Spring 2008
Are You Prepared to Fight Back Against Violence?
According to the Occupational Safety and Health Administration (OSHA), "violence in the workplace is a serious safety and health issue." OSHA's concern is not surprising given that two million workers each year are targets of workplace violence, and that 567 of the 5,734 occupational fatalities in 2005 were homicides.
OSHA has not enacted binding regulations to curb such workplace violence. However, under the General Duty Clause of the OSH Act, each employer "shall furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees." 29 U.S.C. § 654(a)(1). An OSHA interpretation letter from 1992 suggests that failure to "take feasible steps to minimize" recognized risks of workplace violence could violate the OSH Act.
OSHA guidelines and recommendations are the most practical and informative source on what an employer anti-violence policy should contain. The basic goals of any violence prevention program should include 1) management commitment and employee involvement; 2) work site analysis; 3) hazard prevention and control; 4) health and safety training; and 5) evaluation. These five elements are from OSHA's voluntary health and safety guidelines published in 1989. 54 Fed. Reg. 3904-01 (Jan. 26, 1989). Employers are encouraged to build individual anti-violence procedures based on these goals.
OSHA has published topical guidelines for only two industries: late-night retail establishments and the healthcare/social service industries. Both experience higher levels of workplace violence in comparison to other employers. See Recommendations for Workplace Violence Prevention Programs in Late-Night Retail Establishments (1998), and Guidelines for Preventing Workplace Violence for Health Care and Social Service Workers (2004).
These topical guidelines can serve as points of comparison for other types of employers in creating their own programs. For example, in the late-night retail industry, OSHA explains that an employer should conduct worksite analysis by identifying the incidence of robbery and assault at the establishment, identifying the time of day and number of employees working at these times, and determining what security measures were in place, among other factors. Hazards are thought to be controlled through improving visibility, maintaining adequate lighting, increasing staff levels and physical barriers, lowering the amount of money in cash registers, and adopting emergency procedures.
Succession Planning for the Closely Held Business - Part III
This third article in the series addresses issues surrounding valuation of shares of a closely held business.
Establishing the value of shares for estate tax purposes is important because the value of shares owned by a decedent is one of the most heavily litigated and intensely disputed issues in determining the estate tax liability of a deceased shareholder and buy-sell agreements can be useful to establish this value. However, the IRS often takes the position that the actual value of stock in a closely held business owned by a deceased shareholder is significantly greater than the value of stock reported by the estate, resulting in substantially higher estate taxes owed by the estate. The worst case scenario is that the IRS successfully challenges the buy-out price. The estate would then find itself in the undesirable position of receiving a contractual agreement price for the shares that is lower than the valuation upon which it pays estate taxes.
Under Section 2703 of the Internal Revenue Code, buy-sell agreements are disregarded for valuation purposes unless all the requirements discussed below are met. An important point about applying the tests of Section 2703 is that an agreement is deemed to meet all three tests if it is between people who are not members of the transferor=s family and if non-family members own more than 50% of the value of the subject property.
The agreement must constitute a bona fide business arrangement. This test is not very difficult to pass. For instance, reasons found valid include (1) maintaining current management policies, (2) maintaining exclusive family control, and (3) retaining key employees.
The agreement must not be a device to transfer property to members of the decedent=s family for less than full and adequate consideration. In order for a buy-sell agreement to meet this test, two requirements must be satisfied.
First, the buy-sell agreement must not be designed to serve a Atestamentary purpose. Factors considered in determining if a buy-sell agreement has a Atestamentary purpose include:
- Whether the decedent was ill at the time of entering into the agreement;
- Whether there were extensive negotiations prior to entering into the agreement (as opposed to a parent dictating the terms of an agreement with his or her family);
- Whether the agreement is consistently enforced with respect to other transactions involving company interests;
- Whether the buy-sell price was formulated based on comparables or appraisals (as opposed to a formula such as book value chosen for a convenience;
- Whether the drafters of the agreement sought professional advice in selecting the formula price;
- Whether the agreement requires that the price be periodically reevaluated;
- Whether significant assets, such as goodwill are excluded from the formula price; and
- Whether the agreement provides for below-market payment terms for the purchase of a decedent's interest
Second, the formula for establishing the purchase price of interests subject to a buy-sell agreement must be fair. In general, courts evaluate fairness as of the date that an agreement is executed rather than the date of a decedent's death. The courts normally presume that unrelated parties to a buy-sell agreement will negotiate a fair formula. However, agreements between related parties (parents and children in a family-owned business) are subject to special scrutiny; the estate of a deceased shareholder may be forced to prove that the formula price will not result in an amount that is lower than what would be agreed upon by unrelated persons with adverse interests.
The entire agreement must have terms comparable to those of similar arrangements entered into by persons in an arm's-length transaction. The last test of Section 2703 can generally be met if the agreement could have been obtained in a fair bargain between unrelated parties or if the restrictions conform to standard practice in the business. A problem in analyzing whether this test is met is that most buy-sell agreements are negotiated to address unique facts and circumstances and not public documents.
Retirement Theft: 401(K) Plans
Nearly $2 trillion is invested in 401(K) plans, the popular defined-contribution plans in which employers and employees make pension contributions. Yet most 401(K) plans are not routinely audited. While federal law requires that retirement plans with at least 100 workers be independently audited on a regular basis, the U.S. Labor Department reports that the overwhelming majority of 401(K)'s involve fewer than 100 workers.
Steps must be taken to safeguard these retirement plans, which are increasingly subject to various types of theft. For example, a compliance officer at an Atlanta investment firm was indicted on federal charges of stealing nearly $5.5 million in retirement funds. The money was taken over several years from more than 200 workers at several of the investment firm's clients. The theft was only spotted when one of the firm's clients - a business owner at a local car dealership - completed a careful review of his plan's account statements after initially finding two suspicious transactions.
This type of calculated theft affects employers and employees alike and is far more difficult to guard against than straightforward breaches of duty, such as when employers collect 401(K) contributions and fail to deposit the money in workers' accounts, or simply fail to make matching contributions to such saving plans.
The Atlanta case offers some lessons for both small-business owners and their employees.
No. 1: Upon retirement, employees should work with their employers to promptly roll retirement funds into individual retirement accounts. Otherwise, you might find yourself in the same position as several retirees who left their money in one of the affected 401(K) plans. As a result of the criminal investigation, the plans were frozen and the retirees cannot regain access to their money until the investigation and certain insurance disputes are resolved.
No. 2: Regardless of whether you are an owner or an employee, if you have a 401(K), force yourself to reconcile each account statement. You should contact the custodian of the plan assets if you are not receiving regular statements. The sum deducted from your paycheck should match the sum deposited into your 401(K) account. Any discrepancy should immediately be brought to the attention of the plan's trustee. In the Atlanta case, some of the trustees were not receiving regular statements, while others failed to read them.
No. 3: Do not assume that the plan's custodian is checking everything. When the FBI and a trustee of one of the affected plans reviewed forged checks, the trustee realized that the checks were made payable to people he didn't know. In that case, the plan's custodian never once called the trustee to check on the authenticity of the payments.
All 401(K) participants have a legitimate interest in the safety of their retirement accounts, but business owners may have an additional cause for concern if they have a fiduciary duty to their employees by virtue of serving as trustee, and thus may be liable for the misuse of the accounts by others. For more information on retirement theft, contact the U.S. Labor Department's Employee Benefits Security Administration.
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The material on our website and in this newsletter has been prepared for informational purposes only. It does not constitute legal advice, and transmission of information from this site is not intended to create, nor does its receipt constitute, an attorney-client relationship between Nauman Smith Shissler and Hall, LLP and the visitor to this site. The information contained in this newsletter is not intended as tax advice. As required by IRS Circular 230, we inform you that any information contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for the purpose of promoting, marketing or recommending to another party, any tax-related matter addressed herein.
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