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June 3, 2014

As discussed in Part 1 of our Tax Reform Update, two tax proposals have gained momentum in recent weeks. A short summary of President Obama’s 2015 budget can also be found in this post.  The House Finance Committee Chair, Dave Camp, released his “Tax Reform Act of 2014,” aimed at reforming the current taxation of “carried interests.” Below is a short summary of his proposal, effective January 1, 2015, if enacted. Though no significant changes can be anticipated until after elections, both of these proposed reforms show tax change is likely coming in the near future.

Under Chairman Camp’s Proposal, an applicable partnership interest held in connection with the performance of services would be subject to a rule that characterizes a portion of any capital gains as ordinary income. An applicable partnership interest would include any interest transferred, directly or indirectly, to a partner in connection with the performance of services by the partner, provided that the partnership is engaged in a trade or business conducted on a regular, continuous and substantial basis consisting of the following:

(1) raising or returning capital,

(2) identifying, investing in, or disposing of other trades or businesses, and

(3) developing such trades or businesses.

This provision would not apply to a partnership engaged in a real property trade or business. The recharacterization amount would be determined (but not realized) on an annual basis and tracked over time. The result would be less capital gain characterized as ordinary income to the extent a service partner contributes capital to the partnership.

Any distribution or gain from the sale of a partnership interest (i.e., a realization event) would then be treated as ordinary to the extent of the partner’s recharacterization account balance for the tax year. Amounts in excess of the recharacterization account balance would be capital gain. The invested capital of a partnership is, as of any day, the total cumulative value determined at the time of contribution of all money and other property contributed to the partnership on or before such day.

Partner loans to the partnership and indebtedness entitled to share in the equity of the partnership would qualify as invested capital. Furthermore, if at any time during a tax year a taxpayer holds directly or indirectly more than one applicable partnership interest in a single partnership interest, all interests in a partnership would be aggregated and treated as a single interest.

If you have questions regarding any of the above tax terms, anticipated changes, or this proposed reform, please contact Steve Dunavant, Senior Managing Director, at sdunavant@cbiz.com or 901.685.5575.

May 29, 2014

Momentum has definitely picked up with two tax proposals surfacing in recent weeks. President Obama’s 2015 budget and the House Finance Committee Chair Dave Camp's “Tax Reform Act of 2014” both contain provisions that would change the current taxation of “carried interests.”  The thrust is directed at the taxation of Hedge Fund and Private Equity Managers, and both proposals contain concepts designed to “carve-out” the ordinary income component, thus resulting in a combination of capital gain and ordinary income.  Both reforms would also significantly increase the complexity of partnership filings.  Below is a summarized look at the President’s Proposal, effective December 31, 2014, if enacted, and Representative Dave Camp’s proposal will be covered in an upcoming blog post.

Though it is unlikely we will see anything significant develop until after elections, it is apparent that tax change is coming. The President’s Proposal would tax as ordinary income a partner’s share of income on an “investment services partnership interest” (ISPI) in an investment partnership, notwithstanding of the character of the income allocated from the partnership. This income would not be eligible for long-term capital gain rates, and the partner would also be required to pay self-employment taxes.

  • An investment partnership is a partnership where substantially all of its assets consist of investment-type assets.  An ISPI is “carried” or “profits” interest that is issued as compensation for performing services for the partnership.
Similarly, the portion of any gain recognized on the sale of an ISPI that is attributable to the invested capital would be treated as capital gain.
  • Invested capital excludes contributed capital that is attributable to loan proceeds or other advances made or guaranteed by any other partner or the partnership.

The proposal also contains anti-abuse rules designed to prevent the avoidance of the proposal through the use of compensatory arrangements other than partnership interests.

If you have questions regarding any of the above tax terms, anticipated changes, or this proposed reform, please contact Steve Dunavant, Senior Managing Director, at sdunavant@cbiz.com or 901.685.5575.

February 25, 2014
The recent Tax Court decision in Shea Homes, Inc. and Subsidiaries (Shea), et al. v. Commissioner will reshape how some residential developers and homebuilders view application of the completed contract method for recognizing income. Under the completed contract method of accounting, income is recognized upon the completion of the "subject matter" of the contract. A contract is considered complete at the earlier of two tests:
  1. the 95% completion test, or
  2. the final completion and acceptance test

Shea's “subject matter” of the contract extended beyond the individual home and lot and included the larger development, amenities and other common improvements as well. Shea emphasized the features and the lifestyle of its communities to potential buyers as an important element of the development, and it noted the requirements set forth in performances bonds and CC&Rs. Accordingly, Shea computed the 95% completion test by comparing the development’s total direct (representative of the actual “bricks and sticks” costs of home construction) and indirect costs to the development’s total budgeted direct and indirect costs. Under its methodology, Shea deferred income for all homes sold until the development’s incurred cost were equal to or greater than 95% of its budgeted cost.

The IRS argued that “subject matter” of the contract was the individual home and lot, and accordingly, Shea should recognize income as each home was sold. The Court agreed with Shea noting that the IRS analysis of ‘subject matter’ was “simplistic and short sighted,” and did “not acknowledge the complex relationships created by the purchase and sales agreement.”

Residential developers and homebuilders should keep this case in mind, as it will open the door for some tax planning opportunities.

If you have questions about the key provisions of the case and how those provisions will shape taxation, structuring, and financing for residential developments going forward, contact Steve Dunavant, Senior Managing Director, at sdunavant@cbiz.com or 901.685.5575.      

January 30, 2014

Over 100 employees attended our semi-annual office meeting at the Racquet Club of Memphis. CBIZ guests including Jerry Grisko, CBIZ President/Chief Operating Officer, Bill Tapp, Senior Managing Director in the Tampa Bay office of CBIZ MHM, and Ken Rideout, CBIZ President of Employee Services Tennessee, gave presentations reflecting the national, regional and local perspectives of CBIZ.

These perspectives served to inform Memphis employees of where the company has been and where it is headed. Steve Dunavant kicked off the meeting with 2013 metrics and then steered the conversation into office plans for 2014 - the firm's third year with the national accounting services provider. Representatives from different service lines also gave short presentations reflecting on 2013 results and announcing 2014 goals and initiatives. Eustis Corrigan, a New Orleans native, gave the closing remarks to the firm, and he certainly kicked it up a notch by bringing in personalized CBIZ MHM tabasco bottles for the staff. The takeaway: CBIZ MHM is 'Spicing it up' in 2014!        

November 19, 2013

The Memphis office held their bi-annual CFO/Controller Conference November 13th at the University of Memphis Fogelman Center.

One hundred financial leaders in the Mid-South attended the half-day event where they gained insight into the current challenges in the industry including the ever-changing issue of healthcare reform. The first of four presentations given by PeopleCap Principals, Howard Cleveland and Andy Nix, spotlighted the importance of having a people strategy both in the process of hiring and in the management of current employees. Their long-term picture of employee engagement outweighing any benefits a company may offer served as a launching pad for Steve Dunavant and David Gearhardt's topic of the current financial environment of which CFOs are having to navigate.

The Affordable Care Act, though continuously changing, is putting an added burden on both CFO and HR professionals in the area of employee health benefits. Perhaps the most frustrating is the absence of much control over the impeding requirements.

Jenny Kiesewetter, Founding Member at Kiesewetter Law Firm PLLC, recognizes the shift of risk management from the collective "House Money, House Rules" way of thinking to placing more responsibility on the employee. The transfer of risk leaves many individuals with the choice to leverage private exchanges within the marketplace. Kieswetter clearly recognized this "industry trend" during her presentation on "The Future of Employer-Provided Healthcare."

The conference came full-circle with the final Q & A portion presented by a selected panel of CFO and HR professionals in the Memphis area. A common theme throughout this session was the growing partnership between the financial and human resources department at companies across the Mid-South. The panel represented some of the most well-respected companies and professionals in the local community: Perkins & Marie Callender's, nexAir, Bryce Corporation and Fred's. Though healthcare plans and benefits varied across the stage of businesses, all agreed that they are keeping a close eye on the healthcare reform and its effects on their employees.

Marcia Vargas, Sr. Vice President of Human Resources at Fred's, said it best, "We can no longer rely on benefits as the lever for employee satisfaction and recruitment. We are going to have to identify other ways to create employee engagement."

Healthcare is certainly changing the way employees view their employer. If our conference has any one takeaway, it is that Memphis businesses deeply care for their employees and their health.

October 17, 2013

The Memphis Business Journal’s 4th annual CFO of the Year Awards took place this morning at the Holiday Inn University of Memphis. These awards are designed to honor financial professionals in Memphis and the Mid-South for outstanding performance in their roles as corporate financial stewards. We are proud to have been a sponsor of these awards since their inception in 2010.

Steve Dunavant, Sr. Managing Director, is pictured at left presenting the award for the winner of CFO of the Year in the Non-Profit Company (more than $30 million annual revenue) category. Nominees for these awards must be a Chief Financial Officer or hold an equivalent position at a local company or organization.The following is a list of the award winners in their respective categories:

Private Company (less than $100 million annual revenue)

Winner: Brent Patterson, Semmes-Murphey Clinic

Private Company (more than $100 million annual revenue)

Winner: David Rosenthal, Buckman

Non-Profit Organization (less than $30 million annual revenue)

Winner: Brandon Wellford, Memphis Bioworks Foundation

Non-Profit Organization (more than $30 million annual revenue)

Winner: David Zettergren, University of Memphis

Lifetime Achievement Award

Winner: Richard Carney, Chuck Hutton Company

Congratulations to all of the award finalists! Click here to see the full list of CFO of the Year finalists. Learn more about all of the nominees in the CFO of the Year section of this week's Memphis Business Journal.  

August 6, 2013

We held our bi-annual office-wide meeting this past Thursday, August 1st. The two hour event featured an opening presentation from Senior Managing Director, Steve Dunavant, who spoke on Q1, Q2 and projected local office numbers for the next six months. He also introduced new Managing Director, Eustis Corrigan, who was attending his first office-wide meeting since his start in May. Corrigan noted the talent and potential for the Memphis office to expand its reach in the Greater Memphis Area and surrounding markets. Other speakers included representatives from the tax, audit and marketing departments, as well as more light-hearted presentations from the social and community involvement committees. Moira House, Director of Human Resources, spoke on the new renovations and updates made to the Memphis office facilities. Construction began on the 29th and 30th floors of Clark Tower earlier this summer. New office space, technology upgrades and additional conference rooms will be the end result of an almost two-month long project.

The office-wide event concluded with an address by Gordon Thompson, Managing Director and founding partner of Thompson Dunavant PLC. He commented, "I think the services, growth and opportunity we have seen in the past two years shows that we made the right move by joining CBIZ. The presentations and leadership we've seen today are a testament to your hard work."

Indeed, the overall consensus is that CBIZ MHM Memphis is on track for a great 2013 and an even greater next few years.

July 11, 2013

Are you trying to sift through countless articles about the employer mandate delay? Save yourself some time by reading this short Q & A with Steve Dunavant, Senior Managing Director of CBIZ MHM - Memphis. Steve weighs in on the large employer mandate delay and answers the questions employers and employees alike want answered.

1. What has been delayed and what has been excluded?

The employer shared responsibility penalty requiring companies with more than 50 full-time employees to provide health insurance to workers as well as an employer and plan reporting requirement have been delayed one year. For employer planning purposes, employers should know that all systems are "go," at least at the moment, for other requirements of the law. You can view our CBIZ Health Reform Bulletin for more detail.

2. Does the extension suggest that employers delay their own implementation efforts as it relates to the ACA's large employer provisions?

Employers were clearly struggling to digest the law and its guidance ahead of the former effective date. Similarly, the Government was experiencing its own difficulty in implementing the provisions as well and cited the information reporting requirements for large employers, insurers and self-insured health plans as the reason for the extension of the effective date. The additional time is clearly needed, and accordingly, employers should continue to evaluate and plan for implementation of the ACA provisions so that they are properly prepared in advance of the new effective dates.

3. Does this delay affect employees?

The delay of the employer mandate until 2015 does not change the effective date for the individual mandate. It is important to note that tax credits are available to individuals to assist with the purchase of health coverage. Those credits are only available to employed individuals who are either not offered health coverage by their employers or are offered coverage that is not affordable (i.e. costs more than 9.5 percent of employees income) or does not provide a minimum value (provides coverage for 60 percent of health care costs). Absent the employer reporting provisions, it is questionable how the Government will verify claims by employed individuals that coverage is not available, unaffordable or inadequate.

4. Does this delay affect employer planning?

Possibly, fewer employers may cut employee hours to below 30 hours/week (so as to classify them as part-time) because they will avoid being charged a penalty this year (see §4980H). Additionally small employers concerned about exceeding the 50 FTE threshold will have additional time to consider the impact triggering the ACA large employer provisions.

5. Will there be future delays for individuals?

Though there has been speculation about the Obama administration delaying further provisions of the Affordable Care Act, there has been no official correspondence about such delays. A recent GAO Report released this past June notes that "much remains to be accomplished in a relatively short period of time," and that significant implementation challenges remain.


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