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Testimony
for the Hearing of
the Ways and Means Committee

of the
U. S. House of Representatives

by
Wim. G. Reed, Jr., Chairman
Simpson Timber Company

Seattle, Washington

Tuesday, April 24, 1990

Mr. Chairman and Members of the Committee:

I am wm. G. Reed, Jr., chairman of Simpson Timber Company, a familyheld company engaged in growing and harvesting trees, and manufacturing and selling building products.

At the start, I wish to commend Chairman Rostenkowski for recognizing that some serious problems exist with Section 2036(c) of the Internal Revenue Code and for his willingness to have repeal or change of this section of current tax law considered by the ways and Means Committee.

Simpson Timber Company is a medium-sized company in our industry. We own about 765,000 acres of timberlands in Washington, Oregon and California. Our 2,400 employees produce lumber, plywood and doors in 12 manufacturing plants in 7 West Coast communities. The company is an important part of the economy in most of those cities. Our products are marketed nationally and internationally.

Trees are the heart of Simpson's business. We are harvesting our second forest and planting our third, assuring a perpetual supply of wood products. Simpson plants seedlings immediately after an area is harvested, and our records show that 85 million seedlings have been planted in California and Washington since 1943.

Simpson tree farms benefit the environment. They produce needed oxygen and clean water, are home for wildlife, and when and where possible, are open for public recreation. Fish habitat is a very special interest and avocation of mine, and I'm pleased to report that fish and timber harvesting can and do coexist on Simpson lands and in much of the forest products industry.

We have worked very hard to be good corporate citizens in the mostly rural communities where our operations are located. The Mark E. Reed Scholarship Program, named after my grandfather, has awarded 1,027 college scholarships to young people at a cost of $787,300, since the program started in 1947.

Our charitable contributions to health and human services, education, culture and the arts, and civic causes, through the Matlock Foundation and corporate giving, have totaled $12,800,000 since 1976, when completed records were available.

And the company has provided tens of thousands of jobs, billions of dollars of payroll, and millions of dollars of tax payments throughout its 100-year history.

This year, 1990, is the Simpson Centennial and we're celebrating throughout our operations the stewardship of the owners and employees who have brought the company through the first 100 years.

My great-grandfather, sol Simpson, founded the company in Southwest Washington State in 1890, as we say with "50 men and 12 horses." I represent the fourth generation of ownership and some of the children of my generation--those being the fifth generation--have completed their education and are starting with the company. They are preparing to continue the business.

Before addressing Section 2036(c), it might be useful to address the merits of family-owned businesses, because this section of law has made it difficult to plan lifetime transfers of interest in family enterprises.

Family businesses have advantages and disadvantages, and Simpson has experienced both over the last century. However, they seem to offer some very real benefits to society and to the environment. Let me see if I can explain:

Growing trees for timber as a crop is a long-term business. It takes 50-60 years to grow a crop of Douglas fir, western hemlock or coastal redwood to maturity.

In general, I believe family businesses can be more interested in longterm goals rather than short-term profits. We don't have a vast number of uninvolved stockholders primarily seeking immediate return on investment.

Since we plan to continue Simpson as a family business, the concept of sustained yield has special meaning to us. We operate on the basis that trees are a renewable resource, and that we will manage our lands for continuous production of timber, now and in the future. It is not by accident that there are more trees growing today on the original Simpson lands than there were when the company first became a landowner in 1895.

Today, in the era of LBO's, there have been many takeovers of what had been well-managed timberlands, with the result in some instances of an increase in harvest rate to service the debt. This situation isn't likely to occur with family businesses, and public policy, it seems to me, should encourage family businesses to be passed on from generation to generation.

Current law, with Section 2036(c), in its effort to correct the estate tax "freeze," is so far-reaching that many nonabusive business transactions --particularly ones between family members--are caught in the net. The result is added taxes that inhibit the ability to, or increase the costs of, continuing to maintain the family business. Family businesses are then forced to go public, local control and focus is lost, and some of the social and environmental benefits in the forest management sense are placed at risk.

Under present law, it is unlikely Simpson will be able to remain familyowned over the long term.

While our family favors repeal, family businesses are willing to consider alternatives, but we hope these can be as narrow, as simple, and as clear as possible. In addition to its economic problems, 2036(c) is so complicated and overly broad that not even our attorneys or accountants can clearly explain when and how it applies to our business transactions.

The replacement proposal may well create the same kinds of problems we have seen with Section 2036(c). There are numerous unanswered questions, setting the stage for a renewed atmosphere of uncertainty and confusion as these experts try to advise their clients on how to proceed.

One specific concern with the proposal has been brought to my attention in a very personal sense. My father died last October after a long illness. At the present time, we are planning for a redemption of stock to pay his death taxes. Should the proposed replacement to Section 2036(c) become law, the language makes it unclear as to the consequence of a redemp tion to provide funds to pay death taxes and is dependent upon regulations for clarification. This makes an uncertain situation for us.

The best we can say about the proposal is that there may be less in it which is harmful to Simpson than is in Section 2036(c). Given a choice, we would probably elect to have the new proposal. However, we respectfully urge you to repeal the entire Section 2036(c). Period.

I appreciate the opportunity to testify. If you have any questions, I'll be pleased to respond.

610/40.3

Chairman ROSTENKOWSKI. Mr. McKenney.

STATEMENT OF DAVID MCKENNEY, PRESIDENT, McKENNEY'S,

INC., ATLANTA, GA, REPRESENTING THE SHEET METAL & AIR CONDITIONING CONTRACTORS' NATIONAL ASSOCIATION, INC.

Mr. McKENNEY. I am David McKenney, president of McKenney's Inc., a second-generation air-conditioning and mechanical contracting firm in Atlanta, GA. Thank you for this opportunity to appear before you on behalf of the Sheet Metal & Air Conditioning Contractors, SMACNA, and its 5,000 contributing contractors. My testimony is an abbreviated version of SMACNA's written statement, which has been provided to the committee.

SMACNA's membership is composed primarily of small familyowned, highly entrepreneurial firms. Section 2036(c) was an unwelcome surprise to SMACNA members and a cause of grave concern to the small business community in general, and especially in our industry where pride of building a business and transferring it to the next generation is a tradition, a tradition that represents an essential element of this Nation's free enterprise system.

SMACNA supports repeal of section 2036(c) and other tax provisions unfairly limiting or hindering transfers of family business ownership between generations. This law eliminates the legitimate estate freeze technique, which our company used in 1975 to pass ownership and control of our business from my parents to me.

For a number of years, quarterly dividends on that preferred stock helped provide funds for my parents' retirement. Recently, that stock became the bulk of my sister's inheritance. The dividends are an important part of her family's standard of living.

We applaud the effort taken in the discussion draft to focus on the abuses which may have occurred under prior law, and to continue to allow legitimate transfers. It is critically important not to allow the end product of your deliberations to penalize family businesses which need sufficient cash to survive.

The vast majority of family owned construction businesses are not highly capitalized. Under section 2036(c), the assessment of large tax liabilities on newly purchased or inherited companies limits their ability to borrow, to obtain bonds and to acquire new work which will ultimately result in failure for many contractors.

In addition, IRS regulations for section 2036(c) have broadened the law's restrictions to include any estate properly passed from parent to child that might appreciate substantially and in which the parent might have a stake.

This undermines the ability of generations to work and prosper side by side in their family business, and threatens their very existence. As a representative of an industry which reflects the entrepreneurial heritage of the American worker who puts down his tools, starts a business and if he becomes successful, dreams of passing the business onto future generations, I believe the current discussion draft is a vital first step in the process of modifying current estate valuation law.

We look forward to the opportunity to provide further constructive input into the process of turning this draft into a law which ends flagrant abuses while promoting the opportunity for continued operation of family owned construction firms, family farms and other family businesses.

SMACNA supports the recommendation to repeal 2036(c) retroactively. We believe that the approach of establishing the value of qualified fixed payments is basically sound. SMACNA believes the flexibility in the provisions concerning qualified fixed payments, especially the 3-year grace period and bankruptcy/insolvency exception, are helpful, but we believe further consideration of other special business circumstance exemptions would be useful.

SMACNA is concerned about the up-front taxes on gifts. Under some conditions, it appears that some owners could be in worse shape than under current law. We see potential problems with the practical application of valuation rules. We encourage the committee to consider more clearly outlining valuation guidelines.

Repealing IRS section 2036(c) is a must. While eliminating abuse is important, returning to more nearly pre-1987 estate transfer rules is essential to the survival of family owned businesses, especially now that small businesses are being recognized as the fastestgrowing provider of jobs in our economy.

We look forward to the opportunity to assist in this effort. Thank you for your attention.

[The statement of Mr. McKenney follows:]

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