term investments and long-term effects of decisions. Second, they tend to be civic-minded and community-minded. Third, they tend, statistically, to have high ethical standards, partly because the founders' family name is often attached. (See April 1990 Family Business magazine.) Fourth, they tend, systematically, to have better financial returns, due in part to the owner's shadow in management as well as the above-mentioned long-term perspective and commitment. (Pitcairn and Wharton empirical studies strongly statistically support the latter statement regarding familycontrolled public corporations.) STATEMENT FAMILY HOLDING COMPANY GROUP Re: Repeal of Section 2036(c); The Family Holding Company Group is an organization of twenty-four family companies which is concerned with the impact of federal tax policy on family companies in general and family holding companies in particular. Family holding companies are companies that either have a portfolio of investment assets, such as publicly traded securities, or which control or are associated with actual family-owned operating businesses. The stock of these member holding companies is owned by family groups and is not actively traded. Family investments held through holding companies are subject to an unfavorable tax regime under present federal tax law: tax - (1) Families which hold investments or operate active businesses directly, or through partnerships and S corporations, are taxed at a maximum income rate of 28 percent; whereas corporations (including family corporations) are taxed at a maximum rate of 34 percent. (2) Unlike publicly held companies, mutual funds, real estate investment trusts and other corporations, a family holding company is either subject to the personal holding company tax of section 541 or the accumulated earnings tax of section 531, so that family holding companies must either distribute all or most of their earnings or be subject to these penalty taxes. (3) Due to the erosion of the dividend received deduction (now only 70 percent), dividend earnings received by these companies are subject to triple tax (i.e., at the level of the payor corporation, the family holding corporation and the individual shareholder). (4) At the death of a family holding company shareholder, large amounts of estate taxes must generally be paid even though the decedent's shares are unmarketable. Because of this punitive taxation, almost every member of our Group would liquidate if it could do so without being subject to another prohibitive this one on the appreciation in the assets held by the company. Congress has imposed an unfairly discriminatory level of taxation on investments held through family companies at the same time making it prohibitively costly to change the structure of such investments. In light of the highly unfavorable income taxation of family holding companies, the enactment of section 2036(c) in 1987 and its troublesome amendment in 1988 were severe blows to our membership. Shareholders of family holding companies suffer to the same degree as any other shareholders of family companies under section 2036(c), but they may not qualify for extended estate tax payments under section 6166. Consequently, in light of the existing duplicative and unfair taxes on family holding companies and for the many other reasons cited by numerous persons at the Committee's hearing on April 24 and in related written submissions, we urge the immediate repeal of section 2036(c) with retroactive effect to December 17, 1987. Failure to repeal this overbroad and inequitable legislation would expose shareholders in members of our Group to inestimable and potentially disastrous estate taxes. With respect to the discussion draft, we share the view of many others in commending the Chairman for introducing this substantial improvement to present section 2036(c). Also like many other organizations which have submitted statements which comment on this discussion draft, we believe that both substantive and technical improvements are required in this draft. In order to avoid repetition, we particularly associate ourselves with the substantive comments of the U.S. Chamber of Commerce of April 24, 1990, and will limit our own comments to only one of these issues of substance. We strongly object to proposed section 2702 of the discussion draft which would require that certain options (or agreements) be disregarded in determining the value of an interest in any family business. There is no dispute that family businesses frequently use and genuinely need such options (or agreements) for bona fide non-tax business reasons (e.g., to prevent sales to hostile outside interest, to protect the family business in cases of divorce, bankruptcy, etc.). Present law simply evaluates whether any such options (or agreements) have any real impact on the fair market value of such interest in the family business. If it does not actually reduce the price a willing buyer would pay a willing seller, then it does not reduce the value for transfer tax (estate, gift and generation-skipping) purpose. If it does actually reduce such price, then this is recognized also for transfer tax purposes. Thus, present law gives options (or agreements) no more or no less significance than any other fact or factor that is considered in determining fair market value. Long-standing Treasury regulations expressly address and prevent any abuse in this area. Reg. § 20.2031-2(h). Section 2702 would create an exception to the general fair market value standard; such an exception is unnecessary, unfair and very bad tax policy. Congress should certainly not be adopting exceptions to long-established and well accepted tax policy for the purpose of increasing gift and estate taxes on interests in family business. This is particularly egregious where the statute seems to be designed to force sales of family corporations. Neither section 2702 of the discussion draft nor any comparable exception to the fair market value standard which denies equal treatment to family business should be adopted. Congress should be encouraging family business by the repeal of section 2036(c) and not penalizing family business by adopting provisions such as section 2702. George W. Helme, IV of the Family Holding Company Group and Vice President, Wilmington Trust Company GREATER PHILADELPHIA CHAMBER OF COMMERCE GOVERNMENT AFFAIRS DEPARTMENT STATEMENT ON SECTION 2036 (C) THE ESTATE TAX FREEZE The Greater Philadelphia Chamber of Commerce supports a full repeal of the current Estate Tax Freeze rules, which have created extreme difficulties for the transfer of family-owned companies between generations. While the chamber supports full repeal, as proposed by Rep. Bill Archer, we also recognize the concern of some Members of Congress over the potential for abuse by some individuals seeking to avoid the payment of appropriate estate taxes. The draft legislation being considered by the ways and Means Committee, if passed, will be an improvement over the existing rules. This Chamber and other business organizations believe, however, that a number of changes should be made to the draft for the bill to be fair to the family-owned business in this country. Several of the requirements will make estate planning more costly and complicated for the small business person. We cannot endorse the bill in its present form, but do believe the committee is taking a better approach than is currently in place. The Greater Philadelphia Chamber of Commerce offers the following comments on the draft bill: 1. The Chamber favors the valuation method of calculating estate taxes over the incomplete gift method. The valuation method allows a parent to freeze his or her interest and pay the appropriate gift taxes at the time of the freeze without penalizing the future growth of the business. 2. The language contained in the draft bill for buy-sell agreements is not practical and unfair. Of particular concern are: provisions which require all buy-sell agreements to be renegotiated every three years in order to be considered valid by the Internal Revenue Service; (this requirement is prohibitively costly for a person to undertake every three years, and drives up the cost of the estate taxes paid), and ignoring the Rights of First Refusal for dependents when purchasing stock upon death of the parent. Without giving the children the right to purchase the stock at an agreed-upon price prior to opening the purchase to outsiders, the family could lose control of the business they have worked so diligently to improve and grow. 3. There should be a formula used by the IRS to give the business a fair amount of time to pay the tax, rather than requiring full payment at once. Deferring the payment of the taxes over time, without incurring high rates of interest, would be less of a burden to the small business. |