GENERAL TREASURER’S WORKSHOP

October 18, 2003


Presented by
NAIC
Minneapolis/St. Paul Chapter


Instructor:
Bruce Reed

Agenda

Welcome and Introductions

General Treasurer’s Workshop

Instructor: Bruce Reed

How many of you have been to a Treasurer's workshop before?

Buddy system

This presentation is available at www.brucereed.com/Presentations/index.htm

Welcome and Introductions - Expectations

What do you expect to get out of this class?

Welcome and Introductions - Disclaimer


Certain portions of this presentation are subject to NAIC and ICLUBcentral copyright, but the presentation itself is copyrighted by Bruce Reed.

Welcome and Introductions - Other Workshops

Club Accounting Basics

Some topics covered in the Beginning Treasurer workshop:
(this presentation is also available on this web page)

Verification of Club Books

Verification of Club Books - Pre-filing verification

Verification (audit) of the Clubs records is not generally tied to the filing of the Club's tax returns.

However, many clubs may benefit from having some kind of verification by another member before closing the books for the year and filing tax returns.

Verification of Club Books - Reports to print for Verification

print reports for 01/01 thru 12/31, or as-of 12/31

Verification of Club Books - Other documents

Include the last statements from the prior year for beginning balance verification.

Verification of Club Books - Procedures

Verification of Club Books - NAIC Resources

Verification procedures
   - old.better-investing.org/clubs/verifying-books.html

Annual Verification Report
   - old.better-investing.org/clubs/audit-report.html

Year End Duties

Some topics covered in the Treasurer's Year-End/Tax Workshop:
(this presentation will also be available on this web page)
(note - not all items apply to all accounting systems)

Tax Information

Some topics covered in the Treasurer's Year-End/Tax Workshop:
(this presentation will also be available on this web page)

Advanced Topics

Advanced Topics - Company-paid fees/commissions

The Club receives a quarterly Dividend Reinvestment Plan statement that shows the current dividend paid and also "Tax Reportable Company Paid Fees and/or Commissions".   How are these fees recorded?

Company-paid fees and commissions are treated as additional dividends.   They are reported as taxable dividend income on the 1099-DIV form that your Club receives at the end of the year.   Company-paid fees are added to the cost basis of the purchased stock.   In Club Accounting, Charges Paid by Company is listed under Securities, Enter New Transaction, Charges Paid by Company.

Advanced Topics - Can one member buy out another?

May a new member buy out a withdrawing member? May current members subdivide the withdrawing member’s shares among themselves? Are there fees involved?

No, No, No.

You can’t have one member buy out another member because it involves complex accounting and tax consequences.

Your Partnership Agreement can spell out how other members can make deposits which match a withdrawing partner's value.   This cash can be used to pay off the departing member.

If a withdrawal fee is charged, it works best of the new deposits are entered with a date before the withdrawal, because the withdrawal will change the unit value.

This should not be a problem if no fee is assessed.

Advanced Topics - Options for total withdrawals

What are the options for members making a total withdrawal?

  1. Club pays withdrawing member with cash on hand.  This may or may not require the sale of securities to make enough cash available.

  2. Club pays withdrawing member with less cash than the member's cost basis and the rest in stock.

  3. Club pays withdrawing member with more cash than the member's cost basis and the rest in stock.

Advanced Topics - Options for total withdrawals - Withdrawal paid with all cash

With cash payment, the Club may have enough cash on hand, or may have to sell stock.

Selling a stock, at a gain or loss, has the normal ramifications of a loss or gain, but has no other direct effect on a withdrawal.  Selecting stock to sell should follow your normal procedures for selling stocks.

Advanced Topics - Options for total withdrawals - Withdrawal paid with stock

If part of a withdrawal is paid with stock, the Club is able to defer gain or loss from the stock until each member withdraws or the Club disbands.   Since there is never a sale of the stock for the Club, all earnings are deferred until each member realizes a gain at withdrawal.

However, usually there is no good reason for a Club to defer a loss.


If the amount of cash received is less than the withdrawing member's cost basis in the Club, then all taxable gains are deferred until the sale of the stock, at the member's discretion.   The member's cost basis of the stock is their cost basis in the Club minus cash received.

If the amount of cash received is more than the member's cost basis in the Club, then the difference is taxable gain, and the stock has a cost basis of zero.

Advanced Topics - Options for total withdrawals - Other Considerations

Convenience of stock transfer - does the member also have an account at the Club's broker?

Does the Partnership Agreement allow payoffs with stock?

Advanced Topics - Equal partners?

Does everyone have to be an equal partner?  No!


Advanced Topics - Total Return, Compound Ann Ret

Total Return

This is the total rate of growth.  100% would be a doubling of value.

For stocks, this is the total return since the purchase date(s).
For members, this is the total return since the specified date.
This number is interesting, but doesn't mean anything.  Look at the C.A.R. instead.


Compound Annual Return (C.A.R.)

This is the annual rate of growth.  15% would match NAIC target objectives.
Note that a Total Return of 30% for a 2-year period is not the same as a 15% Compound Annual Return.

For stocks, this is the annual rate of growth since the purchase date(s).
For members, this is the annual rate of growth since the specified date.

Advanced Topics - Cash Accounts

The source and/or destination of the transaction determines the Cash Account to post transactions to.

You can create new Accounts to tailor the accounting to your Club specifics, in addition to or in place of the provided accounts - Bank, Broker, Suspense.

For example, if you are trying to make entries that accurately reflect the dates of collecting member's monthly payments and the dates of bank deposits, you could create a Cash Account called Member Collections.

Here are the transactions you would enter:
This way, your records will exactly match the bank statement.

Advanced Topics - Cash Accounts - Cash Accounts, cont.

Another advantage of creating your own Cash Accounts - if, for example, your broker is TD Waterhouse, you could create a Cash Account labeled 'TD Waterhouse'.  Then your Valuation Statement will clearly identify your broker.


Here's another use for custom Cash Accounts - non-investment monies, such as money for an investment pool contest.  Here's how.  First create a Cash Account labeled 'Investment Pool Contest'.

Then, on the date or dates money is collected, you enter a Cash Accounts, Transfer transaction, Source is 'Investment Pool Contest' and Destination is 'Bank'.  Use the Comments field to enter any details, such as the Members who are participating.

On the date a winner is declared, a check is written to the winner.  A transaction is entered in Cash Accounts, Transfer, with a Source of 'Bank' and a Destination of 'Investment Pool Contest'.  Use the Comments field to enter the name of the winner.  Continued...

Advanced Topics - Cash Accounts - Cash Accounts, cont.

Important Notes:

For this type of activity, the key thing is to only use Cash Accounts, Transfer for transactions, and to enter offsetting transactions.  When all is said and done, the 'Investment Pool Contest' account should have a zero balance.  This is called a 'wash' transaction.

This type of activity is not recorded using Members, Deposit or Members, Member Fee because this type of activity should not affect the Member's cost basis in the Club.

As a matter of principle, these types of transactions don't properly belong on the books of the Club, but if the Club thinks this is the best way to track something like this, it's important to follow the right process - see Note 1 about 'wash' transactions.

More important than the note above, if this type of money is deposited into the Club's Bank account, the Club's records should reflect that in the Cash Account for Bank.

Advanced Topics - Member Deposit vs. Member Fee

How can you tell when to enter Member money as Deposit and when to enter it as a Fee?

Before answering that, we should point out there's another way Member money could be entered.  If the money should have no impact on the Member's cost basis in the club, the transaction should be entered under Cash Accounts.  See the earlier example for an Investment Pool Contest.

Assuming the Member money collected does have something to do with the operation of the Club, then how do you determine whether to enter it as a Deposit or a Fee?

Simply put, a Member Fee doesn't buy units, therefore a Member Fee is a penalty against the member.  Anything collected from all members cannot be a penalty.  What would be the point of penalizing all members?

But what about sharing the cost of Club expenses, such as the annual NOCA fee?  That's an easy one.  Look back at the beginning of that question - it says 'Club expenses', not 'Member expenses'.  Continued...

Advanced Topics - Member Deposit vs. Member Fee - Member Deposit vs. Member Fee (cont.)

Here's an example.  This example may seem extreme, but picture a club such as mine (I have 94 units) with a new member joining (starting at 1 unit).  

Our example club called the Mostly Me Investment Club has two members - Mostly Me and Little You.

The next few screens compare the results of Equal Allocation vs Normal Allocation (proportional).

Advanced Topics - Member Deposit vs. Member Fee - Member Deposit vs. Member Fee (cont.)

Equal allocation method:

  1. NAIC Tax Printer expense is entered with equal allocation -- $24.50 for Me and for You.  That's an immediate decrease of 2.4 units each.
  2. Now Me has 91.6 units and You has -1.4 (negative!) units.  Unit Value is still $10.01, Total Value is $902.00, Total Units is 90.1.  You is now worth -$14.01!
  3. Dividends add to Club Value, Unit Value is now ($902+$98) / 90.1 = $11.10.  Me is now worth $1016.06 and You is worth -$16.06.  You lost money when the club had earnings!
  4. NOCA expense is entered which is equally allocated - $24.50 for Me and for You.  That's an immediate decrease of 2.2 units each.
  5. Me now has 89.3 units, and You now has -3.7 units, totalling 85.7 units in the Club.
  6. End of year distributions are normally time-based.  The March dividends would be allocated using the units owned after the January expense.  Since You owned -1.4 units out of 90.1, you have -1.61% ownership.  $98.00 times -1.61% is -$1.57, which is printed on the K1.
  7. Now You has to explain to the IRS how You had negative dividends!
  8. And Me has to explain to the IRS the 101.61% ownership in the club!

Advanced Topics - Member Deposit vs. Member Fee - Member Deposit vs. Member Fee (cont.)

Normal allocation method (proportional):

  1. NAIC Tax Printer expense is entered with normal allocation, decreasing Total Club Value to $902 ($951-$49).  Unit Value is now $902 / 95 = $9.49 (down from $10.01).
  2. No change in Units.  You still has 1 Unit.
  3. Dividends add to Club Value, increasing Total Club Value to $1000 ($902+$98).  Unit Value is now $1000 / 95 = $10.53.
  4. No change in Units.  You still has 1 Unit.
  5. NOCA expense is entered with normal allocation, decreasing Total Club Value to $951 ($1000-$49).  Unit Value is now $951 / 95 = $10.01 (back where we started!).
  6. During the year Me and You did not buy any more units, and their percent of ownership did not change.  Makes sense to me!
  7. The Club had $98 of earnings and $98 of expenses, resulting in no change in Total Club Value.  Me too!  And You too!
  8. End of year distributions -- You had 1.05% ownership throughout the year.  You are allocated $.52 for Tax Printer Expenses, $1.04 Dividend income, and $.52 for NOCA Expenses.  Net result - no gain or loss.

Advanced Topics - Member Deposit vs. Member Fee - Member Deposit vs. Member Fee (conclusion)

In our example for Equal Allocation, the Club had net gain/loss of zero, and nobody bought (or withdrew) units.  So how did You lose $50.57?  I don't care -- I gained $50.57!

In summary, think of it this way.  ALL income and expenses for the Club apply to the Club, not directly to Members.  Then when all is said and done (tax time!), each Member gets their share.

Advanced Topics - Dates on Transactions

For transactions that rely on unit value (Member Deposits, Withdrawals), if possible, avoid using the same date as any transactions that change the unit value.   This will reduce doubt about which transactions will affect the unit value for transactions which have units.

Especially avoid entering withdrawals on the same day as a valuation.  There have been reports of problems related to this.

Resources

NAIC

ICLUBcentral

Yahoo

IRS

Resources - NAIC

Local

Minneapolis/St. Paul Chapter NAIC
P.O. Box 18264
West St. Paul, MN 55118
Voice Mailbox: 952-932-9686

National

www.better-investing.org Toll Free: 877-275-6242

Email Discussion Lists

lists.better-investing.org - click on Club Treasurers

Club Treasurer's Duties

old.better-investing.org/clubs/treasurer-duties.html

Other information

old.better-investing.org/clubs/clubs.html#corner

Resources - ICLUBcentral

Web Site

www.iclub.com

NCA

NAIC Club Accounting (NCA) for Windows V2.3.5 (current version)
Legislative changes will require an update for year-end
NCA $169
NCA Support (includes NOCA) $49/year
NAIC Club Tax Printer $49 (each year)

NOCA

NAIC Online Club Accounting
www.naic-club.com
NOCA with Support $49/year
NAIC Club Tax Printer $49 (each year)

Resources - Yahoo Stock Information

Stock Quotes

finance.yahoo.com

Historical Stock Quotes

chart.yahoo.com/t

Resources - IRS

Web site

www.irs.gov ( NOT www.irs.com !)

Publication 541 - Partnerships www.irs.gov/pub/irs-pdf/p541.pdf

2002 Form 1065 instructions www.irs.gov/pub/irs-pdf/i1065.pdf
2002 Schedule K-1 instructions www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Questions?

eMail me

This presentation can be found at www.brucereed.com
Click on Investment Club & Treasurer Presentations.


Recap - expectations


Please fill out the NAIC workshop survey