tions. The Report of the SBA Task Force on Venture and Equity Capital for Small Business details the woes of small business in attracting capital. It should be mandatory reading.

Two points might be evaluated. The first shows that a private evaluation of the Joint Committee on Internal Revenue indicated that a corporate dividend of $150 of a certain type of corporation would yield a credit of $56. The 50% or lower taxpayer would not only have no tax but could apply this balance as a credit against other income. The second item needing evaluation is the change that both France and England made in mitigating their double tax. The effect may not have been as anticipated.

Small business need not question whether the double tax should be eliminated, but rather, if it is eliminated or reduced, significant offsetting benefits must be granted small business for survival. Less than that would be the most severe blow that small business has received in some time.

CONCLUSION

Tax laws and their implementation with attendant paperwork have become a burden beyond the comprehension of the average man. One federal tax service, The Bureau of National Affairs, takes up 15 feet of shelf space! It does not even deal with payroll taxes! Every suggestion for simplicity is answered with another layer of law followed by layers of regulations. The tax rates are burdensome enough. Compliance with the law is becoming one of the most expensive necessities in business.

Simplicity and Equity is what small business demands. That is the sum total of our needs. The preceding pages are some steps that may be taken toward that goal. Your help and concern are appreciated.

REV. PROC. 75-31-ExнIBIT A

NOTICE

[Describe class or classes of interested parties]

Application is to be made to the Internal Revenue Service for an advance determination on the qualification of the following employee retirement plan: Name of Plan:

Name of Applicant:

Name of Plan Administrator:

Plan ID No.

Applicant ID No.

The application will be submitted to the District Director of the Internal Revenue at (address of district office) for an advance determination as to whether or not the plan qualifies under section (enter 401(a), 403 (a), or 405 (a)) of the Internal Revenue Code, with respect to (initial qualification, plan amendment, or plan termination).

The employees eligible to participate under the plan (describe by class): The Internal Revenue Service (enter has or has not) previously issued a determination letter with respect to the qualification of his plan.

Each person to whom this notice is addressed is entitled to submit, or request the Department of Labor to submit, to the District Director described above a comment on the question of whether the plan meets the requirements for qualification under part I of subchapter D of chapter 1 of the Internal Revenue Code of 1954. Two or more such persons may join in a single comment or request. If such a person or persons request the Department of Labor to submit a comment and that department declines to do so in respect of one or more matters raised in the request, the person or persons so requesting may submit a comment to the District Director in respect of the matters on which the Department of Labor declines to comment. A comment submitted to the District Director must be received by him on or before (date). However, if it is being submitted on a matter on which the Department of Labor was first requested, but declined to comment, the comment must be received by the District Director on or before the labor of (date) of the 15th day after the day on which the Department of Labor notifies such person or persons that it declines to comment, but in no event later than (date). A request of the Department of Labor to submit a comment must be received by that department on or before (date) or, if the person or persons making the request wish to

preserve their right to submit a comment to the District Director in the event the Department of Labor declines to comment, on or before (date).

Additional informational material regarding the plan and the procedures to be followed in submitting, or requesting the Department of Labor to submit, a comment, may be obtained at (place or places reasonably accessible to the interested parties).

Senator BYRD. Our next witness is Mr. Herb Krasnow, president, National Association of Small Business Investment Companies. He will be accompanied by Mr. Walter B. Stults, executive vice president. STATEMENT OF HERBERT KRASNOW, PRESIDENT, NATIONAL ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES; ACCOMPANIED BY WALTER B. STULTS, EXECUTIVE VICE PRESIDENT

Mr. KRASNOW. Thank you, Mr. Chairman.

I am president of a medium-sized small business investment company, SBIC. I listened to the testimony this morning, and I just about zippered up my pocketbook.

There is much that was said this morning that was tremendously negative in approach. Many positive things are happening in the small business area, which are not understood.

I would like this morning to draw a bit on that.

In 1958, the effective act that started the small business investment company program gave rise to some companies and, 18 years later, there is excellent successs; $3 billion have been invested in the 18year period. The loss written off by the Treasury has been only $29 million.

On a numbers-only basis it would be quite significant, but probably what is more significant is that a new financial concept has been born. It is called venture capital today. There is a core of tremendously experienced people who have, as their goal, the investment of money in small business, the building up of their small businesses, cycling their money, and then, when they have their profit, taking that money and investing it in other small businesses.

One of our purposes in being here this morning, Walter Stults and myself, is basically to recommend ways where this process may be accentuated so there will be more capital flowing into the small business sector.

Several people spoke of the Task Force of the Small Business Administration. That was created by William Casey under the supervision of Administrator Kobelinski.

I understand reports have been delivered to the staff and to the various Senators of the subcommittee. The report covers many of the aspects that were discussed this morning and there were different groups of people who presented different viewpoints: the viewpoint of the small business, the viewpoint of the underwriting community, the viewpoint of the banking community, the viewpoint of the Small Business Administration itself.

Many of the things that were said today are very well-written in the report and I would very much like to have an opportunity to be of any assistance if there are any aspects there that could yield to more discussion or more detailed recommendations.

92-201 O 77-5

In our own trade association, we have also examined how to do the job better. We have come up with a 20-point program which I would like very much to see entered into the minutes. We call it our NASBIC legislative and regulatory program.

There are some tax aspects in there, also some nontax aspects. I am a man who has been in venture capital since 1949, 28 years of my life, the biggest bulk of my life. I am positive that the numbers that are in the prepared testimony that I presented to the committee there are numbers that indicate that the small business community is vibrant, it is large, it is not dying, but it is being discriminated against. Basically what really is needed is first, an understanding of what the small business community really is as against the so-called business community which masquerades as something else again.

And, what are the positive and the negative factors that, in effect, must be looked to because it is not all negative. There are many, many positive factors.

If this committee can focus on the fact that there are two business communities, that the small business community under the SBA standards employs more than 50 percent of the employees of this country and small business may be small but it is not insignificant. That is really the major point.

Not only is this most significant in numbers, but also in its creativity, in the fact that, from a social viewpoint, it is tremendously important to many of us in the United States to have a strong independent sector. There are not too many of us who want to live in a country of big business and big labor and big government. We strive for that independence.

It is a tremendous psychological and emotional factor. It is completely separate and apart from the numbers. There are studies that are a part of the documentation that we have submitted that shows that this creativity performs for the country in a way that big business does not.

We all are emotional and psychological creatures, and many of us have given up opportunities to enlist in the big business areas simply because of those emotional and those creative factors that we treasure. I am one of them. I would not want to be a part of them-not that they do not have a great place, not that they have not been instrumental in making this country many, many things that it is, but there is a vital factor and a vital place for small business in our society. If we can recognize that, then I think my presence here this morning and the presence of many of the other men will be most important. The specifics will vary. What is very surprising, though, when we talk about the Casey task force report and talk about the Small Business Administration's Advisory Council, talk about the NASBIC program, Ned Heizer will be talking about the National Venture Capital Association, there is commonality. Many, many of the same things are repeated time and time again.

I will not repeat them this morning because they are in my reports and with some study, notwithstanding, they will all come out.

The fact I would like to get across is that in the creativity that lies in our small business sector, there is growth, there is a great deal of

pride, there is independence, there is protection for our democratic ideals, and all of these things have a place.

Thank you very much, Mr. Chairman.

Senator BYRD. Thank you, sir.

What two or three proposals-if you were going to boil it down to two or three proposals-would you consider to be the most beneficial to small business?

Mr. KRASNOW. We have many biases that are built into our tax laws, I am a certified public accountant as well as a venture capitalist and a member of a medium-sized accounting firm.

I recognize in this profession-for instance, we have the reorganization provision that permits a small business man to take common stock, or preferred stock in some circumstances, of a larger, publicly owned company. He pays no taxes; taxes are deferred.

That same man may be confronted with a desire to pass the business to his employees. To do that he has to take his sales price, maybe take 50 percent of that, and turn it over to Uncle Sam. Given the same dollar equivalent of merging him with the larger company, turning over his business to his employees, when in the second case it comes to 50 percent of his tax dollars, there is only one way to go.

So we have a bias toward merging smaller, independent firms, into larger, public companies. That, in many, many cases, is antisocial, antidemocratic. It is moving us toward monopoly.

One of the provisions is basically a provision that says, if you will take the money that you get from the sale of your business and reinvest it in other small businesses, we will let you defer the tax just as if you basically were to merge it into a larger company. It is to remove the bias. Tremendously important.

Senator BYRD. What you are saying is that the tax laws are operating in a way which increases bigness.

Mr. KRASNOW. Absolutely. No doubt about that.

Senator BYRD. In many cases, it forces the smaller companies to merge or sell to the larger companies.

Mr. KRASNOW. That is absolutely true, sir, and it happens in many, many ways. That would require not 10 minutes but maybe 3 or 4 hours of discussion, that, in effect, just are antisocial.

I serve on the board of a company on the American Stock Exchange. Friday afternoon after the close of business we bought control of a wonderful growth company, itself an OTC publicly owned company, where, because there was no market in their shares, they sold for cash to this company on the American Stock Exchange. It just is wrong. In this case, as a member of the board of directors, we are very happy because we have some wonderful men coming into our group and it is going to enhance our profits and all of the things that we look to, but I have to say to you, though, that basically the destruction of these independent companies because they do not get a trading value, good price/earnings ratio, a market because they are too small, is just as bad for our country.

The type of deferral that we talk about in our NASBIC program is tremendously important. We are also in favor of the jobs credit which now, in effect, has been turned back to conference. Here, too,

business represents itself in being interested in the investment credit. The fact of the matter is, big business is much more interested in investment credit; little business, small business, tremendously labor oriented, does not use machinery many, many times.

Accordingly, this jobs credit which now, in effect, has passed both houses is tremendously effective for us and will, in effect, help our unemployment situation as well.

I do not mean to say that basically everything should be done for small business, it is allusory, simplistic, it will not happen.

I say that there should be a greater understanding of the place of small business in our society so that they get evenhanded treatment and are not discriminated upon, either by dollar sign or lack of understanding.

Senator BYRD. Let me ask you this. In 1976, Congress made many changes in the estate and gift tax laws. What has been the effect of these changes on small business?

Mr. KRASNOW. Those changes as to the businessman who accumulates up to $500,000 of net worth have been, and will be tremendous, because they do not force him to divest the family business simply to put aside the estate tax money that he knows his executors will have to provide.

It is one of the more far-reaching changes that we have seen in the small business sector and we had that in our program it is very much to be recommended for explaining the benefits that could be effectuated by that.

Senator BYRD. Mr. Stults, do you have anything to add?

Mr. STULTS. Mr. Chairman, I would like to ask unanimous consent that our program be inserted as a part of the hearing record and that Mr. Krasnow's statement in full be inserted.

Senator BYRD. The committee will be glad to do that.

Mr. STULTS. Mr. Chairman, you were talking about the basket case under ERISA and the fact that you are open minded. I sat here last week listening to the testimony before the Bentsen subcommittee. It was pointed out by witness after witness that pension fund trustees have $455 billion under their control. It is expected, in another 5 or 6 years, that over half of all of the financing in the Nation will be in the hands of these trustees.

The prudent man rule has meant that a trustee has to protect himself down the road from suits filed by any employee covered by a plan who could say "Why did you invest in the Krasnow company at 10 and it went to 5? We are going to sue you."

There would be no similar question about an investment in A.T. & T. or in General Motors. So I would maintain, and other witnesses did last week, that for all of those billions of dollars, that they are now all being invested in the shares of some 200 firms.

Now, I think that has a tremendous stultifying effect on our national economy. A 2-percent basket clause-insurance companies in Virginia and almost every other State in the country have a nonadmitted assets classification of 5 percent-allowing pension fund trustees to put 2 percent of their stocks, of their assets into venture capital pools, into SBIC's and into the securities of small businesses themselves. That is an investment in growth.