I just got a new client that needs a forensic investigation, primarily because he had an inadequate shareholders’ agreement. It seems he and his partner wanted to save the initial legal fees and used something they found on a web search. Well, you know the simple expression: “Pay for it now or pay more later to fix it.” These partners will be paying much more, along with the consternation and uncertainty of the protracted legal process they will be subject to.
I believe the purpose of any legal agreement is to assert rights in the event the activity does not work out or a problem develops or one of the parties is unable to speak for themselves. Hopefully most agreements are never looked at after they are executed, and those for people unable to speak for themselves will be long delayed (such as with a will or trust).
There are numerous types of agreements and contracts businesses need. These provide clarity and define specific rights in times of distress and discord. Poorly drawn agreements do not accomplish this. My advice is to get it done right the first time. Go to a knowledgeable attorney, have a draft reviewed by your accountant for tax, valuation and business issues, and execute a contract that will reflect what you really want to accomplish…and protect. The best agreements occasionally have problems; the inadequate ones almost always cause problems. Do not do-it-yourself.
Even worse is neglecting to execute any agreement at all. When problems arise the dissonances and costs increase exponentially from the poorly drawn agreements. Disregarding sound practices is like going to a gun fight without a gun.
The checklist for a Van Halen rock concert has an item requiring a bowl of M&Ms with no brown M&Ms according to Atul Gawande in his 2009 book The Checklist Manifesto. The purpose being that if there are brown M&Ms it would signal the tour manager that the checklist wasn’t followed carefully and then everything that was supposed to have been done would need to be thoroughly checked.
Rock group tours are businesses employing upwards of 200 people with expensive equipment being used under dangerous settings with performers on small cluttered stages in front of tens of thousands of fans. If you’ve been to such a concert it is easy to lose sight of the meticulous preparation and care that goes into the supposedly spontaneous performance.
Last week I read a NY Times obituary of Joseph Rascoff who was the tour master for the Rolling Stones and many other groups. He was a partner at a Manhattan CPA firm in 1974 when his firm declined to take on the accounting for the Stones because they had a history of drug abuse and mismanagement. He immediately took a leave of absence from his firm and became the Stones’ road accountant and eventually tour producer. He never returned to the firm.
Rascoff found out that the rock and roll business never had real professionals attempting to get the groups under control. The groups’ tours had myriad complexities of long road trips through many cities, arena scheduling, transporting, feeding and housing the performers and support staff, engaging temporary help, making sure the equipment arrived, was set up and taken down properly and timely, that there was adequate rehearsal time, arranging for proper insurance, initiate contracts, and sponsorship, merchandising and promotional activities and interviews. They also needed monitoring of royalties and box office receipts. Attention was also needed to offer lower cost alternatives to expensive details in the performances. Once the Rascoff-types came on board the performers only had to concentrate on their artistic responsibilities. The costs of the financial managers were quickly offset with a more effective and efficient operation that permitted the artists to devote their efforts to their creative exploits.
The takeaway here is that commercial pursuits, regardless of the products or services offered, are serious businesses that need sound management techniques to attain a smoother and more profitable operation. Another takeaway is that checklists can be effective to assure compliance with carefully thought out and effective procedures.
There should be no question in anyone’s mind that I prefer index funds over so-called actively managed mutual funds. I am also leery of bond funds. Here is some “proof” of the efficacy of index funds and owning individual bonds over a long-term period.
Barron’s April 10, 2017 Mutual Fund section shows the quarterly, 1 year, 5 year and 10 year annualized returns. I address here the 5 and 10 year results which did not do better than the S&P 500 Index for any of the four large cap sectors they reported on. Additionally, while the S&P 500 measures large cap and there are separate indexes for mid, multi and small cap stocks, none of the nine sectors in those categories outperformed this index for the last 5 years nor did six of the nine for the last 10 years.
This to me is clear that the index funds were a better choice – certainly over the last 10 years. To be fair, many of the differences were small, however, people invest in the active funds because they want to beat the index – not mimic it. I believe this shows reasonable “proof” of the advisability of the index funds over actively managed funds.
These next comments address fixed income funds. The 5 year and 10 year annualized returns show that the three short term U.S. Government bond funds all averaged less than 1 percent for 5 years and the 10 year yields were about 2 percent for the three funds. Buying 1 or 2-year bank CDs and continuously rolling them over would have provided a greater return. Ditto for the Intermediate term funds. A slightly more sophisticated strategy would have been to set up a CD ladder and that would have even done better.
The long term corporate general bond funds with returns of 4.18 and 5.41 for 5 and 10 years, and the high yield funds with 5.57 and 5.89 did better than CDs would have done, but all the other bond fund categories in the Barron’s chart did not. The method I suggested in previous blogs was to buy individual bonds for longer terms, “clip” the coupons and forget about the volatility, I believe, would have done better than these funds. For your information, a 5-year CD 10 years ago was paying 4.8% and 5 years ago 2.0%. A 10-year Treasury bond was paying 4.71% with corporates about a point higher. My “buy and hold” bond strategy would have even outperformed the high yield funds. Further the average funds category means that as many funds did worse as did better. What are the chances you would only have picked the better funds or even the average ones? If you want chances, buy a lottery ticket. If you want security and dependable cash flow, buy bank CDs or a basket of longer term corporate bonds. A viable choice is also fixed annuities for upwards of five to ten years.
There is a lot more that I can say, but for now, I believe I provided enough “proof” for you to question your current strategies and if you have an investment manager, print this blog and ask him or her to critique it and compare to your current portfolio. If they say anything significantly different than what I wrote here, I would appreciate you letting me know. Here is the “proof.” How you handle it is up to you.
Two friends were recently fired in an abrupt, brusk and disrespectful way. A third was treated in a manner that was designed to cause her to quit. They did not deserve it, but that seems to be the way it is done now-a-days. It is not right, but the companies do not care.
The days of the gold watch are dwindling if not gone. All three companies were giant well known organizations – not Mom and Pop enterprises.
The first one was employed in a second career retiring from an illustrious position where he acquired a national reputation. He was summarily fired after 13 years with the company. He was called into an unscheduled meeting where his boss told him he was being let go – his position was eliminated. He was asked to wait until a HR person came in to tell him what his severance package would be and then was escorted out of the building by a security guard. His personal effects were packed by his two assistants and sent to him. Whatever work was in progress was gone, of no effect. His request to complete it or to update them on it was declined. He did not deserve this treatment, and it certainly could have been done without creating bad feelings. The organization lost a friend. They didn’t care.
My second friend was with his employer for over 27 years – it was his only job being hired when he graduated college. He had many positions in the organization and rose steadily. Each time acquiring greater responsibilities. One day he received an email from his boss asking him to come immediately to the conference room. When he walked in and saw the HR person with his boss, his heart sank. He was let go with the usual “position was eliminated” spiel and then the boss left and HR detailed the severance package. This happened on a Wednesday and he was given until Friday to clean up what he was working on and to brief his subordinates on what was hanging out there. Total numbness – he never saw it coming until it happened. At least he wasn’t escorted out of the building. He had a fierce loyalty to his company and a big regret that they did not have an exit conference soliciting his opinions, comments and thoughts on how the company or his division might be improved. He still cared – they didn’t care!
The third instance is of a friend’s daughter – someone with ten years at her first job out of school. Her rise, promotions, responsibilities and compensation was solid and she felt good working there. She also felt that at some point she might even become a partner. About six months before she quit, the two partners she worked with started treating her in a nasty and unprofessional manner constantly denigrating her work and reassigning her staff. She complained to them and also to the partner in charge of the office and was told that she was imagining things and that they “loved her.” Well, she had no trouble finding a job and gave notice. She wanted to stay, but that became impossible. On her last day the partner in charge called her into his office, retold her that they “loved her” and asked if there was any way she would reconsider her resignation. He wanted no hard feelings with his ten-year employee that was forced to quit. This company advertises their great care of their people and how much they matter – it ain’t true. They don’t care!
Things have changed in the market place including an end to civility and caring.
Baseball is a business with private ownership, so little information is available about how teams operate. Tuesday Brian Cashman, General Manager of the New York Yankees, gave a glimpse in a NY Times article.
The article discussed his longevity with the team and his role as general manager. I found it quite interesting and am sharing some thoughts with you here.
Cashman stated that his job was to run the team as director of baseball operations. There is some oversight and overriding decisions by management, but by and large he handles assembling the team and turns it over to Joe Girardi, the field manager for the daily decisions. Cashman tries is to balance the analytics with the scouting acumen while taking a long view with the goal of assembling a World Series winner – nothing less. He gave an example of how he wanted to trade Robinson Cano at the time he was the best Yankee player. This was before Cano would become a free agent anticipating that he would not re-sign with the Yankees when his contract was up. He reasoned that the 31-year-old Cano would want a 10-year contract with super big bucks while a trade then could have landed the Yankees a desirable player. There was no question he was worth big money, but the 10-year deal did not fit into Cashman’s equations which included juggling team salary caps, luxury taxes and player development. Ownership overruled any trade.
Cashman said Hal Steinbrenner who was a pilot, looked at things at a 30,000-foot vantage point while he had a 5,000-foot view. Ownership’s role was multifaceted. Of course they want a winning team, but the owners also must consider sponsorship commitments, partners to answer to, maintenance of the season ticket holder base, and TV network ratings among many other non-baseball functions. It is a business and most fans never get to see this part of it. At the time, it was important to the owners for Cano to remain a Yankee until his free-agency.
The Yankees are a business and I appreciated Cashman’s insights since they apply to how every business is operated. The products and services might differ, but the principles of sound management and leadership are similar. I also am a Yankee fan and crave any “inside” information about them.
Following are 20 reasons for obtaining an extension. The extension must be filed by this year’s due date of April 18. Further, the extension covers filing, not paying the tax which must be paid by April 18 or penalties will be assessed and the extension can possibly be disallowed.
- You did not receive some K-1s or 1099s or other documents with information that you need to report
- You did not receive letters confirming charitable contributions that are required to be in your possession by the due date (including extensions) of your tax return. This includes certified appraisals for contributions of property over $5,000.
- You have pending litigation or a tax audit and reporting certain transactions might prejudice your position or you are awaiting resolution which might affect an item on this year’s return
- You are involved in a marital separation, litigation or are a candidate for a public position that requires tax return disclosure and you want to delay this as long as possible
- You might want to reverse a 2016 IRA conversion to a Roth IRA and would rather not file by April 18 so an amended return would not be necessary if you decide to reverse the conversion by October 16, 2017
- Circumstances may have prohibited you from assembling all your information properly. This might include a medical emergency or searching for tax basis of securities or assets that have been sold, or being on jury duty for a protracted period
- If your tax preparer is unable to devote the necessary time to get the return ready to file on time
- You have a complicated situation and you feel it is best to have an extension so the preparer would have more time under less rushed conditions to devote to your return
- You might want to open and/or fund a SEP pension plan. By extending, you will have until October 17 to make your decision. If you have a Keogh, 401k or SIMPLE plan, the contribution for last year can be made by the extended due date, but the Keogh and 401k must have been established by the previous December 31 and the SIMPLE by September 30, 2015 (crazy and inconsistent rules for basically the same type of deductions)
- You did not file last year’s return and feel that filing this year’s return before the prior year will cause extra IRS attention to you. However, irrespective of what you did not file, you should file this year’s return on time which would include the extended due date. Note: I wrote about how to handle missed tax filings on Feb 20, 2012 and you can retrieve this in this blog’s archives
- Those with a 2016 installment sale might want to wait as long as possible in 2017 to consider electing out of the installment sale if your 2016 taxable income is substantially lower than what is expected for 2017 or later years
- People with net operating or other losses that can be carried back might want to delay filing to determine if they should elect to forego that and carry it forward
- The extension can delay elections that are made on the first-filed tax return reporting certain new transactions
- The extension is for a gift tax return where not all the issues are clear including generation skipping elections and spousal consents, or where basis information is not readily available or valuations are not completed
- There is a high risk of audit – filing an extension might reduce the chance of an audit. Note that it will not lower the chance of a computer-generated notice questioning an item or picking up income that was not reported
- An error is discovered on a prior year’s return and additional time is needed to research and correct it, and the current year’s return might be affected by the change
- You will be out of the country during the filing period. Note: If you are a U.S. citizen or resident and qualify under special rules for being out of the country on April 18, 2017 you will have an automatic two-month extension to file and make any payments and do not have to file for the extension. If you need additional time after that date, then you will need to file for an additional four-month extension. If you are abroad and want the extension because you expect to qualify for special tax treatment you should file Form 2350
- You did not receive a W-2 wage statement from an employer. This can be a problem, but the IRS has Form 4852 Substitute for Form W-2 to recreate your version of your W-2
- A suggestion to avoid filing an extension when you did not receive a K-1 that will report an insignificant amount is to estimate the amount and file on time. When you file next year’s return adjust the amount for the difference in what you reported and the actual K-1 amount. If the amount is substantial I suggest waiting for the final K-1 and filing the extension
- You ran out of time to get the return done
A tip for those filing extensions that also should pay estimated tax is to include the first quarter estimated payment with the extension payment. In case you underestimated your 2016 tax for the extension, the added first quarter payment would reduce that penalty which is greater than the penalty for the underestimated 2017 tax. Also, do not forget to file state and local extensions if applicable, and pay the tax you anticipate owing.
Those that want to file for an extension can easily do it using IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) which can be downloaded at https://www.irs.gov/pub/irs-pdf/f4868.pdf. Search your state’s and locality’s websites for their extension forms.
Mr. President, Tuesday you had a town hall meeting with CEOs which is part of a continuing dialogue with business leaders designed to elicit ideas of ways to jump start the economy. Ideas and firsthand experience is essential to develop a plan and effective laws. With the recent attempt to overhaul Obamacare I did not notice any practicing physicians being invited to the White House; and with proposed tax law changes I do not notice that there any practicing CPAs being consulted with.
Practicing physicians, particularly those that own smaller practices see the direct results of health care legislation, rules, regulations, overbearing compliance and added costs of such while serving their patients in the best manner they deserve. They also show the patience their patients need for their diagnosis and treatment but are continually being thwarted by the new business model adopted in the medical profession. These doctors should be heard from about what goes on at the patient level in their offices all the way up to their interaction with the insurance companies that pay the doctors. Invite the doctors to be heard.
Practicing CPAs that sit down with clients to receive their tax information, and then prepare the returns and deliver the results also need to be heard. They see firsthand the effect of the tax laws, unintelligible mazes in the tax forms, dozens of definitions for the same thing, and totally confusing rules for some of the most common income items; and the effect on a client of receiving a smaller refund or making an unexpected payment. Income taxation is a necessary obligation and should be understandable by a large majority of taxpayers, and it isn’t. I know you do not prepare your own return and would not expect you to given the complexity of your activities, but I am sure most members of Congress do not have such complexity and suggest that not only do most of them use a professional preparer, but am willing to proffer that most cannot even do their infant child’s or grandchild’s return. If I am right, then that is either a sin or the epitome of arrogance by those we trust to look out for us with reasonable laws. I know you are busy, but try doing one of your grandchildren’s returns and you will know what I mean.
CEOs are important to meet with, but so are physicians and CPAs and other professionals working in the areas that will be affected by legislation. Please consider this. Thank you.