Affordable Care: Premium Tax Credit

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Affordable Care: Premium Tax Credit

The US Supreme Court upheld the government regulations that provide that an otherwise qualified individual who obtains health insurance through the federal exchange (rather than a state exchange) is entitled to a Premium Tax Credit (PTC). This is the 6/25/15 decision in King v Burwell.Since this is the “Affordable Care” Act we are talking about, the PTC is a key part that helps make insurance affordable.

Some Possible Issues

  • States with exchanges may consider ending them to save costs and let people go to the federal exchange. This seems to be an unintended consequence of the decision and the feds might not have sufficient resources to handle this possible action.
  • This survival of the PTC may lead Congress and President Obama to fix it. It is too complex. The IRS likely does not have the resources to determine if people properly claimed it.
  • The PTC behaves as if individuals of all ages and all geographic regions can spend about 8% of their income to obtain health insurance. Because insurance costs more as you age and housing costs a lot more in some regions, that assumption is unrealistic.

Should health insurance tax rules be examined as a whole to try to better equalize the treatment among different ways to obtain health insurance? Currently the best deal is to get employer-provided coverage because it is tax-exempt to the worker – no income or payroll tax. And you get this benefit regardless of your income level.

Should we take the bold step of divorcing health insurance from employment? It drives up costs, it creates unfair tax advantages for those who have it, and the cost to employers helps make them uncompetitive in the global market. The tax cost of the employer-provided health insurance exclusion is over $200 billion per year. Why not use this money to lower rates and improve and expand the PTC?

Also – note that the King ruling also affects the employer mandate. With more individuals eligible to avail themselves of the PTC, it is more likely that an applicable large employer can have at least one full-time employee claiming it thereby possibly exposing the employer to the employer mandate penalty.

NACVA QuickReads: Normalization Adjustments

Recently, Joe wrote a ‘QuickRead’ article that was published on the website

The article can be read here, as well as, below.


Are there hidden risks to the valuator?

The best defense against liability is a good offense. As Joseph Petrucelli explains in this article, a good starting point to ensure the appropriate level of professional skepticism and due professional care is maintained in engagements is asking the question: “What would a reasonable person think about my judgment?”


Normalization Adjustments


As valuators, we are asked to determine the necessary normalization adjustments needed to formulate an economic benefit stream that will generate an accurate value for a moment in time. Often, we base this determination on the client’s or management’s representations. We have statements built into our limited conditions and assumptions that declare we are not responsible for the quality of the information being provided to us and that it is deemed to be accurate.  This is supported by a host of other so-called protections that we believe will ensure we are not sued or implicated, but are we really shielded?

In order to be truly shielded as valuators, we need to assume a position of offense, rather than defense, in order to avoid liability. This can only be achieved by maintaining due professional care and an appropriate level of professional skepticism. I have established my own standard that asks the following question: What would a reasonable person think about my judgment? After all, it will be these same reasonable people that will decide whether or not we should be implicated or sued.

Focus of the Article

I propose that we start developing positions of offense, since a good offense is the best defense when avoiding liability. My goal is to create an understanding of the risks, created by limited conditions and assumptions, we often state in our reports. In fact, these limited conditions and assumptions will likely put you in the hot seat when being cross examined, and likely destroy your credibility.

“This [avoiding liability] can only be achieved by maintaining due professional care and an appropriate level of professional skepticism.”

“I take no responsibility.” “The client told me.” “I have not audited the records.” These are just a few examples of the language used as limiting conditions and assumptions.  Will this provide convincing evidence to a reasonable person that we have done our due diligence?  Have we provided reasonable certainty to the average person with this type of language hanging over our opinion? I say, no. When the opposition begins to twist and turn our words, a reasonable person may begin to doubt that the appropriate level of professional skepticism has been applied.  Will a juror or a judge appreciate that we completed our report without looking into the credibility of documentation used to support our position and merely relied on the unchecked representations of the client or management? Yet, we are asking these reasonable people to believe we have arrived at an objective and independent opinion with due professional care. Let’s take a look at due care and negligence in legal terms. Forget the accounting terms, reasonable assurance or certainty.

Due care is the conduct that a reasonable man or woman will exercise in a particular situation in looking out for the safety of others. If one uses due care, then an injured party cannot prove negligence. This is one of those nebulous standards by which negligence is tested. Each juror has to determine what a “reasonable” man or woman would do.Negligence means a person has acted negligently if he or she has departed from the conduct expected of a reasonably prudent person acting under similar circumstances.2

What if the records we examine indicate tax evasion or avoidance, manipulations to create sudden income decline syndrome (SIDS), or fraudulent transfers of assets that would have been found by looking at a bank statement? These are only a few examples of the potential mistruths our client or management may represent to advance their own self-interests. Do you think clients and management are concerned that we are licensed and that we can be implicated by their actions? None of us want to have to defend ourselves by saying that we may or may not have known, or that we should have known.

We need to be able to defend ourselves from positions of strength, and that can only be achieved through analyzing key documents and meeting the sufficient evidence standards under Rule 201 of the American Institute of Certified Public Accountants (AICPA). Meeting these standards will put us in an offensive position ready to defend our actions.  The failure to uphold the highest level of support for your opinion is exposing yourself to liability. Reliance on exclusionary language will not save you when the reliance may be deemed by a “reasonable” man or woman to be negligent.

Who is Responsible for the Risks We Face?

Like an audit, tax return preparation, or any other engagement, we are only as good as the management and client we represent and the documentation and supports we are provided. Hearing from lawyers, management, or clients that they do not have the records should be a big red flag. When documents such as bank statements can be directly subpoenaed from the bank, tax returns can be obtained with a filing of IRS Form 4506, and large transactions of receivables or payables can be verified through third parties, valuators should exercise due diligence to obtain proper documentation and verify accuracy when they are material to the adjustments. This is an offensive approach to make sure the documents we are heavily relying on are accurate. Nothing is more devastating than finding all your credibility and work have been destroyed because you relied on the wrong information. Remember that “reasonable” person. Do you really believe he or she will give you the benefit of the doubt if it’s concluded that the item would have been material to your estimation and could have been readily obtained?  We can assume that we are covered because we said so in our limited conditions and assumptions. Yet in the outcome, we may be faced with the dreaded net opinion, and/or have been found to be not credible, and even worse, deemed negligent.

Materiality, one of the ten basic accounting principles, is critical in evaluating risk. Materiality serves as the great equalizer in the reasonable person’s thinking. If you use exclusionary language with respect to a significant fact finding which is based solely upon your client’s statements, and you ignore the fact that supporting documents could have or should have been obtained, which were not provided, think twice before drawing any opinion…unless of course, you like liability.


I first found out about this word in a valuation risk weekly webinar I was giving, and it is a word we all should add to our thinking as valuators. The Webster Online Dictionary describes it as a “neglect or wrong performance of an official duty, a concealment of treason or felony by onewho is not a participant in the treason or felony, or a seditious conduct against the government or the courts.”  Let’s assume normalization adjustments for taking expenses in violation of the internal revenue code, unreported income, or hidden assets. Do we get to hide behind the limited condition and assumption exclusionary language? Tell it to the IRS Special Agent who shows up at your door and asks you to explain, or the judge or juror who is saying in their mind ,“Yeah right. He didn’t know about it.”  Whether you did or you didn’t is irrelevant. You are now in a defensive position.

Did you prepare a letter that notifies the client and/or his representative that Circular 230 of the Internal Revenue Code says, “I have to alert you to potential tax irregularities and errors and to correct them?” Make sure you have documented and alerted the necessary parties if this occurs to avoid misprision.

If any fraud is found to be present in any of the documents or information you based your opinion on, you could be deemed negligent. This is especially the case if found by a reasonably prudent person acting under similar circumstances, namely the opposing expert. In such a scenario, you will quickly find yourself in defensive position.  All the exclusionary language (defensive thinking) will not replace due professional care, application of the appropriate level of professional skepticism, and proper sufficient evidences (offensive thinking). This is also called covering your back.

Assessing Your Risk 

There are obvious risks that we need to consider as valuators. The normalization adjustments, discount and/or capitalization rate development, and what supports were relied on in formulating our opinions are just some of the areas to be concerned with, based on my experience. The offensive valuator understands the available evidences needed to support his or her opinion.

Normalization Adjustments

There are varying normalizations, and I could write articles on each of the potential normalizations or, better termed, necessary adjustments. Instead, I am proposing a ranking system to determine the risk associated with the judgments we make with five (5) being the highest exposure to my opinion and credibility and one (1) being the lowest. The reasonable compensation adjustment is always a five (5) due to the complexities in developing the adjustment and the potential impact it can have on the value. The higher the compensation, the lower the value.

It is extremely concerning that two experts who  have been provided with the same facts can often have extremely different adjustments in arriving at a final value. With the potential existence of conflicting interests, we need to clearly explain to the parties involved that we do not advocate for our clients, but rather our opinion. Maintaining this principle is the foundation behind arriving at an objective, independent and supportable opinion.


Here is a simple rule: any adjustments that are material to the value opinion we arrived at need to pass the “reasonable” person test.  The test is that, upon their review of the adjustments made in determining the value, they would conclude that the appropriate level of professional skepticism and due professional care was maintained by the valuator.

Joseph R. Petrucelli, CPA/CFF/CGMA, FCPA, CVA, MAFF, PSA, CFE., is the managing partner of PP&D Accounting Services, Inc., and author of Detecting Fraud in Organizations published by Wiley. He serves as a testifying expert in federal and state courts involving valautions. He also developed a five-day valaution risk webinar for NACVA. He can be reached at


1 “Due Care,” The Free Dictionary, Farlex, Inc.,

2 “Negligence,” The Free Dictionary, Farlex, Inc.,

2014 Tax Guide

This is to serve as a basic and preliminary tax guide. We will be adding more information as legislative developments may affect exemption and dividend amounts. For individualized information contact your tax expert today.


Standard Deductions


Married Filing Joint Return

Surviving Spouse

Head of Household

Unmarried (not SS or HH)

Married, Filing Seperately

Dependent Standard Deduction (Minimum)

Add Amount for Blindness or Age

Add Amount  if Unmarried and Not SS [/one_half]


$ 12,400

$ 12,400

$   9,100

$   6,200

$   6,200

$   1,000

$   1,200

$   1,550



Itemized Deductions


Non-business Casualty Loss (AGI Threshold)

Medical Deduction (AGI Threshold)

Misc. Itemized Deduction (AGI Threshold)

Phaseout of Itemized Deductions











Personal and Dependent Amount

Phaseout of Exemptions



$   3,950




Education Provisions


American Opportunity (Modified Hope) Grant

Lifetime Learnign Credit

Student Loan Interest Deduction

Coverdell Education Savings Account Contribution

US Savings Bond Interest Exclusion (Phaseout Starts)

–             Married, Filling Joint

–             Single, SS or HH



$    2,500

$    2,000

$    2,500

$    2,000



$ 113,950

$ 76,000




1099-K: IRS Compliance Program

IRS launches compliance program for Form 1099-K

The IRS has announced a Form 1099-K compliance program in which it will send 20,000 notices to business taxpayers to make sure they are properly reporting their income and that the merchant card data received by the government is accurate. The agency will also be sending notices to business clients regarding mismatches of Form 1099-K information.

This means that merchants doing credit card sales (Amazon, PayPal, Internet) must be sure to reconcile their income to the amounts reported to them on form 1099-K. Discrepancies will result in inquiries from the IRS.

Read the full AICPA article here.



College of Staten Island Featured in the Washington Monthly

The College of Staten Island, where managing partner Joseph Petrucelli is an adjunct professor, has ranked in America’s Best-Bang-for-the-Buck Colleges as reported by the Washington Monthly in the September/October 2012 issue. Check out the article below to find out what other colleges made the cut.


The College of Staten Island[/box]


America’s Best-Bang-for-the-Buck Colleges

In this year’s rankings, we show which schools get their students over the finish line at a reasonable price.

By Rachel Fishman and Robert Kelchen

The main flaw in most college rankings is that they tend to measure how prestigious institutions are rather than how effectively they serve their students. Indeed, many schools have moved up the U.S. News & World Report rankings by abandoning the students they traditionally serve in favor of recruiting “a better sort” by raising their admissions standards.

The Washington Monthly has long believed that such behavior by colleges doesn’t serve the broader interests of the country, and that rewarding such behavior is wrong. And so the magazine designed its own ranking system to do the opposite: to rate colleges based on how well they perform with the students they have, regardless of the students’ backgrounds or SAT scores, on metrics that measure the widely shared national goals of increasing social mobility, producing research, an inspiring public service.

One goal that has long been missing in the magazine’s rankings, however, is cost-effectiveness. After all, college may be a good investment, but not if you pay too much for it. Pursuing a college education still makes economic sense for most students, but that won’t be true for much longer if tuitions continue to rise, as they have for years, at rates faster even than health care costs.

So this year, the Washington Monthly rankings incorporate a new measure we call the “cost-adjusted graduation rate.” This involves tweaking the calculations the magazine has long used to derive a school’s social mobility score. In the past, we predicted a college’s graduation rate using the median SAT/ACT score of each school and the percentage of its students receiving Pell Grants and then compared it to the actual graduation rate. This year, we made two changes. First, to increase our ability to predict graduation rates, we used additional student and institutional characteristics, such as the percentage of students attending full time and the admit rate. Second, to get at cost-effectiveness, we took the gap between the predicted and actual graduation rate of a school and divided it by the net price of attending that institution. Net price represents the average price that first-time, full-time students pay after subtracting the need-based financial aid they receive.) The aim of our new cost-adjusted graduation rate is to highlight those colleges that use their resources to effectively educate students at a relatively low cost—and to call out those that burn though tuition dollars without much to show for it.

What did we find? First, that colleges and universities that do well by this measure tend to be public institutions. That’s not a surprise, given that tuition at these schools is kept relatively low by state subsidies (though per-student subsidies have been declining in many states). It also turns out that quite a few minority- serving institutions, such as the University of Texas-El Paso and Elizabeth City State University, score near the top of the list.

What may be surprising, however, is that some of the highly ranked universities from U.S. News, including Carnegie Mellon and the University of Southern California, rank near the bottom. Even though these institutions have high graduation rates, the types of students that they enroll are already expected to graduate at high rates. Moreover, these schools tend to be expensive, with net prices that can top more than $30,000 per year.

Here are some examples of different kinds of colleges and universities that are able to graduate the students who can be the most difficult to get across the finish line at a relatively low average net price.

Research Universities

Predicted grad rate: 54%
Actual Grad Rate: 66%
Net Price: $7,817
Reason It Made the Cut: According to Diverse: Issues in Higher Education, SDSU ranks twentieth in the nation for bachelor’s degrees conferred on ethnic minorities.

With a predicted graduation rate of 54 percent and an actual graduation rate of 66 percent, SDSU does an impressive job at graduating students given their demographics. This is due in part to a concerted effort by the university to collect and analyze data about its students. With data in hand, SDSU is better able to identify where students run into roadblocks and develop interventions that result in improved outcomes. These interventions include mandatory orientation for first-year and transfer students, special programs for low-income and first-generation college students, a dedicated office for the retention and success of students, and a strong partnership with San Diego’s local public schools to ensure that students in the pipeline arrive prepared.

Predicted grad rate:49%
Actual Grad Rate: 63%
Net Price: $10,207
Reason It Made the Cut: Rutgers-Newark is a public, urban, nonflagship university that attracts mostly commuter students. Despite its nontraditional student population, its graduation rate is 14 points better than predicted.

According to U.S. News, Rutgers-Newark is the most diverse national university in the United States, with no racial group able to claim majority representation on campus. Its diversity, location, and relatively affordable tuition have attracted a growing student body, adding 3,000 students in less than a decade. As enrollments grow, Rutgers-Newark has pledged to remain accessible to large numbers of first-generation college students. To maintain this mission, the university actively recruits in the city of Newark, where one-quarter of residents live below the poverty line and the median household income is approximately $35,000. The university’s Academic Foundations Center houses both pre-college and undergraduate programs to provide outreach and support to students from disadvantaged backgrounds to help ensure their success.

Master’s Colleges

Predicted grad rate:39%
Actual Grad Rate: 51%
Net Price: $5,590
Reason It Made the Cut: Although Fresno State’s graduation rate may seem low, this Hispanic-serving institution (HSI) performs 12 points better than predicted.

Approximately 38 percent of the students at Fresno State are Hispanic, and 52 percent receive Pell Grants. Many of the university’s students are the first in their family to go to college. While these characteristics normally yield a student population that is difficult to graduate, Fresno State does relatively well getting their students across the graduation stage. As a member of the Presidents’ Alliance for Student Learning and Accountability, Fresno State has committed to gathering, reporting on, and using evidence to improve student learning. Using data has helped the institution to see where students fall through the cracks—those who are between their second and third years, especially those who lack connections and relationships with their major department. With this knowledge, department chairs reach out to every student between their second and third years to act as a point of contact and to provide support.

Predicted grad rate:33%
Actual Grad Rate: 48%
Net Price: $6,675
Reason It Made the Cut: With 48 percent of incoming students receiving Pell Grants, this institution has a substantial difference between its actual versus predicted graduation rate.

As an urban, commuter institution, the College of Staten Island attracts a diverse group of students from the New York City metro area. Because of the difficulty in retaining commuter students, the college offers many programs to enrich students’ academic lives and provide incentives for them to stay invested in finishing their degree.

The SEEK program, offered through the City University of New York, helps underprepared students by offering them academic support and financial assistance. In addition, the college has three honors programs, including the Macaulay Honors College University Scholars Program for incoming freshmen who pursue their degree full time. These scholars receive a full tuition scholarship and participate in research projects. They are also provided an additional $7,500 fund as an incentive to study abroad and do in-depth research.

Baccalaureate Colleges

Predicted grad rate:19%
Actual Grad Rate: 42%
Net Price: $1,442
Reason It Made the Cut: While a graduation rate of 42 percent may seem low, Elizabeth City State, a public, historically black university, only has a predicted rate of 19 percent. ECSU is doing much better than predicted, and at a very low net price.

Part of ECSU’s mission is to provide a studentcentered environment, delivered in a manner that enhances student learning. The university has many academic initiatives, including a summer school program
to help underprepared students get on track so they arrive in the fall ready to succeed. ECSU recently expanded this program and saw enrollment increase from 1,358 in 2009 to 3,118 in 2010. In addition to a summer program, the university maintains more than twenty other academic programs, including “Motivation, Opportunities, Determination, Excellence and Leadership (MODEL) Scholars,” GEAR-UP, Mathematics and Science Education Network, Upward Bound, and TRiO Programs.

Predicted grad rate:38%
Actual Grad Rate: 68%
Net Price: $9,854
Reason It Made the Cut: College of the Ozarks has a relatively low net price and one of the largest differences between predicted and actual graduation rates.

The mission of College of the Ozarks is to provide the advantages of a Christian education to youth who are without sufficient means to procure such education. Similar to Berea (see below), instead of paying tuition, all full-time students work approximately fifteen hours per week on campus to subsidize their education, allowing them to graduate debt free. Ozarks students can work an additional forty hours per week during summer breaks to help cover the cost of room and board, potentially bringing their total cost of attendance to zero. Additionally, students are expected to complete their academic program within eight semesters and require special approval from the dean of the college to extend up to a maximum of two semesters. This policy helps to ensure that students graduate on time. But College of the Ozarks has a low acceptance rate (9 percent) and a small enrollment (1,377 students), reaching only a very specific population of students.

Liberal Arts Colleges

Predicted grad rate:50%
Actual Grad Rate: 64%
Net Price: N/A
Reason It Made the Cut: In addition to an extremely low net price, the gap between the predicted and actual grad rates is 16 points.

Since its founding in 1855, Berea College’s scriptural foundation, “God has made of one blood all peoples of the earth,” has shaped the institution’s programs and culture. Part of Berea’s mission today is to provide educational opportunity to students primarily from Appalachia who have great promise and limited economic resources. As a result, more than half of Berea students are first-generation college students, and the average family income for an incoming student is $29,273. All students receive a four-year scholarship worth up to $96,400, and every student works approximately ten to fifteen hours per week to earn money to cover the cost of books and food. It is important to note, however, that admission to Berea is highly selective. Even though this college does a great job considering the students it enrolls, its capacity is small.

Predicted grad rate:28%
Actual Grad Rate: 54%
Net Price: $7,485
Reason It Made the Cut: With an average student age of thirty-six, Granite State serves mostly adult, nontraditional students through a variety of flexible degree programs.

Granite State College is one of the four institutions that comprise the University System of New Hampshire. In addition to being New Hampshire’s leader in delivering online higher education, Granite State’s primary mission is to serve as the system’s college for adults. The college’s open admissions policy and multiple academic centers throughout the state ensure that its reach is broad. And by offering flexible degree programs in high-demand fields and credit for prior learning, the college makes it possible for students to balance the responsibilities of school, work, and family. Granite State also offers intensive classes to help accelerate the path to a degree, like a course that spans only four weekends or six Saturdays instead of twelve to fifteen weeks.

Should you be worried about recent municipal bankruptcies?

Municipal bonds have received a lot of attention recently, in part because their tax advantages could become more valuable in 2013. However, they also have come under scrutiny because of some widely publicized bankruptcy filings by local governments.

Economic problems, lower investment returns, and cuts in federal aid have led to an increase in the number of local governments filing under Chapter 9 of the U.S. bankruptcy code. They included the single largest U.S. municipal bankruptcy on record (Stockton, California, one of three municipalities in the state to file for bankruptcy in a single month).

Despite the increased pace of filings, muni bankruptcies are still extremely rare. From June 2011 to June 2012, only 17 municipalities or local government entities filed for bankruptcy in federal courts. Compare that to the 9,285 Chapter 11 filings by businesses during the same time.*

One way to check on your muni holdings is to use information available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA®) database, available at You’ll need to know the bond’s CUSIP number; this nine-digit identifier can be found on a trade confirmation or brokerage statement. The information available generally includes the revenue sources pledged to repay a bond and whether any bond insurance, letter of credit, or other guarantees have been provided for its repayment.

The database doesn’t include all municipal offerings, and though it’s updated yearly, information can become outdated. The bond’s current credit rating from one of the three major ratings agencies can suggest its most recent status. However, remember that a high credit rating doesn’t reflect or guarantee a bond’s market value or liquidity.

*According to the Administrative Office of the U.S. Courts.