CAPITAL FORMATION

MONDAY, OCTOBER 13, 1980

U.S. SENATE,

SELECT COMMITTEE ON SMALL BUSINESS,

Minneapolis, Minn. The committee met, at 1:30 p.m., in the Sheraton Inn Northwest, Minneapolis, Minn., Hon. Max Baucus and Hon. Rudy Boschwitz, acting chairman, presiding.

Present: Senators Baucus and Boschwitz.

Also present: Herbert L. Spira, chief counsel; and Robert J. Dotchin, minority staff director.

STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM THE STATE OF MONTANA

Senator BAUCUs. The hearing will come to order.

This afternoon, it's my honor to cochair this Small Business hearing with Senator Boschwitz. Senator Boschwitz and I are both on the Small Business Committee, a committee that's been much more active in the last two or three Congresses probably than in any other era in the Senate. Further, it has been in the forefront of the Congress, primarily due to the need of much more attention in our country to small business concerns.

As you will notice, particularly in the wake of the White House Conference of Small Business, many Members of the Senate and the House have introduced many bills to implement the recommendations of the White House Conference of Small Business.

Some of those have already been enacted into law. There are 14 major areas where the Senate has tried to address these recommendations to help small business.

A summary is as follows: Four of those have been enacted into law, five reported out of the committee, but all but one of the top 15 recommendations has been introduced, and all but two have been subject to hearings. Thus, a large portion of the major problems concerning small business has been addressed; although legislation has not yet been passed in all instances.

As we mentioned earlier at noon to those of you who attended the luncheon, one of the main focuses certainly to help small business compete effectively in America these days, is how to change the Internal Revenue Code to more fairly reflect small business needs. We want not only to encourage capital formation accumulation; but to find ways, essentially, for small business to not only fend off large business, but probably more important, fend off the various regulators in Washington, D.C., and, to some degree, those in the State also.

The Senate Finance Committee, partly because of the response to Republican tax suggestions in this political year and also, I think, more fundamentally, because of the now-recognized need to help America generally rebuild its industrial foundation, and also more particularly to sharpen and focus self-identity in America-that is, small businessmen-reported out a tax bill which, in some major respect, helps small business concerns.

That was a tax bill that only touched upon needed changes in the Tax Code-reduction in the corporate tax rate, some changes in the capital gains rate as reduction liberalizing changing the subchapter 5 provisions-but it did not, however, address some other needs such as changing the Federal estate tax laws so that small businesses can keep small business in the families rather than being forced to sell portions to pay the Federal estate taxes, roll over provisions, and a whole series of other provisions, which have not been enacted.

I firmly believe, however, that once the dust settles on the evening of November 4, and once there is a clearer picture of who will be in the White House and who will be our Nation's representatives, both in the Senate and the House, that the mood in the country today to begin to rebuild America, to rebuild and to reestablish a competitive edge in America, in competition with foreign countries, and also generally to lower unemployment rates, to address problems of inflation and to give America essentially more confidence in America's future and destiny. I believe Congress will further develop the kinds of bills that we have all heard of that have been introduced and that, during the next Congress, we will see some very definite action.

I must say, though, that those results will more likely occur the more that businessmen-particularly small businessmen, because I think that's the greater need-in Minnesota and Montana, my State, and across the country, to keep a very close eye on Washington and also become even more involved than you all have thus far.

I know it's trite to say, "Get involved," but, believe me based on my experience for 2 years in the Senate working with my Small Business and Finance Committee colleagues Rudy Boschwitz and Dave Durenberger, there's nothing like getting the attention of a Senator and a Congressman in order to achieve the results that you want, than just buttonholing that Senator in a corner, talking to him, and to keep talking to him. And the same with phone calls, and followup efforts, personal requests or, again, more telephone calls. That's the key.

So I'm suggesting to all of us to take advantage of the current mood, and regardless of the election results, I think that mood will continue and we will better take advantage of it with just good old hard work— individually and through organizations.

I'm very happy to be here in Minnesota. I consider Minnesota not part of Montana-that's presumptuous to stay-but certainly akin to the State. I went to college at Carlton College in Northfield, I have a lot of close friends in Minnesota; and whenever I go home, I land in Minnesota and take off from Minnesota. I don't know what your experience is with our major airlines, but I felt close to home again when I returned to Montana a few days ago and, sure enough, my bags weren't there.

So with that, let me say that I'm very happy to be here and feel like I am home and I would like to turn the hearing over to a good friend

of mine and someone who is a fresh, refreshing spirit in the Senate, your Senator Rudy Boschwitz. Rudy?

STATEMENT OF HON. RUDY BOSCHWITZ, A U.S. SENATOR FROM THE STATE OF MINNESOTA

Senator BOSCHWITZ. I'm not sure what he means by that last part, but nevertheless, we do serve together on the Small Business Committee and we happen to have offices near one another, so we do see a good deal of one another, Max and I. I'm very pleased that he's here with me today to participate in this small business hearing, which probably means that I am going to have to go out to Montana at some future date and return the courtesy, which I will do with great pleasure.

We are going to talk this afternoon-this is the normal format of a Senate hearing in that we have a recorder and that we go through various witnesses. We are going to talk today, first, about ESOPS and ESOTS, employees' stock option plans and employees' stock option trusts with Senator George Pillsbury from Minnesota. Primarily we're going to focus our attention at the idea of accumulating capital for beginning businesses and the problems that are involved. We spoke briefly this morning about the line at the bank window and who's at the head of the line the most credit worthy-and a person starting a business is a long way from the beginning of the line, particularly if it's a small business, which most businesses are when they start. So we are going to be talking about the accumulation of capital, we're going to be talking about maintaining a small business and also the effect of estate taxes. We are going to go on for about 3 hours.

I might just tell you, as a matter of protocol, that Senate committee hearings are mostly informal. The Senators get up and walk in and out and so do the folks who are listening. We normally don't have this good an attendance, I might tell you, and particularly not this good an attendance of people who are most particularly interested. Mostly, in the Senate hearing, the room may be full but it's full of staff people from other Senators who are coming to monitor it, staff people from other committees who may have an impact or effect, the bill that's being considered in your committee may in some way impact on some of the jurisdiction of their committee, and, of course, Senate committees are rather jealous of their jurisdiction, so I welcome you all today to the hearings of the Senate Small Business Committee and, with that, I return to my chairman and ask him to go forward. Senator BAUCUs. Thank you, Rudy.

Our first witness this morning is Senator George Pillsbury, who will speak to us about employee stock ownership plans and apparently what experience he has had with them and what recommendations he has changing the tax code or other changes to better effect its purposes. Senator Pillsbury, welcome to the hearing and if you have a statement, you can submit it for the record. If you want to read it, you can do that, too. Whatever is more convenient for you.

STATEMENT OF HON. GEORGE S. PILLSBURY, MINNESOTA STATE SENATOR

Mr. PILLSBURY. Thank you very much, Senator, and Senator Boschwitz.

First of all, I want to thank you for letting me be early on the program so I can go out and continue my campaigning in Mound, Minn. this afternoon.

My name is George Pillsbury. I live at 1320 Bracketts Point Road, Wayzata. I have served in the Minnesota Senate now for almost 10 years. For the previous 21 years, I was a member of the Pillsbury Co., management-first in the overseas division and then the agriproducts group. This brought me into close touch with many small and large food distribution businesses. I'm here this afternoon, though, for just one purpose and that's to urge your committee to include in your legislative proposals, a concept that became law in Minnesota over 6 years ago, then Senate file 1269, which now is chapter 157. of the Laws of Minnesota for 1974. It states, first, that it's the intention of the legislature to encourage the participation in the ownership of industrial and other commercial businesses by the employees of the enterprises. Then, it defines an employee stock ownership trust for the purposes of this act, and, briefly, an employee stock ownership trust means a trust which is qualified as a qualified stock bonus trust under section 401 of the Internal Revenue Code of 1954 as amended through December 31, 1972.

But here are the unique provisions in Minnesota law that I think would be very helpful to have included in Federal law. Minnesota law makes a contribution to such an employee's stock ownership trust, other than that which might accrue to the benefit of a natural heir, deductible from taxable income. It also exempts any contribution other than that which accrues to the benefit of the natural heir, from the inheritance tax. And, finally, it exempts any contribution, again other than which accrues to the benefit of the natural heir, from the gift tax. The objective of this bill is to motivate the present owners of enterprises to build significant equity ownership to the benefit of their employees. Owners would be motivated to give, during their life or at their death, some of their ownership to the trust for the benefit of the corporate employees, just as today they are encouraged to make gifts to charitable founda

tions.

Under today's law, when an owner of a Minnesota enterprise contemplates his or her death, there is no sure way that he or she can keep the ownership in the hands of Minnesota citizens. The choices are to sell out to some other company, go public or transfer it to a charitable foundation. Now, the owner in Minnesota is able to sell, give, or bequeath a portion or all of his or her estate to a qualified stock ownership trust. Then, they can have funds to pay their inheritance and estate taxes and leave a balance of the ownership to their heirs. By choosing this alternative, a small business would be able to continue as a small business. The wealth would continue to stay in the area where the earnings will continue to produce income for the employees and tax revenues for the Federal and State governments.

When Minnesota passed this bill, it became a unique place in which to do business and to be employed. Interestingly enough, at the same time we were doing this, legislation was introduced in the U.S. Senate by then Senators Fannin, Hansen, and Dominick, which was Senate file 1370, that included these provisions, and, at the same time, Congressman Frenzel and others introduced a companion bill in the House of Representatives. Several years later, in 1978, Senate file 3241 was

introduced by Senator Long and some others and it also included the provisions of the Minnesota law, and, as I recall it, I think it was even passed by the Senate, but was taken out in conference committee, and it permitted charitable contribution treatment for income, gift and estate tax purposes for a donation of employer stock by a shareholder to an ESOP or TRASOP, provided the stock is not allocated to the donor, to certain relatives of the donor or to any 25-percent shareholder. My thinking is that were this committee to include these provisions in its legislation or were Senate file 2983 to be enacted into Federal tax law, equity ownership of the future growth of American industry, agribusiness, and other commercial businesses would flow toward the people who work in these enterprises, as well as those individuals and institutions who presently own most of this property. Thus, one could visualize a rapid number of citizens owning American enterprises from the, currently, 5 percent of the population presently owning most of the equity. The resulting financial security to the employees and productivity and cost benefits to American industry generally would be dramatic.

And let me just add this: I have discussed this concept for years with many, many people-small businessmen, large businessmen-and I have never found anyone who didn't think it was an incredible idea― from Curt Carlson, who has Carlson Enterprises, to Mr. Shapiro, who has Food Producers. And I mention this latter company because finally Mr. Shapiro was forced into selling his company to Beatrice Foods. He had a small St. Louis Park successful food manufacturing-distributing business that could very well have continued on as a Minnesota company owned by the employees if we had had this as a Federal law, as well as a State law. And, lastly, I've talked to many people, including myself, who have a sizable block of stock in a particular company, who would be very glad to put in their will that 10 percent of their stock would be left to an ESOT.

So, again, those are my comments. I think this is an opportunity to, in a sense, transfer wealth to workers in a constructive way, not through some taxing system, and encourage more owners in our business.

Senator BAUCUS. Thank you very much, Senator Pillsbury. I must say, I've been a firm champion for the ESOP's for the last year and a half, since I've been in the Senate, for various reasons. I was first introduced to ESOP's when the Milwaukee Railroad began to go down the tubes and Senator Long suggested to me, and to others, that perhaps if we could develop some kind of ESOP for the Milwaukee Railroad, that the employees of the railroad would chip in and would help, if not to purchase the railroad, at least contribute to the Milwaukee. And it might not work this time around because the Milwaukee is in such a difficult position, but certainly is a good model to follow to prevent future, not only Milwaukee's, but other companies that seem to be in dire difficulty.

I also think it's analogous to some of the productive trends in Japan where, I'm told-I have not been in Japan, so I cannot speak with any firsthand experience-but I'm told there's a greater cooperation between management and labor, partly due to cultural and historic reasons, but I'm just wondering whether ESOP's would help to lead to that kind of cooperation in America to avoid some of the divisiveness that we have had in America between management and