CI winter qrk by sanmelody


									                                                                                                           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

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
(                                               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.

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- and
receivables and sales could indicate a   bility that related party transactions
                                                                                                                                       PRSRT STD
                                                                                                                                      U. S. Postage
                                                                                                                                      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

                                                                                                                     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                      

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.                                                    

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