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Summer 2004 Buy-Sell Agreements — Protect Your Interests in A Variety of Situations by Erich Rail A detailed checklist of owner, a creditor may Partner factors may indicate a become a member of buy-sell agreement is the ownership group. Buy-sell agreements generally are advisable. Here are A buy-sell agreement advisable for closely held businesses. some factors to consider. ensures that owner- They can prevent unwanted persons ship interest cannot from joining the ownership group, • Desirability of liquid- fall outside the exist- ensure continuity of ownership and ity of ownership ing group without the management and help provide a interest group’s approval. ready market for your ownership The owners want to interest. ensure a ready mar- • Lack of interest in Just as important, a properly draft- ket for their owner- ownership by own- ed agreement can offer significant ship interest. ers’ heirs estate planning advantages. Co-owners’ heirs feel Any buy-sell agreement has major • Elimination of uncer- Erich Rail the business is too income tax implications as well. The tainty about owner- risky, or they have no applicable rules are complex and con- ship transfers desire to participate. tain many traps for the unwary. A binding agreement can establish the rights and obligations • Desirability of valuation for estate of the various parties and tax purpose removes the uncertainties The owners are interested in estab- of transfers to family lishing the value of their owner- members. ship interest for federal and state estate tax purposes. • Foresight of future ownership conflicts A well-drafted buy-sell agreement If it is anticipated that the can help the co-owners transform remaining owner(s) their ownership interest into a liquid would have difficulties asset, prevent unwanted or unintend- coexisting with the family ed changes in ownership and avoid of a deceased or with- expensive and time-consuming estate drawing co-owner, an tax valuation hassles with the IRS agreement can ensure that after the death of an owner. the remaining owners The agreement’s terms are binding, gain control. We welcome the opportunity to even if they produce no tax benefits. discuss setting up a buy-sell agree- Thus it is important to avoid pitfalls • Undesirability of ownership by ment or to review an existing agree- and to take advantage of available outsiders ment to ensure that the tax and non- benefits. In the event of the insolvency of an tax consequences are as intended. Martin Werbelow LLP Phone: 626/577-1440 FAX: 626/577-1082 2 Charitable Car Contributions — Take Steps to Avoid ‘Crash’ With IRS by Erica Lazzaris The IRS deems the Warning: Some Senior Accountant FMV to be the price charities authorize a agreed upon between a for-profit entity, such The General Accounting Office willing seller and a will- as a car liquidation recently released a scathing report on ing buyer when both business, to use the deductions claimed for charitable parties have knowledge charity’s name for the contributions of automobiles. It seems of relevant facts. purpose of soliciting that the cash proceeds most charities Here are some steps donations. The charity receive from liquidating these gifts to take to help make receives a flat fee or amount to less than 5 percent of the your deduction hold up percentage of the pro- claimed value. (This is not a typo!) when you donate a ceeds and has no con- That’s right; people are claiming vehicle to a charitable trol over the for-profit deductions 20 times as high as the organization. business activities. amount the charity actually receives. In this case, the IRS IRS enforcement in this area will Erica Lazzaris • Document a detailed will treat the contribu- stiffen, and the IRS recently released description of the tion as having been two publications aimed at educating vehicle and the factors used in made to the for-profit business and donors and charities about the rules. determining FMV, including condi- not to the charity. These are Publication 430 — A tion, mileage, unusual equipment Charity’s Guide to Car Donations and and options. Observation: In the event that, Publication 4303 — A Donor’s Guide to • Take verifiable pictures of the car, down the road, car donations are lim- Car Donations. inside and out, ited to what the charity receives as They are avail- including the proceeds, look for charities that will able on the IRS engine. actually use your car in their charita- Web site You’ll have to • Obtain the blue ble operations and programs or will (www.irs.gov). book information. distribute the car to a needy individ- Pending tax prove the real fair • Retain pages ual. If you do, you will be able to bills in both the from your local claim a larger donation value. House and market value Auto Trader, or sim- Senate contain ilar pub- provisions to lication, check these that advertises used cars abuses in vehicle donation programs. similar in make, looks The House bill would require a quali- and condition to the one fied appraisal for deductions of $250 you are donating. or more (compared to $5,000 under • Keep maintenance existing law). records, vehicle inspec- The Senate bill limits any vehicle tion receipts and consid- deduction amount in excess of $500 to er obtaining a statement the eventual gross proceeds received from your local mechan- and reported by the charity selling ic. A simple statement the vehicle. claiming the car is in If you want your deduction to hold running condition with up under an IRS audit, you’ll have to no known malfunctions prove the real fair market value or an estimated cost to (FMV). A simple blue book valuation fix a known problem isn’t good enough, but it’s a starting would provide good point. back-up information. 3 Investors Beware — Signs Warn of an Ailing Company by Paula Darbyshire decline in the company’s might have been Senior Accountant financial strength. If inven- motivated by a tories and receivables are desire to improve The Enron, WorldCom and similar growing each year, but sales reported earnings catastrophes corroborate the opinion are not growing or are or financial posi- that the average investor needs to growing at a much slower tion. personally take a deeper look into a rate, rising receivables and • Litigation: company’s financial situation before inventories on the balance The notes to the he or she decides to invest. sheet will drive down cash financial state- Investment advisers offer simple from operations on the cash ments will dis- tips to investors to help them prevent flow statement. close any pending bad investment decisions and lost • A check of both the lawsuits, which funds. Both qualitative and quantita- income and cash flow state- could involve tive factors should be considered in ments may reveal that while claims for substan- determining whether to invest. the income statement shows tial amounts. Paula Darbyshire Some of the quantitative factors positive net income, the • Going con- that can be derived from any financial cash flow statement shows cern: The account- statement and can foretell possible negative cash flows from operations. ant may have disclosed that there is future trouble follow. In this case the cash flow statement is substantial doubt about the firm’s • A comparison of cash and short- a better indicator of the company’s ability to continue as a going concern. term investments against debt will health. These and other possible note dis- indicate whether the company is • A review of accounts receivables closures should be viewed as a red operating off of borrowed money. to sales figures could indicate future flag to investors. cash flow problems. If a com- Investors should also search for pany’s accounts receivables any additional information, which, if are high in relation to sales, it the company is public, can be found may be an indication that it is in 10Qs, 10Ks and proxy statements. having a problem collecting These statements often tell more than from customers. the basic financial statements as the • A showing of high debt company faces possible securities to equity and negative earn- fraud if they conceal anything. ings could indicate the finan- Useful information to investors cial insecurity of a company. contained in these statements can High debt to equity is okay as include: long as you have a high • Customer and supplier concen- return on equity to justify a tration. high borrowing level. • New, strong competitors. A company that reveals • Historical trends of financial evidence of the preceding fac- data. tors should be viewed with • Frequent restructuring. skepticism. • Executive compensation. Also, don’t ignore the • Director bibliographies. notes to the financial state- When an investor considers all of ments. Embedded in the the information obtained from these plethora of technical account- simple indicators, they can get a • A comparison of current assets ing verbiage, investors will find valu- clearer picture of the financial stabili- with current liabilities will indicate able qualitative information. Useful ty of the company. whether the company has enough liq- note disclosures could include those uid funds to pay off its short-term that follow. Company information can be debt. • Related party transactions: found at the Web sites that follow: • An examination of inventories, Investors should consider the possi- http://www.sec.gov and receivables and sales could indicate a bility that related party transactions http://finance.yahoo.com. PRSRT STD U. S. Postage PAID Pasadena, CA Permit No. 740 “Men occasionally stumble on the truth, but most of them pick themselves up and hurry off as if nothing had happened.” —Sir Winston Churchill ––– Inside This Issue ––– Buy-Sell Agreements . . . . . . . . . . . . . . . . . . .1 Warning Signs . . . . . . . . . . . . . . . . . . . . . . . . .3 Charitable Car Donations . . . . . . . . . . . . . . .2 Thank You . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 MEMBER WESTERN ASSOCIATION OF Thank You ACCOUNTING FIRMS With the completion of the 2003 tax code that affect all of us. ASSOCIATE OFFICES tax season behind us, we want to With most of these changes Anchorage • Boise • Chico Anchorage • Chico • Denver thank you for your business. This phased in and out over a number Denver • •Ogden •• Ontario •• Portland Ogden Ontario Phoenix Portland past tax season the firm and our of years, the complexity of tax law San Diego • •San Francisco • Seattle San Diego San Francisco • Seattle clients were faced with the com- continues to increase with no end CURRENT INTEREST is a quarterly pulsory e-filing requirement in sight. publication of Martin Werbelow LLP, Certified imposed by the State of California, For example, Congress and the Public Accountants, Pasadena, California. The and we more than met the chal- president currently are discussing material published in this newsletter has been prepared for our clients’ and business lenge. several more legislative proposals associates’ general information. Because of the Year to date, 40 percent of the that contain significant tax provi- newsletter’s summary nature, information presented should be relied upon for business individual tax returns we prepared sions. and tax planning decisions only after and completed have been electroni- Even with the current level of obtaining appropriate accounting, tax and/or legal advice. Inquiries of our cally filed, and our success rate for partisan bickering and the fact that partners and professional staff on topics returns accepted electronically (no it is an election year, some of these presented are encouraged. Additional copies of this publication are available rejections) is 99 percent. provisions could be enacted by upon request. Please write us on The last three years have ush- year-end. letterhead stationery if interested in receiving CURRENT INTEREST ered in a host of changes in the tax Our firm is pleased you have regularly. arena. From the massive 2001 Tax allowed us to handle your tax mat- Act to a more modest 2002 ters. As potentially major legisla- David P. Beringer, Editor Send comments or suggestions Economic Recovery Tax Act and tive developments take place, we for this newsletter to the taxpayer-friendly Jobs and are always available to discuss the email@example.com Growth Tax Relief Reconciliation impact of a new or pending tax Production by Creative Consulting Act of 2003, we have seen major law on your personal or business Visit our Web site at changes in nearly every area of the situation. www.mwco.com