Hartford Business Journal

14 Hartford Business Journal • March 16, 2015 www.HartfordBusiness.com ExPErtS cornEr Major federal tax changes proposed for 2015 By Andrew S. Lattimer D uring President Obama's State of the Union speech in January, a number of significant tax measures were addressed that set the tone for Congressional action in the coming months. A number of tax increases were proposed that would generate about $320 billion in rev- enue over the next decade, as well as new and revised tax credits and a program to promote retirement savings. These proposals can be broken into three groups — revenue raisers, tax credits and retirement savings. On the revenue side, highlights include: Capital gains/dividend tax rates: Long- term capital gains and dividend tax rates would be increased to 28 percent for high-income households defined as taxpayers filing a mar- ried joint tax return whose income is greater than $500,000 annually. Trust-fund loophole: This is closing the so-called "trust-fund loophole" by requiring pay- ment of capital gains tax on the increase in value of securities at the time they are inherited. This would eliminate the "stepped-up" basis loophole that lets wealthy taxpayers pass appreciated assets onto their heirs tax free, although the proposal would allow couples to defer the tax until the death of the second spouse. In addition, no tax would be due on inherited small, fam- ily owned businesses unless and until the business was sold, and any closely held business would have the option to pay tax on gains over 15 years. Capital gains of up to $200,000 per couple ($100,000 per individual) could be bequeathed free of tax, with this exemption automatically portable between spouses. Couples would have an additional $500,000 exemption for personal residences ($250,000 per individual), with this exemption also auto- matically portable between spouses. Tangible personal property — other than expensive art and similar collectibles, such as bequests or gifts of clothing, furniture and small family heirlooms — would be tax exempt. New borrowing fee: A fee would be charged on large, highly leveraged financial institutions in order to discourage excessive borrowing. This would apply to financial insti- tutions with assets greater than $50 billion. In terms of tax credits, people should expect to hear more about the following items in the weeks and months to come. Two-wage earner tax credit: This is a credit up to $500 for households with two wage earners with combined income of up to $210,000. Families could claim a maximum credit equal to 5 percent of the first $10,000 of earnings for the lower-earning spouse in a married couple. The maximum credit would be available to families with incomes up to $120,000, with a partial credit available to couples with income up to $210,000. Child tax credit: The child tax credit could be increased to as much as $3,000 for each child under the age of five. Families could claim a 50 percent credit for up to $6,000 of expenses per child under five. The maximum credit for young children, older children and elderly or disabled dependents would be available to families with incomes up to $120,000. Earned income tax credit: This credit would be doubled for workers without quali- fying children, increasing the income level at which the credit phases out, and making it available to workers age 21 and older. Education tax credits: The six education- related tax incentives would be combined into just two, while improving the American Oppor- tunity Tax Credit (AOTC) to provide students up to $2,500 each year over five years as they work towards a college degree. The refundable portion of the AOTC would be increased to $1,500. Part-time students would be eligible for a $1,250 AOTC (up to $750 refundable). In addition, many of the tax credits that are scheduled to expire after 2017 would be made permanent. Finally, there is a major initiative being proposed regarding retirement savings, which would require employers with more than 10 employees who don't have a 401(k) retirement plan to automatically enroll full-and part-time employees in an individual retirement account. The employers, in turn, would receive tax credits to cover the costs involved. There is currently no timeframe proposed for these tax changes, and people should expect to hear more about these proposals throughout 2015. n Andrew Lattimer is a tax partner with Blum- Shapiro in the firm's West Hartford office. Andrew S. Lattimer from page 1 Back9 execs attempt to save company basketball legend Ray Allen, and The Phoenix Cos. CEO Jim Wehr — dozens of other Con- necticut residents are among the 140 or so investors that pumped upwards of $40 million into the company since its founding. According to a list of company sharehold- ers obtained by Hartford Business Journal, from a source who asked not to be identified, other local investors include: former State Treasurer Francisco Borges, who is cur- rently chairman and managing partner of Simsbury investment firm Landmark Part- ners; former interim UConn athletic director and former St. Francis Hospital senior vice president Paul Pendergast; Michael Cantor, co-managing partner of Hartford intellectual property law firm Cantor Colburn; Hartford lawyer and UConn Foundation Chairman Coleman Levy; former Phoenix Cos. Chair- man and CEO Robert Fiondella; Karlos Bog- hosian, owner of Hartford-based Capitol Chiropractic Center; and Mark Shenkman, founder of New York/Stamford investment firm Shenkman Capital, among others. Waterbury lender Webster Financial Corp. also invested in the company, as did Con- necticut taxpayers, who pledged $5 million through state loans and grants. The high-caliber investor pool under- scores the excitement, faith and promise many local leaders placed in the golf life- style media company. Trying to make those investors whole, or at least return some of their individual bets, which ranged from tens of thousands of dollars to over $1 mil- lion, is the chief reason current and for- mer Back9Network executives say they are scrambling to raise more money, with the hopes of re-hiring workers and eventually getting back on TV. Current Back9Network executives — CEO Charles Cox, Carlos Silva, and Reid Gorman — declined to comment about or reveal investors. They are the company's only remaining employees and have been working since October without a salary, they said. cash crunch Back9, which has its corporate head- quarters in Hartford's famed Phoenix Boat Building and a TV studio on Constitution Plaza, suspended operations in February after running out of cash. At its peak — in the fourth quarter of 2014 — the company was burning through as much as $2.5 million per month, sources said, which included $540,000 monthly payments to be on DirecTV. In January, the company announced its first major job cuts, laying off 35 people. A month later the company suspended operations and pulled itself off DirecTV, where it had been air- ing since Sept. 29. Since then, Cox, Silva, and Gorman have been weighing go-forward strategies, includ- ing jockeying for another large cash infusion — up to $30 million — to restart the com- pany, first online and eventually back on TV. For a fraction of that amount, the trio say the company could at least get its online pres- ence up and running again. Cox said he has been in talks with a num- ber of investors in the golf and media indus- try and remains optimistic about a deal. It's not clear, however, what type of deal it would be and how it would impact shareholders. Meantime, former Back9Network CEO James Bosworth, who was pushed out of his chief executive role last year, said he's also working with some existing investors to raise capital and save the network. Bosworth, who remains the company's largest shareholder, said Back9 could be revived with the right management team in place. He said he is wooing New York inves- tors for another $40 million-$60 million, a sum he predicts would fully fund the company and allow it to successfully get back on TV. Bosworth wants back on Back9's board of directors and is not opposed to the idea of returning as CEO, but he said his main con- cern right now is trying to protect sharehold- ers, many of whom he personally convinced to invest in the company. "As the founder, I want to see this suc- ceed," said Bosworth, who wagered his own money in the company. "Great content that engages the lifestyle audience is what Back9 needs to be successful. I am very confident that I can deliver that type of programming." If neither Bosworth nor Cox successfully raise funds, and do it quickly, Back9 has few alternatives. Bankruptcy and liquidation — each likely to wipe out shareholders — are on the table. Even if they do woo new capital partners, current investors will likely see their stake in the company diluted. Most Connecticut investors named in this story and contacted by Hartford Business Journal failed or declined to comment. Their individual investments ranged from $25,000- $50,000 to over $1 million, documents show. In a written statement, Webster Financial spokesman Bob Guenther confirmed the Waterbury lender's investment in Back9, but declined to say how much. "We felt it was a promising startup,'' Guenther said. Even though Bosworth and the current management trio say they are raising capital, they aren't doing it jointly. In fact, both sides have been sparring for months. Back9 sued Bosworth in December, alleg- ing he had violated his separation agreement by making disparaging comments against the company. Bosworth responded in court documents that the suit was a tactic by then Board Chairman Sandy Cloud Jr. to divert attention away from the company's financial issues. The case is now in arbitration. Back9's stumbling block was failing to raise the money it needed to not only launch on DirecTV, but also stay on air long enough to generate advertising revenue. That requires upwards of $100 million, Bosworth said. Back9 only raised about $40 million. After announcing its DirecTV deal last June, the company hoped to raise an additional $30 million, but fell well short of that mark, sources said. The money was supposed to fund opera- tions until TV ad revenue started flowing in. Bosworth said current management made a mistake launching the network with debt and only about two months of cash on hand. In a statement Back9Network said: "The decision to pursue the DirecTV deal and launch the network in late September while simultaneously raising the required capital to run the network long-term was made in late April by Jamie Bosworth and the Board of Directors. Launching a 24-7 cable television network is a major undertaking and everyone involved was aware of the challenges." As Back9 hit the airwaves and ramped up hiring in the fourth quarter of 2014, it was burning through $2 million to $2.5 million in cash per month, sources said. A big part of that spend included the $540,000 monthly DirecTV payments, sources said. To get on air, Back9 agreed to pay DirecTV almost $24 million over three years, sources said. Back9 executives declined to disclose terms of its DirecTV contract. The company wasn't expecting significant TV advertising revenues early on, but was hop- ing additional capital would get them through a ramp-up period. When those funds didn't come the company largely relied on digital media rev- enues that couldn't cover operating costs. n HBJ's Brad Kane, Matt Pilon and Gregory Seay contributed to this story.

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