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Search Terms: estate w/10 tax w/10 repeal, House or Senate or Joint

Document 44 of 54.

MAY 13, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 2082 words

HEADLINE: PREPARED TESTIMONY OF KEVIN O'SHEA
CHIEF FINANCIAL OFFICER
SHAMROCK ELECTRIC CO., INC
ELK GROVE, ILLINOIS
ON BEHALF OF
NATIONAL SMALL BUSINESS UNITED
BEFORE THE HOUSE SMALL BUSINESS COMMITTEE
TAX, FINANCE AND EXPORTS SUBCOMMITTEE
AND RURAL ENTERPRISE, BUSINESS OPPORTUNITIES
AND SPECIAL SMALL BUSINESS PROBLEMS SUBCOMMITTEE
SUBJECT - THE IMPACT OF THE ESTATE AND GIFT TAX
ON SMALL BUSINESS

BODY:

Mr. Chairmen, Ranking Members, Members of the Subcommittees, thank you for allowing me to appear before you. My name is Kevin O'Shea, Chief Financial Officer of Shamrock Electric Company Incorporated of Elk Grove, Illinois. I am also a member of National Small Business United (NSBU), the oldest small business organization in the nation representing 65,000 small businesses in all 50 states.
As members of the House Small Business Committee, I know you are well aware of the impact that the estate and gift tax -- also known as the death tax -has on America's 23.3 million small business owners. For you to take the time to address the shape and scope of reform on the death tax is critical and I applaud your efforts.
For years, families, like mine, have been faced with the problem of liquidating the family business in order to pay for the taxes on its inheritance or to drain valuable resources from the business to establish costly and confusing trusts. Congress should repeal the death tax.
The Shamrock Electric Story
I have changed the old saying from "the only certain things in life are death and taxes" to "the only certain things in life are death, taxes and paying taxes after your death."My grandfather started our family business in the 1910's. In the 1950's my father and uncle took over the firm. The business was not really worth anything at that time, but through hard work and determination, they turned it into a very successful company. When my uncle passed away, my father received his stock through a buy-sell agreement. My father is now 68 years old, and he wants to start slowing down. He has a winter home in Florida where he goes for 5 months each year.
Today, our company has about 10 families that have more than one relative working for us. I consider us to be the essence of a family owned business. My father and I put a high priority on our employees and their future with our company. We sell construction services, and we are nothing without our employees. We have spent the last eight years planning so that their future would not be jeopardized. We have spent over $400,000 on estate planning in that period of time, and we will continue to spend an amount equivalent to 10% of our firms after tax profits on estate planning. This is money that could be used to expand the company, could be used to pay our employees more, or could be used in a hundred different ways to make our company a better place to work. Instead, we use the money to plan for the eventual death of my father, so we can give a cash equivalent to half of his life's work to Estate Taxes.
When my father does leave, I will own the company and the estate taxes will be paid through life insurance, planning, and luck. Here are my complaints about the whole process:
1) For the past eight years, when my Father and I would discuss estate planning, all of my sentences would start with "when you're gone". I don't like to think about my father's inevitable passing. It has left lasting emotional scars on both my father and I to go through this process. If the death tax were buried, future generations would be sparred this problem.
2) When we first started discussing estate planning, my father was going through some health problems. It was very difficult for me to deal with estate planning while my father was staring his own mortality in the face. I can't imagine what he went through. 3) In the first few years of our estate planning, the company, and our industry as a whole was having a down cycle. We had a few years that we almost lost the entire company. But through it all, we had to pay the attorneys, accountants and life insurance companies to keep the plan going, in the event that there would be a company left to pass from one generation to another. We would have pulled out of the tailspin sooner if we did not have the huge overhead cost of estate planning.
4) The process of estate planning has caused a rift between my only other sibling and I. Because I am involved with the company, the plan is that I get the company and my sister gets an equal value of cash and other assets when we settle the estate. Because of the tax planning however, my father's will reads that she will get an amount equal to what the company was worth when we transferred it to me. I have received my inheritance from my parents, even though they are still around. My sister will not receive hers until they are both gone. My inheritance is growing in value; hers is a set value when the estate is settled. She was my "best person" at my wedding-we've been best friends all of our lives - The process of planning for the continuity of the business has caused animosity between us. I hate that.The relationships I have with my father and sister are more important to me than the company. But, remember there are 120 families that depend on this company for their weekly paycheck. We are forced by the government to go through this process of estate planning so that those families have a future.
And, it isn't just Shamrock Electric Company who faces this problem day in and day out. I was an elected representative to the White House Conference on Small Business in 1995. Repeal of the Death Tax was one of the top three topics from that conference. That's 2,000 small business owners speaking in unison: Please repeal the Death Tax.
Death Taxes: Who pays, the truth vs. imagination
The traditional rationale for estate taxes is fairly simple: taxing unearned, windfall income at high rates does not hurt the economy and can provide needed streams of revenue to federal coffers. But when looked at more closely, we find that these presumptions do not hold up.
First, there is a widespread and preconceived--but wholly inaccurate- notion of exactly whom estate taxes are likely to affect. Many architects of our current tax code seem to believe that those who pay estate taxes are exclusively leisure-class individuals who have inherited vast amounts of wealth and property and streams of income they have not toiled a day to earn. But the fact is we already do levy taxes on these people--for the very wealthy, estate taxes run 55-60 percent of the entire inheritance. And such individuals can shelter vast amounts of wealth in trusts that can provide a secure income stream to their heirs. So, the net effect of our estate tax system is not so much the taxation of unearned wealth, but the devastation of many small family businesses. Suggestions that those who pay estate taxes are rich is misleading at best, and as you will tell from my family's story, wholly inaccurate. Many small business owners work a lifetime to build a growing and successful business, plowing profits and capital back into the business. The value of that business at the time of a transfer may seem substantial, but it often supports a very middle class family that does not have the extraordinary resources necessary to pay estate taxes.

Policy makers have justified highly confiscatory estate tax rates, since they (it is said) deprive heirs only of money they have not "earned." This type of thinking is very alarming to the thousands of family members who have labored a lifetime in their parents' businesses--in order to help build a firm which they might someday pass to their own children, only to have the government proclaim that they have not "earned" it.
On a personal note, I started at Shamrock when I was 14 years old, working in the warehouse during the summer. I have held ever job at the company from truck driver to electrical apprentice and draftsman to Chief Financial Officer; to be honest I have prepared myself to be a part of Shamrock from my very first day of High School. I work 40 hours during the slow times and 60 hours during our peak times. To have someone say I have not "earned" the value of Shamrock Electric is very insulting to say the least.
I also want to remind members of the panel that every dollar of value that resides in most small business owner's personal estate and assets owned by their companies have been acquired with after-tax dollars. When the company is profitable, they pay income taxes to every level of government, from the local municipality in which they live or work, to the state and federal governments. In years in which the company is not profitable, it is still taxed. They pay real estate taxes and personal property taxes on the productive assets used in the business. They also pay unemployment taxes, workers' compensation taxes, and the payroll taxes that go to support Social Security and Medicare. Quite frankly, I find the notion of death annoying enough on its own; the fact that government is going to make one last grab at small business owner's assets when they are no longer here to defend them is adding insult to injury.
Liquid assets and Small Business
In many ways, liquidity is at the heart of the estate tax debate for many family businesses. One of the biggest on-going problems for small businesses is providing sufficient cash flow for the day-to-day operation of the business. So,when a large estate tax bill arrives, many families are forced to sell the business to pay the taxes. Even with the current exemption - and even the small business specific $1.3 million exemption -- many small businesses simply do not have the liquid assets to pay their tax bill. Also implicit in estate tax proposals is the suggestion that high estate taxes do not hurt the economy because it is a tax on "windfall income" and therefore not subject to "higher taxes hurt productivity" allegations. Windfall income? Such proponents seem to have no concept of the difference between frozen and liquid assets. A frozen asset in the form of a business would have to be sold in order to pay the taxes. Some businesses are even forced to sell piecemeal: the land, the building, the equipment, the supplies, all go to different buyers, and the business is closed. The business stops paying taxes and its employees lose their jobs. This scenario hardly represents a prescription for painless increased federal revenues.
I mentioned earlier that we are nothing without our employees. Our employees have a very strong loyalty to this firm. If we were forced to sell Shamrock to pay the tax bill, the employees would leave and there would be no value to the new owner. Fellow members of the construction industry are aware of this and it is very common in my field. This actuality makes it exceedingly difficult to sell a firm after a founder's passing, which is an unforeseen and often unmentioned issue caused by the death taxes existence.
Capital Formation
Though estate taxes are often seen as a fairness issue for small business owners, estate taxes also represent a tremendous ongoing capital drain on family businesses. For a family business to face up to the many challenges posed by the estate tax and survive -- intact -- is a formidable chore. Effective estate planning is a drain on the resources of the business. Assets diverted, whether to an insurance policy or another device, to pay an eventual tax is money, which cannot be invested in the business to grow and create jobs. In this sense, the estate tax is a daily drain on a family business years before such a tax is ever actually owed. When a business owner has had the foresight to plan for a smooth transition, it might appear that the estate tax has had little effect on the survivability of the business. But such a business may have already been hit by the estate tax, again and again over the years, as opportunities for growth and investment were passed up, in order to channel funds for estate planning. These funds are better spent on productive assets that would create jobs and strengthen the company. The system, which perpetuates this situation, is very shortsighted.
To sum it all up, I will add a quote attributed to Albert Einstein: "Not Every Thing That Counts Can Be Counted; And Not Everything That Can Be Counted Counts". I would like to thank the Members of the Tax, Finance and Exports Subcommittee and the Rural Enterprises, Business Opportunities and Special Small Business Problems Subcommittee, especially Chairman Manzullo and LoBiondo and Ms. McCarthy and Ms. Christian-Christensen for allowing me to appear before you today. Please help my family and millions of other working families by repealing the death tax. Don't make my children suffer through what I have had to. Please bury the death tax.
END

LOAD-DATE: May 14, 1999

Document 44 of 54.


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