Thank you for allowing me on behalf of the Associated Speciality Contractors to present our views on this issue. Thank you. [The statement of Mr. Weber follows:] STATEMENT BY LEO WEBER FOR THE ASSOCIATED SPECIALTY CONTRACTORS BEFORE THE HOUSE WAYS AND MEANS COMMITTEE ON A COMMITTEE DISCUSSION DRAFT APRIL 24, 1990 Good afternoon, my name is Leo Weber. I am the President of Weber Electric Inc, an electrical contracting firm located in St. Paul, Minnesota. I am also the President of the National Electrical Contractors Association (NECA). It is a pleasure to testify before you today on behalf of the Associated Specialty Contractors (ASC). The Associated Specialty Contractors is a coalition of eight national associations whose combined membership totals about 25,000 firms. On a construction site the specialty contractors represented by these groups do up to 80% of the total work. I am very pleased that your Committee has decided to hold hearings on section 2036(c) of the Internal Revenue Code relating to estate valuation freezes. As presently written this provision not only penalizes my company and my family, but many other similar construction companies. BUSINESS SUCCESS DOES NOT ALWAYS COME QUICKLY Like many construction business owners, I spent many long years in training before I became an entrepreneur. In 1942 I received my first training in electricity from the Navy. After serving in both the European and Pacific theaters, I returned to St. Paul and joined a NECA/IBEW apprenticeship training program. From 1949 to 1960 I moved up from journeyman to general foreman and in 1960 I decided I wanted to be my own boss. I borrowed $10,000 from a friend, purchased three used trucks, rented space in a old butcher shop, and opened up Weber Electric Inc. During my first year as a small business owner, Weber Electric had two electricians and a total sales of $275,000. Last year, after 30 years of hard work, my firm worked an average field crew of 50, and had sales in excess of $6 million. Not only has my business grown over the past 30 years but so has my family. I have eight children and 13 grandchildren. Two of my sons work for Weber Electric, and my youngest son is currently undergoing apprenticeship training. I fear, however, that the broad and complex provisions of section 2036(c) will discourage and probably prohibit my sons and other members of my family from carrying on Weber Electric in its present form. SECTION 2036(c) DISCOURAGES ENTREPRENEURSHIP Most family business owners, myself included, have made provisions for passing their business onto their other family members. We have hired financial planners to structure our business and our holdings in such a manner to facilitate the transfer of our property to our heirs. We have done this planning not as a means of subverting the law or avoiding taxation, but so that our heirs for generations to come, will be prepared to continue the family business. However, as presently written, section 2036(c) will force many family business owners to sell their business to non-family members. If the business has appreciated considerably, as has mine, it will force heirs either to sell the company or liquidate large assets of the company to the pay estate taxes. I realize that Section 2036(c) was initially enacted to close an estate planning tax "loophole". In an effort to curtail the practices of the abusers, Congress enacted an estate tax system which severely punishes contractors like myself who have devoted a lifetime building a company and a reputation to leave behind. Unfortunately, as a result of an individual's success, his children will not be able to afford to carry on the family business because of this law. SECTION 2036(c) IMPACTS BONDING CAPACITY One of the most valuable assets of a construction contractor is bonding capacity. Bonding companies require financial statements when determining whether or not they will grant a bond to a contractor, and in what amount. Construction contractors normally maintain very little inventory, and therefore, are determined to be financially sound on the basis of their retained earnings or their work in progress. In fact, today, most bonding companies require contractors to leave the majority of their financial assets in their businesses cash reserves. As a result of section 2036(c), heirs to businesses may be required to take money out of the business in order to pay the estate tax. If this occurs, a contractors bonding capacity could be greatly diminished resulting in a loss in his ability to get the level of bonding needed to compete for work. A COMPANY'S WORTH CAN BE DETERMINED BY A NAME One of the most valuable assets of a construction contractor is the name and personal reputation of the owner. Ongoing success for a small business may depend on continuity of family ownership. Section 2036(c) discourages the transfer of ownership to another member of a family. One of the major reasons that Weber Electric continues to be a healthy contracting business in the 90's is my insistence on providing superior service to established customers. I have cultivated relationships with particular contractors and owners. My company has developed a reputation for doing our work on time. It has taken me 30 years to build this reputation and to lay this groundwork for my sons. If my sons were forced to sell my company and start a new business from scratch there would not be much to show for this lifetime of commitment to Weber Electric. A PROPOSAL FOR A NEW SECTION 2036(c) As you can see, section 2036(c) in its present form provides many problems for the family-owned construction business. I am grateful to this committee for recognizing that some modification of this provision is required. If given a choice we could like to see a simple repeal of estate tax valuation provisions of 2036(c). However, we also understand the feeling of Congress that certain abuses need to be eliminated. We have reviewed your "discussion draft" to modify section 2036(c) and believe that this alternative appears to us to be the first step on the way to an acceptable compromise. I am an electrical contractor, not a tax expert. I am sure I do not grasp all the subtleties apparent to accountants and tax attorneys. However, the draft appears to contain some good news and some bad news. The good news is that the draft sets valuation of the transferred property at the time of the transfer. This is extremely important. To us it is the centerpiece of the proposal. The bad news is that the draft appears to affect many types of transactions that were not part of the problem. We would like to see complete repeal of the 2036(c) language as a starting point. The Committee should then adopt a solution that uses more of a rifle shot than a shotgun approach. We would hate to see a bill which solves this problem, but which would create others that would hurt small, family-owned businesses. For example, it is not clear whether some portions of the property being transferred would be subject to both an estate and a gift tax. It also appears possible that the handling of indebtedness might result in double taxation of a portion of the value of the business being transferred. The "deemed gift" rule also appears to be too broad. For example, it could be imposed on non-family equity holders. 33-144 0 - 90 - 11 CONCLUSION To summarize, current law has created a nightmare in the minds of accountants and in the hearts of construction contractors throughout the country. The current law on estate tax valuation must be repealed. It nearly prevents a working, fiscally sound small business from being passed from one generation to another. Should it be necessary to replace the repealed law with something else, the draft legislation is a responsible starting point. But it needs a great deal more detail work. Thank you for allowing the Associated Specialty Contractors to present our views on this issue. MEMBERS OF THE ASSOCIATED SPECIALTY CONTRACTORS Mason Contractors Association of America National Association of Plumbing, Heating and Cooling Contractors National Insulation and Abatement Contractors Association Painting and Decorating Contractors of America Chairman ROSTENKOWKSI. Thank you very much, Mr. Weber. Thank you very much for joining us this afternoon. We appreciate your appearance and we appreciate your observations. Thank you. [Whereupon, at 2:25 p.m., the hearing was adjourned.] [Submissions for the record follow:] |