instrument is valued one way at one time, but another way at another time. Would it not be simpler to apply long-standing valuation principles to all preferred interests, with the proviso that the instrument must bear or pay an inflation rate yield to substantiate value?

Finally, I would address the issue of buy-sell agreements, which are included in the proposed anti-valuation abuse statute. I would suggest that they are out of place here. The "abuse" potential of buy-sell agreements is that they can artificially deflate the value of the business itself, and its component interests. This is not an issue of creative over-valuation of one class of interest to smuggle value out through another. In my opinion, the only reason to have an anti-valuation abuse statute as set forth above in the context of preferred interest freezes is to create a statutory mechanism for dealing with defaults of payment of requisite yield, remedies, and related matters. Otherwise, one could easily graft the principles into the valuation regulations under 2033, for instance. The requirement that the buy-sell value be "reasonable" when created adds nothing to existing law. The requirement that the value be "refreshed" within three years of the agreement's triggering is primarily a trap for the unwary; but perhaps serves a purpose in assuring that once reasonable values do not become purposefully or carelessly outdated. If so, it would be easy enough to incorporate this into the applicable regulations elsewhere, or to issue a revenue ruling on the point. But before any action is taken, I would ask that the effect of this "three year review" be considered in the context of legitimate option agreements of longer duration. For instance, suppose dad gave (or sold for an appropriate price) an option for son to buy out dad's interest in X for $2.0 million when the current value of dad's interest in X is $1.0 million. The option is exercisable at any time over the next ten years. Six years from the time the agreement is entered into, dad's interest in X is worth $2.5 million. If exercised by son, is there $500,000 in unexpected gift consequences?

The issue of what a private business is worth, with or without any additional guidance from the Service, will always be problematic. By and large, the Service has done very well in the courts litigating abuses in this arena. I would point out that the most infamous current buy-sell valuation case undoubtedly that of the Estate of Hall and that even if the proposal under consideration had been law, the result of the case (favorable for the taxpayer) would not have been altered. The buy-sell is a sin qua non of private business continuity planning; shareholders and partners have to know what their respective liabilities to each other are in the case of a falling out or death among them. More so than in a public business, the very fact that one of their members retires or dies can, in itself, depress business value. I think the Service has been generally fair minded in this area, and taxpayers likewise. In the case of the latter, self-interest

if nothing else rises above tax savings; either I, as a co-owner, want to protect my spouse, or want to assure there is enough money around to "balance" my estate between active and inactive heirs.

I want to thank the Committee for having this hearing today, and for putting forth a proposal to replace 2036 (c) which starts us down the right path. I hope my comments are helpful toward finding a more acceptable alternative for small business. We stand ready if we can be of further assistance.

Chairman ROSTENKOWSKI. Mr. Zaucha.

STATEMENT OF THOMAS K. ZAUCHA, CHAIRMAN, SMALL BUSINESS LEGISLATIVE COUNCIL; AND PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL GROCERS ASSOCIATION

Mr. ZAUCHA. My name is Tom Zaucha. I am president of the National Grocers Association, a trade association here in Washington, whose mission is exclusively devoted to the interest of the independent grocer.

Today, I am testifying as chairman of the Small Business Legislative Council, a coalition of over 100 different trade associations that represents all segments of commerce in the United States.

Mr. Chairman, in my testimony today, I would like to travel two roads with you. One involves the journey from the past to the present. It is a tragic trip which millions of family-owned businesses have been forced to take against their wills due to the enactment and force of the IRS Code 2036(c).

But I am happy to recognize what I see here today as a second road, the possibility of a new journey for all of us to undertake. Let me look at this from three perspectives. The first is the process.

The past 4 months have witnessed a number of candid and productive discussions between Treasury, members of this committee and the small business community. În particular, Assistant Treasury Secretary Ken Gideon, has thus far been open, forthright and responsive in his approach to tax reform.

Similarly worthy of particular commendation was the action of this committee in releasing a discussion draft of major 2036(c) modifications. SBLC is especially pleased that 2036(c) would be retroactively repealed.

The announcement by you, Mr. Chairman, of today's hearing was yet another step in that right direction. Your desire to obtain an informed discussion about possible modifications of 2036(c) that would address legitimate complaints about the current law provisions is on target.

In addition, SBLC is especially encouraged that now 218 Members of the House have joined with Representative Bill Archer in cosponsoring H.R. 60 to repeal 2036(c). All of this willingness by the administration, the Congress and business community to work together to create a solution to this crisis represents the high road, one that is marked by an open and constructive process.

Now, Mr. Chairman, members of the committee, this hearing will very, very well document the inherent flaws that permeate 2036(c). I think there is little question among anybody that ultimately, it must be repealed. But I think the question we must ask ourselves and document for the record is what have been the results in the real world of the flaws of 2036(c).

First, it is important to understand that a vital component of the American system and our national prosperity has always been the family business. From this country's farms and ranches to the grocery store to a wide variety of enterprises which have proudly borne their family names for generations, independent family business has been at the very foundation of our country.

This is powerfully attested to by the fact that heretofore, Congress has consistently encouraged and sought to strengthen such family involvement. Having said this, we must understand that section 2036(c) dangerously reverses the proven historical record and presumption in favor of the family business and its role in our economy.

Mr. Chairman and members of the committee, I think I can bring home to you these consequences by sharing some real-life examples drawn from our own membership. I can assure you that such test cases are being repeated over and over again every single day.

To illustrate this, I go back to last fall, where Tom Goodner, an owner and operator of Goodner's Supermarket in Duncan, Oklahoma, told the Senate Small Business Committee the effects of 2036(c) on the four-store operation that was started by his father 52 years ago. He said the following: "I felt it necessary to initiate my estate planning process with our own counsel, but we were stopped dead in our tracks by the hazards of 2036(c)." As another example, consider Chuck and Don Butson of New Hampshire, whose parents started a business almost 40 years ago. When they tried to undergo the planning process, the Butsons told us that after 40 years of active involvement by their parents in the business, the hardest step was to inform their 71-year-old father that he must sever his relationship with the company if the company was going to survive.

We go to another example in Ohio. A one-store operator with five daughters who wanted to continue in the family business. At this point in time, they have had to stop their estate planning and in the event of the death of the owner, they are afraid they are going to have to sell the business.

In Cynthiana, KY, a grocer with four stores and six children, four of whom want to stay in the business. In his words, "We don't know what steps we can properly take. Section 2036(c) goes too far. My children have worked hard and long for the growth of our business and are entitled to own it. My biggest fear if Congress doesn't fix it right, we will be forced to sell the business."

Mr. Chairman, where do we go from here? We think that the draft presented by the staff and Treasury is a good first step but in its current form, we cannot support the draft. We have offered for the record 18 specific technical improvements based on three standards.

One, the standards of it are still too broad, and we can reduce the breadth and scope of the draft. No. 2, on the basis of equity and fairness, we think improvements can still be made; and, third, with regard to the overall efficiency and the complexity of the current law in the draft, improvements can be made.

Mr. Richard Dees, who will be on the next panel, will be prepared to talk in depth about these 18 specific recommendations. Thank you very much.

[The statement of Mr. Zaucha follows:]

Mr. Chairman my name is Thomas K. Zaucha and I presently serve as the 1990 Chairman of the Small Business Legislative Council and as President and CEO of the National Grocers Association. I very much appreciate this opportunity to testify on behalf of both organizations concerning a subject of major importance to all of us: the legislative future of Internal Revenue Code Section 2036 (c).

As you know, the Small Business Legislative Council (SBLC) is a permanent, independent coalition of over one hundred trade and professional associations that share a common commitment to the future of small business. Our members represent the interests of over four million small businesses in manufacturing, retailing, distribution, professional and technical services, construction, transportation and agriculture. A list of our members is attached.

The National Grocers Association has always been an active, vital member of the SBLC. We include over 2500 retail and wholesale grocery companies operating throughout the United States. N.G.A.'s retail members are predominately independent operators that are family owned and closely held businesses encompassing supermarkets, grocery stores and convenience stores to serve the American consumer. N.G.A.'s wholesale members serve as the food distributors to these retail grocers.

Mr. Chairman, in my testimony today I want to travel two roads with you. One involves the journey of the past to the present. A tragic trip which millions of small, family-held businesses have been forced to take against their wills, due to the enactment and force of IRS Code, Section 2036 (c). But I am happy to recognize what I see here today as a second road. The possibility of a new journey for all of us to undertake.

Let me look at it from three perspectives. First, and today most important, is the process. The past four months have witnessed a number of candid and productive discussions between Treasury, members of this committee and the small business community. In particular Assistant Treasury Secretary Kenneth Gideon has, thus far, been open forthright and responsive in his approach to tax reform. Similarly worthy of particular commendation was the action of this committee in releasing a "Discussion Draft" of major 2036 (c) modifications. SBLC is especially pleased that Section 2036 (c) would be retroactively repealed.

The announcement by Chairman Rostenkowski of today's hearing was yet another step in the right direction. His desire to obtain "an informed discussion about possible modifications to 2036 (c) that would address legitimate complaints about the current law provisions..." is on target. In addition SBLC is especially encouraged that now 218 members of the House have joined with Representative Bill Archer (R-TX) in cosponsoring H.R. 60 to repeal Section 2036 (c). All of this willingness by the

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