain that these lenders who purchase these and service these loans in the ordinary course of business of lending they do not intend to sell these, they do not hold these as inventory. They are lenders servicing loans will in fact qualify and will not be considered dealers.

Second, to the extent they do sell, again in their ordinary course of business not holding these inventory items out but because they need to adjust their credit risk profile. Because maybe there is a branch in a certain part in of the country that they're shutting down and they need to sell off a portfolio but not in the fact that the ordinary business is selling these loans. But more in the ordinary course of business of lending they would need to sell these, that these would not also put them into a dealer capacity.

If we cannot get there, if there still is some concern that these lenders who are just lending may somehow still be considered dealers we would like to ask at the very least that they get the same treatment as the originators under law. But if the very next day they're going to purchase the loan, they should at the very least be afforded the same protections that are already there on the regulations where if I don't sell over certain amounts I'm not going to trip into dealer status. But we don't believe we should get there because again, this is the trader business of lending, these are not securities dealers, this is a contract that exists that allows small retailers, local businesses to offer financing to their customers. Thank you.

MS. ELLIS: I'm sorry can I ask a quick question?

MR. PASSINI: Yes.

MS. ELLIS: So, to the extent if you were treated as the originator then you would fall within the negligible sales exception?

MR. PASSINI: Correct, correct. Yes, so we don't necessarily think we would need to go that far because again, this is the trade or business of lending. But if we can't get there at the very least we would ask to be treated as the originator when we are under contract picking up these loans shortly after origination.

MS. ELLIS: Thank you.

MS. KRIBELL: Thank you. Next, we have Arthur Davis on behalf of the American Escrow Association.

MR. DAVIS: Thank you. I will be under ten minutes. I'll be similar to Nick with kind of walking you through the logic of why we commented as we did. First of all, thanks for holding the hearing. Our most recent experience with federal regulatory requirements has been the Bureau of Consumer Financial Protection and they do not hold public hearings even on major regs. So, the most recent regulation effect is the (inaudible) integrated disclosure. It took about five years, the last piece of it took effect this year. So, I think there is great value in these public hearings and I know it is part of the tradition of the service and the Treasury but thanks for holding it.

I want to walk through the logic of our comments. We thought carefully, do we really want to raise the question about whether a real estate settlement agent, which is what the membership of the American Escrow Association consists of, is in the field of accounting. It doesn't seem logical to raise it but I want to explain it this way.

Real estate settlement agents actually appear and actually do a fair amount of accounting. So, you have to get in the question of how incidental is it and then how much do you have to work both of definitional provisions plus the De Minimis test. If everyone out there has to run through the De Minimis test then it appears to be contrary to some of the announced purposes of the guidance in the preamble.

So, let me start it this way to walk through the logic of why we've commented the way we have. First of all, this is a legislative regulation. To us, that means two distinct things. It has to be APA compliant and there is a great deal of deference that would be granted by the courts on litigation to determinations of Treasury and the IRS. F4 under 199a seems to us to not only cover NI abuse rules and addressing tiering but also the general rules of the road. And that plays out in some of the preamble already published. For example, it has already been referred to, whether relying on definitional guidance, prior guidance under 4481202, the preamble says that the goal is clear and distinct guidance governing what constitutes an SSTB under section 199a. That's definitional.

Furthermore, and separate under the De Minimis analysis there is the statement that there is an objective of the IRS and the Treasury Department not to have everybody out there get involved administrability of calculating how much of a specified service activity might be considered covered. So, for us what it amounts to is when you look at all those pieces together, is the correct answer if the rule isn't changed that everybody has to go through a De Minimis calculation and therefore it runs contrary to the wording that the goal is to avoid that. Wouldn't it be better to clarify that since functional activity of a settlement agent does involve accounting but that's not the core functional activity of a settlement agent. They follow instructions of others. They do accounting because all their trust fund dollars, which is how the money runs through the real estate settlement firm, generally in a pool trust account, has to be available to the penny similar to an estate administrator in Virginia reporting to the Commissioner of Accounts to the state.

So, you do have to have accounting records balance to the penny. Settlement agents do prepare and make available to the customers, balance disbursement sheets basically a source and use of funds. And the federal disclosure requirement, as I said, used to be the HUD 1 now it's the closing disclosure. It's essentially a combination of the cost of obtaining credit, the cost of closing on credit and the cost of closing on a real estate transaction which consists of what looks like a balance sheet and an inflow and outflow analysis.

So, to us the answer is why don't you distinguish between what is functional activity that's not accounting which is everything they do that accounting is incidental through the term core services. Now the only problem and I'll admit to it at the outset is that the term core services I could not find elsewise in Title 26. It is in Title 12 under RESBA. It was used by HUD back from the nineties to distinguish what is allowable and disallowable compensation for referred business based on what is core title.

Now title in RESBA generally means, it's not just legal title transferring deeds, title insurance, it is all the functional activities of selling a real estate transaction includes what you would normally call closing functions. If you were to qualify in the rulemaking given that this is a legislative regulation and you have the authority to do it, that type of incidental accounting is not covered. Then at the definitional level it is answered

(Recess)

MS. KRIBELL: We are now trying to make it warmer (laughter). So, right, well, who knows?

SPEAKER: Right in between.

MS. KRIBELL: We are very difficult people (laughter). Okay, I think we are going to get started again. Everybody's back.

We next have Guy Colado of Commerce National Bank of Florida. Thanks.

MR. COLADO: Thank you. Good afternoon, we've made it that far already.

MS. KRIBELL: (Laughter).

MR. COLADO: And I'm here representing Commerce National Bank and Trust in Winter Park as well as several hundred Sub-Chapter S Banks which provide trust services. Thank you for allowing me to voice my concern regarding the proposed regulation under Section 199CAP.A of the Tax Cuts and Jobs Act, on behalf of our bank and the Sub-Chapter S Banks nationwide.

I'm chairman of a bank-holding company: Commerce National Shares of Florida, which is regulated by the Federal Reserve Bank and files as a Sub-S. The holding company owns a national bank with a trust department. The activities of both the bank and the holding company are tightly restricted; the bank, by its national charter and holding company by the federal law and Federal Reserve Bank.

These institutions — the limitations on the activities of the bank and of the bank holding company are enforced by bank regulators including thorough examinations on a regular basis. The close regulation of S Banks and their holding companies and the limitations on activities they are permitted to engage in serves as a guard against abuse of the tax deduction available under Section 199CAP.A.

I'm here to voice my support for defending a trust department, or a trust company, that is under the umbrella of a bank holding company as providing a core bank service, which qualifies its earnings as a qualified business income.

Our bank's name, Commerce National Bank & Trust defines us. The word "national" indicates we are organized under the laws of the United States; "bank" specifies we are permitted to accept deposits and make loans. Our deposits are insured by the FDIC. The word "trust" signifies we have trust powers which were granted by the national bank regulation and the Office of the Comptroller of Currency. Only a nationally chartered bank with Federal Regulatory approval and oversight can use the words "national", "bank" and "trust" to identify itself.

Personally, I've spent a half a century in banking and for the past 31 years from our current location. I was born and raised in Winter Park, which is a residential community in the Greater Metropolitan area of Orlando. During the past 20 years Florida has grown to the third most populous state in the Union, while Winter Park has successfully maintained between 28 and 30 thousand population with a harmonious mix of homes, small business, education and cultural amenities. We are indeed a community bank with attributes which foster an opportunity for community banking, and trust services.

We are the only community bank in a five-country Central Florida area which provided trust services and this affords us a distinctive banking niche. Typically, our bank and the trust department each provide about 50% of our income. While this percentage can vary from year to year, it's unlikely our bank, which has 100 million in bank assets but has 300 million of trust assets under management, would ever meet to propose threshold.

Trust services had been a traditional activity that Sub-S banks had been permitted to conduct as core bank services and should not be subject to any threshold. This proposed rule would affectively punish us for having a thriving trust department which meets the needs of our community and our niche market.

For banks like ours, threshold approach simply is unworkable. This approach could require a bank to split its business into qualified and non-qualified activities. First, this burden would impose a significant and unnecessary administrative burden on the bank; second, complicate it's tax administration. And, third and most significantly, it would undermine the objective of the tax law change by ultimately raising costs to borrowers which are predominantly small business.

This tax relief is critical to continued community bank independence. It would be a discriminatory penalty for a Sub-S bank that exceeds a definitive threshold to lose a deduction of all the income earned by the bank.

Thank you for considering my perspective. I urge you to clarify that all trust companies, trust department income should qualified business income. Thank you.

MS. KRIBELL: Okay, thank you very much. Next we have Joseph Frampton of Paducah Bank and Trust Company.

MR. FRAMPTON: Good afternoon and thank you very much for hosting this conference. I follow Tom & Guy and when I'm finished you know all you'll need to know about Sub Chapter S Banks.

I'm very happy to be here today. I speak as a shareholder, Director, Chairman of the Board and Chief Executive Officer of the Paducah Bank and Trust Company. We are a one bank holding company. We have a regulation as a state charter bank by the state of Kentucky and the Federal Reserve System.

Our bank is located in Paducah, Kentucky, a rural county of about 25,000 on the Ohio River in far western Kentucky. The poverty rate is our city is over 24%. The median household income is slightly above $33,000.00 and the per capita income is approximately $20,000.00.

Our bank was founded in 1948 and so we are celebrating our 70th year this year and we have not moved far; only one block when we moved our headquarters due to necessity of growth. We are focused on serving the residents of our city and our county.

We have total assets of 640 million dollars. We have 134 owner employees. We maintain an election under Sub-Chapter S. We have 60 shareholders, the largest of whom is our ESOP designed as a KSOP, which owns slightly more than 20% of our company. We are clearly not a Wall Street bank. We are clearly a Main Street bank.

I'm not an attorney, I'm not a CPA, and I must admit that much of what I've heard this morning in terms of tax code, which has been addressed by very knowledgeable people, is well above my level of thinking. It reminds me that when I was 2 and a half years old, over here at formerly the department store Woodward and Lothrup, I was lost on the escalator and my mother panicked; I felt that same sense of loss this morning (laughter).

I believe that the proposed regulation that I read is not consistent with what Congress intended. I believe that it would have provided some parity between C-Corp banks, corporations and S-Corp banks. It's apparent that when reading the proposed regulation, however, that many of our shareholders would not be entitled to the QBI, we are over 25 million in gross receipts and our other activities, which have been discussed here, loan sales, trust and investment, are about 7% on a gross revenue basis.

Our company, therefore, would have to provide a larger distribution to our shareholders to cover that additional liability should we lose the QBI. Our company would be about $720,000. This would widen the gap between S and C Corps. It would also widen the gap between us and other S Corps, interestingly.

Let me mention briefly another S-Corp bank that is just a few blocks away down the street. They also have 25 million plus in gross receipts but their other activities, SSTBs as they are called, are not 5% so they would be entitled, as is my understanding, to the QBI. That means that we would have to distribute the additional $720,000, they would not. That means that they would retain that and retain earnings; we could not. As a bank we leverage our capital to support our communities. $720,000 at a 10% capital ratio would generate 7.2 million dollars of growth in our community.

We would be at a distinct disadvantage from our competitor who has simply chosen a slightly different business model. And, we would not be able to leverage that retained capital to support our community, which needs our support.

What about those SSTBs, and you've already heard about that. Our brokerage trust and loan sales activities have been offered to our customers and we've been successful with that. Our customers in our communities which I briefly described would otherwise be under served in terms of these activities.

The de minimus Rule as proposed penalizes us for successfully meeting these consumer needs over a period of years. Now, we could shrink those lines of credit, those lines of business, excuse me, so they might drop below the 5%; that's not in our company's interest, nor is it in the interest of our customers.

Clearly, the services that we provide that fall under the SSTB definition are as you just heard permissible activities under the Federal Reserve regulatory rules. We have engaged in these activities for years and years. Why? They are permissible, they are beneficial to our customer base, and they are beneficial to our bank. They should not be separated out. They are part and parcel of the approved activities; we do not treat them as separate businesses. We do not account for them separately. They are departments within our bank.

Yes, we know the gross revenue. I do not know the net profit exactly. We don't calculate that. In preparation for this meeting we did a brief calculation and I believe that after a quick reallocation of general expenses and overheard, that the net profit from these three activities would be about 4.3%; that's considerably less than the 7% on the gross level. If we were using net, at least at our preliminary calculation, we likely would qualify for the QBI.

We view all three of these services, in addition to our core banking business of making loans and taking deposits as key and holistically part of our business. They are simply part of the basic business of banking.

By the way, why do we sell loans? And, you heard that addressed; we serve our community by making single-family residential home loans. We sell those, we don't make a market in them; we don't securitize them. We simply sell them. Why? In order to mitigate the regulatory risk of loan concentration and long term interest rate risk. We've done that forever and it makes excellent sense. It's part and parcel, again, of the holistic part of banking services we provide.

I mentioned our company is owned 20% by the ESOP. If we do elect to move to a C-Corp, which may happen if we are disallowed the QBI, then the distributions that are enjoyed by our shareholder employees through the ESOP would dramatically drop. We will distribute fewer dollars to our shareholders. That drop will be about 1.1 million less to our ESOP participants.

Those folks are middle income ordinary working class folks who make our bank successful. I'm confident it was not the intent of Congress to harm their retirement plan, which we provide nicely for through the sharing of the earnings that they create.

You heard a discussion about the unpredictability of revenue streams from these activities. I don't know what we are going to distribute for the January distribution in order to pay the tax liability because we don't know about QBI yet. I haven't — we don't know — I don't know what to tell our shareholders. Please give us some clarity quickly, please.

I ask that you treat all bank and company income as qualified business activity; it's part and parcel of our franchise under federal banking regulations. Consider increasing the de minimis rule to at least 25%. Give us some relief there so we can look at all of these activities holistically. Consider using net income rather than gross receipts. Be careful, but consider it because the answers are very different.

Thank you very much for listening to three bankers and particularly to me. Thank you for struggling and wrestling with these issues. I understand they are complex, they are time consuming and everybody is a party of interest. It's difficult but I appreciate the role that you are engaged in and I hope that you will not be as lost as I was that day in Woodward and Lothrup (laughter). Thank you.

MS. KRIBELL: Thank you. MR. FISHER: Mr. Frampton?

MR. FRAMPTON: Yes, sir.

MR. FISHER: What percentage of loans in banks similar to yours would you say are sold?

MR. FRAMPTON: Our total loan portfolio is about 468 million. The most we have ever sold in one year, in terms of first mortgage residential loans, was about 70 million as I recall, but that varies dramatically based on interest rate and our ability to book those loans initially.

Loan sales have dropped recently. We are not in a growth market and so that fluctuates maybe from 70 million to as low as 25 or 30 million, and we are in a down-turn right now because of rising rates and lack of activity in our market. It's very difficult to predict and we do a 5 year plan for the FED at their request. I have no idea what that's going to look like in the coming years based on the revenue fluctuations based on interest rate economic conditions.

MR. FISHER: Thank you.

MS. KRIBELL: Okay. Thank you very much. Next we have Steve Lewis of Jefferson Bank.

MR. LEWIS: Good afternoon. My name is Steve Lewis. I'm Chairman of the Board of Jefferson Bank and Jefferson Bankshares Inc., located in San Antonio, Texas. We are a state chartered Texas bank whose primary federal regulator is the FDIC and the State Banking Department.

Our bank was chartered in 1946 by members of my family and a small group of local citizens. The bank is owned by JBI, Jefferson Bankshares Inc., a one bank holding company. Total assets of the bank on December 31, 2017, were 1.7 billion. Today we are about 1.9.

All of the bank's businesses consist of making loans and deposits, providing trust and fiduciary services to customers in and around San Antonio, Texas. In addition, the bank has two wholly owned subsidiaries: A registered investment advisory service, which provides advisory investment services and an insurance agency.

Our holding company elected Sub-S treatment in 2002 because it was the most efficient way to maintain our investment and growth capital and is one of the primary reasons that we continue in business today. It is our understanding and belief that all of the activities that our bank and company perform are eligible for the QBI deduction enacted by Congress under Section 199CAP.A of the internal revenue code.

We ask that the Treasury Department and the IRS clarify this and it's regulations so there is no uncertainty on the part of us conservative bankers who do not like to take much risk, particularly not when dealing with the IRS. We ask the Treasury to clarify in its proposed regulations that all of the bank's fiduciary activities conducted as part of the trust business be clearly qualified for QBI deduction.

Some have suggested that because such business may involve investment management, these activities may not qualify for the deduction. We further ask that the Treasury confirm that our bank is not dealing in securities by virtue of selling of loans it originates to customers. This is an integral part of a bank's business and should by now means be treated as separate trader business.

Our bank, and all banks, is in the business of making loans and taking deposits and is regulated and examined by thousands of pages of laws, rules and regulations and is chartered with the primary purpose of serving the credit and other financial needs of our community.

We have required capital ratios to make liquidity ratios to meet and other safety and soundness requirements. To meet these and to serve our customers, we must be able to sell loans to third parties such as Freddie Mac, Fanny Mae, and with respect to our government guaranteed lending, to such other third party financial intermediaries. None of whom we consider to be our customer but rather institutional counterparties.

And, Mr. Fisher, to answer your question, our bank originates about $250 million a year in first lien mortgages. We retain in our portfolio somewhere between 30 and now 40 percent of those loans and we sell the balance. The main reason for the retention is that the interest rate is an adjustable rate mortgage that we like. Normally they are 3, 5, 7 or even 10 years but we are not in the business of writing 20 or 30 year mortgages because I can't match the assets or the liability.

So the production mortgage department will make a, you know, a person comes in to the bank, takes an application, we make a mortgage, we settle the mortgage and go on another day. And then maybe the next customer wants a shorter term ARM with good credit, we will put him in our portfolio. So it's more a choice for the consumer.

Anyway, as such, we are very different from the professionals identified as specified service, trade or business in the statute and proposed regulations but we ask that you clarify this in the regulations. If we are not able to include revenue from these types of core banking services in qualified business income deduction would clearly place our bank and our holding company at a disadvantage to those C corporation banks that are taxed to the 21 percent corporate tax rate. Clearly this is not the result that Congress intended.

We urge further clarification in these regulations and specifically described in the comment letter filed on September 21, 2018 by the ABA, the Independent Community Bankers of America and the Sub S Bank Association which incorporated by reference. Thank you very much for my opportunity to testify today.

MS. KRIBELL: All right. Thank you very much. Okay. We have one additional speaker who was not on the agenda. Drew Fossum of Tenaska Inc.

MR. FOSSUM: Thank you very much for letting me speak here and you've done a very nice thing by letting me onto the list and a very mean thing to these people. It's like everyone has got the look like they're being held after school so I apologize. But the bad news is there is one more speaker, the good news is I won't use anywhere near 10 minutes.

I am Drew Fossum, I'm the general counsel and senior vice president at Tenaska Energy. We are a privately held closely held diversified energy company headquartered in Omaha, Nebraska. We build and operate electric power plants. We trade natural gas and electric power and are involved in a number of ancillary energy businesses.

We have two issues with the 199 Cap A. One is the definition of SSTB under 199A D2B. In particular the trading and dealing in commodities language. And I'll speak a little bit about that. And the second is the aggregation rules, in particular the 50 percent ownership requirement that was in the proposed regulation.

So just a couple of quick things on why Tenaska cares about those two issues. Two of our integrated businesses, first on the trading and dealing and commodities issue. Two of our businesses are relatively large traders in physical natural gas and physical electric power and there is such a thing as physical electric power. It's difficult for me to wrap my head around but we are one of the top five largest physical gas marketers in North America. Peer companies like ours are like Shell and Exxon and McCoy Bank. We typically buy natural gas from producers of the field. We arrange for transportation of that natural gas and interstate pipelines or interstate storage providers and we resell the gas to customers like Washington Gaslight.

The natural gas industry is partly deregulated such that the owners of the pipelines are not allowed to be commodity market participants anymore so companies like ours have stepped into that role of being the buyer and reseller of gas. Much like the way Mr. Hessey described Ag commodity aggregators who will have fleets of trucks and grain elevators and will arrange the business of moving the physical commodity around from producers to ultimate end users. That same role exists in the natural gas and electricity industry and we fill that role which makes us mainly interested in the way that trading and dealing in commodities language works.

And second, the aggregation rules affect us as well. Tenaska is a large family of companies and there are a number of entities within our corporate family that we own less than 50 percent of. Typically our process of developing and building large electric generation facilities involves bringing in partners at an early stage after we reach financing of those projects. We have sold some of those power plant entities down to below 50 percent. Some of them we hold more than 50 percent of but for the regulation to result in a different outcome depending on whether we own 51 percent or 49 percent of one of our power plant entities, strikes us as problematic.

So let me speak just for a couple minutes about each of those two issues. First, on the trading and dealing and commodities issue we believe that the regulation should be clarified to provide that disqualified SSTB's are those that provide the service of trading or dealing with commodities for others for a fee. A business should not be disqualified from the 20 percent deduction if it buys and sells commodities as an essential part of its organic business.

And I refer you back to the statute itself. 199A D2 provides that an SSTB is any trade or business quote which involves the performance of services that consist of investing in investment management, trading or dealing in securities as identified in section 475C2, partnership interest or commodities. Key words there being performance of services. If the statute is interpreted and the relegations are promulgated in a way that entities that are purely physical market participants that truck corn back and forth from grain elevators to barge loading facilities or that ship natural gas on leased capacity on interstate pipelines like our company does, if they're treated as disqualified SSTB's and not entitled to that 20 percent deduction we believe that reads the phrase performance of services out of the statutory language.

Now Mr. Hessey made some interesting points that we agree with on the distinction between purely financial trading on the one hand and physical trading on the other. Our company is a purely financial trader in natural gas and electric power. We entered into hedge transactions much like Mr. Hessey described some of the Ag market participants, heeding the basis risk for the chronological risk of physically holding that commodity while it is being trucked or barged or sitting in a grain elevator. Same situation for us. We hedge basis or locational risk. We hedge time value risk while we have natural gas stored in underground storage fields but our business is essentially physical and we believe the physical business involving companies that take physical possession of the commodity should be entitled to the deduction.

One of the things that I think is really important is the statutory language really in 199A D2, the section I just read a second ago, clearly is contemplating financial market activity. Investing in investment management trading, dealing in securities and commodities sounds like financial market activity. The cross reference itself to 475E 2 we think further emphasizes that by the reference back to commodities that are traded on a board of trade or actively traded in that, kind of like Nymex for natural gas, would be disqualified from receiving the 20 percent deduction.

But commodities like Mr. Hessey mentioned borrowing that just coincidentally looks a lot like we — looks a lot like corn but isn't traded as an actively traded futures contract trader and barley would not be disqualified. That is an arbitrary we think unfair result that is inconsistent with the congressional intent and the language of the statute.

The grain glitch was a great additional example of that. We have covered that in our written comments as well. If Congress were about leaving arbitrary distinctions between types of commodities, so be it. But we think had the interpretation that would result in SSTB treatment for physical commodities like nat gas, corn and wheat that are traded on futures exchanges Congress would have fixed that in the fix to the grain glitch as well.

Finally, in our comments, we proposed some specific language that we believe could be added to the current regulatory text to really emphasize this distinction between companies that take physical possession of the commodity like ours and companies that don't. Again to emphasize that distinction between financial market activities that we believe is intended to be treated as SSTB activity and purely physical market activity that's not. And we would be glad to discuss that language with you if it's appropriate or convenient.

So last just a minute, I said I would go less than 10, I will. Aggregation, our big beef here is with the 50 percent threshold. We don't believe it is necessary to allow congressional intent to be realized. The two out of three test that the under proposed reg 1.199A 4 could actually be expanded to include the 50 percent threshold, not as a disqualifier outright but turn the two out of three test into a three out of four test is one of the proposals that we make in our written comments or else we would suggest reduce that 50 percent test down to a 10 percent threshold. And we have cited to a number of examples in the code and the regulations where a lower ownership threshold has been utilized for purpose that we believe are analogous to what you are trying to accomplish here with the proposed regs.

So I will stop. I really appreciate the opportunity to talk with you for a few minutes and again thank you very much for the good and hard work on the proposed reg and I hope we can answer any questions.

MS. KRIBELL: Okay, thank you very much. MR. FOSSUM: Thank you.

MS. KRIBELL: Okay. Is there anyone else here who would like to present oral comments? Okay.

MS. SANDS: (Off mic.)

MS. KRIBELL: Did you speak with anybody at the front?

MS. SANDS: So I checked in with them. MS. KRIBELL: Okay.

MS. SANDS: And just asked them to open it up at the end.

MS. KRIBELL: Okay.

MS. SANDS: Is this an appropriate time? MS. KRIBELL: Okay, sure, yes.

MS. SANDS: Thank you. MS. KRIBELL: Thank you.

MS. SANDS: Get myself organized just for one second. I'm sorry. Good afternoon. My name is Alex Sands. And I'm with the American Veterinary Medical Association or the AVMA. AVMA represents 91,000 member veterinarians across the country.

Many veterinarians are organized as small businesses and are small business owners making us keenly interested in this deduction. So we appreciate the hard work that you put into the role to provide some clarity around these issues and questions resulting from the Tax Cuts and Jobs Act and are grateful for the level of detail provided in that rule that want to raise a few issues from the veterinary perspective for you today.

So AVMA essentially echoes some of the comments of the NFIB particularly around SSTB's in the field of health and I'm going to talk a little bit more about that today. And this is an area where we are encouraging Treasury and the IRS to take sort of Congress's broader intent in mind to support small businesses like veterinary practices.

So admittedly there are some intersections between human and animal health, particularly with the respect of the safety of the food supply, diseases that can be transmitted from animals to humans and the prominent placement of companion animals that thy have in our lives.

Through these and other areas, veterinarians play an import a role in protecting human public health but the actual delivery of veterinary care is very different from the delivery of human healthcare. A significant difference is that the veterinary patients are property essentially in terms of the law and may be raised for food, fiber, sport, research or companionship and the nature of the animal may dictate the level of veterinary care that corresponds to — for that owner.

Another significant difference is that a traditional veterinary practice unlike a physician's office may have diverse incomes streams that do not directly relate to the treatment of their animal patients. For example, a companion veterinary practice may have a retail component, laboratory and diagnostic services, boarding and grooming services or — and or a pharmacy. The proposed rule specifically states the sale of pharmaceuticals is not included in terms of the service in the field of health yet under the same regulations a veterinarian would likely not be able — or would not be able to segregate out these income streams because they're included in the field of health, SSTB status. Even though the other income streams do not directly relate to veterinary services or the field of heath. This is an area we feel it's hard to comprehend Congress's intent that they would allow a non-veterinary owner to deduct boarding and kennel services whereas if the veterinary owner of that business would not be able to utilize the deduction.

And another important distinction, unlike animal healthcare, a large segment of human healthcare is delivered though government agencies and third party payers. This is an important distinction between the business models of the veterinary practices and physician's office for example. But these are just a few of the examples, we dive into more detail in our comments and sort of with this backdrop in mind, we thought for these reasons for the purposes of the deduction that veterinary practices would be able to utilize the deduction and in our comments we encourage Treasury and the IRS to reconsider this approach for the purposes of the final rule. So thank you for considering our position and I'm happy to take any questions should you have any.

MS. KRIBELL: Okay. Thank you very much.

MS. SANDS: Thank you for the opportunity.

MS. KRIBELL: Okay, do we have anybody else? Okay. This concludes today's public hearing. Thank you to everyone who came here today and especially to our speakers. We greatly appreciate your comments and your testimony. Thank you.

(Whereupon, at 13:36 p.m., the HEARING was adjourned.)