Masonry Magazine June 1989 Page. 18
TAX MATTERS
continued from page 17
mined which expenses were personal and which were business. The personal expenses were charged to a shareholder loan account on the books of the corporation.
Although the IRS tried to tax the personal expenses as a dividend, the court agreed with the taxpayer, holding the expenses were nontaxable loans. The court found that the travel was primarily for business, the nondeductible amounts were determined by tax attorneys and corporate accountants (not by Mr. Turner himself) and the nonde- ductible amounts were classified as loans to Mr. Turner on the books and financial statements of the corporation and on Mr. Turner's personal financial statements.
Two classic factors were missing: no interest was charged to Mr. Turner, and he did not repay the amounts for years. But these missing factors were not enough to explode Turner's argument that the advances were legitimate loans rather than dividends. The corporation's recordkeeping procedures saved the day, and turned the score in the taxpayer's favor.
Transferring Your Business When You Have
Two Or More Kids
The dream of most successful business people is to have their kids continue the family business. In addition, the typical business owner wants to treat his kids "equally" (or "fairly" or "equitably"). In the real world, my experience is that most business owners accomplish their dream and the equal treatment with a very simple transfer plan- they leave their business half to each child if they have two kids, a third to each child if they have three kids, and 50 on.
Does this simple transfer plan work when one or more of the kids is in the business and one or more of the kids is not in the business? The unfortunate answer is that such a transfer plan almost always fails. Why? Well, remember one basic fact-Dad is gone. The child (or children) running the business must answer to their non-business siblings. The business child usually feels he/she is undercompensated. The other kids usually feel the business child is taking too much and want their share of the profits. Simply put, for a multitude of reasons, the kids fight. Often, the only winners are the lawyers hired by the warring children.
What should be done to avoid these family feuds? My long experience in consulting in this area is to arrange a transfer plan that allows the business children to wind up with the business. Sometimes the makeup of the owner's assets makes the plan easy to accomplish-just leave the business assets to the business kids and the nonbusiness assets to the nonbusiness kids.
But what happens when there is a shortage of non- business assets-the most common situation. Where possible, you should use life insurance to make up the shortfall. Suppose the owner is uninsurable or the premiums are too costly. Then what?
Here's a plan that usually solves this seemingly impossible problem: Give at least one share of stock to each child, whether or not in the business. Now, everyone is a stockholder. The stockholders enter into a buy/sell agreement allowing the business child to buy the shares of his siblings at fair market value after Dad passes on. This allows Dad to treat this children equally. But after the buy/ sell agreement purchase by the business child, he winds up with the business and the other kids wind up with cash. The terms of the agreement should allow the busi- continued on page 32
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18 MASONRY-MAY/JUNE, 1989
1989 Solaris USA