22. 23. 24. 25. If considered, the payment stream, however contingent, should be an amount that can be elected to be a QFP. It should be made clear whether indebtedness includes As Parent owns 60% of corporation and child 40%. Only one Parent Parent and child own stock in a corporation. Partnership is formed with parent contributing $1,000,000 Exhibit C-2 26. 27. 28. as to time. $2701(b)(1)(A)(i). It presumably could be an elected QFP. $2701(b)(4)(B)(ii). SUGGESTION: The provisions for partnerships should be made parallel to that of corporations. This interest should qualify as a QFP. This could be accomplished by moving the language in $2701(b)(4) (B) (ii) to $2701(b)(1)(A). Parent Grandparent owns preferred. Parent owns common. SUGGESTION: The basic concept of the statute is to permit trans- Parent owns over 10% of common in publicly traded 29. Corporation is not publicly held. Parent owns 40% of preferred and 20% of common and gives 10% of common to child. Corporation due to economic problems and covenants in its bank loan agreement does not pay preferred stock dividend. Since more than half the dividends would be paid to nonfamily members, it is clear the failure to pay dividends is not tax motivated. SUGGESTION: The ownership level for the deemed gift rule should be raised to at least 50% of the common. Note that since the preferred must be cumulative the only disadvantage to the government (advantage to the taxpayer) is the time value of money issue. Exhibit C-3 30. 31. 32. In the past, grandfather left common stock 50% to parent; Buy-sell agreement was entered into between parent and Buy-sell agreement was entered into between parent and Exhibit C-4 33. 34. of such property as of the time of such sale, the buy- Buy-Sell Agreement was entered into between parent and 33-144 0 - 90 - 4 Exhibit C-5 STATEMENT OF E. JAMES GAMBLE, CHAIRMAN, ESTATE AND GIFT TAX COMMITTEE, AMERICAN COLLEGE OF TRUST AND ESTATE COUNSEL, ACCOMPANIED BY WALLER H. HORSLEY, PRESIDENT, AND THOMAS P. SWEENEY, VICE PRESIDENT Mr. GAMBLE. I am James Gamble, an attorney practicing in Detroit, MI. I appear in my capacity as chairman of the Estate and Gift Tax Committee of the American College of Trust and Estate Counsel. With me are Waller Horsley of Richmond, Virginia, president of the college and Thomas Sweeney of Wilmington, DE, who is vice president of the college. We want to express our appreciation to the committee for the process you have provided us in making the discussion draft public and for permitting us to examine it, prepare comments and to submit the comments to you this morning. The college supports the committee's effort to stop abusive valuation freezes. We support the approach used in the discussion draft in treating this as a gift tax valuation problem. We wholeheartedly support the proposed repeal of section 2036(c) because we think that has been a disaster by and large and is bad legislation that should be repealed. We do feel that chapter 14 is too broad and complex. And we prefer the joint task force report that Mr. Wallace and Mr. McGaffey described to you because that would be simpler and less intrusive in the everyday affairs of small businesses than chapter 14. I want to give you three examples of what we perceive to be some of the particularly complex areas raised by chapter 14. The first is that it applies to people who do not control the small businesses. Its threshold of 10 percent ownership is exceedingly low. People who own only 10 percent of a business are not in a position to engage in abusive freezes. They do not control the business. They also do on occasion, however, lend money to small corporations in which they own property. They also lease property to it, and this bill would impose upon them the burden of trying to determine each time they want to make a gift of common stock to a member of their family whether or not they are subject to the provisions of this act. It will require them to bring in a battery of lawyers and accountants to analyze it for them. It will be extremely costly. They may decide chapter 14 does or does not apply. It is just not worthwhile to make chapter 14 apply to people who are not the controlling forces behind the corporations. Chapter 14 would also apply to people who own more than 10 percent of an interest in a publicly owned corporation. These people, again, do not control the course of the publicly owned corporation. There seems to be no useful point in applying chapter 14 to them because they just are not in a position to install an abuse valuation freeze, which is what this is all about, in a publicly owned corporation. Secondly, the discussion draft ignores the fact that market values may be readily available to be used for gift tax purposes. |