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William & Mary Annual Tax Conference Conferences, Events, and Lectures

1989

Effective Use of Buy & Sell Agreements:Alternatives to the Traditional Buy & SellAgreementMyron E. Sildon

Copyright c 1989 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository.https://scholarship.law.wm.edu/tax

Repository CitationSildon, Myron E., "Effective Use of Buy & Sell Agreements: Alternatives to the Traditional Buy & Sell Agreement" (1989). William &Mary Annual Tax Conference. 204.https://scholarship.law.wm.edu/tax/204

EFFECTIVE USE OF BUY & SELL AGREEMENTSALTERNATIVES TO THE TRADITIONAL

BUY & SELL AGREEMENT

By

Myron E. Sildon, Esq.The Sildon Law Group, P.C.

Kansas City, Missouri

Delivered toWilliam & Mary Tax Conference

atWilliamsburg, Virginia

December 8-9, 1989

copyright-Myron E. Sildon, Esq., 1989. All rights reserved.

TABLE OF CONTENTS

I. Hypothetical Fact Pattern in the Family Business ................... 1

Ii. The Need For A Business Succession Analysis Which Should BeUndertaken Periodically in Planning for the Passage of Controlof the Family Business ............................................. 3

III. Why the owner might consider selling the business .................. 3

IV. Reasons to Find Alternatives ....................................... 5

V. Problems With Traditional Buy Sell Arrangements .................... 5

Vi. Warnings ........................................................... 7

VII. Alternatives Which May Be Used In Lieu Of The TypicalRedemption Approach ................................................ 8

A. There can be a combination of the alternatives,and perhaps still a need for some redemptionelement ....... . . ........ .. ................................ 8

1. Spin-offs, split-offs and split-ups ........................... 8

2. Sale - leaseback of corporate assets ........................... 9

3. Allocate accounts receivable to selling shareholderas wage continuation .......................................... 10

4. Deferred compensation agreements .......... ........................ 12

5. Severance pay ................................................. 13

6. Consulting agreements .............. ............................................ 13

7. Covenants not to compete andconfidentiality agreements .................................... 14

8. Defined benefit pension plans and otherqualified retirement plans ..................................... 21

9. Employee stock ownership plans ................................ 22

10. Recapitalizations ............................................. 25

11. Charitable gifts of corporate ownership interest..............26

12. Stock bonuses and stock options ............................... 27

13. Voting trusts ................................................. 29

14. S corporations ...................... ............................ 29

15. Sale of the business to outsiders ............................ 30

16. Going public, i.e. Initial Public Offering .................... 31

17. Guaranteed income payments to partners ........................... 31

18. The use of life insurance to assist in thepurchase of a shareholder's interest in a business ............ 32

19. Installment payments with deductible interest ................. 35

20. Issue debentures .............................................. 35

21. Private annuities ............................................. 35

22. Plan for the continuity and succession of thebusiness by the family ........................................ 36

VIII. Summary ............................................................. 36

Appendix A - Conflict of Interest Engagement Letter ..................... 37

Appendix B - Reprint of Kansas City Times Article on theneed for a Business Succession Plan ........................ 39

I. Hypothetical Fact Pattern in The Family Business

A Business Succession Study is one of the most importantplanning opportunities available to the family business. Oftentoo little consideration is given to the important questions ofwho will be running the business in five or ten years or evennext week should something suddenly happen to the President,such as an untimely death or disability.

Let's take a look at a hypothetical situation.

The President of the family business thought he had completedhis estate planning because he had recently executed a Will andTrust Agreement. The Trust provided that in the event of hisdeath his assets would be held by the Trustee for the benefitof his wife for the remainder of her lifetime, and then bedistributed to his children. The President's interest in thefamily business was the largest asset in his estate. As isusually the case, he thought that he had a plan. However,when he was killed in an accident, it turned out thateveryone, except the president had a plan.

The commercial banker had a plan. The bank collected thecredit life insurance proceeds made payable to it when thecompany took out a large loan.

The sales manager had a plan. He thought he was the mostimportant person in the company and that it simply couldnot exist without his brilliant sales effort. He wascertain that he should be named President so he encouragedthe widow to make him President or he threatened to leaveand take his sales efforts to a new company.

The operations manager had a plan. If he became thePresident, he would fire the sales manager whom he didn'ttrust and didn't like. The operations manager felt thatonly he knew about the operation of the company inside andout. He told the widow that her late husband thought heshould be the president.

The vendors had a plan. They knew that the smoothcontinuity of the business was essential to maintain thedistribution flow and service for the products that thefamily business had sold for years under the leadership ofthe now deceased President. Their plan was to find anothercompany who could maintain the line since they assumedthere was no succession or continuity plan.

The competitors had a plan. Within a month, they wouldapproach the widow about their willingness to "help herout" by buying the company at a distressed price.

The widow had a plan. She would stay home, perhaps get theyoungest child through high school and simply continue todraw the salary that her husband had received. If a salarycould not be paid to her, she would declare a dividend tomaintain her level of income and accustomed standard ofliving. Her plan included trying to maintain the businessuntil the children could come into the business.

Had the Business Succession Study been completed, it mighthave been possible for the President, long before hisdeath, to have helped his wife learn enough about thebusiness, its employees, and its other relationships tohave a chance of maintaining the business in the event ofhis untimely death or incapacity.

One of the sons had a plan. He would follow his ambitionto be a rock star and the family would have plenty of moneyto buy him out. The daughter had a plan. She and herhusband would move back to the middle west and run thecompany for her mother.

The Internal Revenue Service had a plan. It was to valuethe business on the basis of what it earned as a goingconcern before the President died.

Remember how this all began with the President thinking hehad a plan? His plan was to leave his assets in trust.The Trustee had a plan. It wanted to sell the familybusiness since the Trustee no desire to manage it and didnot want the liability of running a business.

By undertaking a Business Succession Study, throughcompetent counsel, the President could have left ablueprint to be followed by everyone involved. He couldhave said in the Business Succession Report who heconsidered to be the most reliable and talented members ofthe management team. He could have discussed businesscontinuity with his employees and vendors and given themassurance through a Buy & Sell Agreement or by other meansthat the business would be maintained. The Buy & SellAgreement would have set the value of the company forestate tax purposes. He could have discussed anorganization chart with the key managers that would havebeen in place in the event of his early demise. He couldhave worked with his accountant to develop financialstatements to help his wife understand the business, andgiven her the opportunity to realize that sound managementand advice was available to help run the company. He couldhave given the key employees assurances that they wouldhave a future in the business by rewarding them with bonusarrangements, stock options, deferred compensation programsand qualified retirement plans, including an ESOP. TheStudy might have revealed a need for life insurance to paythe estate taxes or to fund the Buy & Sell Agreement. By

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completing and periodically updating the businesscontinuity plan with counsel, the President could havegiven the Trustee (a) the comfort to allow the business tocontinue to operate as a family business; or (b) ideasabout finding potential purchasers for the company and howthe company should be valued in ways that might have beenunique to the company or its industry.

For all of the years that the President had spent buildinghis dream company, a relatively small amount of time andmoney could have been spent in developing a Succession Plan-- this study might have been worth more than any decisionthat had ever made for the company. The family businessand its owner might have had a Plan.

II. The Need For A Business Succession Analysis Which Should BeUndertaken Periodically In Planning For The Passage OfControl Of The Family Business

A. To assist the family

B. To assist the corporation

C. To assist the trustee

III. Why the Owner Might Consider Selling the Company

A. The retiree or the decedent's estate and family may needcash:

1. To pay estate taxes

a. Consider installment payment of estate taxesunder Section 6166 or 6161*

b. But it is still with after-tax dollars andlimitation on deduction of interest

c. Statutory limitations - 35% of adjusted grossestate includes interest in a closely heldbusiness

2. To provide for living expenses for surviving family

3. To equalize distribution to family members who arenot in the business

4. The remaining owners do not want anyone owning aninterest in the business who is not an activeemployee where conflicts can arise regarding;

* - All section references are to the Internal Revenue Codeunless otherwise indicated

a. Salaries

b. Dividends

c. Expansion plans

B. Family or owner disputes even when they are all activein the business

1. The owners may have differing points of view about:

a. Future direction of the company

(1) Whether to expand into other businesses

(2) Whether to admit other owners

(3) Whether to permit nepotism

(4) Etc., etc.

b. Compensation levels, expense allowances, typesof fringe benefits

C. Desire to transfer control to younger generation

1. Younger generation may have less incentive to causethe business to grow if ultimately he has to buyout siblings or parent's estate.

D. Desire to diversify to more liquid investments, or whatis perceived as a better investment opportunity,however:

1. Business may not be able to afford to pay fair

market value for seller's interest

2. New investments have draw backs:

a. Less control -- example -- public companies

b. Less knowledge about the new investment

c. Lower return -- few investments as good asclosely held business

d. More leverage -- equals greater risks, e.g.

real estate

e. Less liquidity e.g. real estate

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E. Owner may have been approached by outsiders ormanagement wanting to buy the business through aleveraged buy out

IV. Reasons to Find Alternatives to the Traditional RedemptionType Buy & Sell

A. With lower personal tax rates now applicable, receivingpersonal compensation is not as bad

B. Higher corporate tax rates now exist, so it is importantfor the corporation to obtain a deduction

C. Repeal of capital gains deduction in TRA '86 hadeliminated the primary advantage of the traditionalagreement to the seller. As of September 29, the Househad approved a 19.6% preferred rate window for capitalgains.

D. Recognition that buy outs are often funded from futureearnings, i.e. gross income which should be offset bydeductible payouts

V. Problems With Traditional Buy & Sell Arrangements

A. These problems may be present whether selling acorporate or partnership interest

B. Usually funded and paid with non-deductible, after taxincome

C. Closely held business is growing so rapdily, it outpaces ability of the company or remaining shareholdersto pay for it. Therefore, a redemption may not bepossible and one of the alternatives may be essential.

D. Although often funded with insurance, the company maynot be able to afford life or disability buy outinsurance.

1. Also selling shareholder may not be insurable atreasonable rates

2. Redemption may result from retirement orwithdrawal, not death or disability, so no proceedsavailable to fund a non-deductible buy out.

E. Selling owner or surviving family may end up with anunsecured promise of the company to pay for the interestpurchased on an installment basis.

1. Get personal guarantee of remaining owners

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2. Retain a security interest

a. The stock or partnership interest sold

b. All outstanding ownership interest

c. Other collateral

d. Loan agreement should restrict

(1) dividends

(2) sale or pledge of assets

(3) all but limited salary adjustments

(4) transfer of control

e. Loan agreement should require

(1) personal guarantee of remainingshareholders

(2) Right of seller during pay back period toreview financials of the company and toaccelerate loan if condition worsens

F. No stepped-up basis for remaining shareholders

1. One solution is to use cross purchase agreement

a. Fund it with life/disability buy out insurancebought by other shareholders

(1) Cumbersome if multiple shareholders

(2) Use an escrow or trust agreement

(a) Reduces number of policies

(b) Assures proceeds will be usedto buy out the interest

(3) Insurance bought with after-tax, butlower bracket, income

b. Avoids alternative minimum tax on 75% ofproceeds in excess of book value of policy

2. Partners can get a stepped up basis by filing aSection 754 election

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G. State law may preclude corporate redemption ifinadequate capital or retained earnings

1. Agreement should provide remaining shareholdersmust purchase the stock proportionately if capitalis inadequate under state law.

H. May have wanted to retain investment in business for

other family members

VI. Warnings

A. Any deductible alternatives will be carefullyscrutinized by IRS to see if payments are simplydisguised payouts for corporate stock or disguiseddividends.

B. Legal ethics and need for engagement letter

1. Dual representation issue - model code ofprofessional responsibility - E.C.5-16

a. Representing the business and multiple

shareholders

b. Invite each to have separate counsel

(1) Try to represent business and theremaining owner

(2) Develop the ideas and draft theagreements for each party to show theirrespective counsel

2. Each owner is different and has individualconsiderations

a. Age, health and stage in life

b. Ability to pay for the buyout with outsidefunds or to reduce salary to fund the buy outinternally

c. May have different objectives e.g.diversification vs. retaining for familymember

3. Get each party to sign engagement letteracknowledging conflict was revealed and discussed(See Appendix A)

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VII. Alternatives Which May Be Used In Lieu of the TypicalRedemption Approach

A. There can be a combination of the alternatives andperhaps still a need for some redemption element

1. Spin-offs, split-offs and split-ups Section355

a. Where the shareholders of single businesshave a disagreement regarding corporatepolicy such as how certain aspects of thebusiness should be run, it is frequentlypossible for the co-owners to split uptheir existing corporation tax-free underthe provisions of Section 355 so thateach of the shareholders end up with aseparate corporation.

b. To qualify for tax-free treatment, thedivision ordinarily involves a type Dreorganization Section 368(a)(1) (D).

c. These transactions frequently involve thetransfer by a corporation of one of itsbusinesses to a new subsidiary which iscontrolled by the corporation. Thesubsidiary is then distributed to ashareholder in exchange for all of theshareholder's stock of the parentcorporation.

d. To be tax-free, the followingrequirements must be met:

(1) The distributing corporationmust distribute solely stock orsecurities to a shareholder inexchange for his securities inthe distributing corporation.

(a) The stock or securitiesdistributed must be acorporation which was"controlled" by thedistributing corporationimmediately before thedistribution.

(b) The transaction must notbe used principally as adevice for distributingthe earnings and profits

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of either the distributingcorporation or thecontrolled corporation.

(c) Immediately after thedistribution, each of thecorporations must beengaged in the activeconduct of a trade orbusiness.

(d) The distribution can betax-free even though it isnot made pro-rata to allof the shareholders of thedistributing corporation.Section 355(a) (2) (A)

2. Sale - leaseback of corporate assets

a. Although not tax-free, a corporation candistribute a portion of its assets to ashareholder in redemption of hisshares. Those assets can then be leasedby that shareholder back to thecorporation or to others. The leasepayments made by the corporation would,of course, be deductible under Section162.

b. There can be some subjectivity in thevalue of the assets distributed, and somenegotiation in the amount of rentalpayments made by the corporation to thenew owner of the property which is leasedback to the corporation.

c. The use of a sale and lease-back is acommon method to permit a shareholder towithdraw from the corporation and to haveseparate, more liquid and diversifiedassets that he can either continue tolease to the corporation, lease to othersor sell in order to diversify hisinvestment further.

d. The redemption with appreciated assets isgenerally taxable to the corporation.Section 311

e. This technique is particularly usefulwhen an owner is retiring and needs tocontinue to receive income, or where onechild is not active in the business

3. Allocate accounts receivable to sellingshareholder as wage continuation. Stock has asmaller book value.

a. This technique is frequently used in aprofessional corporation redemption tomore accurately reflect the fact that theaccounts receivable really belonged to orwere associated with the sellingshareholder, and would have been thesource of his compensation had heremained an employee

b. Example: In a law firm, the shareholdermight have been compensated under aformula approach when he was paid forbusiness produced. Without thistechnique of allocating A/R as wagecontinuation, the corporation would havehad to collect the receivables asordinary income and then have paid moneyto the shareholder on a non-deductiblebasis for his stock which might haveincluded a value for the accountsreceivable. The method of providing wagecontinuation to the shareholder moreaccurately reflects a continuation of theearnings of the firm by the professionalhaving to pick up the ordinary incomeresulting from his efforts while anemployee. It is not uncommon for aprofessional corporation to provide thatthe value of a professional's stock doesnot include any value for goodwill or forthe outstanding accounts receivable. Ifthis allocation is on an arms-lengthbasis and is not treated as a disguisedpayment for the value of theprofessional's stock, it should hold upas a valid biforcated recognition of theseparate interest of a professional inthe business.

c. In cases in which a shareholder receives,under a Wage Continuation Agreement, anamount for his shares in excess of theirbook value, the IRS has been unsuccessfulin arguing that such payments are non-deductible compensation when the excessis attributable to good will. However,the result has been different when theexcess is attributable to accountsreceivables.

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(1) In Muskogee, Radiology Group,Inc. v. Commissioner, 37 T.C.Memo, 1978-490 (1978), aphysician in a radiology groupreceived $131,016 for hisshares in a professionalcorporation. Of this amount,$31,016 was received as bookvalue of the stock and theremaining $100,000 was payableunder a deferred compensationarrangement. The court heldthat the $100,000 wasdeductible as compensation.The tax court rejected theIRS's contention that thisexcess over book valuerepresented an intangibleasset, in this case goodwill,because the doctor performedessentially personalservices. Therefore, anygoodwill depended on thepatient/doctor relationshipwhich could not be transferredwith a mere sale of stock.

(2) In Ted N. Steffen v.Commissioner, 69 T.C. 1049(1978), a doctor sold his stockin a professional corporationfor $43,975. This amount wasbroken down as follows:

Item Amount

Medical Equipment $ 3,200

Cash Value of Life $ 775Insurance Policy

Book Value of Common Stock $ 1,000

Salary $39,000

The corporation was a cashbasis taxpayer and the bookvalue of the stock did notinclude outstanding accountsreceivable. The court heldthat the $39,000 was notdeductible as salary expense.The court stated that to the

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extent that such amount wasattributable to thecorporation's accountsreceivable, it did notconstitute compensation for thedoctor, but rather representeda distribution to the redeemingshareholder of appreciation inthe value of corporateassets.

4. Deferred compensation agreements

a. Frequently the deferred compensation paidto a terminated or retiring or deceasedshareholder is coincident with thepurchase of his interest in acorporation. Obviously the amount thathe receives for his stock will be of lessconsequence to the selling shareholderif, at the same time, he is receivingdeferred compensation for servicesrendered while he was in the employ ofthe corporation or in recognition of pastservices. With proper advanced planning,a corporation can have an agreementprefunded to pay a former employee forservices previously rendered by him.

b. Rev. Rul. 60-31 (1960-1 C.B. 174) is thebeginning point for any considerationdeferred compensation.

c. There has been a great amount of activityin the entire non-qualified deferredcompensation area since the InternalRevenue Service held in a series ofPrivate Letter Rulings that employerdeposits into an irrevocable trust knownas "Rabbi Trust" would not be taxable tothe employee as long as the trust assetswere subject to the claims of theemployer's creditors. IRS Private LetterRuling 81-13107; 83-29070; 84-18105; 85-09023 and 86-34031.

d. Secular Trust, i.e. funded deferredcompensation agreements, have alsoreceived a great deal of interestrecently.

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5. Severance pay

If a corporation truly has an employmentcontract with one of its employees, it shouldbe able to deduct the payment to that employeeto sever his employment relationship as longas the amount is reasonable. However, in S.Blechman and Sons, Inc. v. Commissioner (2292d 925) the Second Circuit held in 1956 that acorporation could not pay its treasurer$96,000 in retirement of its stock and bondsheld by him, which had an aggregate book valueof $96,000, and deduct the excess of $24,000as the cost of cancelling the treasurer'semployment contract in the absence of anagreement allocating the payment. The courtheld that the entire $120,000 was solely forthe redemption of the stock and the bonds.

6. Consulting agreements

a. Where a former employee will truly renderconsulting services to a corporation, itshould be possible to deduct theconsulting payments under Section 162.On the other hand, pursuant to thecomplete redemption provision rules ofSection 302, the redeemed shareholdercannot have any relationship to thecorporation other than that of acreditor.

b. As long as there is relatively little taxrate difference between capital gains anddividend income, it may not seem tomatter whether the transaction is treatedas a complete redemption. But there isstill an advantage in capital gaintreatment because (a) tax free recoveryof basis (b) capital gains can be used tooffset capital losses; and (c) thecapital gain deduction may be re-enactedin the future. It is possible to have aconsulting relationship withoutsimultaneously having a redemption of ashareholder's stock, and therefore theissue remains can a corporation deductconsulting payments made to a terminatedemployee. The tax court answered thataffirmatively and A. Yelencsics (74 T.C.1513) Acq. 1981-2 C.B.2 In thatsituation, the payment made by thecorporation was pursuant to a consulting

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agreement that was contained in the stockpurchase agreement and it was permittedas a business expense deduction.

7. Covenants not to compete and confidentialityagreements

a. Covenants not to compete are deductibleby a corporation if it can show that theamount paid is reasonable, and if therewas truly a threat of competition from ashareholder. If the shareholder is tooold to compete, or if the amount paid forthe covenant is unreasonable, then itwill not be allowed. The general rule isthat where the seller of a businesspromises not to compete with thepurchaser for a given period of time, apurchaser may amortize the amount paidfor the covenant over its stated life.Tax Management Portfolios, Amortizationof Intangibles 209-3rd, A-19 (1987)citing Annabelle Candy Co. v.Commissioner, 314 F.2d 1 (CA-9 1962).Most cases require the covenant to haveindependent significance apart fromassuring the transfer of goodwill.Additionally the covenant should havebeen separately bargained for by theparties so that separate or severableconsideration can be shown. Id.

(1) Separate allocation

Courts apply four tests indetermining whether any amountmay be separately allocated toa covenant not to compete:

(a) Is the compensation paidfor the covenant separablefrom the price paid forgoodwill?

(b) Is either party to thecontract attempting torepudiate an amountknowingly fixed asallocable to the covenantunder the circumstancesgiving rise to thelikelihood that the taxeffect of the allocationwould be considered;

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(c) Is there proof that theparties actually intendedthat some portion of thepurchase price beallocated to the covenantnot to compete when theysigned the agreement; and

(d) Was the covenanteconomically real?

(2) Allocation of price in contract

In order to substantiate theamortization deduction, anallocation of a portion of theprice of a contract issufficient to support theamortization deduction. SeeUllman v. Commissioner, 264F.2d 305 (CA-2 1959), aff'd 29T.C. 129 (1957) (strong proofmust exist to overcome thedeclaration or an assignedvalue to the covenants in thecontract); Dauksche v. Busey,125 F. Supp. 130 (D. Ohio 1954)(Allocation of part of theprice to the covenant was heldrealistic because (a) thepartner could have competed hadhe not signed the agreement,and (b) the price assigned tothe covenant was notdisproportionate to the amountof business done.

The parties' intent issignificant when determining ifthe allocation will beeffective. In Ackerman v.Commissioner, T.C. Memo 1968-254, an allocation of $30,000to the covenant not to competewas upheld because it wasfreely and knowingly made.However, in Lemery v.Commissioner, 52 T.C. 367(1969), the court disallowedthe parties' allocation of$200,000 in a covenant not tocompete and held that thecovenant was not subject to

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amortization. The courtapparently did not believe thatthe taxpayer demanded thecovenant, and there was littlerisk of competition.

Where there is no allocation ina contract, the Tax Court hasheld it to be strong evidencethat no allocation was intendedSchmitz. v. Commissioner, 51T.C. 306 (1968), aff'd 457 F.2d1022 (9th Cir. 1972), or hasdetermined for itself theamount to be attributed to thecovenant (Herndon v.Commissioner, T.C. Memo. 1962-184).

Where stockholders and theirspouses agreed not to competewith their corporation inexchange for 10 annual paymentsof $10,000, the covenant washeld as merely a device toobtain deductions for thecorporation for annualdistributions in the nature ofdividends. The corporation wasdenied amortization ofdeductions for payments undercovenants. G. A. Nye, 50 T.C.203, Dec. 28,942. AccordMackey's Inc., 34 T.C.M. 1214,Dec. 33,413(M), T.C. Memo 1976-280.

Ten annual payments to anindividual for refraining fromcompetition in a restrictedterritory for ten years wereheld deductible. Eitington-Schild Co., 21 BTA 1163, Dec.6629. Payments made by ataxpayer in consideration for apartnership's agreement not tocompete during the periodpayments were made aredeductible as amountsrepresenting exhaustion of acontract used in the taxpayer'sbusiness. Carboloy Co., Inc. 2T.C.M 413, Dec. 13,351 (m).See also News Leader Co., 18

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BTA 1212, Dec. 5834; B.T.Babbitt, Inc., 32 BTA 693, Dec.8976; O'Dell & Co., 61 T.C.461, Dec. 32,414.

The payments for the covenantnot to compete is amortizableover the entire term of thecovenant. Warsaw PhotographicAssociates, Inc., 84 T.C. 21,Dec. 41,822.

(3) Amortization of covenant not tocompete

A taxpayer claiming a deductionfor amortization of the cost ofthe seller's covenant not tocompete has the problem of theduration of the intangible.Under the tax code,depreciation of intangibles isallowable only where the use ofthe intangible is of limitedduration. Depreciation ofgoodwill is expresslydisallowed. An agreement torefrain from competinggenerally has a specified life,but if it is a necessaryadjunct of goodwill, its lifeis indeterminate despite thefact that the contract recitesthat it runs for a definiteperiod of time. The buyer hasthe burden of showing that thecovenant not to compete is notthe purchase of goodwill.

If the covenant not to competeis really goodwill, the costcannot be depreciated. CCHStandard Federal Tax ReporterReg. Section 1.167(a)-3Paragraph 1717.

Twenty percent (20%)amortization of the contractprice of a business was allowedwhere that amount was stated tobe for a contract not tocompete requiring the formerchief stockholder to hold hisservices available to the

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taxpayer. Christensen MachineCo., 18 BTA 256, Dec. 5640.

Where an agreement not tocompete was not bargained forseparately and no value wasassigned to it in the contract,it could not be amortized overthe period of the covenant.General Insurance Agency, Inc.,401 F.2d 324 (4th Cir. 1968);Robins v. Weill, Inc., 382 F.Supp. 1207 ( ); J.L.Danehy, T.C. Memo 1974-2281.

b. Confidentiality agreements, on the otherhand, which provide that the shareholderwho is receiving payments to keep certaininformation confidential as part of hisbuy out, are generally not amortizablebecause they are in the nature ofgoodwill and generally are not thought tohave a limited period or useful life.Perhaps it would be possible to structurean agreement that said that the employeecould not reveal confidential informationfor a certain limited time if it could beshown that the confidential informationwould only have a market value for alimited period, such as until a publicannouncement was made about a newproduct.

(1) Trade Secrets.. Secret formulaand processes are not subjectto depreciation because theiruseful lives cannot bedetermined with reasonableaccuracy. Kaltenbach v. UnitedStates, 1 U.S.T.C. 353 (Ct.Cl. 1929); Yates Industries,Inc. v. Commissioner 58 T.C.961 (1972). But see LiquidPaper Corp. v. United States,83 U.S.T.C. 9305 (Cl. Ct. 1983)(manufacturer of typewritercorrection fluid was entitledto depreciate his secretformula where its estimateduseful life was reasonablyascertainable due totechnological advancementsoccurring within the taxpayer'sindustry). Evidence indicated

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that the secrets had a usefullife far in excess of the four-year termination date of anoncompete agreement obtainedfrom the seller of secrets.

(2) Customer lists. Generallycourts have held thatamortization of customer listsis not permitted because it isinseparable from the purchasedgoodwill, or considered massassets, or both. 209-3rd BNATax Management Portfolios,Amortization of Intangibles A-40 citing Klein v. Commissioner372 F.2d 261(2d Cir. 1966);Metropolitan Laundry Co. v.United States, 100 F. Supp. 803(N.D. Cal. 1951.)

The mass asset rule isfrequently cited in customerlist cases to denyamortization. See, e.g., Boev. Comm'r, 372 F.2d 261 (2ndCir. 1966) (Tax Court concludedthat the taxpayer purchased asingle intangible capital assetwhen one partner purchased amedical practice).

The court in Fullerton Co. v.United States, 381 F.Supp. 1353(D. Ore. 1974) explained, "Thequestion whether the purchaserof a customer list is acquiringa single mass asset or a groupof individual assets isfrequently a factual questionand will depend on the methodused to evaluate theacquisition in light of thenature of the business beingacquired." (In Fullerton, aninsurance company was notentitled to depreciate thevalue allegedly assigned tocustomers of the company sincethe taxpayer failed toestablish ascertainable usefullife.)

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A list of all customersregularly using goods orservices was held to be asingle capital asset andamortizable. MetropolitanLaundry Co. v. U.S., 100 F.Supp. 803 (N.D. Cal. 1951).

Remember that the test todetermine whether an intangibleasset may be amortized iswhether it has a limited usefullife which is fixed in time orcan be measured with reasonableaccuracy. Regs. Section1.167(a)3. One who acquires acustomer list knows that thesecustomers have needs for goodsand services, but the purchaserwill be able to retaincustomers if he providessatisfactory services.Customer lists are usuallyconsidered to retain theirvalue because new customers arereferred by old customers, andsome of the old customerscontinue to use the servicesindefinitely. While somecustomers discontinue becausethey move out of the community,new customers are acquiredamong those who are new intown. Thus a list isconsidered a mass asset, theindividual components of whichmay expire or be replaced,causing fluctuations in thevalue of the whole, but whichhas no measurable loss ofvalue. Id.

The cost of lists of laundrycustomers was found to be 75%depreciable over a five-yearlife. The remaining 25%related to institutionalcustomers which could beexpected to be retained on anindefinite basis. ManhattanCo. of Virginia, Inc. 50 T.C.78, Dec. 28, 918. Accord E.Panichi, 834 F.2d 300 (2dCir.).

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In a Kansas City case, acustomer card file acquired inthe liquidation of a subsidiaryhad a value separate fromgoodwill and was amortizableover a five-year period.However, only two-thirds of theamount claimed as attributableto such file was allowedbecause one-third of thecustomers would repurchase fromthe company regardless of theuse of the customer cardfile. Metro Auto Auction ofKansas Cityl, Inc., T.C. Memo1984-440.

8. Defined benefit pension plans and otherqualified retirement plans

Qualified retirement plans provide anexcellent way for corporations andunincorporated businesses to reduce the amountthat an owner would otherwise need from thesale of his interest upon his retirement. ADefined Benefit Pension Plan is particularlymeaningful because it can provide up to$98,064 (with cost of living adjustments) ofannual retirement income to an employee. Thisbenefit can be funded over a relatively shortperiod because the annual contribution to theplan can be allocated in an actuarial mannerwhich results in the largest portion of theallocation going to the employee closest toretirement. Contributions to all retirementplans are (a) deductible to the business, (b)not taxable to the participant until they arepaid out, (c) compound within the retirementtrust on a tax-free basis until distributed,and (d) are generally distributable asordinary income throughout the participant'sand his spouse's retirement years, or receivedin a lump sum and taxed on the basis of eithera 5 year average at current rates, or a 10year average at pre-TEFRA rates if theparticipant was age 50 on January 1, 1986.

a. A floor offset pension, which providesthat the benefit will be offset bybenefits from a defined contributionbenefit, may make it possible to onlyfund a defined benefit for the employeenearing retirement

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9. Employee stock ownership plans

a. ESOPs may offer the most favorabletechnique of acquiring a deceased orretiring shareholder's stock on afavorable tax basis. They represent awin-win situation for both thecorporation and the shareholder or hisfamily. ESOPs are a form of qualifiedretirement plan which have as theirprimary objective the acquisition ofcorporate stock which will be held forthe purpose of providing a retirementbenefit for the employees of thecorporation.

b. Like other qualified retirement plans,contributions to the ESOP are deductibleby the corporation, and not taxed to theparticipant until he receives aretirement benefit. The funds growwithin the retirement trust tax-freeuntil they are ultimately paid out. Whatmakes ESOPs particularly useful for ourpurposes is the fact that the ESOP isdesigned to invest in employersecurities, and therefore, it is aperfect market for the stock of ashareholder who is retiring, who hasbecome disabled, who has died, or whosimply wants to diversify hisinvestments.

c. It is especially attractive that thepurchase of a shareholder's stock can beaccomplished on a tax deductible basis bythe corporation either making deductiblecontributions, in advance, to accumulatea fund to purchase the stock, or by theESOP borrowing money to purchase thestock of the selling shareholder or hisestate. The exemption to the prohibitedtransaction rules allowing the ESOP toborrow is Section 4975(d) (3). Theseborrowed funds will be paid back by thecorporation making tax deductiblecontributions to the ESOP which areadequate to service the debt on theloan. Furthermore, 50% of the interestpaid on the loan to a third partyfinancial institution will be excludedfrom the income of the lender, andtherefore, the loans will be available at

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a lower than standard rate, approximately25% to 30% below market interestrates. (Section 133)

(1) Rostenkowski has proposedelimination of the 50% interestexclusion

d. Another tremendous advantage of sellingstock to the ESOP is that the gain on thesale of the stock can be deferred if itis invested within a 15 month window inthe securities of another domesticcorporation. This will permit theselling shareholder who desires todiversify his investments to turn aroundand reinvest the proceeds from the saleof his stock in other corporationswithout paying a tax on the proceeds.Section 1042

e. If a deceased shareholder's family sellsstock of the corporation to its ESOP, 50%of the proceeds of the sale will beexcluded from estate tax and can resultin estate tax savings of up to$750,000.(Section 2057)

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f. The following illustration shows step bystep how these transactions work:

CORPORATION ESOP

(3) "GUARANTEE

SHAREHOLDER

(7) $

BANK

to acquire theSTEP NO. 1 - The ESOPdecedent's stock.

STEP NO. 2 - The bank receives a note from the ESOP.

STEP NO. 3 - The corporation guarantees the Note.

STEP NOS. 4 & 5 - The corporation acquires the stock of thedecedent and uses that stock as collateral for the bank loan.

STEP NO. 6 - The corporation makes annual contributions to theESOP and deducts them.

STEP NO. 7 - The ESOP uses the corporate contributions to payback the principal and interest on the loan that it received toacquire the stock.

STEP NO. 8 - Not illustrated. A retiring shareholder canreinvest the sale proceeds tax deferred in securities of adomestic operating company within 15 months. Section 1042

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10. Recapitalizations

a. Tax free recapitalizations have beenpermitted under Section 368(a)(1) (E) formany years. A recapitalization is simplyan exchange of the securities of thecorporation for a different form ofsecurities. For example, the exchangingof common voting stock for non-votingpreferred stock or for debentures hasbeen permitted for some time. If ashareholder was retiring and was willingto give the future growth of the companyto the other shareholders and to receivea guaranteed income in preference to theother shareholders, he might haveexchanged his common stock for preferred.Such a recapitalization would have beenan ideal technique for encouraging ayounger generation who would continue tobe active in the business to stayinvolved and to reap all of the benefitsof future growth without having toimmediately purchase the interest of theolder generation who is ready to retirebut needs a stream of income from thepreferred dividends. This would alsopermit a distribution of dividends toonly those shareholders who needed theincome, while freeing the corporation ofthe obligation to distribute dividends toa younger generation who was moreinterested in reinvesting available fundsin the corporation.

b. Section 2036(c). It was only when taxplanners became very aggressive andcreated voting preferred stock which wasretained by a parent, and which wasfrozen in value, and distributed thecommon stock, often with no votingrights, to a younger generation in aneffort to freeze estate tax values, thatCongress and the Treasury becameconcerned. The major problem was in thevaluations where the older generationcontended that the preferred stock hadsubstantially all of the present value ofthe corporation, and that the commonstock with all of the rights to thefuture growth could be given to a youngergeneration free of gift tax. The

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response was Section 2036(c) whichprovides, in general, that a decedent'sestate will include the value of thecommon stock where the decedent retaineda disproportionate part of the income ofthe corporation while distributing adisproportionate part of the appreciationpotential to a younger generation.

(1) As of the date of this outline,the Senate Finance Committeeadopted the Boren--DaschleAmendment to repeal Section2036(c) and to substitute somevaluation rules.

c. Notwithstanding Section 2036(c),recapitalizations provide an excellentopportunity to divide the ownership ofthe business into different categories tosatisfy the respective needs of theowners. Other forms of recapitalizationinclude the formation of a partnershipwhere the operating control can be in thehands of either a managing partner or ageneral partner, while the passivepartner could have a limited partnershipinterest but with preferentialdistribution rights.

11. Charitable gifts of corporate stock interest

a. An older shareholder desiring to reducehis interest in a corporation may have atleast two objectives satisfied by thetransfer of a portion of his corporationstock to a charity: (1) to satisfy thedesire to make charitable contributionsin the most tax effective way; and (2) toincrease the residual percentage ofownership in the younger generation; Bytransferring stock to a charity, thedonor obtains an income tax deductionwhile at the same time eliminating thegain that he would realize if he firstsold the stock and then transferred theremaining cash to the charity. The gainis subject to the alternate minimum taxSection 57(a)(6).

b. As is frequently the case, the charitythat is the owner of a minority interestin the business will seek out a buyer forthe stock. It will often sell the stock

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to the corporation, and it will sometimesalso sell stock to the younger generationwho desires to increase its interest inthe corporation. If the youngergeneration buys the stock from thecharity, the purchase may be funded bythe payment of a cash bonus to theyounger generation employee.

c. If the corporation is obligated to redeemthe stock, but the charity is notobligated to sell the stock to thecorporation, the transaction will notlikely be treated as a step transactionby the IRS and taxed as a redemption ofthe donor's stock by the corporation.D.D. Palmer (62 T.C.685); Rev. Rul. 78-197 (1978-1 C.B.83)

d. It is important in these transactionsthat care is given to establish a propervaluation of the gift to the charity.

e. The charitable gift is less likely to bechallenged if the charity can shortlythereafter sell the stock for thatestablished value. It might be a goodtime for the older generation tosimulataneously gift stock to the youngergeneration since a challenge by theInternal Revenue Service of the giftvaluation to the child would only resultin a larger charitable contribution ofthe donor.

12. Stock bonuses and stock options

a. The overall topic of buy/sell agreementspresupposes that the shareholder desiresto sell his stock in the company andreceive cash. In fact, he may have ashis primary objective simply the transferof control to other members of thefamily. It is important for shareholdersto not enter into a binding buy/sellagreement when there is still thepossibility that their children may someday want to enter or take control of thebusiness.

b. Do not overlook the possibility of simplygifting stock to members of the family orbonusing stock to employee familymembers. One of the problems of gifting

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stock is that the value may be growing sorapidly that the gifts cannot be madewithin the annual exclusion because thecompany is growing faster per year thanthe total permitted annual exclusion.This may necessitate a combination oftechniques, including gifting to themaximum extent of the annual exclusion,or even the unified gift tax allowance.

(1) Too often parents retain theunified credit while the valueof the business continues togrow

(2) The unified credit is notindexed

(3) The unified credit could berepealed

c. Bonuses. There are numerous alternativeforms of stock bonuses and stock optionsfor family members. Awarding the familymember employees the opportunity toacquire more stock through theiremployment:

(1) Restricted or non-restrictedstock bonuses may be awardedperiodically. The stock bonusis taxable to the employee whenthe risk of forfeitureslapse. Section 83. Unless theemployee elects to be taxed inthe year of transfer. Section83(b)

(2) Various forms of stock optionsincluding Incentive StockOptions (Section 422A) and non-statutory stock options mayalso be awarded to employees.Incentive stock options assurethe younger generation activein the business that they willhave the right to purchase thestock at the present value at afuture time. The granting ofincentive stock option is taxfree to the employee if theoption price is at 110% of thecurrent fair market value atthe time the option is granted

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and the option is exercisedwithin 5 years. Section422A(c)(6). The bargainelement, however, on the datethe stock is issued is a taxpreference item. If properlyadopted, the employee couldhave up to 5 years to exercisethe option which may mean thatthe employee can wait to see ifhe is still interested in thebusiness before he actuallyexercises the option. Withoutstock options, an employee mayhave a disincentive to increasethe value of the businessbecause he would have to buythe stock from his family at alater time at a higher valuereflecting the result of hissuccesses in running thebusiness.

13. Voting Trusts

a. Voting trusts are another way to assureyounger generations that they will havethe right to control the futuremanagement of the corporation without (1)actually redeeming the stock while theolder generation is alive; or (2) havingthe consequences, i.e. gift taxes, lowbasis carryover, etc. of gifting stock.

b. A voting trust, for example, might assureone sibling who is in the business thatthe transfer of stock to this othersiblings will not affect the ultimatecontrol of the business.

c. This may permit other siblings to retain

corporate stock

14. S Corporations

a. Particularly with the advent of lowerpersonal tax rates, S corporations havegrown significantly in importance andpopularity in the last few years.

b. The obvious benefit of an S corporationis that members of the family who are notactive in the business can still receivedistributions of income. For example,

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the older generation who wants to retirebut retain an income interest could do sowith the use of S corporations. Also, anS corporation can permit income to bedistributed to a sibling who is notactive in the business.

c. With the use of two classes of commonstock, voting and non-voting, the childactive in the business can be assured ofcontrol while sharing the income withmembers of the family who are notinvolved in the business and who willhold only non-voting common stock.

d. By being able to distribute income to aretired shareholder, it may eliminate orpostpone the necessity of having to buythat shareholder's interest, at leastuntil the death of the shareholder whenthere would be a stepped-up basis.

15. Sale of the business to outsiders

a. Sometimes it is not possible for acorporation to redeem the stock of ashareholder, particularly if it had to bedone with after-tax dollars. When aconflict arises between shareholders andneither shareholder can, nor is willingto, purchase the interest of the othershareholder, it may be necessary for theentire company to be sold.

b. Perhaps one of the shareholders whowanted to remain active in the businesscould enter into an employmentrelationship with the new owners.

c. The new shareholders will often arrangefor the acquisition on a leverage buy outbasis which usually will involve (1) areduction of the payroll of thecorporation by the elimination of thehigh salaries previously paid to theshareholder employees, and perhaps otheremployees; (2) tax deductible covenantsnot to compete and consulting agreements;(3) the use of an employee stockownership plan; (4) the sale of corporateassets, even a subsidiary, to obtaincash; (5) perhaps a sale and leaseback ofsome corporate assets; (6) the deductionof interest on junk bonds; and (7) othertechniques.

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16. Going public

a. An alternative to a shareholder sellingout his entire interest in a corporationwill be to have a public offering by thecorporation of some of its stock which inturn will ultimately create a market forthe major shareholder's interest. Thismay make it possible for the shareholderto have the opportunity to diversify hisholdings during retirement, or to assurehis family of the ability to sell theirstock at his death to obtain income. Itmay also make it possible for ashareholder to transfer a portion of thebusiness to a family member who is notactive in the business with assurancethat the inactive family member wouldhave a market for their minority interestin the corporation.

b. This may be an initial public offering orthe shareholder may piggy-back on theoffering by the sale of his own stock.

c. Going public helps establish the value ofthe balance of the stock for estate taxpurposes.

17. Guaranteed income payments to partners

a. One of the advantages of partnerships isthe flexibility of writing a partnershipagreement that can provide for specialdistributions to certain partners.Included in these provisions is Section736(a) that permits a partnership to makeguaranteed payments with respect to aretiring or deceased partner which aredeductible in computing the net income ofa partnership.

b. The payments for a retiring or deceasedpartner's interest may also be deemed tobe in exchange for the withdrawing ordeceased partner's share and treated as asale of a capital asset eligible for longterm capital gain. Section 736(b)

c. Special allocation payments may be paidto a partner who is not active in themanagement of the partnership. This maypermit a partner to retain hispartnership interest, and even pass it on

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to members of his family, therebyreducing the necessity of a partnershippurchasing his interest on a non-deductible basis. Beware, however, ofthe partnership being an enterprise underSection 2036(c).

18. The use of life insurance to assist in thepurchase of a shareholder's interest in abusiness

a. Group term life insurance. Section 79permits a corporation to provide lifeinsurance to employees on a veryfavorable basis. It provides that theemployee will not be taxed on the cost ofthe first $50,000 of group term insuranceprovided to him, and will be taxed on afavorable basis for other group terminsurance which is provided by thecorporation on his life. As a practicalmatter, a large recovery of insuranceproceeds on the death of a shareholderwill reduce the amount that his familywill need to receive for his interest inthe corporation.

b. Individual term or ordinary policies.Any insurance purchased by a corporationand payable to the insured or his familywill permit the corporation to deduct, ifreasonable compensation, the cost of thepremiums. Although the premiums will betaxable to the employee, and included inhis W-2 income, the proceeds of the lifeinsurance will be tax-free and, likegroup term insurance, will have thepractical impact of reducing the amountthat the decedent's family will need toobtain for the business interestfollowing the death of the shareholder orpartner. Such life insurance will alsomake it possible for the decedent todivide his estate by giving the inactivesiblings cash and the active siblingsstock or ownership interest which wouldeliminate the necessity of redeeming aportion of the decedent's interest inorder to provide the liquidity for anequalization of the estate.

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c. Split dollar insurance.

(1) Split dollar insurance hasgrown in popularity and is nowa major technique by whichcorporations assist anowner/employee in purchasinglife insurance. While the fullpremium of ordinary lifeinsurance is taxable to anemployee, under a split dollarplan, only the PS-58, i.e.current value of the annualcoverage, is included in theincome of an employee. Rev.Ruling 64-328(1964-2 CB 11)

(2) Rather than the corporationpaying the entire premium andhaving an employee taxable onthe PS-58 element, thecorporation may want to bonusthe PS-58 cost, and perhapseven the tax on such bonus, tothe employee which will bedeductible by the corporation,and the employee can pay hisown PS-58 costs.

(3) Frequently, to remove thepolicy from the insured'sestate, the employee'sownership interest in the splitdollar insurance policy isowned by an irrevocable trustand the employee makes anannual contribution-to anirrevocable "Crummey" trust.Crummey v. Commissioner 397 Fed2d 82 CA-9 1968

(4) Beware that under Section 2042,an employee's estate willinclude the value of splitdollar life insurance if theemployee is the soleshareholder and if he retainsthe incidents of ownership inthe policy through his controlof the corporation. Rev. Rul.82-145 1982-2 CB 213

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d. Reverse split dollar

(1) This is the latest twist ofsplit dollar insurance. Underthis concept, the corporationis the beneficiary of a lifeinsurance element of a splitdollar policy and thecorporation reports the PS-58costs on the current value ofthe life insurance.

(2) This technique is used to letthe corporation recover for theloss of a key man.

(3) The corporation can also usethe proceeds to redeem hisinterest in the corporation.

e. Disability buyout insurance

(1) Similar to life insurance,disability buyout insurancewill pay proceeds after theinsured has been disabled for aperiod of time, such as oneyear. This would provide theproceeds needed to fund theredemption of a shareholder'sstock who is forced to retirebecause of a disability.

(2) Warning - read policy carefullyto be certain the policy willbe payable by the insurancecompany to meet thecorporation's obligations.

f. Any technique that can assist in eitherproviding the corporationwith the cashto buy out a retiring or deceasedshareholder, or which will give thedisabled or deceased shareholder's estatecash will dramatically ease the burden ofpurchasing an interest in a business inwhat would otherwise have been a non-deductible redemption.

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19. Installment payments with deductible interest

a. Any time there is a purchase of ashareholder's interest in thecorporation, it may be structured on aninstallment basis with the deferredpayments bearing interest. Theopportunity to balance a fair price forthe shares or partnership percentagepurchased and a reasonable rate ofinterest will give the opportunity forsome latitude in obtaining the bestbalance.

b. The installment note may also providethat a "bargained for" element of theNote is that any unpaid installmentsremaining at the death of the holder ofthe note are forgiven. John A. Moss 74TC 1239, Acq. 1981-1 CB 2 This may bevery useful where the selling shareholderneeded cash during his lifetime, but uponhis death he had no heirs to whom hewanted to leave the balance of the note,and where he was more interested inpreserving the company for the employees,which may include a family member.

20. Issue debentures. Similar to the installmentnote is the issuance by a corporation of itsdebentures. Debentures are simplycollateralized, mortgage backed promissorynotes. The interest paid on these notes isdeductible by the corporation and can serve asa means of financing a stock redemption.

21. Private annuities

a. One technique for a shareholder to beable to get the maximum amount of incomefor his interest in the corporation,while minimizing his estate tax would beto sell his ownership interest pursuantto a private annuity. Each payment thathe receives will be part interest, parttax free recovery of basis and partcapital gain.

b. The major advantage of the privateannuity is that it is payable to theseller as long as the seller lives, andimmediately disappears on the seller'sdeath, free of estate tax.

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22. Plan for the continuity and succession of thebusiness by the family

VIII. SUMMARY

A. All of the foregoing techniques are alternatives tothe straight non-deductible redemption of ashareholder's or partner's interest in a business.They may be used individually, in combination, or tobuy a portion of the withdrawing shareholder's orpartner's interest.

B. In some cases, they are simply payments to the ownerso that he will not have to sell his interest in thebusiness and will be free to give it to members of thefamily who are active in the business.

C. As indicated above, "disguised" methods of paying forthe stock or partnership interest will be scrutinizedby the Internal Revenue Service when:

1. They appear to be treated as compensation forservices that have not been rendered

2. They appear to be a bargain sale, i.e. a giftto remaining shareholders, particularly familymembers

3. Or when the substance of a transactionotherwise does not meet the form in which thetaxpayers try to structure it

D. Good planning and a fair effort to value the interestbeing purchased or the services being rendered shouldpermit a good balance of the tax positions of thevarious parties involved.

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THE SLDON LAw GROUPA Pfessional Gorporaon

APPENDIX A

Dear Shareholder of Quicksilver, Inc.:

You have asked us to perform certain services for yourelating to your proposed Buy & Sell Agreement. We are pleasedto do so; however, it is in your best interest, and our ownethical obligation to each of you requires, that you fullyunderstand the considerations involved in "dual representation"of your corporation and its respective shareholders.

The different shareholders can have differing, andsometimes conflicting, interests and objectives regarding theircorporate planning. For example, they may have different viewson how to value the corporate stock upon the death or retirementof a stockholder. There may be a conflict in whether the sellingshareholder should be subject to a covenant not to compete.There may be a conflict in how an installment payout issecured. These are just a few general examples. Each situationis unique.

If you each had a separate lawyer, you would each have an"advocate" for your position and would receive totallyindependent advice. Information given to your own lawyer isconfidential and cannot be obtained by your fellow shareholderswithout your consent.

That may not be the case here where we are advising theentire family, but the opportunity for conflict does exist. Wecannot be advocates for one of you against the other.Information that any of you gives us relating to your thoughtsand special needs cannot be kept from the other shareholders. Ifyou ask us to continue to serve you jointly and the corporation,our effort will be to assist in developing a coordinated overallbuy out plan and to encourage the resolution of differinginterests in an equitable manner and in the best interests ofyour mutual business affairs. We will attempt to represent yourcorporation without a bias in favor of any of you.

-37-2800 City Center Square 110 MainStreet Kansas City Missouri 64105-2196

(816) 474.7777 Pax (816) 474-1302

After considering these factors, each of you must decidewhether you wish us to continue to represent you jointly inconnection with your corporation and related matters. If you do,please review the statement that follows, sign it as indicated,and return this letter to us. An extra copy is enclosed foryour records. If at any time any of you wishes to have theadvice of separate counsel, you are completely free to do so. Wehope that the information provided will assist you in using ourservices effectively. Again, we appreciate the opportunity to beof service. We look forward to a long and successfulprofessional relationship with each of you and yourcorporation.

Very truly yours,

THE SILDON LAW GROUP, P.C.

ByMyron E. Sildon

We have each reviewed the foregoing letter. Each of usrealizes that there are areas where our interests and objectivesmay differ and areas of potential or actual conflict of interestbetween us in connection with our estate planning and relatedmatters. We understand that each of us may retain separate,independent counsel in connection with these matters at anytime. After careful consideration, each of us requests that yourepresent us and our corporation jointly in connection with ourcorporation succession planning and related matters. Each of usalso understands and agrees that communications and informationwhich you receive from any of us relating to these matters may beshared with the others.

I.M. QUICK

U.R. QUICK

QUICKSILVER, INC.

ByP.A. QUICK

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