Please Don’t Kill Our Business

“I come before the committee today representing my family and the nearly 13.5 million other family businesses in the United States. I am also here on behalf of our employees, who represent a few of the nearly 20 million family business, private sector jobs created during the 1980s.

“Telect [a 13-year-old company which makes fiber optic and digital communications equipment] is a closely held S corporation in Liberty Lake, Washington, a suburb of Spokane. We have grown from three employees when we started in September 1982 to nearly 600 today. We compete on a national and international basis. Our 1994 sales were over $41 million. We offer good jobs and good benefits. It has happened solely through the dedication, planning, and the efforts of my parents and me, as well as the efforts of our number one asset: our employees. We may appear to be a large business to some, but we are a tadpole among killer whales in the converging telecommunications and video communications industry.

“When my father decided to start Telect in 1982, he was concerned about where his kids would work and what opportunities would be available to them. My mom, a housewife of 20 years, entered the workplace and collected no salary for nearly two years. I was directly out of high school and went to work on the first day.

“Our philosophy has been to reinvest our profits into new products, employees, and our expanding international opportunities. We pay millions of dollars in taxes every year. The government looks at our families’ tax returns and sees millionaires. We look at our families’ tax returns and see over 600 families living productive lives.

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“In 1986 we began the onerous task of planning the succession in our company. This included the transfer of both leadership and ownership. Leadership is the part that every business should be concerned with. The ownership and death-planning efforts of the business are the areas that should not have to consume time and money. But they do. In his book, Costly Returns, James Payne, an economist in Sandpoint, Idaho, has estimated that the compliance costs of the transfer system, including compensation to attorneys and accountants, amount to approximately 65 percent of the revenues raised.

“We are really proud of what our family has accomplished during the last 121/2 years. The opportunity for the family business is thriving, but the perpetuation of the business into the future is in jeopardy due to the costly effects of our silent partner, Uncle Sam, waiting to cash out upon the death of my parents. I am sure that each of you is already aware that in private companies, a majority of a family’s net worth is often tied up in the business. There is little, if any, liquidity. Uncle Sam has really done nothing to help our business and has still been paid.

“I chuckle when our government says we are allowed to pay estate taxes over 15 years. That doesn’t mesh with our philosophy of trying to reduce our debt, rather than increase it. It appears that Uncle Sam wants businesses to go into debt rather than reinvest in economic-enhancing and asset-building opportunities. I understand that two countries with which the United States competes on an international scale—Germany and Japan—have made it much easier for their family businesses to thrive from generation to generation.

“We have made an effort to maximize gifting and are much further along in estate planning than many other family businesses. My parents have used up their maximum lifetime exclusion of $600,000 each, and are using gifting allowances on an annual basis in order to mitigate the estate taxes that would be levied upon their deaths. In addition, a life insurance trust, costing nearly $250,000 annually, has been set up to allow the heirs to cover potential taxes.

“The trouble is that the company is growing, and it will soon [reach a size that will make it] impossible to buy enough insurance to cover the death tax obligations. We are paying enormous amounts of income tax yearly on the profits of the company and still face a threat to the longevity of the company because of estate taxes.

“If you kill the company at the time the owners die, you are losing the golden eggs of future taxes that the company would generate, plus the income taxes of the employees. This ultimately affects the government because, by eliminating the company, the jobs, and the annual taxes, it realizes short-term gain but long-term pain.

“If my parents die while I am testifying before you, I will have to go back home and prepare a check to Uncle Sam for approximately $6,793,000. That seems ridiculous, considering the fact that their estate is mostly made up of non-liquid assets in a business that is thriving. Not only does it seem unreasonable to tax someone for their estate based on the business interest, it is the worst time—after the death of one of the principals—to be trying to pay such exorbitant taxes.

“Please eliminate this tax from the estates of closely held businesses. If the competitiveness of the U.S. is to increase, please quit thinking that this is taxing the wealthy and realize it is affecting millions of jobs. And please realize that closely held, family businesses are managed not against quarterly results, and many times not for the financial return to the shareholders, but for the greater good of people and products.

“I realized as I prepared this testimony that we could really use a new product. I am going to go back to Spokane to develop a new product that will enable founders and family members of closely held businesses to live forever. Because if this product were to be developed, we would never have to worry about this tax.”The house committee’s reaction

Wayne Williams’ testimony on the crippling effects of the inheritance tax drew relatively little discussion from Ways and Means Committee members. However, Rep. Philip Crane (R-IL), commenting on how many times the same income can be taxed under the present system, said that the “ultimate obscenity in the code is when you have the audacity to die and leave [assets], and they come in and bash your bereaved spouse and loved ones.” Another member, Rep. John Ensign (R-NV), said his family had recently sold a closely held business partly because of the estate tax laws. The business was not liquid, he said, and “we felt the chances of holding on to it without the market to sell into [presumably to pay estate tax] were very small.” Ensign is a veterinarian who now owns an animal hospital.

Much of the committee discussion was about the costs of complying with the federal tax system. Williams reported that six of the 10 people in his company’s accounting department spent 80 to 90 percent of their time dealing with federal and state payroll and income tax matters. When one committee member admitted he had never been in business and knew little about what is involved in compliance with the tax code, Williams invited all the committee members to come to Liberty Lake for a day and “sit down with our people….We would give you an opportunity to work inside, figuring out what it takes to comply with payroll and income tax requirements.”

—Howard Muson

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