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GENERAL REVENUE REVISION
(Natural Resources; Estate Taxes; and Subchapter C)
WEDNESDAY, JANUARY 22, 1958
HOUSE OF REPRESENTATIVES,
Washington, D.C. The committee met at 10 a. m., pursuant to recess, in the hearing room of the committee, House Office Building, Hon. Wilbur P. Mills, chairman of the committee, presiding: The CHAIRMAN. The committee will please come to order.
The first witness this morning is Mr. J. Gordon Roberts, Roberts Dairy Co., accompanied by Mr. John Mason. Will you gentlemen please come forward.
Mr. Roberts, will you give your name, address, and the capacity in which you appear, for the benefit of the record, and also identify Mr. Mason for the record.
STATEMENT OF J. GORDON ROBERTS, ROBERTS DAIRY CO., OMAHA, NEBR., ACCOMPANIED BY JOHN MASON, ATTORNEY, LINCOLN, NEBR.
Mr. ROBERTS. Yes. My name is J. Gordon Roberts. I live in Omaha, Nebr. I am chairman of the board and majority stockholder of Roberts Dairy Co. of that city.
Today I have with me John Mason, an attorney of Lincoln, Nebr., who may be asked to answer technical questions later. The CHAIRMAN. You are recognized for 10 minutes. Mr. ROBERTS. I want to express my appreciation for this opportunity to appear before your committee and explain a problem that confronts the owners of small business in our country, a problem which H. R. 7600 is designed to meet.
At the outset I should explain that I am not a tax expert. My knowledge concerning taxes comes from paying them and from discussions with tax attorneys, accountants, and insurance men who have been trying to help me solve my problem, which is how to keep from having to sell my business to one of the big national dairy
I would like to present my material in three parts:
1. Why our company and others like it should remain independent and not be sold to a national chain;
2. Why present tax laws leave me no alternative unless these laws are changed; and
3. How H. R. 7600 would allow small businesses to continue in business as taxpayers for the Federal Government.
I don't like to bare the facts of my personal situation any more than the next fellow, but it seems to me that talking in generalities would be of no assistance to your committee, whereas an actual case history would most effectively point up the need for this legislation.
To make my case understandable, I must give the background of the business I represent.
The company was started in Lincoln, Nebr., by my father, J. R. Roberts, a tenant farmer at the time he began peddling milk, door to door, out of 10-gallon cans.
In about 1906, however, my father introduced the delivery of milk in bottles for the first time in Nebraska. Shortly thereafter, he introduced pasteurized milk.
As his customers increased, it became apparent that he would have to build a plant for bottling the product. So he called together all of his employees who at that time consisted of wagon drivers, told them his problem, and invited them to come in with him.
He also talked to all the friends he knew, and, as a result, incorporated the company and sold stock to his close friends, his drivers, and himself, many of whom mortgaged their houses to get the money.
With these rather small funds and a mortgage on the plant, he built his first plant in Lincoln in 1911.
Like many other businesses the dairy business demands and devours increasing amounts of capital. My father went into Omaha and Sioux City, Iowa, about 1920, and we went into Grand Island, Nebr., in the late 1940's.
In each case a very substantial investment in a plant and equipInent was necessary. For a small company outside capital is almost impossible to come by. As a result, most of the funds had to come from the profits of the business itself.
With an increase in population and business, more money was needed for working capital to carry inventory.
The horse and wagon disappeared and were supplanted by the truck, and today we must own and operate a large fleet of trucks and tankers.
Quite a number of years ago the whole industry switched to stainless steel which required an enormous investment in replacement equipment.
Lastly, inflation has put a tremendous burden on the business. Where we used to pay a dollar or two per hundredweight of milk to the farmers, today we pay from $5 to $6, and the business has to have the extra capital with which to carry this added cost.
The same thing is true as to all of our supplies and our equipment and wages.
As a result of these cumulative requirements for money in the business, the stockholders had to wait 30 years, because it was not until 1942 that our company went on a regular dividend basis. Since that time we have only been able to pay out about 30 percent of the annual net profit, it being necessary to retain the balance of profits in order to make up the rapidly increasing demand for funds. Even then we have had to borrow heavily and continuously.
As would be expected, I worked on the farm as a boy and when I was old enough started working summer vacations and holidays at the plant learning the business. When I finished college, I went in full time, and I was advertising manager in 1938 when our economy hit rockbottom in Nebraska.
In the meantime, my father had taken ill and on doctor's orders was living in Florida and attempting to run the business by long distance phone. Several of the directors thought we should sell the entire business.
I finally went to my father and proposed that I would be willing to take over as general manager providing I could also get control of the company
However, it was not until 1941 that my father finally transferred the stock to me on a number of conditions involving the payment of a substantial amount of his personal indebtedness and the payment to him and my mother of a lifetime annuity.
A grateful Government moved in upon my father's death attempting to confiscate the business. The business was in sorry shape when it was turned over to me to run. I got the job because nobody else on our board of directors thought the business could survive, and no other qualified person would accept the responsibility.
I was penniless other than for the stock in the company.
Upon my father's death the Government contended that the stock was taxable in my father's estate at a high value. I had to settle the estate tax on the grounds that I couldn't afford attorneys to go to court.
For 5 years after the settlement of the estate tax I eked out an existence in order to meet the estate tax payments after corporation and personal income tax, estate taxes obviously designed to force me to sell.
Since my assumption of management in 1939, approximately 5 years before my father's death, the business has by now more than tripled its size, even taking inflation into account.
In fact, because of the poor financial condition of the company at the time I had assumed management, I paid estate tax on à value which I had largely created myself. 3. The value to the community of small locally owned businesses.
Small businesses like ours should be allowed and encouraged by the Federal Government to continue as independent locally owned businesses. I will illustrate some of the things which my company has done, at the local level, worthy, I believe, of some consideration.
As a bonus to the American economy in his last years, my father developed a method of turning citrus rind into a dairy cattle feet, an industry which today runs into millions of dollars annually. On this project he used all the money he could borrow on his insurance, and did not make a dime.
Earlier he developed the short time method of pasteurization whereby milk was quickly heated to a high temperature and immediately cooled. Thus he eliminated the cooked ffavor of pasteurized milk. For technical reasons, the working out of this procedure was not nearly as simple as one might suppose.
The basic principles involved have been used by the citrus industry since then, as well as the dairy industry.
In our own field, we have developed a low fat dairy spread, the first basically different dairy food since the development of cheese and butter, a product designed to save lives from heart attacks.
We have given land for three public parks in areas in which children would otherwse have no playgrounds. And we are not a large enough company actually to afford this kind of philantrophy. But it is one of those things done by local companies because otherwise no constructive action is taken.
Moreover, we have worked for a long time on youth activities. Personally, 'I am on the President's Advisory Committee on Youth Fitness.
Our contribution of money to causes of all kinds amounted to approximately $50,000 this year. Our part in community service, however, goes beyond contributions of money.
For instance, 2 years ago, Dr. Oliver Reihart, a veterinarian in our community, came to me asking for $2,000 for an International refrig. erated centrifuge with which to study virus.
Inasmuch as he had no reputation at that time except as a healer of dogs and cats, no one would give him the money except me.
Upon getting his equipment in 1955, he developed all the polio cultures locally in the city of Omaha. In 1956 and 1957 he carried out this same work at the State level.
Presently he is planning some research on cancer. He is pursuing a new theory of cancer research based on a bacteriological approach to the problem. Time does not allow a description of this theory, but without the support of local business, his work would not have been possible.
Does loading the deck in favor of big companies make any difference to anyone other than those actually engaged in small or independent business? Let's consider the following statement:
Says William R. Bennett, Ph. D., in his book The American Patent System :
Very few basic inventions have come from corporate research laboratories. Most pioneering inventions have been conceived by independent inventors.
These pioneer inventions include even the image-dissector camera tube making modern television possible. They include Edison's electric light globe, Bell's telephone, Marconi's wireless, and many other basic inventions.
What happens when a business like ours sells out to a large national concern?
True, the payroll is substantially retained, but though the usual purchase announcement states that no change is planned in the personnel of the company, you will find almost inevitably within the first 2 years that the supervisory positions undergo almost a complete turnover.
But what about the effect of this acquisition on others ?
The local insurance men who carry our various insurance lines immediately lose this business, which is written on blanket coverages from the home office of the purchaser.
Our advertising agency loses this account which is handled by a national advertising agency in the East.
Our small suppliers, and even our equipment suppliers, are supplemented with others who supply the chain.
Our local community chest and other local charities suffer, for this is no longer the headquarters office and the contributions are scaled down to the proportions of a small branch contribution, if any.
Our banks lose deposits.
The following letter indicates the importance of support from local business :
DEAR MR. ROBERTS: I have been State chairman of the American Legion junior and midget baseball for 19 years. I have served as local chairman for American Legion junior and midget baseball for 25 years. This operation called for the supervision of from 4,000 to 10,000 boys each year. It is a civic job without pay. We have not had one national concern sponsor any of these teams in the past 25 years. All have been locally sponsored. Very truly yours,
C. O. BOWLEY,
State Chairman, American Legion Baseball. 4. The problem faced by small business :
My tax advisers tell me that if I were to die tomorrow and make the full use of the marital deduction and my wife survived me, my Federal estate taxes would be in the neighborhood of $425,000.
However, the taxman advised me that if my wife should die before me so that I could not take advantage of the marital deduction my Federal estate tax would then amount to approximately $1 million, and this points up my big problem.
How do you find that kind of money! ?
Obviously, my estate could not meet the impact of any such tax as that without selling the stock in the business for whatever it would then bring
As you all know, the sale of the controlling interest in a corporation by the estate of the principal stockholder and chief operating officer results in a substantial shrinkage from what could be realized before the death of such individual.
This is particularly true when the purchasers are aware that the estate is forced to sell in order to meet the tremendous estate tax liability.
Our business never has any excess cash and although the company carries a substantial amount of keyman insurance, on my life, to indemnify it in the event of my death, in all probability the proceeds of this insurance could not be used to any substantial degree to redeem sufficient stock from my estate to meet the estate tax.
In fact, mortgage loans made by our company through financial institutions have specifically required that the proceeds of such policies in the event of my death would be immediately applied on the mortgage.
Under present tax laws the company cannot accumulate enough free cash funds out of profits to redeem enough of my personal stock to meet the Federal estate tax, for out of every dollar of profits the corporate tax takes 52 percent.
Thus, my business cannot be looked on as the source of substantial funds with which my estate could pay the estate tax.
Contrast this picture with the rosy offers I have received from the large national dairy concerns who in recent years have practically beaten a tattoo on my door.
They propose a method which is fast becoming almost a pattern for the acquisition and mergers over the country. They will exchange their stock, which is traded widely on the exchanges, for my stock, and they tell me that by this method of exchange, no income tax of any character will be assessed by reason of the exchange.