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LEDGER LEDGER

DECEMBER 2016WeiserMazars LLP is an independent member firm of Mazars Group.

2 | WeiserMazars Ledger

CONTENTS

3 | Brexit : Five Key Insights for the global Real Estate sector

4 | What the Proposed SEC Rule on Continuity Planning Means

for Your RIA

6 | Is the Mott Haven neighborhood in the South Bronx the new hot

spot? Only time will tell.

8 | SEC Adopts Rules to:

- Modernize Information Reported by Funds

- Enhance Liquidity Risk Management Programs

- Permit Swing Pricing

11 | Potential Quality Issues Overview – What and Why PQI

14 | Succession Planning: Who Is Responsible for Its Success?

18 | Impact of the New Revenue Recognition Standard on the

Asset Management Industry

21 | Taking Steps to Avoid Cash Flow Interruptions

24 | U.S. Watch Market Faces New Challenges While Catering to

Shifting Demands

28 | WeiserMazars Tax Alerts

44 | WeiserMazars Cybersecurity Alert

46 | WeiserMazars Real Estate Alert

DECEMBER 2016 - ISSUE 17

The WeiserMazars Ledger conTains arTicLes and aLerTs pubLished froM ocT. 1 - nov. 30 2016.

Check out our featured article "Succession Planning: Who Is Responsible for Its Success?" on page 14

December 2016 | 3

REAL ESTATE

Following the UK’s landmark referendum decision to leave the European Union, real estate investors have been dealing with the push and pull of post-Brexit market sentiment. Initial panic surrounding the outcome of the vote saw a raft of UK-based fund managers suspend redemptions from property funds worth £18bn1 as investors looked to exit the asset class. Confidence in the residential sector also took a hit. Although as the dust begins to settle, forward looking indicators look a little less gloomy, with twelve month price and sales projections nudging back into positive territory2. For UK commercial property, the picture looks less rosy with Q2 2016 showing a significant deterioration in market sentiment visible across both investment and occupier sides of the market with uncertainty pushing rental and capital value projections into negative territory3.

While it’s still early days to come to concrete

conclusions on how the UK’s Brexit decision

will impact the real estate sector, our global

real estate experts at Mazars have mapped out

five important considerations when assessing

any challenges and opportunities likely to face

strategic players, partners and competitors in

the international real estate sector in key global

locations; the UK, Germany, France and the US.

1. With property values and currency issues

exercising minds in the UK, investors

should not forget to factor in demographic

and social trends that are having a

fundamental impact on the UK property

sector.

2. Don’t underestimate the power of trading

links to ensure that relationships between

EU members and the UK remain mainly

favorable, but priorities could change when

it comes to tech start-ups looking for an

innovative and cost-effective base.

3. While a mass exodus by financial services

firms in the UK is unlikely, having strategies

in place to mitigate potential disruption,

as well as using the opportunity to widen

property investment horizons will be key.

Focusing on the degree of risk in real

estate portfolios should be top of investors’

agendas, but decision making may be

hampered until there is more visibility on

the political outlook following forthcoming

elections in France and Germany.

4. While high levels of uncertainty remain,

investors should take the chance to look at

other real estate locations and vehicles that

can offer potential in order to compensate

for any fallout global real estate may suffer

post-Brexit.

Sources

1 http://www.bbc.co.uk/news/business-36783428

2 Residential Property Survey 18/6/16 from the Royal Institution of

Chartered Surveyors (Rics)

3 Commercial Property Survey 20/7/16 from the Royal Institution of

Chartered Surveyors (Rics)

shahab is a parTner in our neW York pracTice. he can be reached aT 212.375.6791 or aT [email protected].

BREXIT : FIVE KEY INSIGHTS FOR THE GLOBAL REAL ESTATE By Shahab Moreh

This article was originally published by Mazars Financial Services blog on September 30, 2016.


REAL ESTATE

WHAT THE PROPOSED SEC RULE ON CONTINUITY PLANNING MEANS FOR YOUR RIA

Business continuity and disaster planning has been a focus of the Securities and Exchange Commission in its examinations of Registered Investment Advisors in recent years, following the impact of disasters such as Hurricane Sandy on advisors in the affected region, as well as increased concern over cybersecurity risks. Investment advisors generally have business continuity plans (BCPs) in place; however, the degree of specificity and robustness of these plans vary significantly across the industry. The SEC’s recent proposal to require formalized plans that sufficiently address specified criteria (Rule 206(4)-4) will require RIAs to elevate their planning and risk mitigation efforts.

By Katelyn Kogan and Carlos Martins

This article was originally published by WealthManagement.com on September 21, 2016.

December 2016 | 5

“COMPLIANCE CONSULTANTS WILL BE IN HIGH DEMAND OVER THE NEXT COUPLE YEARS AS RIAS ENHANCE THEIR EXISTING PLANS AND ENSURE COMPLIANCE WITH THE NEW RULES.”

The 60-day comment period for this rule just ended. While

there may be some small changes to specifics before the

regulation is finalized, feedback from various industry parties

was mostly supportive of the general direction of the guidance,

so RIAs should not expect significant changes from the

proposal. A significant point of contention is the inclusion of

the rule in the anti-fraud section of the Investment Advisers

Act instead of with more operational directives.

Advisors with sophisticated business continuity and transition

plans already in place should revisit them to ensure they are

tailored to the company with sufficient specificity and contain

all essential elements of the SEC proposal.

These include: maintenance of critical systems and protection

data, alternate physical locations, communication plans,

review of third-party services critical to operations and a plan

for winding down or transitioning the business.

Advisors with less robust plans should:

§ Assess current systems and processes, focusing on the

reliance on both technology and external vendors for

critical functions, such as trade execution and processing,

and custody of customers’ assets. This analysis should

identify the core business systems and inventory, the

required systems, data, supplies, facilities and personnel

needed to execute those functions.

§ Develop and document a plan that identifies potential

disaster or disruption scenarios. Rank them in terms of

probability and impact, and lay out detailed procedures

for getting the business’s critical functions back up and

running as quickly as possible with minimal losses.

§ Implement a documented plan, which includes employee

training, vendor contracting, and getting new safeguards,

redundant technologies and alternate physical locations

up and running.

§ Test the plan to ensure effectiveness. Tests can vary in

complexity and may involve restoring data and systems to

a hot site, executing drills with employees, or conducting

simulations to assess the completeness of disaster

recovery plans and employee understanding. Advisors

need to review their business continuity plans at least

annually to ensure they are operating properly and

address any changes to the business or industry.

Costs of compliance with the new rule will include both hefty

one-time upfront costs and lesser ongoing annual costs.

Some of the costs may be passed on to investors down the

line through higher fees. The SEC staff has estimated that

the upfront costs will range from $30,000 to $1.5 million per

advisor and will take from 50-500 hours. Whether RIAs will be

at the lower or higher end of these ranges will depend on the

size and complexity of the advisor’s business, as well as how

comprehensive their existing plan is. The SEC acknowledges

that this will be a costly transition for many but believes that

the benefits to the market will significantly outweigh the costs.

A drawback is that increased costs may create barriers to

entry or cause some advisors to exit the market due to already

low margins, reducing overall competition.

Compliance consultants will be in high

demand over the next couple years as RIAs

enhance their existing plans and ensure

compliance with the new rules. Good legal

counsel is of course key, and audit firms

experienced with business continuity and

disaster planning are valuable partners in

this process as well.

This clarification of the SEC’s expectations on business

continuity plans may help advisors to be better prepared for

SEC examinations, as previously there was uncertainty on

what exam staff were specifically looking for.

As a fiduciary, the investment advisor must always be focused

on mitigating risk and protecting customers’ assets. A strong

business continuity and transition plan is integral to achieving

this and should be a key objective of companies and chief

compliance officers in particular. This new rule will result in

some added costs, but its guidance is expected to be beneficial

over the long run. Moreover, its principles-based approach

will allow advisors to tailor the plan to address firm-specific

operations and risks.

kaTeLYn is a Manager in our neW York pracTice. she can be reached aT 212.375.6918 or aT [email protected].

carLos is a parTner in our neW York pracTice. he can be reached aT 212.375.6667 or aT [email protected].


IS THE MOTT HAVEN NEIGHBORHOOD IN THE SOUTH BRONX THE NEW HOT SPOT? ONLY TIME WILL TELL. By Michael J. LaMantia and Alex Eggers

All arrows are pointing in the same direction that the South Bronx will be the next Williamsburg, the next Park Slope or the next Long Island City. For years New Yorkers have had a front row seat to witnessing the domino effect of working class outer borough neighborhoods with easy access to Manhattan being transformed into some of the priciest overdeveloped places in New York City. Up until the past few years this boom has been limited to Brooklyn and Queens. With costs skyrocketing, priced out residents and investors alike are now looking for refuge in the often overshadowed borough to the north, the Bronx.

A community that was once an afterthought of young professionals and real estate investors alike, the South Bronx is in

the midst of a real estate resurgence. Those same factors that led to the astronomical rental increases and multi-family

development booms in Park Slope, Williamsburg, and Long Island City are now causing people to look north to what

many consider is the next big thing. The proximity to Manhattan and affordable rental rates have led to an increased

interest in the South Bronx and in particular the neighborhood of Mott Haven.

After years of seemingly ignoring the borough altogether, real estate developers have zeroed in on the South Bronx

as the next area for a multi-family development boom within the five boroughs. Compared to the first six months of

2015, 2016 has seen an 11% increase in multifamily transaction volume. This has been driven by a combination of

the development opportunities drying up in the hot outer borough neighborhoods of the past 10 years in Brooklyn and

Queens and the relatively cheap pricing opportunities the Bronx offers. The average cap rate for multifamily transactions

in the Bronx in the first half of 2016 was 5.05% compared to 3.67% in Manhattan and 4.44% in the Brooklyn.

The marquee real estate players in New York have taken notice. The Harbor Group and Emerald Equity Group’s recent

$140 million acquisition of a 38-building multifamily portfolio in the Bronx is just the most recent example of the growing

interest from significant players in the industry. It was a short two years ago when The Related Companies made news

throughout the industry, acquiring a $253 million portfolio consisting of 35 buildings in the north and west Bronx, made

up of more than 2,000 apartment units. Then in December 2016, The Related Companies along with New York City

Pension Funds purchased 737 apartments throughout North, West and South Bronx for $112.5 million.

REAL ESTATE

December 2016 | 7

While the entire borough has experienced an uptick in activity

in recent years, one area of note has been the Mott Haven

neighborhood. Mott Haven is positioned in the southwestern

most point of the borough; north of the Harlem River and south

of 149th street. Midtown Manhattan is a 25 minute subway

ride away via one of the four subway lines that travel through

Mott Haven (2, 4, 5 & 6) and the Metro North is even closer

at 10 minutes. Real estate investors have zeroed in on this

neighborhood, drawing parallels between Long Island City and

Park Slope due to the proximity to the river and picturesque

skyline views of Manhattan that attract the affluent buyer/

renter.

Up until the last few years the waterfront of Mott Haven had

received little attention from investors and had remained

largely undeveloped. The waterfront consisted of long stretches

of industrial buildings and vacant land parcels.

In March of 2015, Somerset Partners acquired two waterfront

sites in Mott Haven for a combined $58 million. In connection

with these acquisitions, Somerset will develop approximately

1,600 residential units, a retail component and a waterfront

promenade. Whereas other outer borough communities in

Queens and Brooklyn, such as the now stalled Hallet Cover

project in Astoria, have seen a development slowdown due

to the expiration of the 421a program, the relative affordable

pricing of the South Bronx has left investors with confidence

that full market rent projects can succeed.

Through the first six months of 2016 Mott Haven accounted for

whopping 21% of total development transactions traded in the

borough during that time. The uptick in activity in Mott Haven

has not been limited to purely residential ventures. FreshDirect

expects to complete an 800,000 square foot manufacturing

and distribution facility in Mott Haven in the summer of

2017. In August of 2014 a developer acquired the Bronx post

office which sits on the northern border of Mott Haven for

$19,000,000 from the USPS with the intention to develop the

property into a retail, commercial and community complex. The

post office project is expected to be completed in the spring of

2017.

As is often the case when neighborhoods are the focus of

increased residential development attention there are those

that raise concerns about gentrification. As housing costs rise

in the historically lower middle class area there is concern of

pushing out longtime residents from the community. As part

of Mayor Bill de Blasio’s primary housing initiative a $200

million capital investment for developing the Bronx’s southern

waterfront has been announced. The plan calls for 4,000 new

apartment units of which most will be set aside for low and

middle income residents.

Only time will tell what the future holds for the South Bronx

but if history tells us anything, no matter what public policy is

employed by the mayor and local officials Mott Haven will be on

an unstoppable path towards gentrification.

MichaeL is a senior Manager in our neW York pracTice. he can be reached aT 212.375.6501 or [email protected].

aLex is a Manager in our neW York pracTice. he can be reached aT 646.315.6136 or [email protected].

UPCOMING EVENTSEvolution of Downtown | December 14, 2016 | New York

WeiserMazars is a proud sponsor of Bisnow’s Evolution of Downtown conference. With sprawling retail centers such as Westfield WTC, Brookfield Place, and the South Street Seaport, office complexes like The World Trade Center, and a bustling residential scene, what’s next for Lower Manhattan? Join Partner, Ron Lagnado as he moderates

the Residential Climate panel at Rudin Management’s 1 Battery Park Place!

FAE NYSSCPA Real Estate Conference | November 15, 2016 | New York Join WeiserMazars Partner, Ron Lagnado as he speaks on the International Considerations panel, focusing on the

increasing demand for IFRS-basis financial reporting from real estate companies, as a result of the continued increase in foreign capital in the market. Ron’s focus will include accounting and reporting differences, with regard

to investments; property, plant, and equipment; impairment; leases; sales of real estate; and deferred loan costs.


FINANCIAL SERVICES

SEC ADOPTS RULES TO: - MODERNIZE INFORMATION REPORTED BY FUNDS- ENHANCE LIQUIDITY RISK MANAGEMENT PROGRAMS - PERMIT SWING PRICING

by Lorenzo Prestigiacomo

Background:In October 2016, the Securities and Exchange Commission (“SEC”) voted to

adopt changes for better reporting and disclosure of information by registered

investment companies, and to enhance liquidity risk management by open-end

funds, including mutual funds and exchange-traded funds (ETFs). The new rules

are part of the SEC’s initiative to improve transparency and increase monitoring

and regulation of the asset management industry.

SEC Chair Mary Jo White stated in the SEC press release, “These new rules

represent a sweeping change for the industry by requiring strong transparency

provisions and enhanced investor protections,” and “Funds will more effectively

manage liquidity risk and both Commission staff and investors will receive

additional and better quality information about fund holdings.”

MODERNIZE INFORMATION REPORTED BY FUNDS The new rules will improve the quality of information available to investors, and

will allow the SEC to more effectively collect and use data reported by funds. Most

funds will be required to begin filing reports on new Forms N-PORT and N-CEN

after June 1, 2018, whereas fund complexes with less than a $1 billion in net

assets will be required to begin filing reports on Form N-PORT after June 1, 2019.

Portfolio Reporting A new monthly portfolio reporting form – Form N-PORT – will require registered

funds (other than money market funds) to provide portfolio and position holdings

data to the SEC on a monthly basis. The form will require monthly reporting of the

fund’s investments and:

§ data related to the pricing of portfolio securities,

§ information regarding repurchase agreements, securities lending activities,

and counterparty exposures,

§ terms of derivatives contracts, and

§ discrete portfolio level and position level risk measures to better understand

fund exposure to changes in market conditions.

December 2016 | 9

The information in these reports for the last month

of each fund’s fiscal quarter will be available to the

public after 60 days.

Census Reporting Form N-CEN – a new annual reporting form – will

require registered funds to report certain census-

type information to the SEC annually. These reports

will be filed within 75 days of the end of the fund’s

fiscal year.

Structured Data FormatFunds will report portfolio and census information

in a structured data format, which will improve

the ability of both the SEC and the public to

analyze information across all funds and to link

the reported information with information from

other sources. The SEC currently receives this

type of information from money market funds

through Form N-MFP, and from certain private fund

advisers through Form PF.

Reporting on Fund Financial Statements The SEC amendments require enhanced and

standardized disclosures in financial statements

that are required as part of fund registration

“THE SEC AMENDMENTS

REQUIRE ENHANCED AND STANDARDIZED

DISCLOSURES IN FINANCIAL

STATEMENTS THAT ARE REQUIRED

AS PART OF FUND REGISTRATION

STATEMENTS AND SHAREHOLDER

REPORTS.”


FINANCIAL SERVICES

statements and shareholder reports. The amendments will

include more specific information related to derivatives,

similar to the information about derivatives that is already

required in the monthly portfolio holdings reports.

Additionally, in order to make fund derivatives holdings

easier to review, the amended rules will require derivative

disclosures to be displayed prominently in the financial

statements, rather than in the notes.

Increased Disclosure Concerning Securities Lending ActivitiesThe new rules require more disclosures relating to fund

securities lending activities, including income and fees.

ENHANCE LIQUIDITY RISK MANAGEMENT PROGRAMSThe rule requires mutual funds and other open-end

management investment companies, including ETFs, to

establish liquidity risk-management programs. Most funds

will be required to comply with the liquidity risk-management

program requirements by December 1, 2018, whereas funds

with less than a $1 billion in net assets will be required to do

so by June 1, 2019. The liquidity risk-management program

must include:

Assessment, Management, and Periodic Review of a Fund’s Liquidity Risk The funds are required to assess, manage, and periodically

review their liquidity risk. Liquidity risk is defined as the risk

that a fund could not meet requests to redeem shares issued

by the fund without significant dilution of remaining investors’

interests in the fund.

Classification of the Liquidity of Fund Portfolio Investments

Each fund is required to classify each of the investments in

its portfolio. The classification is based on the number of

days in which the fund reasonably expects the investment will

be convertible to cash in today’s current market conditions

without significantly changing the market value of the

investment.

Funds will be required to classify each investment into one of

the following liquidity categories:

§ highly liquid investments,

§ moderately liquid investments,

§ less liquid investments, and

§ illiquid investments.

Determination of a Highly Liquid Investment Minimum

A fund will be required to determine a minimum percentage

of its net assets that must be invested in highly liquid

investments, defined as cash or investments that are

reasonably expected to be converted to cash within three

business days without significantly changing the market value

of the investment. The fund also will be required to have

policies and procedures for how to respond to a situation in

which a highly liquid investment minimum is not met.

Limitation on Illiquid Investments A fund will not be permitted to purchase additional illiquid

investments if more than 15 percent of its net assets are

illiquid. If a fund goes over the 15 percent limit, it must report

that fact to the fund’s board, along with how the fund plans

to bring its illiquid investments back to the 15 percent limit

within a reasonable timeframe.

The new form – Form N-LIQUID – generally will require a fund

to notify the SEC confidentially when the fund’s level of illiquid

assets exceeds 15 percent of its net assets, or when the

amount of highly liquid investments falls below its designated

minimum for more than a brief period of time.

Board Oversight A fund’s board will be required to approve the fund’s liquidity

risk-management program and the designation of the fund’s

adviser or officer to oversee the program. The fund’s board

also will be required to review, at least annually, a written

report on the program and its effectiveness.

PERMIT SWING PRICINGThe swing-pricing rule will permit, but will not require, mutual

funds to use swing pricing. Swing pricing is the process of

adjusting a fund’s net asset value to pass on to shareholders

the costs associated with their purchase or redemption

trading activity. Swing pricing can promote investor protection

by giving funds an additional tool to mitigate the potentially

dilutive effects to shareholder purchase or redemption

activity. The fund’s board will be required to approve the

swing pricing policies and procedures, and to review a written

swing-pricing report for implementation and effectiveness.

The fund’s board will also be required to approve the fund’s

swing-factor upper limit, swing-pricing threshold, and other

changes.

The final rule will be effective two years after the date of

publication in the Federal Register.

Lorenzo is a parTner in our neW York pracTice. he can be reached aT 212.375.6654 or aT [email protected].

December 2016 | 11

Health care service providers seeking compliance through State regulations,

NCQA, Medicare, or Medicaid requirements, need to have processes in place in

order to ensure quality care and take necessary actions to correct and prevent

quality issues. These issues include access to care and inappropriate treatment

and/or services. The goal is to make sure that the quality of care is consistently

at its highest level for each individual.

By Tammy Putnam

POTENTIAL QUALITY ISSUES OVERVIEW – WHAT AND WHY

HEALTH CARE


HEALTH CARE

“IT IS IMPERATIVE THAT ACCURATE ASSESSMENTS OF PQIS ARE MADE TO ENSURE THAT ALL QUALITY ISSUES ARE IDENTIFIED, APPROPRIATELY HANDLED, AND MONITORED IN ORDER TO PREVENT FUTURE OCCURRENCES.”

Every health plan, provider, provider group, and facility is

responsible for ensuring the safety and implementation

of care for each and every enrollee/patient it serves.

Identification of potential quality issues (PQI) is an essential

first step. Monitoring and corrective actions must be

performed on a continual basis in order to take the

appropriate actions necessary to achieve improvement and

prevention of egregious issues. However, when it comes to

PQI, many people are still unclear as to what a PQI actually

is and how it should be reviewed, determined to be an actual

quality issue, and how it should be addressed. The following

is a PQI overview to help clarify and better understand the

PQI process.

A Potential Quality Issue (PQI) is any suspected provider

quality of care or service issue that has the potential to

impact the level of care being provided to the enrollee/

patient. Providers may include independent physicians,

medical groups, hospitals, nurses, ancillary providers and

their staff as well as health plan staff.

An Actual Quality Issue (AQI) is a PQI that has been reviewed

and investigated by the appropriate level of staff, and based

on that review and investigation, determined to be a quality

issue that requires further action to resolve.

PQIs may be identified through many sources, including:

§ Grievances and appeals

§ Site visits

§ Medical record audits

§ Satisfaction surveys

§ Utilization review information and encounter data

§ Phone logs/Inquiries

Examples of issues which impact enrollee/patient Quality of

Care include the following:

§ Access issues (obtaining appointments, appointment

in-office wait time, telephone availability, provider office

hours, etc.)

§ Lack of or delays in specialty provider referrals by the

treating provider

§ Lack of identification of necessary care

§ Care provided which does not meet the standard of care

§ HIPAA violations

§ Bedside manner of provider or provider staff

§ Cleanliness issues

§ Language assistance issues

§ Lack of diagnosis and/or Coordination of Care for

enrollee/patient behavioral health issues

PQIs from GrievancesPQIs may originate from a variety of sources such as

enrollees/patients, provider and health plan staff, etc.

Many PQIs result from grievances, so

it is important to keep in mind that all

issues involving quality that originate

from grievances should be considered

PQIs and elevated to PQI review based

on the perspective of the complainant.

While the review and investigation may reveal that an AQI

did not exist in the first place, a potential quality issue must

always be reviewed and investigated as a PQI to make that

assessment and demonstrate that all quality issues are

being considered. When in doubt whether or not something

is a quality issue that should be elevated to a PQI, always

elevate, review, investigate, and document the grievance

as a PQI to be sure. Include the full grievance file, medical

records, and any other documentation as supporting

background information in the PQI file. This will help anyone

reviewing the file to be able to see the full picture.

PQI AssessmentPQIs can be anything and everything. Suspected PQIs need

to be elevated for review in order to determine if an AQI

actually exists. A review of relevant documentation and

medical records along with discussions with all parties

involved should be conducted and thoroughly documented in

the PQI file, regardless of whether or not the PQI is identified

as an actual quality issue or not. Proper documentation

will demonstrate that the PQI has been thoroughly and

appropriately assessed for an actual quality issue. All

clinical PQIs must be assessed by a clinical reviewer such

as a Medical Director, Chief Medical Officer, Dental Director,

Optometric Director, etc. When in doubt as to whether or

not an issue should be elevated for PQI review, always err

on the side of caution. It is better to have taken the time

December 2016 | 13

to thoroughly consider the facts than to have missed an

opportunity to correct or prevent a quality of care issue.

Accurate Assessment of PQIs - Benefits and Potential Risks

It is imperative that accurate assessments of PQIs are made

to ensure that all quality issues are identified, appropriately

handled, and monitored in order to prevent future

occurrences. Inaccurate assessments of PQIs will likely

result in a failure to assign the appropriate level of corrective

actions to address current issues. Another risk is that quality

issues will not be thoroughly identified or addressed. For

example, if a member requests a provider change, they may

be satisfied once the change has been implemented; however,

the issue(s) that caused the change may remain unaddressed.

Was there an issue with timely access to appointments,

in-office wait times, and/or the quality of care or service

provided by the provider? Without a complete investigation

of all quality issues there will be missed opportunities for

identification and correction, resulting in ongoing, unidentified

problems.

Severity Levels and Corrective Actions for AQIs

Severity Levels:If the PQI has been reviewed and determined to be an AQI,

the PQI should then be assigned an appropriate severity level

based on the alleged issue. These severity levels should

be defined and determine by the level of corrective actions

required. This assists you and anyone reviewing the file to

understand why certain actions were taken on the AQI and to

ensure consistency with all AQI reviews.

For example:Quality Issue – Patient complained that the provider’s staff

member placed a caller on hold for a lengthy amount of time.

Severity Level I – No harm to the enrollee

Corrective Actions – Investigate the issue, contact complainant

and provider and staff member in question to gather facts.

Refresh both parties on timeliness to prevent future issues

with lengthy call hold times. Monitor, track and trend.

Quality Issue – Patient underwent surgery to amputate a leg.

Provider amputated the wrong leg.

Severity Level V – Issue has a direct and severe impact to the

patient as a result of the negligence of the provider (death,

loss of limb or bodily function, etc.)

Corrective Actions – Review by Peer Review Committee and

reporting to Credentialing, the Quality Assurance Committee,

and Board of Directors. Immediate suspension during case

review followed by immediate termination and 805 reporting

to the Medical Board, or reporting to other appropriate

licensing agency, for confirmed egregious provider negligence.

Opportunity for provider appeal.

Corrective Actions:Corrective actions must be appropriate for the level of severity

of the issue(s).

Corrective Actions are not limited to, but may include the

following:

§ Required education and/or training

§ Ongoing monitoring

§ Tracking and trending

§ Focused Audits

§ Suspension

§ Termination

Corrective actions should be assigned deadlines for

completion, which are monitored for both completion

and follow-up. This should be conducted to ensure that

corrective actions have resulted in improvement of the quality

issue. Corrective actions could potentially be a one-time

training or a long-term training that includes tracking and

trending. Include all review notes and document all verbal

and written contacts made related to AQI investigation as

well as corrective action efforts and follow-up completed to

document that appropriate steps have been taken to address

the issue(s).

SummaryAppropriate and constant PQI identification, corrective

actions, and follow-up are key in successfully identifying

opportunities for improvement and ensuring that the quality

of care provided to enrollees/patients consistently meets

the established care standards. When quality issues are

consistently monitored and efficiently addressed, you can be

confident that patients/enrollees are provided the best care

possible and that requirements are met for ongoing quality

improvement.

TaMMY is a Manager in our sacraMenTo racTice. she can be reached aT 916.696.3670 or [email protected].


SUCCESSION PLANNING: WHO IS RESPONSIBLE FOR ITS SUCCESS?

Succession planning has been a subject widely discussed among upper management for businesses and organizations of all sizes and industries. The topic of succession planning is broad in scope and has several implications for the workplace. Why, you ask? For one, the workplace is larger and more diverse by generation, gender, and race than ever. Why is succession planning so essential? Succession planning focuses on individuals and their potential to fill key leadership roles. Therefore, it provides the cornerstone for motivating the economy, and more importantly, allowing culture to progress in a positive direction. It would be a mistake not to address this issue because ignoring it would enable it to develop into a crisis. Since economic, culture and lifestyle are more integrated than ever before, what happens in our domestic and work lives will certainly have an impact around the world.

By Ron Ries

NOT-FOR-PROFIT

December 2016 | 15

By Ron Ries

Let’s examine who should be responsible for developing

an appropriate succession plan for an organization. The

workplace is currently comprised of five generational groups

based on year of birth, as follows:

1925-1945 Silent Generation

1946-1964 Baby Boomers

1965-1979 Generation X

1980-2000 Millennials or Generation Y

2001-present Generation Z (the new silent generation – too

young to make much noise yet)

Keep in mind, millennials make up a majority of today’s

workforce. In getting back to our initial question of

responsibility, each generation must take on their share for

generational succession planning to work. Let’s take a closer

look at each group.

For the most part, the Silent Generation has done their part

in transferring leadership and responsibility, to its successor

generation. For the purposes of this discussion, we’ll let them

off the hook. Next are the baby boomers. This generation

group is known as “the post-World War II” group. They took

the reins of power and responsibility through revitalization,

consisting mostly of expansion, economic success, and

profitability. Now, they have the responsibility of passing the

torch to the next generation.

Baby boomers have achieved wealth, prosperity, and

sustainability, and in general, can be viewed as successful.

But now comes the critical phase of transferring not only

economic wealth but leadership as well. Some have

insinuated that the baby boomer generation has sat on

its “laurels” taking in its economic success and beginning

retirement instead of providing guidance to the next

generation. What is meant by transferring values? We

are talking about the transfer of experience, knowledge,

and positive momentum which all stem from the natural

maturing or aging process. Meaning, the aging of culture

on the whole rather than in years and includes evolved best

business, ethical and prudent practices.

We have watched many baby boomers retire and generally

it seems that they fail to transfer their values to the next

generation. They should possess the desire to sustain what

they have developed instead of leaving it for others to blindly

take the reins. It is essential that they impart the tools and

methodology of their success to future generations. This

issue is one of the reasons why most companies seek the

support of alliances such as mergers or acquisitions because

they have not adequately developed the transferability of

values. This problem has led to a professional failure which

has incidentally been overshadowed by economic success.

Let’s focus our attention on future generations and in

some respects group them together, namely Generation X

and Millennials. As the beneficiaries of the baby boomers,

they have the joint responsibility of asking for leadership

roles since they are the successors. It is up to them to

convince baby boomers that they have

the dedication, courage, knowledge,

and emotional quality to take on the

responsibility of leadership, and accept the

training and learning necessary to gain

momentum. To this point, baby boomers

need to share and embrace these qualities

in every way possible to make this transition meaningful. One

reason why companies seek alliances with others instead of

achieving an individual succession plan is because they do

not see the talent that exists within their employee base. They

are hungry for growth, so they try to secure their success by

selling out to others. This misstep is rapidly becoming the

norm within our economic culture and stifles new thinking,

leadership, and entrepreneurship.

Similarly, generation X and Millennials need to learn to

respect the values of their predecessors. Certainly, they

can learn to develop new methodologies and practices

through proactive planning and analysis of best practices.

They should promote a culture of investing in their future

instead of an expectation of reaping the rewards of others

without developing further opportunities, for themselves

and for generations to follow. This partnership between

the generations is essential in establishing a continuum of

progress and success by working to overcome perceived

cultural and generational differences. These differences are

factors of inaction that can be transformed into positive,

productive action steps.

Bridging the generational gap may seem like the most

obvious solution in achieving forward progress, but it does

“BRIDGING THE GENERATIONAL GAP MAY SEEM LIKE THE MOST OBVIOUS SOLUTION IN ACHIEVING FORWARD PROGRESS, BUT IT DOES LITTLE TO MITIGATE GENDER AND ETHNIC CONCERNS IN OUR CULTURE.”


NOT-FOR-PROFIT

little to mitigate gender and ethnic concerns in our

culture. We have witnessed many success stories

over the past years regarding gender advances,

partially due to an acceptance based need in the

workplace and a change in female roles both

professionally and domestically. Let’s not forget

that women now possess a greater share of the

workplace than ever before. More women offer

the necessary skillset— based on education—

to enter the workplace and provide economic

resources for themselves and their families. This

activity inadvertently works to level the playing

field and promote equality. The role of women

throughout our culture is evolving; we see this not

only in domestic life, but in the corporate world,

the political arena, and even in the military. We

continue to see progress being made in this aspect

of our diversification process, and this momentum

must build and develop as the generation gap

grows in tandem with advances made in relation to

gender issues. This development creates new role

models within the workplace and helps to set the

tone for the successor silent generation.

The most complicated succession planning

initiative appears to be race equality. This issue

is steeped in the past and continuously affected

by existing cultural divides. It must be dealt

with aggressively, proactively, and with the tools

necessary to implement change. Many companies

have developed diversity officers within their

human resource functions to help address the

issue. Their role is to integrate the workforce. These

efforts require a sufficient amount of attention

to be successfully achieved. An organization’s

culture is greatly influenced and judged by the

success of these efforts. This initiative should

include acceptance, education and the motivation

to achieve fiscal, economic and emotional success.

Race equality is the most critical issue facing

diversification efforts.

How can we create diversification in our

professional and personal lives? Let’s look

to success as a pivotal point in this process.

It signifies accomplishment and prosperity.

Successful businesses, families and society as

a whole have been instrumental in showing us

that in its optimal form diversity ignores bias

based on generational, gender and ethnic issues.

Their stories serve as lessons to empower

others facing similar challenges. Embedded

in this success are several key factors such as

the transfer of thought leadership, continued

support of independent thinking, inclusion during

decision-making situations, collaboration at all

levels of management, effective communication,

and broadening conformity and acceptance of

others’ ideas and recommendations. This evolving

process incorporates the realities of each person’s

experiences, lifestyles, and goals.

Now is the time to tackle these challenges which

ultimately will lead to increased opportunity and

favorable results. The accounting profession as

a whole can positively influence change if we

diligently work towards identifying the right path

to accomplish these goals. Succession planning

in all its forms and methodology should be a

positive experience and is a necessary process for

achieving sustainability and maintaining a unique

culture, style, and successful practice or operation.

It is up to us to promote and improve equality and

inclusion within the workplace.

Need help to develop a game plan of your own?

WeiserMazars can assist you in creating a

succession plan tailored to your specific needs and

will guide you every step of the way.

ron is a parTner in our neW York pracTice. he can be reached aT 212.375.6782 or [email protected].

December 2016 | 17

Women of WeiserMazars - Be Visible featuring Lauren ReoLauren Reo is a senior tax manager in the Private Client Services Group and has been with the firm for

almost 8 years. Hear what she has to say about what it takes to be a leader and the advice she gives to others on being successful by scanning the barcode below!

To “Be Visible” means taking a proactive approach to demonstrating leadership while empowering others through shared knowledge. Our Be Visible campaign highlights women leaders who embody the core

values and principles that the firm seeks to promote.

FEATURED VIDEOS

UPCOMING WEBCASTS

We are pleased to announce the launch of our WeiserMazars Online Insights

webcasts! These informative sessions, led by our service line and industry segment

leaders, are designed to educate our connections on the latest developments in the accounting industry and the technical

resources needed in today’s business environment. Scan the barcode below to

view the 2016 schedule and register!

DECEMBER 1ST

Individual and Entity 2016 Tax Update

Time: 11:00 AM EST

DECEMBER 13TH

New Partnership Audit Rules Update

Time: 2:00 PM EST

DECEMBER 13TH

The Taxation of Real Estate Investment Trusts

Time: 11:00 AM EST

DECEMBER 15TH

3 Topics Sophisticated Estate Planners Should Know About Life Insurance

Time: 11:00 AM EST


Background:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards

Update (“ASU”) 2014-09, Revenue from Contracts with Customers. Topic 606, Revenue from

Contracts with Customers, presents the new revenue recognition guidance. FASB also issued

ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,

in August 2015. As a result of ASU 2015-14, the amendments in ASU 2014-09 are effective for

annual reporting periods beginning after December 15, 2017, including interim reporting periods

therein for public entities. Nonpublic entities should apply the amendments in ASU 2014-09 for

annual reporting periods beginning after December 31, 2018, and to interim reporting periods

within annual reporting periods beginning after December 15, 2019. Entities may elect to adopt

early, and apply the amendments for an annual reporting period beginning after December 15,

2016 (the original effective date of ASU 2014-09).

IMPACT OF THE NEW REVENUE RECOGNITION STANDARD ON THE ASSET MANAGEMENT INDUSTRY By Adrienne Abele and Charles V. Abraham

FINANCIAL SERVICES

December 2016 | 19

The new standard will replace all industry-specific guidance

currently available in U.S. generally accepted accounting

principles (“GAAP”) by applying five broad steps to determine

when to recognize revenue. The guidance affects all entities

that enter into contracts to provide goods or services to their

customers, unless the contract type is specifically excluded

from the guidance. The types of contracts that are excluded

from Topic 606 include: lease contracts, insurance contracts,

contractual rights or obligations for financial instruments,

guarantees (other than service and product warranties), and

nonmonetary exchanges between entities in the same line of

business to facilitate sales to customers.

Overview of Topic 606:Topic 606 states, “The core revenue recognition principle is

that revenue is recognized to depict the transfer of promised

goods or services to customers in an amount that reflects

the consideration to which the entity expects to be entitled in

exchange for those goods or services.”

Companies are required to apply the following steps to a

transaction to determine when to recognize revenue and the

transaction amount to be recorded:

Step 1: Identify the contracts with a customer.

By definition, a contract is an agreement between two

or more parties that creates enforceable rights and

obligations. Under the new revenue recognition policies,

separate contracts will be considered a single contract if the

contracts were negotiated as a single commercial package,

consideration in a contract is dependent upon the other

contract, or if the goods or services are a single performance

obligation.

Step 2: Identify the performance obligations in the contract.

A performance obligation is defined as a promise to transfer

a good or service under a contract with a customer. If the

contract provides for the transfer of more than one good or

service, the entity must determine whether each performance

obligation is distinct. The performance obligation is deemed

to be distinct if: (a) the customer can benefit from the goods

or services on its own, and (b) the promises to transfer the

individual goods or service are separately identifiable in the

contract. Consideration must also be given to whether the

goods or services are substantially the same and have the

same pattern of transfer.

Step 3: Determine the transaction price.

The transaction price is the amount of consideration in a

contract to which an entity expects to be entitled in exchange

for transferring promised goods or services to a customer.

Variable consideration amounts must be estimated and

included in the transaction price “only to the extent that

it is probable that a significant reversal in the amount of

cumulative revenue recognized will not occur when the

uncertainty associated with the variable consideration is

subsequently resolved.”

Step 4: Allocate the transaction price to the performance

obligations in the contract.

Transaction prices are typically allocated to each

performance obligation on the basis of the standalone selling

prices of each performance obligation. If the standalone

selling price is not apparent, an estimate must be used.

Acceptable estimation methods include: the adjusted market

assessment approach, the expected cost plus a margin

approach, and the residual approach.

Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation.

A performance obligation may be satisfied at a point in

time, or over time, that will determine the timing of revenue

recognition.

Impact on the Asset Management IndustryThe implementation of Topic 606 and the five-step approach

discussed above could have a significant impact on when

asset managers recognize revenue. Asset managers

typically earn revenues via two methods: management

fees – generally charged as a percentage of assets under

management (“AUM”), and incentive fees (or carried interest)

– generally a percentage of profits, subject to clawback

provisions, hurdle rates, and high watermark provisions.

Management fees

For example, if an asset manager earns management fees

as a percentage of AUM on a quarterly basis, although the

transaction price is a variable amount, the uncertainty is

resolved on a quarterly basis, as the fee is computed based

on the AUM under management each quarter. It is our view

that recognition of management fees as described above is

consistent with current requirements under U.S. GAAP.

Performance-based fees

Under current U.S. GAAP, performance-based fees (i.e.

incentive fees or carried interest) that are not finalized (and

therefore clear) by the end of a reporting period can be

recorded using one of two methods. Topic 605-20-S99-1


FINANCIAL SERVICES

(formerly EITF D-96) discusses the two methods:

§ Method 1: The manager does not record any incentive

fee income until the amount to be recognized is finalized

(i.e., in a private-equity fund, it might be at the end of the

life of that fund, when all positions have been sold or

liquidated).

§ Method 2: The manager records the estimated incentive

fee income based on what would be due under the

contract on a “hypothetical liquidation” of all assets and

liabilities at that reporting date.

Since performance-based fee contracts often include

clawback and benchmarking provisions, which depend

significantly upon market conditions, fees will be recognized

under the new revenue recognition standards only when the

uncertainties have been resolved and no significant reversal

of recognized revenues is probable. The receipt of cash may

not necessarily indicate recognized revenues under the new

rules.

Because of the constraint on variable consideration

discussed in Topic 606, asset managers who are currently

using Method 2 will have a significant delay in the timing of

recognition of performance-based fees. On the other hand,

asset managers who are currently using Method 1 may need

to accelerate the timing of their revenue recognition, because

Topic 606 includes a concept on assessing whether there

is a “minimum amount of variable consideration” at each

reporting period.

Upfront fees

Asset managers may obtain upfront fees from their investors

for distribution services performed.

§ If the distribution service is assessed as a separate

performance obligation, the obligation is satisfied at

the investor subscription, and the upfront fee will be

recognized immediately (consideration during step 2).

§ If the distribution function is assessed as being a

supporting function of the management services,

then it is not a separate performance obligation, but

rather an advance payment for management services

(consideration during steps 1, 2).

Asset managers must consider the specific facts and

circumstances of each arrangement, and could be affected

by whether the fund or the investor (i.e., the LP in the fund) is

deemed to be the customer, and whether other services are

performed by an entity within the same group as the asset

manager. The transaction price should be allocated based

upon the identified performance obligations established in

the contracts.

Contract costs

If recovery of costs incurred relating to obtaining or fulfilling

a contract is expected, these costs are recognized as an

asset. These costs should:

§ relate generally to a contract or to an anticipated

contract that the entity can specifically identify;

§ generate or enhance resources of the entity that will be

used in satisfying performance obligations in the future;

and expect to be recovered.

Costs that are recognized as an asset must be amortized

and reviewed regularly for impairment. Management must

exercise judgement to determine the period over which

to amortize these costs and when to analyze impairment

considerations.

Next steps

Asset managers are encouraged to become familiar with

the new revenue recognition standard and evaluate how

the five-step approach will affect their systems, internal

controls, policies, and practices. Entities should also discuss

these changes with key stakeholders (owners, investors,

lenders) so they can understand the impact of these changes

to the financial statements (including increased disclosure

surrounding revenue recognition, performance obligations,

significant judgments, etc.).

WeiserMazars can helpPlease contact your WeiserMazars Engagement Partner for

an in-depth discussion of how these changes can affect your

business.

charLes is a parTner in our Long isLand pracTice. he can be reached aT 516.620.8526 or aT [email protected].

adrienne is a senior Manager in our Long isLand pracTice. she can be reached aT 516.620.8591 or aT [email protected].

December 2016 | 21

Cash flow at a nonprofit often projects a shocking outlook of an organization’s ability to operate

smoothly. Incorporating some guidelines into business activities can enhance monitoring cash flow.

And, a financial statement note disclosure in an organization’s financial statements might be required

due to a new Financial Accounting Standards Board (FASB) pronouncement.

A key component of cash flow is the ongoing monitoring, reporting, and discussion regarding the cash

on hand and incoming funds from accounts receivables. If management can maintain a snapshot of

the cash flow report at meaningful intervals (daily, weekly, bi weekly, monthly), it will allow them to

project forward based on past results. The wisdom gained from the past provides a clear directive for

the future. As Winston Churchill said, “The farther back you can look, the farther forward you can see.”

By Ethan Kahn

TAKING STEPS TO AVOID CASH FLOW INTERRUPTIONS

NOT-FOR-PROFIT

This article was originally published in the September/October 2016 issue of Exempt.


NOT-FOR-PROFIT

Timing and accuracy are the key tenets to maintaining

strong cash flow. Initially, management should meet with the

individuals responsible for moving the process forward to

generate funds. This usually is an individual who prepares

vouchers for drawing down on government funds, a billing

department that submits invoices to the funder for payment

or a development officer obtaining funds from donors.

Those individuals should understand that they are critical

to the organization since nobody can get paid without their

efforts.

It is imperative for billing or any mechanism designed

to bring in cash, to be handled timely and accurately.

Ensuring a timely work product involves planning, whereby

management establishes timelines and expectations for the

following:

§ Submitting information to the fiscal department;

§ Establishing a timeline for the fiscal department to

process the information; and,

§ Initiating a review to ensure that billing is handled

expeditiously and accurately.

Timing of payrolls and other significant costs need to be

aligned with the processes for generating cash in flow

timelines and be incorporated into the calculation of time for

when they are expected to be completed.

A healthy relationship with your funder is also important

for timely payments. Should there be a delay in payment,

someone in the fiscal department should have the good

working relationship with the funder allowing them to call

and inquire about any delayed payments.

ManagementManagers should identify a format that can be used for

making decisions and understanding the cash position.

Do not allow detail and unimportant data to confuse the

reporting, as cash flow meetings then tend to be simply a

presentation without adding value to the organization.

Managers often require the current cash flow position

and desire a forecast of expected future cash flows. Some

would project several weeks and others several months.

However, best business practices are to project in a “rolling

12” format whereby each month there’s another 12 months

of projections. In light of the new financial statement

note disclosures, the fiscal year end projections should

be included amongst other documents to prepare the

appropriate note disclosures. This prepares management

for crises while serving as a preventative tool for managing

upcoming departmental issues since cash flow includes

fundraising, programming, and various operational and

facility related issues.

It is essential for management to have a good understanding

of swings in cash flow and why they are occurring. Effective

leaders ask poignant questions and often request source

documents to support various findings.

Reviewing supporting documentation and the verification

process reveal the figures that are real and which figures

are estimates. This avoids relying on skewed numbers due

to errors, arguable assumptions, and speculative numbers.

Additionally, an effective manager will think ahead and

secure a strong and trusted relationship with a bank. This

relationship should provide a line of credit accessible for a

rainy day, when cash is tight and much needed.

It is important to separate cash generated by normal

revenue streams versus cash provided through a loan or an

overpayment by a government entity whereby the excitement

of having cash in the bank may be masking the underlying

liability for repayment of such liability.

AccuracyIf it is difficult to see a problem, it is even more difficult

to solve it. Accurate information provides the essential

information for management to fully understand successes

and obstacles and affords the ability to tackle issues in

advance.

While instituting a cash flow oversight process, or when

simply monitoring it, managers should emphasize accuracy

by incorporating a training session for all fiscal and program

staff. How important their role is in the process and how

senior management is reliant on their information to make

serious decisions would be explained to them. This provides

a clear understanding that information provided to finance

and supplied to management needs to be real and accurate.

It will mislead the direction of the entire agency if it is not

accurate. Heading in the path of a cash flow crises

As part of a complete package, the cash flow report should

anticipate seasonal lump sum payments, such as the

pension payouts (for organizations that pay out pensions in

one lump sum at year end) or any other reasonable seasonal

payout. Finance departments and management meetings

December 2016 | 23

are often consumed by day to day operations and ongoing

audits (audits by independent CPAs government agencies,

funding agencies, etc.). These audits analyze the organization

in different ways.

The time commitment to running the programs and handling

the audits can be a full time job for many. However, the cash

component ultimately reigns, since if there’s adequate cash

then the programs can continue, and audits can be worked on.

If there’s not enough cash available then it will be detrimental

to the organization as payroll, rent and many of the daily

necessities cannot be administered.

Funders often look at cash and liquidity to understand

whether the organization has the ability to pay its liabilities

and continue to operate programs. If cash flow is low or

there’s an overdraft, it is an indication to funders that there’s

a significant issue.

Some industries are slow during the summer months.

Programs are less intense and organizations close, such as

schools. But, the administrative staff might still work year

round. Having fewer programs means fewer billings and less

cash inflow. That requires managers to plan ahead before the

summer begins to ensure there is adequate cash available to

cover costs.

Accounts receivable agingThe fiscal department should provide management with aged

receivable reports so that they know which payments are late

and respond accordingly. Late payments can impact payroll,

depending on the level of cash reserves available, if any at all.

Be resourceful with your resourcesTough decisions need to be made when cash flow is tight

and finances become a serious issue. Amidst the pressure of

adequate cash for upcoming payrolls and costs, managers

might decide to dip into investments or reserves. Ensure that

the cost of failure does not exceed the initial amount being

taken from the investment or reserves.

Look at your investments, and if applicable, the organization’s

investment policy to see whether any investments may be

liquidated. Liquidating investments should be a last resort

since they normally are set up to generate income for

operations and are long term.

It might be difficult to replace these liquidated investments.

Another avenue to increase cash flow might be outstanding

security deposits. A review of your asset balance in security

deposits could indicate that the organization neglected to

collect its deposits when vacating particular sites.

Often there are over or under payments when dealing with

government funds. Managers will need to gain clarity about

whether its cash is available due to overpayments, which in

reality will have to be repaid to the government. If there have

been under payments and the cash might be tight, managers

can work on receivables to bring the funds in.

For organizations not government funded, raising cash flow

is often based on uncertainties. There are philanthropists that

take interest in a particular organization’s mission and can be

relied upon for donations.

These relationships are critical for the organization and

much effort is needed to ensure that they maintain their

level of confidence and devotion to the organization’s needs.

Marketing and fundraising personnel need to communicate

with the funders in an ongoing basis.

Danger ZoneOne area to be aware of that potentially could create

dangerous results is when an organization offers revenue

incentives, meaning employees can earn more income if

they meet various income levels. This causes employees

to overstate their revenue or take ag gressive positions on

recognizing revenue at times when it might even be incorrect.

As an example, an employee who is looking to show more

revenue might record a receivable and its corresponding

revenue for a promise/pledge that is either fictitious or an

amount not intended by the donor. A philanthropist might at

times indicate giving an unspecific amount of money and an

employee desiring a bonus will amplify expectations.

If fundraising personnel are held to goals and milestones,

then they might communicate to finance a pledge based on

what the donor has given in the past but has not yet actually

been pledged or secured.

Monitoring cash flow requires discipline, clarity, strategy and

action plans. Without cash, there’s no ability to pay payroll,

rent, programs, and events or ability to remain in business.

When there’s a negative cash flow, there will be little time to

react and no room for error.

eThan is a parTner in our neW York pracTice. he can be reached aT 212.375.6794 or [email protected].


MANUFACTURING & DISTRIBUTION

U.S. WATCH MARKET FACES NEW CHALLENGES WHILE CATERING TO SHIFTING DEMANDS

Following the slowdown in China starting in 2014, many Swiss watchmakers have viewed the U.S. market as a «compensating» eldorado. Has it really been the case?The U.S. accounted for approximately 28 percent of total

watch industry sales worldwide in 2015, which amounted to

$11 billion in revenue. Of these, Swiss-made watches, largely

belonging to category of luxury watches, added up to $2.3

billion, or about 20 percent of the U.S. market. The strong

economic performance in the U.S. is expected to drive the

watch industry upward in the coming years, and the high-

value watch industry is expected to grow. This trend is very

favorable for Swiss luxury watchmakers exporting to the U.S.

As the economy improves the sales trends of the luxury-

watch industry in the U.S. appear to be better than in

other regions of the world. However, the U.S. and Chinese

consumers are different and the U.S. growth may not

necessary compensate the downtrend sales in China. Swiss

watchmakers are also facing other challenges in the U.S.

such as growing interest in smartwatches, changing currency

exchange rates, and rising use of digital media.

The first two months of 2016 saw a decline of exports of 5.4 percent on a yearly basis. How healthy is the U.S. watch market today?

Interview with Julie PetitThis article was originally published by EuropaStar on September 26, 2016.

December 2016 | 25

The U.S. watch market is facing hurdles of technological

advancement and lifestyle changes in its buyers. Display

time has become a ubiquitous feature in electronic devices,

from coffee machines to cell phones. This has created the

perception that owning a traditional watch is redundant,

which was further solidified by the rise of smartphones.

Sales of traditional watches are suffering also because of

the lack of additional functionalities other than telling time.

Currently, more people in the U.S. own a mobile phone than

a watch and smartwatches are gaining market shares,

in part because of their ability to provide useful features

like thermometers, GPS’s, altimeter’s, and mass storage.

Not many Swiss manufacturers have adopted this new

technology. Tag Heuer has started to launch smartwatches.

While sales are still low, Tag Heuer’s watches have been

well received in the U.S. watch market and may become a

trend.

Who are the biggest players in the U.S. watch market today, by range of price (local vs. foreign brands)?The U.S. watch industry offers a wide range of choices for

its consumers, from high-end Swiss luxury watches costing

hundreds of thousands of U.S. dollars, to cheaper watches

from Hong Kong priced as low as $4. Most manufacturers

focus on a specific segment of the market, distinguished

by the price point of their products. Rolex, Omega, Cartier,

Breitling, and Patek Philippe are examples of luxury-market

players while Longines, TAG Heuer, Rado, Tudor, Michael

Kors are middle-range-market players. Imports from China

mostly comprise the lower-market segment.

Although many key players in the industry will not reveal

their number of watches sold, Apple, Rolex, TAG Heuer,

and Omega are the most popular watch brands in the

U.S. Brands rounding out the top ten include Swatch,

Michael Kors, Tissot, Breitling, Patek Phillippe, and Hublot.

According to 2015 surveys on the biggest players in the

U.S., Rolex was the most preferred brand among upper-

income teens, i.e. household income more than $107,000.

Michael Kors, Casio and Fossil ranked second, third, and

fourth respectively among this group. Apple ranked fifth

with five percent of upper-income teens preferring the

product.

Relatively new brands like Shinola want to revive the American watch industry tradition. Are they succeeding in their endeavor? After the economic slump the slogan “Made in America”

caught on with politicians, manufacturers, and consumers

alike. Brands like Shinola capitalized on this trend and

established themselves as American manufacturers

of bicycles, watches, and leather goods. Shinola was

founded in 2011. Its annual sales amounts to about $100

million and Shinola watches sell for between $475 and

$1,125. Shinola’s popularity surged after President Obama

purchased one of their watches for himself, declaring the

company a symbol of American manufacturing bringing

jobs back to the country. President Obama even gifted

a Shinola watch to former British Prime Minister David

Cameron with the seal of the President on it.

Shinola’s watches are assembled, crafted and designed in

its factory in Detroit, Michigan by around 500 employees.

The company failed to meet the standards set by the

Federal Trade Commission (FTC) to be called “Made

in America.” Shinola is partially owned by the Swiss

manufacturer Ronda AG and procures some of its

components from Switzerland. Nevertheless, Shinola is

viewed as one of the trendiest watchmakers in America

among millennials. Its endeavor has been greatly

successful and is taken as an example by other U.S. brands

both in and outside the watch market.

The American watch giant Fossil is increasingly going digital, to the point that their entire production might consist of smartwatches by five-years’ time. We feel that the appeal of connected watches is bigger in the U.S. than in Europe and can directly bite into the market of quartz watches. Is this directly related to the decrease of Swiss watch exports to the U.S.? How successful are smartwatches in the U.S.? Do traditional watchmakers have to worry?The introduction of smart-wearables has raised a heated

debate in the industry as to whether smartwatches will

nullify the traditional watch market. Approximately one

in 20 Americans owns a smartwatch. This segment is

expected to grow and may cannibalize sales of traditional

watches within the next five years. But has not been the

case in 2016, even if the decline in the export of Swiss

watches seems to be related to the increase in sales of

smartwatches in the U.S. Smartwatches challenge the

under $1,500 traditional watch category for the most part.

Depending on the number of apps and features available,

most entry-level smartwatches are currently priced at

$120-200, while middle range watches priced at $300-500.

Apple’s most anticipated smartwatch was launched at an

entry price of $350. While it was considered expensive by


MANUFACTURING & DISTRIBUTION

some, the price made adoption of the technology feasible

to a broader audience of consumers.

The popularity of smartwatches does give rise to more

discussions among other watch manufacturers. In 2015

Fossil reported a decline in watch sales of 8 percent.

To reverse this trend, the company acquired wearable

technology maker Misfit for $260 million and launched

its first smart-device. In addition to spending on in-store

promotional activities, Fossil also announced it has been

working on innovative designs and plans to launch 100

smart-products in eight of its brand lines by the end of

2016.

In 2015, Montblanc launched the e-Strap device. It is a

smartwatch combining mechanical timepiece and digital

functionalities. The e-Strap watch meets the highest

standards of traditional Swiss fine watchmaking while it

has an activity tracker and can control a smartphone. The

e-Strap which is sold around $4,000, can take pictures,

receive phone notifications or search for the phone (or the

watch) within a range of up 30 meters.

Can you assess the reality of the success (or failure) of the Apple Watch?The Apple Watch is marketed as a lifestyle trend. The

Apple Watch represented a 5-to-6 billion-dollar revenue

stream in the U.S. for its first year on the market, based

on the known average selling price of around $450 per

unit. Seventy-seven percent of Americans who bought

the Apple Watch liked the product and found it useful.

However, the Apple Watch cannot be viewed as a success

when comparing it to launch of the iPhone or other first-

generation Apple products. The media was very excited by

the launch of the Apple Watch but sales in the U.S. have

not been as high as expected. One of the main deterrents

causing potential customers to forego the watch appears to

be the price. However, it seems that people are interested

in the Apple Watch, and it is viewed as an aspirational,

advanced-technology product. A global adoption may still

be further down the road.

Online sales seem to already be part of daily life in America, contrary to Europe. How big is this phenomenon related to watches, compared to traditional brick-and-mortar retail?Online sales are indeed part of daily life in America. The

online watch market can be viewed as risky for both buyers

and sellers of luxury watches though, as buyers may

unwittingly purchase fake products and sellers face risks

to their reputation. Most well-known European companies

like Cartier, Bulgari, and Baume & Mercier do have an

online presence in the U.S.

Traditional watch companies follow different strategies.

For instance, Omega considers watch buying to be an

emotional decision and as such prefers to have physical

brick-and-mortar stores host its transactions. This is

reflected in Omega’s more than 300 mono-brand stores

worldwide. Conversely, other watchmakers like Fossil

follow a different path, viewing e-commerce as an

important component to success in the long run. Fossil

increased its online focus and has reduced its physical

presence from 296 stores to 281 stores in 2015.

The trend of online sales is stronger surrounding

smartwatches than traditional watches. Companies like

Apple have options for both a traditional shop space and

an online presence. Apple believes empowering customers

and making the buying experience convenient them are the

keys to success in an age where technology changes how

businesses are operated.

How important is the vintage watch market as well as the second-hand watch market in the U.S.?Conventional auction houses like Sotheby’s, Christie’s, and

Antiquorum still dominate the vintage auction market. They

are mainly used for high value items, including vintage

watches, most of which are sold at high price points,

deterring potential buyers. The vintage watch market is

a business on its own and represents a small market.

Further, to a millennial, vintage has a history making

vintage watches appealing.

December 2016 | 27

On the other end, the advent of websites like eBay and

Craigslist that encourage people to sell their unwanted

possessions has increased interest in pre-owned watches

for both buyers and sellers. This has encouraged many

new start-ups to create online shops connecting sellers

with potential buyers. The recent increase in online

marketplaces for pre-owned watches indicates that the

number of second-hand watches for sale has increased.

Some of these sites even encourage their buyers to buy

new watches from the manufacturer’s shop as they later

have the potential to become mint condition, pre-owned

watches – complete with original box and papers.

What are the main elements that drive the U.S. luxury watch market today: purchasing power, buying mood, or geopolitical events?Purchasing power is a commanding element driving

the U.S. market for traditional luxury watches. As young

people get older and increase their disposable income,

they tend to invest in traditional watches as a symbol of

power and money. Owning a Rolex or a Patek Philippe

is considered a status symbol. Further, a traditional

timepiece has a longer lifespan than most smartwatches,

making them popular among older generations.

Fashion trends also drive the U.S. watch market as

watches are seen as pieces of jewelry. About 30 percent

of Americans wear a watch as a fashion accessory, and

close to a third of women buy watches to complement

their wardrobe. The disposability and affordability of

many brands make them a popular fashion choice. This

product segment denotes an increasing demand for

lower cost watches and accessories. Making a stylish

statement also drives the market of the smartwatches.

The decision to purchase a smartwatch appears to be a

function of popular culture and lifestyle trends. The allure

of smartwatches is stronger in younger buyers, which is

not surprising knowing that the younger generation has

grown up with mobile and smartphone technology.

Finally, as the economy improves in the U.S., consumers

are becoming more comfortable spending on

nonessential items such as watches. The economic

situation is definitely an influential driver to take into

account for the watch market.

JuLie is a senior Manager in our neW York pracTice. she can be reached aT 646.315.6109 or [email protected].


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by Richard Bloom

The New Jersey Legislature voted this past Friday, October 7, 2016, to repeal the

state’s estate tax, as part of a deal that included a gasoline tax increase of 23

cents per gallon.

The current $675,000 estate tax exemption will increase to $2 million for

decedents dying on or after January 1, 2017, and the estate tax will be fully

repealed for decedents dying on or after January 1, 2018. The New Jersey

inheritance tax has not been repealed.

The gasoline tax increase was the subject of much debate recently and its

proceeds will be used to replenish the Transportation Trust Fund.

The bill passed by the state legislature also contained the following provisions:

1) The New Jersey sales and use tax rate will decrease from 7% to 6.875% on

January 1, 2017 and to 6.625% on January 1, 2018.

2) Over a four-year period, the New Jersey pension and retirement income

exclusion will increase to $100,000 for joint filers, $75,000 for individuals, and

$50,000 for married filing separate taxpayers, with the increases being fully

phased in by January 1, 2020.

3) The New Jersey earned income credit will increase from 30% to 35% of the

federal benefit beginning in the 2016 tax year.

Governor Christie is expected to sign the bill. A future alert analyzing the bill in

further detail will then be issued.

Please contact your WeiserMazars tax professional for more information.

NEW JERSEY LEGISLATURE PASSES BILL TO ELIMINATE ESTATE TAXPublished on october 10, 2016

December 2016 | 29

by Steve Brecher, Eugene Ferraro and Nathan D. Pliskin

On October 13, 2016, the Department of the Treasury

(Treasury) issued final and temporary regulations under

Internal Revenue Code (IRC) Section 385 to curb earnings

stripping by treating certain related-party debt instruments

as equity for tax purposes.

The final regulations come after wide-ranging proposed

regulations issued on April 4, 2016. The proposed regulations

surprised many tax practioners and affected parties due to

their extensive scope and departure from historical practice

which relied on certain judicial principles in classifying

instruments as debt or equity.

The final Section 385 regulations maintain the overall

approach of the proposed regulations. They allow Treasury to

recharacterize a debt instrument as equity if the instrument

does not meet new documentation requirements. They

also identify certain prohibited transactions in which a debt

instrument will automatically be characterized as equity,

regardless of its substantive characteristics. However,

after taking into consideration numerous public comments,

Treasury has modified the proposed regulations in a manner

which significantly restricts their scope.

This Tax Alert provides an overview of the effective dates,

entities covered, and highlights the reduced scope of the

final and temporary regulations. We will issue additional Tax

Alerts on other key aspects of the regulations.

Governor Christie is expected to sign the bill. A future alert

analyzing the bill in further detail will then be issued.

effecTive daTes:The final regulations are scheduled to become effective on

October 21, 2016, the tentative date of publication in the

Federal Register.

However, Treasury has delayed implementation of the

documentation requirements. Under the final regulations,

the documentation requirements will be effective on January

1, 2018. Therefore, the rules will not apply to financial

instruments issued prior to 2018. Additionally, the proposed

regulations were modified so that taxpayers need not have

documentation in place until the deadline for filing their tax

return, including extensions. These changes will provide

taxpayers with additional time to comply with the new

documentation rules.

Treasury also delayed the potential recharacterization of

debt instruments issued on or before publication of the final

regulations. The proposed rules were made applicable to

instruments issued on or after April 4, 2016. Although the

final regulations do not change this date, they do delay the

actual recharacterization of instruments into equity for tax

purposes. No instrument issued before October 22, 2016 will

be recharacterized as equity until 90 days after publication,

or January 19, 2017 (assuming a publication date of October

21, 2016).

reduced scope:The regulations generally apply to “covered members”

which the regulations define as domestic corporations that

are members of an “expanded group.” The definition of an

expanded group is based upon a modified definition of an

affiliated group under Section 1504(b), generally requiring

80% common ownership and the filing of consolidated tax

returns. Unlike an affiliated group, an expanded group also

includes foreign corporations. The regulations are applicable

to any “expanded group interest” (EGI), which is an interest

in a member of an expanded group held by a member of the

same expanded group. Accordingly, debt instruments issued

by a member of an expanded group to another member of

the same expanded group are potentially covered under the

regulations.

Treasury has significantly scaled back the scope of the

proposed regulations to generally cover instruments

issued by certain domestic corporations (and controlled

TREASURY RELEASES FINAL DEBT-EQUITY REGULATIONS – PART I

Published on october 20, 2016


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partnerships). The final regulations do not apply to instruments issued by the

following entities:

§ Foreign Corporations. This change significantly limits the scope of the Section

385 regulations. The exclusion of debt issued by foreign issuers relieves what

would have been a significant compliance burden for large multinational

groups. It also obviates the potential loss of foreign tax credits posed by

recharacterizing debt issued between foreign entities. However, the preamble

notes that application of the regulations to foreign corporations requires

“further study” and as such, Treasury reserves the possibility that these rules

could be implemented in the future.

§ S Corporations. Characterization of an S Corporation debt instrument as equity

would have potentially created a second class of stock, jeopardizing the entity’s

status as an S Corporation. Additionally, as a flow through entity, there was less

concern about the potential for earnings stripping.

§ Regulated Investment Companies (RICs) and Real Estate Investment Trusts

(REITs) that are not part of a controlled group. Like S Corporations, RICs and

REITs are generally flow-through entities that do not implicate earnings

stripping concerns, and recharacterization of their debt instruments could

jeopardize the entities’ federal tax status. However, unlike S Corporations, RICS

and REITS will be subject to the Section 385 Regulations if they are controlled

by members of the expanded group.

The regulations also exempted certain entities from the rules that recast debt

instruments as equity in certain prohibited transactions. However, these entities

must still comply with the documentation requirements. These partially-exempted

entities include:

§ Certain regulated financial institutions that generally include insured

depository institutions, bank holding companies, certain nonbank financial

companies, registered broker-dealers, and swap dealers.

§ Certain regulated insurance companies. However, this exception does not apply

to certain captive insurance companies to which the Section 385 regulations

will still apply.

Additionally, the documentation requirements do not apply to interests between

members of the same consolidated group. This removes a large number of purely

domestic instruments from the reach of the Section 385 regulations. However, the

regulations are still applicable in a circumstance involving two domestic members

of an expanded group. As a result, taxpayers must be aware that the regulations

may still apply in a strictly domestic context involving no foreign entities.

Our next Tax Alert will discuss the impact of the documentation rules set forth in

the final regulations.

Please contact your WeiserMazars tax professional for more information.

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December 2016 | 31

by Richard Bloom and David Kohn

As reported in our previous alert (click here), it was expected

that Governor Chris Christie would sign into law a bill that

would repeal the New Jersey estate tax and on October

14th, he did just that. This new law also increases the

New Jersey gas tax, increases the pension and retirement

income exclusion, reduces the New Jersey sales and use tax,

provides an additional income tax exemption for veterans,

and raises the New Jersey Earned Income Tax Credit.

This bill was heavily debated over the past several months,

both as to the amount of the gas tax increase and what,

if any, taxes would be reduced. The main purpose of the

legislation is to authorize an increase in the gas tax to

provide funds for the Transportation Trust Fund. The new

law aims to do so with a 23 cent increase in the gas tax. New

Jersey’s gas tax, prior to this hike, was the second lowest in

the nation. When the increase in the gas tax goes into effect

on November 1, 2016, the state will then have one of the

highest gas taxes in the country.

esTaTe Tax provisions

Under the new law, the estate tax is phased out over a two-

year period, with complete repeal of the estate tax taking

effect for decedent’s dying on or after January 1, 2018.

Decedents who pass on or after January 1, 2017 will still be

subject to estate tax, but will have an exemption of $2 million,

an increase from the previous exemption of $675,000. The

current estate tax will still apply to a decedent who passes

away in 2016. The New Jersey inheritance tax regime will

remain in place. Therefore, bequests to certain individuals or

entities will still be subject to tax. in further detail will then

be issued.

Bequests to spouses, domestic partners, children, parents

and charities are exempt from the inheritance tax. However,

bequests to siblings, cousins, nieces, nephews and others are

subject to the inheritance tax. The top inheritance tax rate is

16%.

All New Jersey residents should review their existing estate

plan and documents, such as Wills and Trusts, to determine

if they need to be modified to reflect the new law. One area

to analyze is whether or not one’s current Will funds a

credit shelter trust with an amount tied to the state estate

tax exemption, with the remainder of the estate passing

to the surviving spouse. If the Will states that the credit

shelter trust is funded with the “maximum amount that can

pass free of state estate tax” and the total estate was $4

million, the Trust and the surviving spouse would receive the

following amounts:

Some taxpayers may decide that certain Trusts currently

created under their Wills are no longer needed or may not

be needed beginning in 2018. In addition, life insurance

purchased solely to provide liquidity for estate taxes may no

longer be needed.

saLes and use Tax provisions

Under the new legislation, the sales and use tax rate will be

reduced from the current 7% to 6.875% effective January 1,

2017 and to 6.625% effective January 1, 2018.

pension and reTireMenT incoMe excLusion provisions

The new legislation provides for an increase in the pension

and retirement gross income exclusion over a 5-year

period. Under current law, the maximum retirement income

exclusion is $20,000 for married filing jointly ($10,000

for married filing separately taxpayers and $15,000 for a

single individual). The income exclusion will increase yearly

until 2020 when it reaches $100,000 for a married couple

($50,000 for married filing separately taxpayers and $75,000

for a single individual). Below is the full phase-in schedule:

NEW JERSEY’S ESTATE TAX REPEALEDPublished on october 21, 2016


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earned incoMe Tax crediT and QuaLified veTerans personaL exeMpTion

The law also provides for an increase in the New Jersey Earned Income Tax Credit

and a new personal exemption for qualified veterans. The New Jersey Earned Income

Tax Credit will now be 35% of the federal benefit amount. The previous amount was

30% of the federal benefit amount. Qualified veterans will now be entitled to claim an

additional $3,000 personal exemption. The increase in the Earned Income Tax Credit

is effective beginning with the 2016 tax year while the new personal exemption for

qualified veterans will not be effective until the 2017 tax year.

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by Steve Brecher, Eugene Ferraro and Nathan D. Pliskin

This Tax Alert is the second in the Final Debt-Equity Regulations series regarding final

Section 385 regulations specifically covering documentation rules.

docuMenTaTion reQuireMenTs

The documentation rules contained in the final Section 385 regulations maintain the

same general requirements as the proposed 385 regulations. The regulations still

mandate strict documentary requirements for an intercompany loan to be treated

as debt for tax purposes. Failure to comply with these requirements will result in

intercompany loans being characterized as equity, resulting in the elimination of

interest expense deductions and other potentially adverse implications.

Overview of Requirements

The section 385 regulations apply to debt instruments, or “expanded group interests”

(EGIs), issued between members of the same “expanded group.” An expanded group is

defined with reference to a modified application of the affiliated group rules set forth

in Section 1504(b). Unlike an affiliated group, an expanded group includes related

foreign corporations. Although members of the same consolidated group are exempt

from the documentation requirements, an expanded group is defined more broadly

than a consolidated group. Therefore, the documentation requirements may still apply

in a purely domestic context involving related companies which do not join in filing a

consolidated return.

The final documentation rules retain the proposed regulations’ four-part test to

determine whether an EGI is treated as debt for tax purposes:

1. Written documentation evidencing a legally binding obligation to repay the

borrowed funds must be timely prepared and signed by all relevant parties.

2. The intercompany instrument must also establish that the intercompany lender

has the customary rights of a creditor to enforce the receipt of all required

payments under the obligation. Moreover, the intercompany lender must possess

a superior right over shareholders to share in the assets of the borrower if the

borrower is dissolved or liquidated.

TREASURY RELEASES FINAL DEBT-EQUITY REGULATIONS – PART IIPublished on october 27, 2016

December 2016 | 33

3. The intercompany lender must have a reasonable

expectation of repayment at issuance of the EGI.

Documentation evidencing such an expectation includes

cash flow projections, financial statements, business

forecasts, asset appraisals, and debt-to-equity or

other financial ratios. Non-recourse financing must

be supported by documentation establishing the fair

market value of any property securing the instrument.

The documentation may also reflect the assumption

that the principal amount of the debt instrument will be

satisfied with the proceeds of another borrowing by the

issuer and the reasonableness of such assumption in

the circumstances. The documentation may also include

evidence that in the relevant circumstances, a third party

would have lent funds with similar terms and conditions.

4. Documentation must be maintained that evidences an

ongoing relationship during the life of the instrument

consistent with an arm’s-length debtor-creditor

relationship. Upon the occurrence of any default, the

documentation should evidence the “holder’s reasonable

exercise of the diligence and judgment of a creditor”

such as the assertion of its creditors’ rights and efforts

to renegotiate the debt instrument. Any decision not

to enforce creditors’ rights must be supported by

documentation indicating that such decision was a

“reasonable exercise of the diligence and judgment of a

creditor.”

As in the proposed regulations, the documentation rules

only apply to expanded corporate groups with total assets

of $100M, annual revenue of $50M, or if any member of the

group is publicly traded on an established financial market.

These rules are effective on January 1, 2018, and do not apply

to instruments issued before that date.

Additionally, the regulations provide a consistency rule that

requires holders to characterize an instrument as debt if

the issuer treated such instrument as debt. However, if the

instrument is subsequently characterized as stock, both the

issuer and holder must then treat the instrument as stock for

tax purposes.

Additional Relief Provided in Final Regulations

Although the general documentation requirements are largely

unchanged, Treasury has pared back the types of entities

covered under the regulations. Debt instruments issued by

foreign corporations; S corporations; and non-controlled RICs

and REITS are exempt from the final section 385 regulations

and therefore do not need to comply with the documentation

rules.

Additionally, a company’s documentation evidencing the

issuance of debt is now treated as timely if it is completed by

the company’s federal income tax return deadline, including

extensions. Under the proposed regulations, documentation

would have been treated as timely only if it was prepared 30

days after the issuance of the debt instrument. Coupled with

the 2018 effective date, taxpayers now have an extended

period of time to become compliant with the new rules.

The final regulations also liberalize the rules surrounding

documentation failures. The proposed regulations provided a

per se rule that automatically recharacterized an instrument

as equity if it did not satisfy the documentation rules. The

final regulations provide three exceptions to the per se

recharacterization rule.

The first potential exception is the creation of a rebuttable

presumption that a noncompliant instrument is equity. In

order to overcome this presumption, the taxpayer must first

demonstrate that its expanded group is otherwise “highly

compliant” with the documentation requirements. This

generally requires that EGIs representing at least 90% of

the outstanding issue price of all covered EGIs within the

expanded group comply with the documentation rules. Once

high compliance is established, the taxpayer can rebut the

presumed equity characterization using prescribed factors

indicating debt: (1) an unconditional obligation to pay a sum

certain; (2) creditor’s rights; (3) a reasonable expectation of

ability to repay; and (4) actions evidencing the debtor-creditor

relationship.

Second, there is also a reasonable cause exception requiring

the demonstration of “significant mitigating factors” or

that the failure arose from events beyond the taxpayer’s

control. Upon establishing reasonable cause, the required

information and documentation must also be prepared “within

a reasonable time.” Third, the regulations provide that the

“ministerial or non-material failure[s]” of a taxpayer may be

corrected prior to discovery by the IRS.

Last, the final regulations add a market standard safe harbor

which provides that documentation customarily used in

comparable third-party debt transactions will satisfy the

documentation requirements of the section 385 regulations.

Although the documentation rules are not effective until

2018, a taxpayer is well advised to avoid undue delay

in implementing appropriate procedures in light of the

significant compliance burden imposed by the regulations and

the adverse consequences associated with noncompliance.


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by Thomas Barber and Steven M. Greene

The Internal Revenue Service (IRS) has increased efforts focusing on

abusive tax shelters and structures which the IRS is aware of that have

been used by taxpayers to avoid paying taxes. These tax schemes remain on

its annual list of tax scams known as the “Dirty Dozen” list. Included in the

Abusive Tax Shelter category is the use of legitimate tax structures involving

small or “micro-captive” insurance companies (see IR-2016-25). To help

aid the IRS in identifying which arrangements should be identified as tax

avoidance transactions versus legitimate insurance arrangements, the IRS

issued Notice 2016-66 (“Notice”) on November 1, 2016, which imposes

significant disclosure requirements for certain “micro-captive” transactions.

For those taxpayers participating in this newly identified Transaction of

Interest, disclosure will be required by January 30, 2017. The disclosure is

intended to help the IRS identify those transactions that are tax avoidance

structures. When the Treasury Department and the IRS have gathered

enough information regarding potentially abusive Internal Revenue Code

(“IRC”) § 831(b) arrangements, they may take one or more actions, including

removing the transaction from the transactions of interest category in

published guidance, designating the transaction as a listed transaction, or

providing a new category of reportable transaction.

overvieW

A typical micro-captive structure consists of a person (“A”) who, directly or

indirectly, owns an interest in an entity, or entities, (“Insured”) conducting

a trade or business. A, or persons related to A, or both, also directly or

indirectly own another entity, or entities (“Captive”).

Through various types of insurance or reinsurance contracts, the Captive

assumes the business risks of the Insured. The Insured makes payments to

the Captive under the Contract, treats the payments as insurance premiums

and deducts the payments as ordinary and necessary business expenses

under Internal Revenue IRC § 162. The Captive treats the payments received

from the Insured under the Contract as premium income for insurance

coverage. If the Captive is not a domestic corporation, the Captive makes

an election under IRC § 953(d) to be treated as a domestic corporation. The

micro-captive transaction is structured so that the Captive has no more

than $1,200,000 in net premiums written (or, if greater, direct premiums

December 2016 | 35

MICRO-CAPTIVE TRANSACTIONS UNDER SCRUTINY IN NEW IRS

REPORTING REQUIREMENTSPublished on november 7, 2016

written) for each taxable year ($2,200,000 for taxable years

beginning after December 31, 2016) in which the transaction

is in effect, which meets the criteria of IRC § 831(b), to be

treated as a small insurance company, which if elected, then

taxes the Captive only on its taxable investment income and

excludes the premiums from the taxable income.

poTenTiaL Tax avoidance or evasive insurance TransacTions

The notice lists the criteria for a “micro-captive transaction”

that is considered to have potential for tax avoidance or

evasion. However, the IRS lacks sufficient information to

identify IRC § 831(b) arrangements that are considered to

be structured as tax avoidance transactions. Some of the

criteria, not all inclusive, that are part of the micro-captive

transaction are as follows:

§ Promotor a. Promoter markets the micro-captive transaction

to A

b. Promoter and persons related to the Promotor

provide services to the captive, which includes:

i. Contract forms, captive management

and back office services including tax filings.

§ Contract Coverage a. Coverage involves implausible risk

b. Coverage does not match business need or

insured’s risk

c. Coverage scope in Contract is vague

d. Coverage duplicates coverage already provided

to insured by unrelated party

§ Payments (premiums) to Captive a. Insured’s payments are designed to provide the

insured with a tax deduction of a particular

amount

b. Payments are determined without an

underwriting/actuarial analysis that conforms to

industry standards

c. Payments significantly exceed prevailing rates by

unrelated third party insurers.

d. If insured includes multiple entities, the

allocation amongst insured entities does not

reflect the actuarial or economic measure of the

risk in each entity

§ Claim Procedures and Management of Captive a. Captive fails to comply with some or all of

the laws applicable to insurers in the jurisdiction

where the Captive is domiciled

b. Captive fails to issue policies/binders in a timely

manner that is consistent with industry

standards

c. Claims administration procedures

§ Captive’s Capital a. Inadequate capital to assume risks

b. Capital invested in illiquid or speculative assets

not normally held by insurers

c. Captive loans or otherwise transfers capital to

Insured or affiliates of the Insured, A or persons

related to A

Also, note in certain cases the Captive indirectly enters into

a contract by reinsuring risks that the Insured has initially

insured with an intermediary Company C. In these cases, if

the criteria above are present in this arrangement and the

promoter markets the transaction to A, that transaction is of

interest to the IRS as well.

If some or many of the factors above are present, the

insurance transaction may not constitute a valid insurance

contact and accordingly the insured would be denied an

insurance deduction. Additionally, if the captive does

not provide insurance, the captive does not qualify as an

insurance company and its election under IRC § 831(b)

would be invalid.

It is worth noting that while many legitimate Captives may

very well meet the Transaction of Interest criteria, subjecting


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them to the new disclosure requirements, but that does not taint legitimate Captives.

TransacTion of inTeresT

In order to aid the IRS in determining if a micro-captive transaction risk exists,

Notice 2016-66 identifies specific IRC § 831(b) Captives the IRS would like to gather

additional information about. This Transaction is as follows:

§ A, a person, directly or indirectly owns an interest in an entity (or entities), the

“Insured,” conducting a trade or business;

§ An entity (or entities) directly, or indirectly owned by A, Insured, or persons

related to A or Insured, Captive then enters into a contract(s) with Insured that

Captive and Insured treats as insurance, or reinsures risk the Insured insures

with an intermediary with the captive;

§ Captive makes an IRC §831(b) election to be taxed only on its investment income;

§ Captives where the owner or persons related to the owner of the insured parent,

directly or indirectly, owns at least 20 percent of the voting power in the Captive

(the attribution rules under IRC § 267(b) apply); and

§ One or both of the following apply:

a. The amount of liabilities incurred by the Captive for insured losses and

claim administration expenses over a five-year period is less than 70

percent of:

i. Premiums earned by the Captive during that period, minus

ii. Policyholder dividends paid by the Captive during that period, or

b. The Captive that has made available as financing to A, the insured or

related persons (the “Recipient”) in a transaction that did not result in

taxable income or a gain to the Recipient , any portion of the payments in

the contract, such as a guarantee, loan or other transfer of the Captive’s

capital.

Under Treasury Regulation § 1.6011-4(c)(3)(i)(E), A, Insured, Captive, and, if applicable,

Company C are participants in the transaction of interest for each year in which their

respective tax returns reflect tax consequences or a tax strategy of a transaction of

interest described in the notice.

inforMaTion reQuesTed

The disclosure is satisfied by submitting Form 8886, Reportable Transaction

Disclosure Statement. For Material Advisor’s this is satisfied by filing Form 8918,

Material Advisor Disclosure Statement. For all participants, Form 8886 must describe

the transaction in sufficient detail, including, but not limited to when and how the

taxpayer became aware of the transaction.

The Captive's reporting requirements include additional information, but are not

limited to the following:

§ Reason for reporting;

§ Describing the authority under which the Captive is chartered;

§ A description of the types of coverage provided by the Captive;

§ A description of any claims paid by the Captive during the year(s) of participation

and the amount of, and reason for any loss reserves reported by the Captive on

the annual statement;

December 2016 | 37

§ Descriptions of how the amounts treated as premiums

during the year(s) of participation were determined,

including the name and contact of any actuary or

underwriter who assisted in these determinations, and

§ A description of the assets held by the Captive during the

year(s) of participation, and identification of related parties

involved in any transactions with respect to those assets.

TiMe period for discLosure

Effective November 1, 2016, persons entering into these

transactions on or after November 2, 2006, must disclose the

transaction by January 30, 2017 (90 days after the IRS issued

this Notice per Treasury Regulation §1.6011-4(e)(2)) for all

open tax years by filing Form 8886 with Office of Tax Shelter

Analysis (OTSA). What this means is that disclosure is required

for all open tax years ending after November 1, 2006 that

include a Transaction of Interest.

In addition, going forward, pursuant to Treasury Regulation

§1.6011-4(e), “the disclosure statement for a reportable

transaction must be attached to the taxpayer's tax return

for each taxable year for which a taxpayer participates in a

reportable transaction. In addition, a disclosure statement for

a reportable transaction must be attached to each amended

return that reflects a taxpayer's participation in a reportable

transaction. A copy of the disclosure statement must be sent

to the OTSA at the same time that any disclosure statement is

first filed by the taxpayer pertaining to a particular reportable

transaction.” As such, for a calendar year taxpayer, with a

timely filed extension, this would be September 15, 2017, for

the 2016 tax year.

penaLTies

Under the penalty regime of IRC § 6707A, Persons who are

required to disclose these transactions and fail to do so may

be subject to a maximum penalty of $50,000 and a minimum

of $10,000. In addition, the IRS may impose other penalties on

parties involved in these transactions, including the accuracy-

related penalty under IRC Sections 6662 or 6662A.

If you are involved in an § 831(b) Captive or plan to be in the

future, you should contact your tax advisor immediately as

the clock is ticking in meeting the disclosure deadline. Please

contact your WeiserMazars tax professional for additional

information and to find out how we can help.

by Richard Bloom, Jonah Gruda and David Nigliazzo

Significant changes could occur to the federal tax law for

individuals and businesses as a result of Donald Trump’s

election as the 45th President of the United States, along

with the Republicans maintaining a majority in the United

States House of Representatives and the United States

Senate. Comprehensive tax reform has been a cornerstone

of President-elect Trump’s campaign platform. Items

mentioned have included changes to the individual and

corporate tax rate, capping of itemized deductions, repealing

the alternative minimum tax (AMT), repealing the federal

estate tax, repeal of the Affordable Care Act (including the Net

Investment Income Tax - NIIT), and repatriation of profits held

offshore.

Although there is now a Republican president and a

Republican controlled Congress, passage of tax reform is

not certain. President-elect Trump and the Republican party

have proposed different changes and the recent presidential

campaign has highlighted the fact that President-elect Trump

may not have the full support of the entire Republican party.

In addition, although the Republican party currently controls

the Senate, a Senator can filibuster a bill (unless 60 Senators

vote to end the filibuster) and there are not 60 Republican

senators currently in the Senate. However, a filibuster does

not apply to certain bills that employ a “reconciliation”

process.

Following is a broad summary of many of the features of

President-elect Trump’s proposed changes to individual,

estate and business taxes. Many proposals are not clearly

defined at this point.

individuaL TaxaTion

President-elect Trump’s proposal includes changes to the

POST ELECTION REVIEW OF TAX POLICYPublished on november 11, 2016


TAXTLTETRTT

TAX

individual tax rates and income brackets, increases to the standard deduction,

elimination of personal exemptions, capping itemized deductions, repeal of AMT and

NIIT, and taxing carried interest at ordinary rates.

*Standard deductions, personal exemptions, and itemized deductions are currently

subject to a phase out based on adjusted gross income (AGI).

In addition, President-elect Trump proposes to create new deductions for child and

dependent care expenses as well as an expansion to the earned income tax credit

(EITC) to working parents who do not currently qualify.

Potential Tax Planning and Observations

§ If income tax rates are expected to decline in 2016, taxpayers should accelerate

expenses to 2016 and postpone income to 2017.

§ Roth IRA conversions done in 2016 should be monitored to see if marginal

income tax rates are lower in 2017.

§ If a taxpayer has made charitable contribution pledges, one should consider

funding those pledges in 2016 as opposed to future years since the deductibility

of charitable contributions may be limited and deductions in 2016 could

potentially offset income taxed at higher tax rates.

§ Taxing carried interests at ordinary income tax rates has been proposed in prior

years by Democrats as well.

esTaTe Tax

Included in President-elect Trump’s proposal is a repeal of the estate and gift taxes

(the Trump Plan refers to a repeal of the “death tax” and many analysts believe

that “death tax” would include gift tax). The proposal also apparently replaces the

concept of property receiving a step-up in basis at death with the carryover basis

concept so that a decedent’s built-in gains will be taxed when the property is sold

subject to an exclusion of $5 million of gain per decedent ($10 million per married

couple).

December 2016 | 39


§ While many taxpayers who have not begun legacy planning might want to take a “wait and see” approach, there are

significant risks by not beginning plans now. There are no guarantees that the estate tax will be repealed. Plans should

remain flexible and take into consideration the potential repeal of estate taxes.

§ The Republican Party has proposed eliminating the estate tax in the past.

business TaxaTion

President-elect Trump proposes to reduce the tax on corporate and flow-through business income to 15%. The proposal also

includes a deemed repatriation of corporate profits held offshore at a “one time” tax rate of 10%. In addition, the Trump Tax Plan

eliminates most corporate tax expenditures except for the Research and Development credit.

* Campaign materials indicate that the owners of pass-through entities could elect to be taxed at a flat rate of 15% on their pass-

through income retained in the business.


§ If tax rates are expected to decline in 2017, taxpayers should accelerate expenses to 2016 and postpone income to 2017.

§ Businesses may consider deferring capital asset acquisitions as they might be able to expense the full purchase price in

2017 in lieu of deducting interest expense. This appears to apply only to manufacturers.

§ Some taxpayers may consider deferring asset acquisitions to take advantage of the potential larger section 179 limitation

in future years.

While there is much uncertainty, it is clear that tax legislation must be monitored closely given the change in the Administration

and one must remain flexible in their tax planning.


TAXTLTETRTT

TAX

by Richard Bloom, Jonah Gruda and David Nigliazzo

Our third and final Tax Alert on Treasury’s section 385 regulations addresses the

“recast” provisions of the regulations and also considers the regulations’ impact

on areas such as cash pooling arrangements.

Before we dive into these areas, it is worth taking note of Treasury’s motivations

in issuing the regulations. Congress enacted section 385 in 1969 to grant Treasury

the power to set standardized rules determining whether an instrument qualifies

as debt or equity. Treasury exercised its authority under the long dormant law

in April of this year, releasing proposed section 385 regulations. In doing so,

Treasury set its sights on a more modern issue: protecting the U.S. tax base from

corporate inversions and earnings stripping. Accordingly, the proposed Section

385 regulations did not simply provide definitional rules for classifying financial

instruments. Instead, they created a complex structure intended to prevent

companies from shifting income to foreign jurisdictions via interest deductions.

They also apply in the domestic context to prevent shifting of income and losses,

thus wholly domestic taxpayers must still be prepared to comply with the

regulations. After extensive public comments, Treasury finalized the regulations

this October.Governor Christie is expected to sign the bill. A future alert analyzing

the bill in further detail will then be issued.

recharacTerizaTion/debT recasT ruLes:The final section 385 regulations contain recast rules that target certain

transactions perceived to be abusive by recharacterizing debt instruments as

equity. These rules apply to debt instruments, or “expanded group interests”

(EGIs), issued between members of the same “expanded group.” An expanded

group is defined with reference to a modified application of the affiliated group

rules set forth in Section 1504(b). Unlike an affiliated group, an expanded group

includes related foreign corporations.

The recast rules recharacterize debt instruments as equity when such

instruments are issued in certain specified transactions. The final regulations

generally treat the following instruments, issued between members of the same

expanded group, as equity:

1. EGIs issued to a shareholder as a distribution with respect to the issuer’s

stock;

2. EGIs issued in exchange for stock of an expanded group member; or

December 2016 | 41

3. Certain EGIs issued as consideration in an exchange

pursuant to an internal asset reorganization.

The regulations contain considerable detail and provide

for certain some exceptions in the treatment of these

three transactions which goes beyond the scope of this

Alert. However, Taxpayers should be aware that Treasury

has identified these three unfunded debt instruments as

coinciding with earnings stripping with little associated

economic effect or non-tax motivation. Further, the

recharacterization of an EGI under the recast rules is not

rebuttable. Accordingly, taxpayers should seek assistance

from their tax advisors before issuing any debt instrument

that could implicate these rules.

As a further trap for unwary taxpayers, the final regulations

retain the proposed regulations’ “funding rule” that

characterizes any EGI as equity if it is issued within a

three year period before or after any of the above three

transactions. Although numerous commenters requested

that Treasury reconsider this per se funding rule, Treasury

concluded that no other option was practical given the

fungible nature of money and the risk that the recast

provisions would be otherwise easily circumvented.

cash pooLing & shorT TerM funding arrangeMenTs:Commentators also raised concerns about the potential

for the proposed regulations to disturb cash pooling

arrangements of corporate treasury operations.

Fortunately, the temporary section 385 regulations (issued

contemporaneously with the final regulations) seek to

exempt cash pooling arrangements from being recast as

equity under the funding rule. The regulations provide

multiple tests to exempt cash pooling arrangements. The

most useful one will likely be the “270-day test” which

exempts certain instruments bearing arms-length interest

rates with terms of 270 days or less.

The temporary regulations also contain a broadened ordinary

course exception which will generally exempt ordinary

course loans reasonably expected to be repaid within

120 days of issuance. This exempts debt such as trade

payables from being recast as equity under the section 385

regulations.

eLiMinaTion of The bifurcaTion ruLe:The final section 385 regulations removed the proposed

regulations’ “bifurcation” rule. Under the proposed rule,

the IRS, but not taxpayers, would have the ability to classify

an issued instrument as part-debt and part-equity. This

proposed rule was eliminated from the final regulations,

in part, because of the many comments Treasury received

regarding the rule’s lack of specificity and its difficult

application in practice. As such, the final section 385

regulations leave in place the “all-or-nothing” approach

which classifies an issued instrument as either debt or

equity.

However, the preamble to the final section 385 regulations

indicates that Treasury will continue to study this issue,

leaving the door open for future implementation of a

bifurcation rule.

sTaTe Tax iMpLicaTions:As taxpayers seek to comply with the rules and requirements

of the final section 385 regulations, they must also bear

in mind how these rules may apply at the state level. It is

unclear to what extent states will adopt the section 385

regulations. And, although most states conform their tax

system to the Internal Revenue Code, they do not necessarily

fully adopt the associated federal regulations. If a taxpayer’s

debt is recast as equity by the IRS, they will need to evaluate

how a recasted EGI is treated at the state level.

Please contact your WeiserMazars tax professional for more

information.

TREASURY RELEASES FINAL DEBT-EQUITY REGULATIONS – PART III

Published on november 14, 2016


TAX

TAXTLTETRTT

December 2016 | 43

JUST KIDDING – NEW JERSEY REVERSES COURSE AND REINSTATES RECIPROCAL TAX

AGREEMENT WITH PENNSYLVANIAPublished on november 23, 2016

by Harold Hecht and Seth Rabe

On September 2nd, New Jersey Governor Chris Christie had notified Pennsylvania officials that he had ended a 38 year-old

agreement that allowed New Jersey and Pennsylvania residents to pay income taxes where they reside, rather than where

they work. This change was to be effective January 1, 2017 (see prior WeiserMazars Alert dated September 6, 2016 here).

On Tuesday, November 22nd, Governor Christie announced that he rescinded his prior withdrawal from the reciprocal

agreement. In view of this action, a return to the status quo will allow New Jersey and Pennsylvania residents that earn

salary income to continue to pay income taxes only where they reside, and withholding rules will continue as they have in

the past.

Please contact your WeiserMazars tax professional or a member of our State & Local Tax group to discuss this action and

how it may impact your tax liability or withholding requirements.

TAX PRACTICE BOARD sTephen brecher

[email protected]

JeffreY kaTz

[email protected]

hoWard Landsberg

212.375.6604 or [email protected]

JaMes ToTo

[email protected]

faYe TannenbauM

212.375.6713


T

CYBER SECURITYTTTATTTLTTTETTTRTTTT

CYBERSECURITY

by Peter Schablik

This article provides an overview of the widespread Internet outage that

occurred on October 20, 2016, examining the purpose and vulnerability of

various Internet devices.

WhaT happened

On Friday, October 20, 2016, many businesses and personal IOT devices

were compromised and used to perform a distributed denial-of-service

(DDoS) attack on the service Dyn, which supports several popular

Internet services including Netflix, PayPal, and Twitter. Hackers loaded

programs onto various unprotected IOT devices that created millions of

requests for services, causing an overload and interruption of service.

Imagine one hundred million requests to sign up for new memberships

with Netflix or to watch a streaming video on Twitter. These services

were not designed to sustain this high level of volume and consequently

were unable to serve, valid customers.

IOT devices connected to food service equipment are considered

computers. They may not have a keyboard or be used for inventory or

general ledger transactions but there is a microprocessor, operating

system, memory among other components and they are susceptible to

cyber-attacks. These devices are typically not afforded the same level of

security scrutiny as other computers but are no less vulnerable. Another

concern is that many of these devices may already have Trojan horses, or

program designed to breach security, which can be activated at any time.

WhY does This MaTTer?The compromise of IOT devices will likely lead to the failure of food

service equipment (e.g. freezer shutdowns) or unauthorized access to

confidential information. There has been some discussion regarding

legal liability for the recent computer service outage. If there is an attack

on an Internet service from an alarm controller in a warehouse resulting

in a financial loss; who is liable? There is some concern that a court of

law might consider negligence or gross negligence as a contributing

factor to financial loss in this type of failure to appropriately secure

devices. There is also the risk of reputation damage. Do you want your

customers to know that the systems that protect their food quality are

vulnerable?

December 2016 | 45

CYBERSECURITY ALERT CONTACT

peTer schabLik 617.501.4195

[email protected]

THE INTERNET OF THINGS AND YOUR SECURITY


WhaT prevenTaTive Measures shouLd be Taken?1. Inventory Devices - The first step is to identify potential

IOT devices that are at risk. Mobile devices such

as bar code readers and tablets should be included

in this inventory. A review of contracts and some

network scanning may also be required to identify all

compromised devices.

2. Perform Basic Security Measures – Depending upon

your agreement with the vendor; you may have certain

responsibilities including changing account passwords,

periodically updating patches, and anti-virus, and

malware monitoring. If the supplier is responsible for

performing these services how do you know their effort

is sufficient? You might want to consider reviewing

their contracts, history of security breaches, and

monitoring controls. In addition, major food service

vendors may have security examination reports such as

the AICPA SOC 2.

3. Conduct a Device Penetration Test – Similar to a

network penetration test; a device penetration test may

be warranted. This test probes devices for open ports,

outdated patches, and permanent weaknesses such as

zero-day events where no patch exists. Weaknesses,

where there is a fix should be corrected, and other

vulnerabilities should be regularly monitored.

4. Continuous Monitoring – Monitoring devices is critical.

If the vendor provides monitoring, a discussion of the

procedures performed is necessary. If the vendor is

not performing monitoring the procedures such as

changing administrative account passwords, ongoing

file integrity monitoring, and other techniques should

be considered. For devices connected to your internal

network (e.g. alarm system controlled from network),

the same procedures for protecting workstations and

other internal devices should be followed.


REAL ESTATE

REALESTATETTATTLTTETTRTTT

by Jennifer Safran and Christopher Schreiber

On October 21st New York Governor Andrew Cuomo signed into law the bill that

was passed earlier in the year by the State Senate and Assembly, making it illegal

to advertise rentals of less than 30 days of unoccupied apartments as short-term

rentals on websites like Airbnb. Specifically, the new law makes it illegal to post a

short-term rental on websites like Airbnb that violates the New York City Multiple

Dwelling law. The penalty under the new law for advertising such short-term rentals

ranges from $1,000 for first-time offenders up to $7,500 for third and subsequent

violations.

The New York City Multiple Dwelling law already prohibits rentals in New York City

that are under 30 days if residents are not present, but did not prohibit the listings for

such rental activity on websites like Airbnb.

Airbnb has vigorously opposed the legislation, and has attempted to cleanse out its

New York City listing by over 2,200 listings as of July, which appear to be hosts with

multiple listings.

December 2016 | 47

REAL ESTATE ALERT CONTACTS

Jennifer safran

[email protected]

chrisTopher schreiber

[email protected]

GOVERNOR CUOMO SIGNS NEW YORK AIRBNB BILL


Many in the hotel industry, who are losing valuable

tourism dollars from short-term rental on websites like

Airbnb, favored passage of this bill, arguing among other

factors that these units are held accountable to the safe

regulatory environment in areas such as fire and safety.

Airbnb immediately filed a lawsuit in Manhattan

federal court, asking the court to declare the law as

unconstitutional and for the court to block New York

State and New York City from enforcing the new law.

In its complaint, Airbnb claims the law violates the

company’s First Amendment rights of free speech,

as well as the protection it is afforded under the

Communication Decency Act of 1996.

This is not the end of legislative actions regarding short-

term rentals, as Airbnb has also filed a lawsuit against

the city of San Francisco, against a new ordinance which

took effect in July requiring all hosts to register with the

city. If hosts have not registered the fine can be up to

$1,000 per day to the website company. In addition, other

jurisdictions are looking into regulating these types of

platforms.

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