[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]






         PLANNING FOR THE DEATH TAX: CAN SMALL BUSINESS SURVIVE?

=======================================================================

                                HEARING

                               before the

        SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                              MAY 31, 2012

                               __________


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



            Small Business Committee Document Number 112-069
              Available via the GPO Website: www.fdsys.gov


                                _____

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                      CHUCK FLEISCHMANN, Tennessee
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                     Barry Pineles, General Counsel
                  Michael Day, Minority Staff Director



















                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
 Hon. Joe Walsh..................................................     1
 Hon. Kurt Schrader..............................................     2

                               WITNESSES

Neil D. Katz, Managing Partner, Katz, Bernstein & Katz, LLP, 
  Syosset, NY....................................................     4
Karen Madonia, Chief Financial Officer, Illco, Inc., Aurora, IL..     6
Michael G. Flesher, Owner, Taylor Rental Center, Vestal, NY......     8
Thala Taperman Rolnick, Owner, Thala T. Rolnick, CPA, PLLC, 
  Phoenix, AZ....................................................    10

                                APPENDIX

Prepared Statements:
    Neil D. Katz, Managing Partner, Katz, Bernstein & Katz, LLP, 
      Syosset, NY................................................    25
    Karen Madonia, Chief Financial Officer, Illco, Inc., Aurora, 
      IL.........................................................    31
    Michael G. Flesher, Owner, Taylor Rental Center, Vestal, NY..    36
    Thala Taperman Rolnick, Owner, Thala T. Rolnick, CPA, PLLC, 
      Phoenix, AZ................................................    92
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Materials for the Record:
    Associated Builders and Contractors, Inc. Letter for the 
      Record.....................................................   101
    Statement of the American Farm Bureau Federation.............   102
    Written Statement of Scott Ramminger, President of the 
      American Wholesale Marketers Association...................   104
    Prepared Statement of American Trucking Associations.........   107
    National Newspaper Associations Letter for the Record........   110
    Testimony of Food Marketing Institute Submitted for the 
      Record.....................................................   113
    International Sign Association Letter for the Record.........   115
    Marine Retailers Association of the Americas Statement for 
      the Record.................................................   116
    National Federation of Independent Business Statement for the 
      Record.....................................................   118
    Statement of the National Funeral Directors Association......   121
    The Mason Contractors Association of America Statement for 
      the Record.................................................   125
    National Grocers Association Statement for the Record........   129
    National Roofing Contractors Association Letter for the 
      Record.....................................................   131
    National Telecommunications Cooperative Association Statement 
      for the Record.............................................   133
    Statement of Jack Fitzgerald, Founder, Americans Standing for 
      Simplification of the Estate Tax...........................   136
    National Automobile Dealers Association Testimony for the 
      Record.....................................................   140
    Financial Executives International Statement for the Record..   141

 
        PLANNING FOR THE DEATH TAX: CAN SMALL BUSINESS SURVIVE?

                         THURSDAY, MAY 31, 2012

              House of Representatives,    
               Committee on Small Business,
                   Subcommittee on Economic Growth,
                                    Tax and Capital Access,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10 a.m., in room 
2360, Rayburn House Office Building. Hon. Joe Walsh (chairman 
of the subcommittee) presiding.
    Present: Representatives Walsh, Chabot, King, Hanna, 
Schilling, Bartlett, Schrader, Clarke.
    Chairman Walsh. Good morning and welcome. The hearing will 
come to order. I apologize to everyone at the outset. I have 
had a nasty head cold for a couple days. So if I sound like I 
am in a tunnel, I apologize.
    I want to thank our distinguished panel of witnesses who 
have taken the time to be here today. Special thanks to Karen 
Madonia, who hails from the Eighth Congressional District of 
Illinois. We look forward to all of your testimony. I will 
begin with some brief comments.
    Benjamin Franklin is believed to have written, ``In this 
world, nothing can be certain but death and taxes.'' Now, it 
seems, nothing is certain but uncertainty. For many years, 
death and taxes have gone together in the United States, but 
the structure and rates of those taxes have varied greatly. For 
family-owned small businesses and farms, estate taxes are a 
significant concern.
    Is it not enough for them to worry about new and higher 
taxes, compliance with the health care law, additional 
regulations, accessing capital, and simply staying afloat while 
they are alive? But these small business owners must also try 
to blunt the impact of estate taxes following their demise.
    If Congress fails to act by the end of this year, the 
current federal estate tax law will revert to significantly 
higher pre-2001 levels. And that is not including any estate 
taxes imposed by states.
    Many small companies have non-liquid assets--capital that 
is tied up in real property, machinery and equipment--so their 
heirs do not have cash to pay the estate taxes. Often, 
businesses must be sold--even at ``fire sale'' prices--so this 
estate tax can be paid. In fact, a Joint Economic Committee 
study found that, prior to 2001, the estate tax reduced capital 
formation by about $847 billion. Capital that must be paid in 
estate tax is capital that is not available to be invested back 
into the business, to create jobs, or to grow the economy.
    Today, we will hear about the effects of the estate tax on 
small business owners. We very much look forward to this 
testimony.
    I now yield to our ranking member for his opening remarks.
    Mr. Schrader. Thank you, Mr. Chairman.
    For many starting a successful business or a farm, 
actually, seeing it grow is the American dream. After all, the 
goal of most of these entrepreneurs is to build an estate that 
they can pass on to the next generation, carry on the family 
dream. But for many who have spent their whole lives building 
an enterprise, continuing that legacy tends to be very 
problematic given the estate tax.
    For many family businesses, the estate tax is a major 
hurdle to overcome--very technical, very complex. Playing 
around such intricacies is expensive, time consuming, things 
that most small business folks do not have time or the money 
for at the end of the day. Additionally, it just adds anxiety. 
You have to constantly update your financial plan because of 
what we do or do not do here in the United States Congress.
    And while the Estate Tax Reform was enacted in 2001, and 
allowed entrepreneurs to focus on growing their ventures, the 
reforms were only temporary. In 2010, we were able to give some 
estate tax relief but again, very temporary, just for two 
years. With the existing law expiring, as the chair pointed out 
at the end of the year, reduced exemption limits will take 
effect subjecting many, many more small businesses and farmers 
to the estate tax. So providing relief for thousands of small 
firms and farms is critical to continuing the recovery. 
However, we must be cautious how we do that because we do have 
a debt deficit issue that we are also concerned about.
    As our economy continues its recovery, we must do 
everything possible to help small business job creators. We 
cannot do so at the expense of future generations. So today's 
hearing will assess the implications of the estate tax on small 
firms and farms and examine what the future of this law holds 
for them. Some are calling for a complete repeal of the estate 
tax; others suggest that Congress freeze the estate tax 
provisions in their current form. Nevertheless, one thing is 
clear; we need a permanent solution. So I look forward to 
hearing from each and every one of you what you think that 
might be.
    Small businesses face enough hurdles to succeed without the 
estate tax. Protecting the family business so it can flourish 
is critical to creating American jobs and the future of this 
country. And by crafting an estate tax that works for small 
firms and farms, we can empower entrepreneurs to do what they 
do best, which is create jobs. So I look forward to hearing 
from each and every one. And I yield back, Mr. Chair.
    Chairman Walsh. Thank you, Congressman Schrader.
    If it is okay with you, Congressman King has to dash off to 
a meeting in a second and requested the ability to make an 
opening state.
    Mr. Schrader. Sure.
    Chairman Walsh. Congressman King.
    Mr. King. Thank you, Mr. Chairman. And Mr. Chairman, I very 
much appreciate you holding this hearing today. I think it is 
important that we have this discussion and I appreciate the 
witnesses a great deal.
    I would like to start this out with a little piece of a 
narrative. And that was just a few years ago I received a phone 
call in an evening from an individual whom I knew to be one of 
several siblings in a well-to-do family not that far from where 
I live. And he started out with this: ``Congressman, I drew the 
short straw and I am the one that has to call you. Our mother 
is in the hospital and we are making a decision on whether to 
put her on life support and I would like to know whether 
Congress is going to do something to fix the death tax.''
    Ladies and gentlemen, it is cruel and diabolical to put 
families through this and make death also a taxing decision. 
And it is cruel and diabolical to tap into the accumulation of 
the American dream. If we can tax it when they earn the income, 
we can find ways in our states especially to tax it when they 
spend it, we do not need to tax it if they accumulate it.
    And I, as a founder of a construction business back in 
1975, started out with a negative net worth and built a little 
bit of capital. Now, I have transitioned that into, well, one 
of my sons at a minimum, who has demonstrated to me that it is 
not just intergenerational capital that we develop, but we also 
accumulate intergenerational knowledge. You build a knowledge 
base within the family. They learned things at age 10 that I 
did not learn until I was 40, and that foundation of this--this 
is how you tie together the American dream. The American Dream 
is tied together. People come here to the United States to 
access the American dream. They are raised to access the 
American dream. The pillars of American exceptionalism are tied 
together to paint the foundation for the American dream. And 
what does the federal government do but go in and grab it at 
each transfer of the generations. And why do you build that? 
Why do people go to work after say age 50 or 55 if they are 
able to take care of themselves for the rest of their life? Why 
do they continue to work and succeed if the government is going 
to take the proceeds of that wealth?
    And so this death tax, this estate tax that we are dealing 
with here today, it is a tax directly on the American dream. It 
takes the capital out, the formation out of the family. For 
example, a family farm. Just think of a family farm that over 
two or three or four generations has accumulated maybe 1,500 
acres and set up a green light distribution system, storage 
system, and feed lots and pastures and all those things that go 
together to make a unit, and then that unit is broken up to pay 
the taxes and the entire family business is destroyed because 
what? Because of the political element in this country and in 
this Congress called class envy. We should cheer the people 
that are able to achieve and succeed in the American dream and 
understand that we want to encourage more of that--more capital 
formation, more wealth formation, more family businesses where 
you have the accumulation of intergenerational capital and the 
accumulation of intergenerational knowledge.
    That is my message today, and I hope I can hear the 
witnesses' testimony. And I am hopeful that we will be able to 
move forward and one day see the end to this tax on the 
American dream called the estate tax.
    Chairman Walsh. Thank you, Congressman King.
    If other Subcommittee members have an opening statement 
prepared, I ask that they be submitted for the record.

STATEMENTS OF NEIL D. KATZ, MANAGING PARTNER, KATZ, BERNSTEIN & 
KATZ, LLP; KAREN MADONIA, CHIEF FINANCIAL OFFICER, ILLCO, INC., 
    TESTIFYING ON BEHALF OF HEATING, AIR-CONDITIONING, AND 
 REFRIGERATION DISTRIBUTORS INTERNATIONAL; MICHAEL G. FLESHER, 
  OWNER, TAYLOR RENTAL CENTER; THALA TAPERMAN ROLNICK, OWNER, 
                  THALA T. ROLNICK, CPA, PLLC.

    Chairman Walsh. To our witnesses, you will each have five 
minutes to deliver your testimony. Do your best to adhere to 
that time limit.
    We will begin with our first witness, Neil Katz, who is 
managing partner of the law firm of Katz, Bernstein & Katz, in 
Syosset, New York. He specializes in federal and state income 
tax issues and matters affecting corporate partnership, estate, 
and gift taxation. Not only are his clients small business 
owners, but he is part owner of a small business himself. He 
practices law with his father.
    Welcome, Mr. Katz. You have five minutes to present your 
testimony.

                   STATEMENT OF NEIL D. KATZ

    Mr. Katz. Good morning, Chairman Walsh, Ranking Member 
Schrader, and members of the Subcommittee. I appreciate the 
opportunity to address you today, and I thank you for taking 
time to learn about the difficulties faced by closely-held 
business owners as a result of the imposition of the estate tax 
on the business that they have worked tirelessly to create and 
grow.
    Your hearing memorandum states in its conclusion that there 
is not a great deal of credible evidence about the effect of 
the estate tax on small businesses. While there may not be a 
significant number of empirical studies on this issue, the 
business owners who will testify today and the millions of 
small business owners across our country who are struggling 
with this issue are all the credible evidence that you should 
need.
    Closely held businesses are an integral part of local 
economies throughout the country. Business owners spend their 
entire lives investing time, effort, and capital into making a 
business a success. Many of them would like nothing more than 
to be able to pass the fruits of their labor and capital onto 
the next generation. However, as business owners age, the 
complexities of owning and running a closely held business 
often become overshadowed by the burden of the estate tax 
looming on the horizon.
    The issues faced by business owners and their families 
start long before death with the necessity of seeking out 
professionals to assist with planning to attempt to reduce the 
exposure that the heirs will face. This planning does not come 
without a price. To design and implement an estate plan can 
cost an individual anywhere from $5,000 to $50,000 or more. The 
plan may call for the transfer of interest in the business to 
future generations. Often, this decision is one that the owner 
may not be prepared emotionally or economically to make at that 
time. During the planning process, business owners are forced 
to familiarize themselves with the concept of estate tax 
valuation, and the families need to become prepared for the 
expediency with which estate taxes must generally be paid.
    Estate tax value is a concept that accountants, attorneys, 
legislators, and the Treasury Department have struggled with 
for decades. There is no clear definition in the statute, and 
the only guidance we are given is the hypothetical willing 
buyer, willing seller language of the regulations. Tax experts 
often differ on the meaning of these rules, and to business 
owners this is often impossible to comprehend.
    The real value of a closely held business is often tied 
directly to the owners. Ask most business owners what their 
business is worth in the market and they will say, ``Without 
me, the business is worth nothing.''
    Where estate tax valuation differs from reality, it only 
makes the burden on the business owner and their family even 
greater. When I was younger I started collecting baseball cards 
and today I still have much of that collection in my basement. 
Whenever I am asked why I do not throw out the baseball card 
collection I say that it is because it is worth a lot of money. 
To that my wife inevitably responds, ``It is actually not worth 
anything unless you sell it.''
    To most small business owners, the same principle applies. 
To them, the only value of the business is the check that they 
get to take home each week. However, the estate tax valuation 
concepts force an imposition of a tax as if the business were 
sold.
    Further complicating matters is the requirement that the 
estate tax be paid within nine months of death. While 
extensions are available, they are often short-term solutions 
to a long-term problem. Even Internal Revenue Code Section 
6166, the most significant estate tax extension, has its 
problems. Most businesses do not have the cash reserves or cash 
flow available to make the payments that are required in the 
timeframe, and many businesses do not qualify for this relief.
    Planners with us often recommend that a business owner 
acquire life insurance to provide liquidity to pay the ultimate 
estate tax that will be due. This creates an added expense to 
the business. Depending upon the amount of insurance that is 
required, the premiums can run tens of thousands of dollars 
annually if the owner is even insurable.
    Businesses today are operating on very tight margins. 
Adding the burden of estate tax to the cash flow of the 
business can make continuing the operation of the business 
impracticable. The new owner of the business can often not 
afford to pay taxes and still have money to pay business 
expenses and make a profit. Most individuals do not see working 
to solely pay off an estate tax obligation as the definition of 
the American dream. There is no benefit to a beneficiary if the 
assets that they inherit provide them with nothing other than 
the opportunity to work with no expectation of income. There 
needs to be some incentive for the owner.
    As a final point, more than anything, what the small 
business owner needs is some clarity and certainty in the law. 
The constant changes in the estate tax law over the past 12 
years, coupled with the uncertainty of the future rules is 
unworkable. Congress needs to once and for all establish rules 
that business owners can be assured will survive.
    Since the enactment of ETR in 2001, we have been operating 
in an impossible environment. The chaos of 2010, which again 
stands before us on January 1, 2013, cannot be repeated. 
Business owners and all taxpayers need and deserve certainty.
    Thank you again for the opportunity to speak today. I am 
happy to answer any questions the members may have.
    Chairman Walsh. Thank you for your testimony, Mr. Katz.
    Our next witness is Karen Madonia. Ms. Madonia is chief 
financial officer of Illco, Inc., a family-owned distributor of 
refrigeration, heating, air-conditioning PVF, plumbing, and 
hydronic supplies in Aurora, Illinois. She currently serves as 
co-chair of the Government Affairs Committee of the Heating, 
Air Conditioning, and Refrigeration Distributors International. 
She is testifying today on their behalf.
    Welcome. You have five minutes to present your testimony.

                   STATEMENT OF KAREN MADONIA

    Ms. Madonia. Chairman Walsh, Ranking Member Schrader, and 
members of the Subcommittee on Economic Growth, Tax, and 
Capital Access. My name is Karen Madonia and I am the chief 
financial officer and next generation of Illco, Inc., a 
Chicago-area distributor of heating, ventilation, air 
conditioning, and refrigeration equipment, parts and supplies. 
Thank you for giving me the opportunity to talk about the 
estate tax and its effect on the many small family businesses 
which make up the United States' economy. This is an issue that 
is very close to my heart as my family is in the midst of our 
own generational transfer.
    As background, Illco was a very small company when my 
father purchased it back in 1973. At that time, my dad was only 
32 years old, with a wife, three daughters, and a mortgage, but 
he knew he wanted something more than just a job. He wanted to 
use his passion to create something permanent, to be in control 
of his own destiny. With help from my grandfather, my dad 
decided to take a risk and go into business for himself.
    In those early years, he worked every job at the company, 
and my mom filled in wherever needed. My dad worked seven days 
a week, 10 to 12 hours a day, but his passion for the industry, 
his commitment to his employees, and his drive to grow his 
company empowered him to push forward. And 40 years later, he 
has a business that employs over 90 people in three states and 
generates almost $40 million in revenue.
    My sisters and I grew up understanding that if we wanted to 
be successful, we had to work hard and stay focused on our 
goals, and we carry that ethic with us every day as we work 
alongside our dad.
    While I take great pride in my dad's story, I realize that 
it is not necessarily unique. There are thousands of families 
that have similar histories--families who have decided to risk 
everything to pursue the American dream. Like my dad, they want 
to create something that lasts, that can be passed down to 
their kids and grandkids. I am speaking today about my own 
family's experience, but I know that all family business owners 
have the same issue--how do I pass this business on to future 
generations without losing some or all of it to the IRS in the 
form of estate taxes?
    Each spring I come to Washington with our trade 
association, HARDI, to talk to our representatives and senators 
about the issues that are important to my company and our 
industry. Every year, estate tax is my top priority and I 
appreciate this Committee's interest in this issue. Far too 
often, small business owners feel that there is a lack of 
understanding about this tax and its impact on job creators. 
The reality is that we are not talking about passing on bank 
accounts with million dollar balances. These are businesses 
where most of the net worth is tied up in inventory, equipment, 
and real estate. In the case of Illco, we carry an inventory 
valued at $10,000,000, and accounts receivable of about 
$5,000,000.
    Our inventory has to be high. We provide vital heating, 
air-conditioning, and refrigeration parts and supplies to 
hospitals, schools, nursing homes, and grocery stores. When the 
refrigeration system in a grocery store goes down, it needs to 
be repaired within hours or the food is lost. When the air-
conditioning system in a hospital does not work, patients 
cannot be properly cared for until air is circulating again. 
The products that we sell must be on-hand in order to 
facilitate quick repairs and replacements, which means that we 
have to carry a heavy inventory.
    We also own five buildings and operate a fleet of 26 
trucks. After paying our taxes and making our annual profit 
sharing contribution, the income that is left is put right back 
into the company so we can continue to carry an extensive 
inventory, extend payment terms to our customers, and maintain 
our fleet and our buildings.
    If something happened to my dad, we would literally have to 
sell parts of the company in order to pay the estate tax. That 
would likely mean shutting down branches, laying off workers, 
or liquidating inventory. Even worse, it could mean having to 
sell the entire company just to be able to pay a tax bill that 
only occurred because an owner died.
    Over the last few years, my dad has spent countless hours 
and entirely too much money trying to navigate the estate 
planning waters. Instead of focusing on growing his business, 
he has had to strategize about how to pass his company onto his 
kids without having to dismantle it. And if that is not enough 
of a challenge, he has had to do it within an ever-changing tax 
landscape. We have gone from an exemption of $2 million and a 
tax rate of 45 percent in 2008, to an exemption of $3.5 million 
and a tax rate of 45 percent in 2009, to a full estate tax 
repeal in 2010, to an exemption of $5 million and a tax rate of 
35 percent in 2011 and 2012. In 2013, the exemption is 
scheduled to fall back to a million dollars with a tax rate of 
55 percent. How can anyone formulate an estate plan if the 
rules are changing every year?
    In the business world, we need to think beyond the current 
year if we want our companies to thrive. We are typically 
looking 5 to 10 years out in our strategic plans, trying to 
move all the pieces on the board to better our chances for 
growth and prosperity. That is very difficult to do even in the 
best circumstances, but it is nearly impossible when Washington 
keeps changing the rules.
    The estate tax places an immense burden on small business 
owners by taxing them for creating and growing a business that 
outlasts them. In my opinion, it is a fundamentally flawed tax 
that discourages entrepreneurship, and it should be totally 
repealed. Absent that, I would ask that Congress consider 
maintaining the current personal exemption and gift and estate 
tax rates, and equally important, establish a more permanent 
solution to the estate tax issue.
    Small business owners take tremendous risk at great 
personal sacrifice and they truly are the backbone of the 
American economy. They should be appreciated and encouraged. 
Allowing the estate tax exemption to fall back to a million 
dollars and the rate to climb to 55 percent would absolutely 
devastate a great number of families who are currently working 
on generational transfers.
    I respectfully urge you to carefully consider all the 
ramifications of estate tax policy and establish a long-term 
solution that will allow for generational transfers of family 
businesses. And I thank you for allowing me to put a more 
personal perspective on the issue for you.
    Chairman Walsh. Thank you, Ms. Madonia.
    I now yield to Mr. Hanna, who will introduce our next 
witness.
    Mr. Hanna. Hello, Mr. Flesher. How are you today?
    Our next witness is Mike Flesher. Mr. Flesher is president 
of the American Rental Association. Mike Flesher was born and 
raised in the southern tier of New York. I have the privilege 
of representing many communities there. He operates two Taylor 
Rental Center franchises in upstate New York, truly family-
owned businesses. They provide taxes and opportunity and jobs 
in those communities. Last week, I had the opportunity to visit 
his business in Vestal, New York, to discuss the impact of 
taxes and his ability to hire and grow and plan.
    Welcome, Mr. Flesher. You have five minutes.

                STATEMENT OF MICHAEL G. FLESHER

    Mr. Flesher. Thank you, Chairman Walsh and Ranking Member 
Schrader. And thank you, Representative Hanna, for that 
generous introduction.
    Mr. Chairman and members of the Subcommittee, I am Mike 
Flesher, president of Taylor Rental in Vestal, New York, and 
president of the American Rental Association. I am here today 
to testify on the effects of the federal estate tax on small 
businesses.
    Taylor Rental is a small, family-owned business, with two 
locations in Vestal and Ithaca, New York. Taylor Rental is a 
typical rental business. We employ 16 full-time and four part-
time employees and up to 15 seasonal employees. ARA has 
approximately 4,000 members in the United States, and the 
overwhelming majority of them are businesses just like mine. We 
rent equipment and tools to contractors and homeowners, and we 
rent party and event equipment to individuals and corporate 
clients.
    ARA supports a permanent extension of current estate tax 
law, which allows a $5 million per person exemption indexed for 
inflation, and a 35 percent rate on the remaining assets in the 
estate. Current law also provides for a stepped up basis on 
assets in the estate. It is critical for Congress to pass a 
permanent extension so that small businesses have the certainty 
we need to plan for the future. We are concerned about the 
federal estate tax reverting to the $1 million per person 
exemption and 55 percent rate that existed in 2000.
    My testimony shows the number of rental business locations 
and the economic impact of the rental industry for each state 
represented by a member of the Small Business Committee 
illustrating how ubiquitous the equipment rental industry is 
throughout the United States. According to IHS Global Insight, 
the equipment rental industry in the U.S. will generate $31.2 
billion this year and $49.8 billion by 2016. The industry is 
currently growing four times faster than the U.S. GDP. Much of 
this growth is from the expansion of small businesses within 
the industry.
    What does it take to generate billions of dollars in rental 
revenue? It takes capital, and a lot of it. Collectively, ARA 
members have billions of dollars invested in the equipment our 
customers want and need. An 80- by 160-foot tent that gives a 
young couple the dream wedding they always wanted costs me 
$60,000. Taylor Rental has hundreds of tents that range from 
$1,000 to $60,000 each. Other equipment, like small Bobcat 
loaders cost $34,000, and aerial work platforms can cost 
$50,000 to $100,000. Larger equipment, like track excavators, 
can cost well over $150,000 per unit.
    Equipment rental companies make ongoing capital investments 
to survive and grow because customers demand the latest and 
best equipment. When you rent a car you do not usually get a 
1990 Buick; you get a new car with low mileage. The same is 
true in the equipment rental industry. My customers do not 
equipment. They want new equipment, and I must invest in that 
equipment to satisfy my customers. U.S. equipment rental 
companies are investing $10 billion in new equipment this year 
and almost $20 billion annually by 2015.
    Along with the billions invested in equipment, we own real 
estate and buildings that house our rental stores and 
equipment. Many small equipment rental businesses have 
substantial, but illiquid assets.
    This is precisely why ARA is concerned about the 
possibility that the current estate tax law will expire on 
December 31, 2012, and revert to 2000 levels. If the estate tax 
reverts to 2000 levels, my estate would be severely impacted. 
Sixteen good people, who have given our company many years of 
good service, may no longer have a job. The businesses that 
sold products and services to our company could lose a good 
customer, but foremost, the economic security of my family will 
be uncertain.
    Mr. Chairman, there is a lot of rhetoric about how the 
estate tax really only affects rich people. I do not consider 
myself or my family rich. For the past 43 years I have gone to 
work every day to earn a living. I have invested my resources 
in a company that has grown and been successful despite some 
tough times recently. My estate is my company. I do not have 
assets that can easily be liquidated to pay estate taxes. My 
company will have to be sold.
    Reverting to a policy that was outdated 12 years ago would, 
in my opinion, be a disaster for many small business owners 
like me, and the number one goal that I have worked for will be 
in jeopardy--to provide financial security for my family. In 
addition, the current situation makes business planning almost 
impossible. We need certainty on the estate tax, and we need it 
now.
    Let me be clear. ARA would eliminate the federal estate 
tax. It is a tax on capital, pure and simple. However, the need 
for certainty on this issue has led us to a position of 
supporting a permanent extension of current law. We believe the 
current $5 million exemption with a 35 percent rate and stepped 
up basis is a policy that will help sustain small businesses 
for years to come.
    Thank you, Mr. Chairman. That concludes my statement. I 
will be happy to answer any questions you may have.
    Chairman Walsh. Thank you, Mr. Flesher. I now yield to 
Ranking Member Schrader, who will introduce our final witness.
    Mr. Schrader. Thank you very much, Mr. Chairman.
    It is my pleasure to introduce Thala Rolnick, certified 
public accountant, with offices in Arizona. Her practice 
concentrates on tax planning and compliance for high net worth 
individuals, partnerships, and closely-held businesses. Ms. 
Rolnick also chairs the IRS Liaison Committee and serves as a 
member of the Board of Directors for Valley Estate Planners. 
Thank you for being here.

              STATEMENT OF THALA TAPERMAN ROLNICK

    Ms. Rolnick. Thank you. Chairman Walsh and Ranking Member 
Schrader, thank you for inviting me. As has been said, I have 
been practicing in Phoenix, Arizona, dealing with estate issues 
for the last 16 years.
    The estate tax has been with us since the early Egyptians 
in 700 B.C. first initiated it. The first U.S. estate tax dates 
back to 1797.
    Those in favor say it is an effective tool to raise needed 
revenue and to prevent the concentration of wealth and power in 
a few families. Others believe it discourages capital 
accumulation and curbs national economic growth.
    The question with us today is ``can a small business 
survive the estate tax?'' And the answer is ``it depends.'' The 
estate tax has been a moving target since 2002, when the amount 
that could pass estate tax free first increased from $600,000 
per person to the current $5,120,000 per person. At the end of 
this year, it will drop back to $1 million unless Congress 
acts. The exclusion amount enacted will determine how many 
businesses are actually affected.
    In 2010, when the exclusion amount was $3.5 million, 
according to IRS statistics, 4,425 small business owners' 
estates paid some sort of estate tax. This is approximately .02 
percent of all business owners, yet the total estate tax 
collected was over $69 billion. At a $5 million exclusion, even 
fewer businesses will be subject to the tax. If Congress allows 
the exclusion to revert back to $1 million, based on 2002 
numbers, almost 26,000 small businesses will be subject to the 
tax every year and now it becomes a small business issue.
    When the current estate law was passed in 2010, it 
attempted to reduce the need for some of the more complex 
estate planning techniques. It tried to make the exclusion 
amount more of a family amount by allowing for portability.
    While the idea was admirable, the legislation is flawed in 
many ways. First, it only applies to the estate tax and not to 
the Generation Skipping Tax. So if I want to leave assets to my 
grandchildren, they will be taxed. Second, to be eligible, the 
estate must file an estate tax return Form 706. This is very 
complex and takes a lot of time and energy. The statute of 
limitations then remains open on this for the life of the 
surviving spouse. That could be 5, 10, or even 15 years, long 
after any documentation for how the values were determined are 
gone. If the surviving spouse remarries, the inherited 
additional exclusion may be lost. Finally, if the inherited 
assets increase in value, the surviving spouse's estate may be 
subject to estate tax that would not have been subject to 
estate tax had those assets been placed in an irrevocable trust 
at the time of the first death.
    The current code provides favorable provisions for small 
businesses. Section 2032A provides that land used in a business 
or a farm can be valued at its current use rather than its 
highest value. If the land stops being used in this way or sold 
within 10 years, the additional estate tax is assessed. Section 
6166 allows the estate to pay a portion of their estate tax 
attributable to a farm or closely-held business over a 15 year 
period if the value is greater than 35 percent of the estate. 
Section 2057 is currently obsolete but if the estate tax 
reverts back to $1 million it will become active again. It 
provides an additional exemption to small business owners but 
the calculation cannot be done prior to death and therefore, 
cannot be relied on during estate planning stages.
    In addition to the items identified, a number of important 
estate issues will also expire and I have those listed in my 
written testimony. Most business owners are very resourceful 
and find ways to resolve business issues, but when they do not 
know what to plan for, planning becomes impossible. There can 
be no planning until we have some permanence.
    Therefore, I recommend enactment of a permanent estate and 
gift tax with an exclusion someplace between 3.5 million and 5 
million adjusted for inflation along with step up in basis.
    Permanently rejoin the gift and estate tax.
    Make portability permanent, but also correct the existing 
statute to allow a surviving spouse to accumulate up to a full 
second exclusion. Allow portability for Generation Skipping 
Tax. Change the statute of limitations for these returns to 
three years. Recommend the IRS develop a simple Form 706.
    Preserve reasonable valuation discounts for operating 
businesses where the death of an owner truly reduces the value 
of the business.
    Pass a simpler, easier provision to provide small 
businesses with an additional exclusion. My recommendation is 
in my written testimony.
    Pay for these provisions by restoring progressivity to the 
estate tax at levels above the exclusion amount.
    Reform the Grantor Retained Annuity Trust (GRAT) provisions 
to disallow excess discounts where the trust holds primarily 
liquid assets.
    Thank you for your time, and I would be glad to answer any 
questions.
    Chairman Walsh. Thank you, Ms. Rolnick. I appreciate your 
testimony.
    I will begin with a couple questions and then I want to 
hear from the rest of the Committee.
    This issue of the estate tax is probably an issue that I 
hear of and about when I am back home probably as much, if not 
more, than any other issue. I spend a lot of time, as many 
members of Congress do, speaking to small business owners and 
this is always top of mind with them.
    Why is that? Well, because they feel it. There is a real 
negative impact. Mr. Flesher, you said it. I am going to borrow 
that line from you. ``My estate is my company.'' Bingo. I hear 
that constantly. So this is a tax that directly impacts small 
business owners.
    The other reason though why I think this tax is such a big 
tax with people back home is just philosophically it makes 
people scratch their heads. Look, we are taxed when we make 
money. We are taxed when we grow businesses. We are taxed when 
we buy things. We are taxed when we invest. When we die? Just 
the thought that when we die, Ms. Madonia, when your dad works 
his tail off for 30 to 40 years to grow a business, why? Why 
does the government get to put their hands on any of that 
money.
    I think it is the broader philosophical question that 
annoys a lot of people, even people who are not impacted by 
this tax. I hear that constantly. The amount of money that the 
government raises with this tax is not a large amount, but the 
headaches that we put people through to do it is just amazing 
to me.
    Can anybody answer that question? Just philosophically, 
what is the rational for this tax? And like everything in 
Washington, we get right down into the Xs and the Os. Well, we 
can improve it. We need to extend it by five years, drop the 
exemption down to here, maybe--I do not even want to play that 
game. I will not with my questioning. Why do we even have this 
tax? Can anybody make the case on principle that it is a good 
thing for the government to take money from you when you die? 
Does anybody want to take a stab at that? Mr. Katz, you know 
you are itching to answer.
    Mr. Katz. I am not sure that I can necessarily answer it 
philosophically but I think that I can at least give some 
insight as to the historical perspective of it. I think when 
the estate tax was first enacted there was a tremendous sense 
of needing it for redistribution of wealth; for avoiding some 
of the accumulation, the mass accumulation of wealth by some of 
the larger land-owning and wealth-owning families in the 
country. And I think to some extent the estate tax has survived 
all of these years, not based upon its economic impact upon the 
tax coffers, if you will, but it has survived based upon the 
theory that there needs to be some way to move wealth from 
those that continue to accumulate it to those other.
    Chairman Walsh. Why? Why?
    Mr. Katz. I think to some extent it is the same reason why 
there is larger income tax rates on people who earn more money. 
It is the same theory that, you know, goes back years and years 
of trying to move money down to fund social projects, to be 
able to have funds available to help those who have not, for 
whatever reason, been able to help themselves. And I think to 
some extent the estate tax has the same impact as the 
progressive income tax.
    Chairman Walsh. Well, I think you are right. And I think 
the reason this resonates with people is because of when it 
occurs. I mean, that is basically the basis for most taxes in 
this country. But this really hits a number of intersections 
because you are talking about something so personal, so 
intimate. A family's death, a business owner's death, and at 
that moment here comes the hand of government in to grab 
something.
    Ms. Rolnick, is there any just overarching justification? 
Anything you want to add?
    Ms. Rolnick. I basically agree with Mr. Katz. Basically, it 
was set up to go ahead and prevent certain families from 
accumulating the most amount of wealth and the most amount of 
power. And therefore, going ahead and allowing two classes of 
people--those with and those without.
    Chairman Walsh. So the world now has changed because now we 
are at a point where Ms. Madonia said--and how poignant is 
this--if something happened to my dad we would have to sell the 
business. How in God's name have we gotten to that point in 
this country? Maybe with the best of intentions we have this 
thing called the death tax where you have to look a member of 
Congress in the face and say if something happens to your dad 
you are going to have to sell your business. How is that a good 
thing? How is that a good thing?
    And so is the answer, Mr. Flesher and Ms. Madonia--I will 
let you two chime in here--is the answer to tinker with it so 
that maybe your dad, maybe your family does not have to pay 
that consequence--tinker with it, improve it? Or has the world 
changed that now so impacts small business owners that we 
should just get rid of it? Mr. Flesher.
    Mr. Flesher. Well, I support a full repeal. I have paid 
income tax over the life of my equipment and I have paid state 
sales tax to the state every time I run a piece of equipment. 
We have been taxed over and over again on the life of that 
equipment and my entire business. I do not believe we should be 
taxed again.
    We support the current bill because we think that is a 
possibility. And we think that would help the majority of our 
members in ARA.
    Chairman Walsh. Ms. Madonia, what is your thought or 
recommendation there?
    Ms. Madonia. I guess I would just share a story. I have a 
nephew. Our family business is my parents, my sisters. We have 
a next generation of eight grandkids, and one of those 
grandkids said at one point--we talk a lot about this in our 
family--and one of them said to my dad, ``Why would I want to 
do this? Why would I want to start my own business? Why would I 
want to work really hard like you have if it is just going to 
be taken away from me when I am done? Why not just be another 
guy? Why not just work for somebody else?
    And that is really sad. This is the United States of 
America. It is the land of opportunity. It is where people can 
have a dream and turn it into reality. And to discourage that 
in any way, and I think the estate tax is a major 
discouragement to that, I just think it is fundamentally wrong.
    Chairman Walsh. Well, and you are right in that studies 
would buttress your argument. The estate tax has a major 
negative impact on entrepreneurial activity. And again, that 
just makes sense. If you are going to, again, work your tail 
off year after year to grow a business and then as you all 
said, you need to begin to play this game, Mr. Katz, where 
every year you have got to spend money to figure out how, when 
the ultimate happens, you can, as much as possible, pass money 
down to your kids and your family, you have to spend resources 
to try to do that. That is mindboggling to me.
    I will end there and turn to Ranking Member Schrader for 
his questions.
    Mr. Schrader. Thank you, Mr. Chairman.
    One alternative I will point out is you sell your business 
that you built over time. That is what I ended up doing. A 
small businessman. I had a small veterinary practice and either 
I was not home enough or did not view my kids enough with a 
faith in veterinary medicine. They were not interested in 
following so I ended up selling mine. And it was my retirement 
as many of you have talked about, either through an estate 
planning technique or, as in my case, resell it. But that is 
another thought for the younger generation so he is not totally 
discouraged with being an entrepreneur at the end of the day.
    Great testimony. And one of the takeaways I have from this, 
Mr. Chair, is it is a little similar to what we had in the last 
Congress when we talked about the estate tax. While many, if 
not everyone at the dais would probably want to repeal the 
estate tax if at all possible, we are facing deficit issues 
trying to balance our own checkbook here, believe it or not, 
the United States government. It is encouraging to hear that 
the values that were enacted in 2010, albeit temporary, were of 
value to your different constituencies. Could Mr. Flesher, Ms. 
Madonia, Mr. Katz talk about, real quick, about the $5 million, 
$10 million, the stepped up basis, and the 35 percent? In terms 
of the number of businesses like yours you think, you know, you 
said majority, Mr. Flesher, is at 60 percent, 50 percent? Just 
guessing. I understand.
    Mr. Flesher. We think in our case the $5 million would 
cover a very high percentage of our members. Maybe 90 to 95 
percent. The majority of our members are in the $500 to $3 
million range. But, of course, being indexed, that would help 
those businesses continue to grow.
    If it reverted back, that is a hard, you know, we have 
revenue numbers but we do not know their value. So it is hard 
to say what that number would be.
    Mr. Schrader. How about Ms. Madonia, if we kept at least 
the current area?
    Ms. Madonia. Well, I think part of the equation also has to 
be that that $5 million is not just the value of your business; 
that is the value--that is your value. So now you are talking 
about somebody's profit sharing and 401(k) that they have 
accumulated over the course of time. You are talking about 
their house. All of that has to fall in that $5 million. So 
again, I think it is a fundamentally flawed tax that should be 
repealed all together. Is $5 million more workable than $3.5 
million or a million? Absolutely. But it is still not as much 
as you think it is when you have got a small business and then 
you have got your retirement savings and your house and any 
other assets you have accumulated.
    Mr. Schrader. Sure. Mr. Katz.
    Mr. Katz. Being from the metropolitan New York area, I 
think things are slightly different and slightly skewed in my 
view. People who live in my area, you take the businesses that 
they have and add the value of those businesses to the value of 
their homes and the value of the other assets that we need to 
accumulate in order to be able to afford to live in the area 
that we live in. Although $5 million is certainly helpful, 
there is still going to be a large number of people that are 
going to be subject to the continued estate tax, which is why I 
think that moving more towards some of the discussion that Ms. 
Rolnick talked about earlier in her testimony relating to some 
special exemptions for small businesses to try to remove the 
value of some or all of the small business out of the 
computation of the estate tax would be helpful. If we had a $5 
million exemption to cover home and personal savings and 
401(k)s and all of those types of things and then on top of 
that----
    Mr. Schrader. It is my understanding actually that the 
401(k)s and the homes are already deductible from the estate 
tax.
    Mr. Katz. No.
    Mr. Schrader. They are included?
    Mr. Katz. They are absolutely included.
    Mr. Schrader. That is good to know.
    Mr. Katz. So if we had that exemption to cover those assets 
and then an additional exemption to cover part or all of the 
value of a closely held business, I think to that extent we 
would be able to solve some of the problems.
    Mr. Flesher talked about his estate being his business. If 
you have multiple exemptions or an exemption just for that 
business, he is not going to have the problems that he is 
facing right now.
    Mr. Schrader. So to follow up then, Ms. Rolnick gave some 
great recommendations which I really appreciate at the end of 
her testimony in written form and alluded to them in her oral 
discussion. Have you guys had a chance to read those at all? I, 
for one, Mr. Chairman, would be interested in your comments. We 
can make sure you have access to her testimony because it 
covers a lot of the things that Mr. Katz, Ms. Madonia, and Mr. 
Flesher are talking about. It might be things we would want to 
recommend to our Finance Committee folks, our Ways and Means 
folks, to look at as we get down to crunch time, at some point, 
hopefully before Armageddon sets in and we actually do some 
things with our tax code that are absolutely critical, even 
beyond the estate tax itself.
    So with that I guess I will yield back, Mr. Chair.
    Chairman Walsh. Thank you, Mr. Schrader.
    I now turn to Mr. Hanna from New York.
    Mr. Hanna. Mr. Katz, you and I both live in New York. I 
know the answer to this but I want to hear you say it. What is 
the lifetime exemption for New York?
    Mr. Katz. The lifetime exemption, it is a combination 
lifetime and death time exemption, is $1 million.
    Mr. Hanna. Right. What is the marginal rate on that for a 
deceased in a family?
    Mr. Katz. The highest estate tax rate in New York is 16 
percent.
    Mr. Hanna. So the possibility exists that in New York, for 
Mr. Flesher, where it looks like 35 percent at $5 million is 
really a minimum of 16 once you reach a threshold of $1 million 
and so his effective rate will be 16 percent on that additional 
4 million, plus 51 percent on everything over that 5. You may 
want to reconsider, Mr. Flesher, whether you like the 5 or not. 
Were you aware of that, Mr. Flesher?
    Mr. Flesher. I was, but I did not consider it in part of 
this testimony here.
    Mr. Hanna. Right. Right. The interesting thing is New York 
State has lost a lot of its population over the last few years. 
It is certainly not growing as fast as other states. And one of 
the reasons is that there are other places that are more 
inherently tax friendly. So the people have accumulated wealth 
have a disincentive to stay in New York, and I imagine it is 
generally that way. Any state in the country that has a higher, 
rather than lower inheritance tax.
    The limit seems to be the problem.
    Certainly, people who have a billion dollars or multiple 
billion dollars, you may want to think differently about that. 
I know, like, for example, Bill Gates' father is very much in 
favor of an inheritance tax, but what we are talking about here 
is small businesses and how to preserve them and their wealth 
accumulating, job hiring machinery. There is also a cost to 
society in general to the money that Ms. Rolnick was talking 
about the government collects. Because if you dismantle a 
business that has been 40 years in the making, how have you 
really helped your community or your country?
    So I wonder about the $5 million limit, if it is enough and 
if it is really the question. Perhaps a larger question is do 
we want to tax it at all? Apparently, some people do not. I am 
open to discussion about that, but I do think that even $5 
million is a low limit. And to fix it at that limit and you 
talk about irrevocable life insurance trusts, these are huge 
expenses. I personally have friends who spend hundreds of 
thousands of dollars trying to figure out how to protect their 
estate through multiple gyrations and put themselves at risk, 
give away property before they are ready to do it because, you 
know, they are still alive and they would really like to stay 
in control but our government does not allow them to do that 
efficiently.
    Is there anything you would like to say about that, Mr. 
Katz, being from New York?
    Mr. Katz. Well, I think one of the other issues that in the 
way Congress hurts states like New York was when they modified 
the estate tax law to eliminate the state death tax credit and 
changed it to a state death tax deduction. Prior to the change 
in the law, whatever you had paid to a state like New York 
would come 100 percent off the top of the estate tax bill that 
you would pay to the federal government. By changing those 
rules and making it now just a deduction, you are only getting 
the effective rate benefit of that costing people that live in 
states like New York and other states that do have their own 
independent estate tax, significantly more money.
    Mr. Hanna. Effectively paying a tax on a tax?
    Mr. Katz. Effectively.
    Mr. Hanna. Thank you very much. I yield back.
    Chairman Walsh. Thank you, Mr. Hanna. I now turn to Ms. 
Clarke from New York.
    Ms. Clarke. Thank you, Mr. Chairman. And I thank the 
ranking member. I thank all of you for your testimony here 
today. I find it a very good and very important conversation. 
The testimony here today will help inform many of us as we look 
at how we address this issue going forward.
    Economic certainty is something that we all desire, 
particularly for small business where we recognize the value 
that you have in all of our communities across the nation. And 
I want to just say that what is so unique about our nation is 
that it provides this opportunity for entrepreneurship like no 
other nation. And it is the American dream. It is the reason 
why the United States, I believe, is one of the greatest--is 
the greatest nation on the planet.
    But having said that I have a question, and I think it may 
even go to the philosophical to a certain degree. Do you--and 
this is directed to the entire panel--do you think that the 
unique opportunity provided by our nation has a value beyond 
compounded wealth accumulation? Or do you believe that those 
who have benefitted the most from this unique nature of the 
United States owe something back to the country that provided 
them the opportunity to enrich themselves?
    I heard Ms. Rolnick's requirements in her proposal, but 
from everyone else, and I am sorry, Mr. Katz, I came in during 
your testimony, I heard that nothing should be paid. So I just 
wanted to get some further insights from you. Because of the 
unique nature of our nation, the way that we can basically 
build ourselves from the ground up--sweat equity builds and 
accumulates wealth over time. Is there something that we feel 
obligated to in terms of the nation? And how does that 
reconcile itself with this demand for the estate tax?
    Ms. Madonia. I will start. I guess I would argue that small 
business owners are already giving back because we are 
employing people. We are buying equipment from companies that 
are employing people. I mean, by the very nature of being a 
business owner you are giving back. I mean, you are paying your 
taxes all along the way as you are earning money. We have got 
90 employees that are part of our family. You know, we take 
care of those employees. We provide their health insurance. We, 
you know, contribute to their retirement accounts. We are 
already giving back.
    Ms. Clarke. So it is your opinion that your employees also 
help you to be a thriving business?
    Ms. Madonia. Absolutely.
    Ms. Clarke. So it is a symbiotic relationship and they, 
too, are paying taxes. Right?
    Ms. Madonia. Absolutely.
    Ms. Clarke. Okay.
    Mr. Flesher. I agree with that. That was a great comment. I 
think, you know, we are putting back and giving back every 
single day economically. But I am very proud of my country. I 
served in the military and we do have to do our part. There is 
no question about that. But there is a limit to it. And when 
you are taxed over and over again and then you get what is 
left, you want to hang onto that. And I think that is a 
situation here. And it is pretty simple. I mean, we have paid 
taxes over and over again and we do not want to not pay any 
taxes. We do not want to not do our part. We want to be part of 
the United States, the country that we are so proud of. But we 
do not want to be taken advantage of either.
    Mr. Katz. From a philosophical point of view I guess I need 
to run it right down the middle for a few seconds because 
clearly there is an obligation on behalf of all of us who have 
managed to accumulate, to try and help those who are less 
fortunate than us. I certainly understand the business owner's 
perspective of they have worked hard. Ms. Madonia's father 
worked seven days a week, 12 hours a day, you know, to 
accumulate wealth and should have the opportunity to be able to 
maintain as much of that as possible.
    I think there are probably economists that are a lot 
smarter than myself who would be able to go through and tell 
you what the economic aspects of all of this are, but what I 
can tell you is that from what I see, as much as anything, it 
is the administration of the rules and the uncertainty of the 
rules that have created so much problem for people. Business 
owners do budgeting, do planning. They do it every day.
    If a business owner were to know exactly what their 
opportunities were and know that if something happened in 2012 
it would be a certain rule and if something happened in 2013 it 
would be a certain rule, what happened in 2010 was chaotic. 
Changing rules in December, in the middle of December going 
back to January of that year, we cannot operate like that. You 
cannot ask business owners to be able to plan and budget for 
rent and health insurance and all the other things but at the 
same time not know what the tax is going to be at the end.
    So whatever Congress ultimately decides, whether it is 3.5, 
whether it is 5, just pick something. Just pick something and 
let that be the rule. And let everybody who is sitting at this 
table and all the people around the country who are operating 
businesses and all the accountants and lawyers who are advising 
people, know what the rules are and know how the rules are 
going to be applied.
    Ms. Clarke. I thank you for your testimony. I think this 
gets to the heart of the challenge that we face as legislators, 
understanding and relating to all that you give. And then 
looking at what we can do in terms of fairness. I think at the 
end of the day we want to be fair. We know that you are the 
economic engines of our communities.
    I come from an entrepreneurial family as well. You know, I 
also understand the obligation that we have one to another and 
would want to try to maintain those obligations as best we can 
given where we are economically as a nation. So thank you for 
your testimony.
    Chairman Walsh. Thank you, Ms. Clarke. And I would only add 
that Ms. Madonia, I want to keep saying this, so I apologize, 
``If something happens to your dad you would have to sell your 
company.'' Ninety employees. So I do not know how having to let 
90 employees go is anybody's definition of giving back.
    Let us turn to Mr. Bartlett of Maryland.
    Mr. Bartlett. I am honored, sir, that you let me sit in on 
your Subcommittee. I think protocol says that I go last.
    Chairman Walsh. Okay. Thank you. Rookie chairman.
    Let us turn--hey, Bobby, you are up. Let us turn to Mr. 
Schilling of Illinois.
    Mr. Schilling. Thank you, Chairman. I would like to thank 
each and every one of you for being here today. I am also, like 
a few of them, a small business owner. And one of the things 
that I find very frustrating is the fact that the federal 
government can come in and take 55 percent of your estate. I 
used to do death tax planning, and you know what? We have got 
to stop calling it estate tax. Call it what it is. It is a 
death tax. The last person dies, a survivor dies, you have to 
go in there. And so many times I would go out and I would see 
the families have to go in and spend $10,000, $20,000, $30,000, 
$50,000 a year to make sure that they could keep their business 
or their farm.
    I guess the first question that I would like to have, and 
any of the folks on the panel could answer this for me, is do 
you believe that the death tax hurts or helps businesses in the 
United States of America? Let us go with Mr. Flesher.
    Mr. Flesher. It absolutely hurts them. I mean, you talk 
about the planning process and having certainty. Even with that 
certainty we still have to plan and we have to adjust. We do 
not know how long we are going to live. And our estates still 
change every year. So it is like a double whammy. I mean, it is 
tough to plan for that future anyway. But with the uncertainty 
of having this tax over your head it is impossible. You cannot 
do it.
    Mr. Schilling. Yes.
    Ms. Madonia. I was just going to add that it takes a lot of 
time and resources away from your business, too, in those years 
where you are trying to figure it all out, trying to figure out 
how to pass it on. I mean, my dad has spent a significant 
amount of time over the last few years just trying to figure 
this whole thing out and find a way to pass on his company. 
That effort could have been spent focusing more on the 
business. Those resources could have been used to expand the 
business, hire more people, buy more equipment, open another 
branch. So it does, you know, it is not just money; it is time, 
too, that is taken away.
    Mr. Schilling. Right. And Mr. Katz is probably upon on 
this. If life insurance is not properly owned that also gets 
included into the federal estate. So some people think that 
they are properly planning and in actuality they are actually 
adding to the 55 percent or whatever that number is.
    One of the other questions I have, and I think one of the 
things we see is the heirs are sometimes forced to break apart 
the family business in order. And is that basically what you 
are saying? If something happens to your father, basically it 
is----
    Ms. Madonia. Yes. There is not a big bank account somewhere 
with enough money in it to pay the estate tax, so we would have 
to come up with it somewhere. We would have to, I do not know, 
you would have to get out of certain lines of business. Maybe 
liquidating some of the inventory that we have. You would have 
to close down a branch. Somehow you have to come up with that 
money and it is not just sitting there. It is all invested back 
into the business.
    Mr. Schilling. So your brothers and sisters, would you be 
willing to say that they would do better with that up to 55 
percent of that money? Or would the federal government do 
better with that?
    Ms. Madonia. I think we could handle it a little bit 
better. Yes.
    Mr. Schilling. These are tricky questions, I know.
    Ms. Rolnick. I would like to make a comment, if possible.
    Mr. Schilling. Yes, ma'am.
    Ms. Rolnick. We keep talking about how it is going to 
affect all these small businesses, and it does affect some 
small businesses. But according to the statistics, as I said, 
when there was a 3.5 million exemption, only 4,425 small 
businesses were subject to the estate tax, while there were 
over 22 million small businesses filing income tax returns. So 
although it does affect some, and I appreciate how it affects 
them, but it is not every single small business. And most small 
businesses have been made so fearful that even the corner 
barbershop is afraid that he is going to lose his business to 
the estate tax and he is not even going to be subject to it.
    Mr. Schilling. Very good. I appreciate that comment.
    I have got one minute left here. If maybe we go to Mr. 
Flesher on this one. If the death tax was fully repealed, would 
you use the capital to hire more workers, purchase more 
equipment, or otherwise invest in your business?
    Mr. Flesher. Well, we would continue to invest in our 
business and grow our business. You know, not only our 
families, but we have long-term employees. I have got employees 
that have been with me 26 years, 24 years, 20 years, 18 years. 
It is not just one or two. So, and these employees are fully 
vested in this business and may have an opportunity to take 
over that business or part of that business as well. So the 
ongoing investment in the business would be a definite.
    Mr. Schilling. You know, it is one of those things if you 
want less of something you tax it more. And unfortunately, none 
of us in this room are going to get out of this world alive. 
But I thank you all for coming. Thanks. I yield back, Chairman.
    Chairman Walsh. Thank you, Mr. Schilling.
    I now turn to Mr. Chabot from the great state of Ohio.
    Mr. Chabot. Thank you, Mr. Chairman.
    Well, the first thing that comes to mind, the democratic 
witness for the death tax here just made a statement basically 
saying that there are not that many businesses that after all 
have to deal with this. We are talking about 3,000 plus. But it 
is my understanding it really affects a lot more than that in a 
lot of different ways. Would any of the other witnesses like to 
respond to that argument that we hear periodically that it 
really does not matter that much because there are only a few 
businesses that it really applies to so it does not affect 
anybody else. Could anybody else respond to that?
    Ms. Madonia. Well, to those of us that would be affected, 
it is a big deal. So the fact that there are 3,000 family 
businesses that are affected, you know, maybe to the average 
American is like, well, that is just 3,000 people. To us it is 
our business and it is those 90 families that are employed by 
us and it is our customers and our vendors. It is a much bigger 
piece of the pie than just saying, well, it is just this one 
family.
    Mr. Chabot. Mr. Flesher, I see you nodding. Would you like 
to respond?
    Mr. Flesher. Well, you know, speaking for our association, 
we are a very capital-intensive business. So every one of our 
businesses not only has their properties but the expense of 
running that business. We do not just have an office set up and 
run a computer; we have to buy equipment and replace equipment 
every year. Every year, just to stay even, we have to reinvest 
10 to 15 or even 20 percent just to maintain our inventory. And 
then when you consider during better economic periods we are 
going to try to create more growth, we have to invest heavily 
year after year. So almost every one of our businesses is 
definitely affected by this law.
    Mr. Chabot. Mr. Katz, did you want to say something?
    Mr. Katz. Although only 3,000 or 4,000 businesses are 
affected on an annual basis, that does not mean that all of the 
other businesses are not out there dealing with this. In our 
law firm we do a tremendous amount of planning--succession 
planning and planning for closely held businesses. And even to 
those people that are not necessarily affected on an annual 
basis, they are involved. They are involved in planning. They 
are involved in spending money on attorneys, thankfully. They 
are involved in spending money on insurance premiums to be able 
to deal with liquidity issues. It does take up a lot of time 
and effort and energy. And it can create some incredible 
stress. Having to sit in front of somebody, like Ms. Madonia's 
father and say to him the only way for you to really deal with 
this is for you to transfer interest in your business to the 
next generation now, to start to take advantage of some of the 
rules that are out there. And to have him look at you and say, 
``Well, that is all fine and nice but I rely on this business 
to live. This is my income. If you start moving interests 
around, how am I supposed to survive?'' I do not want to, and 
with all due respect, I do not want to ask my daughter for 
money when I need it.
    So while there may only be 3,000 or 4,000 small business 
owners who die during the year who are impacted by this estate 
tax, it is impacting a lot of people. There are a lot of people 
planning and dealing with this every single day. There are 
conferences for lawyers who do estate planning, thousands and 
thousands of lawyers learning about this. If there are 
thousands of lawyers learning about this, there are hundreds of 
thousands of people that are dealing with this every day.
    Mr. Chabot. Thank you. Is it fair to say that particularly 
in a tough economy like we have now and have had for a number 
of years now, at a time when businesses are trying to stay in 
business and be competitive and focus on what it is that they 
do to create money and wealth and jobs for their employees, 
that a lot of these business owners, their time would be more 
efficiently spent concentrating on their business and how to 
make it better, and therefore, we more successful and hire more 
people than to perhaps have to focus so much time on how to 
keep the government from taking this form them at some point in 
the life of this business? Would anyone want to address that? 
Or you can just say, ``Yep, that was a good point, 
Congressman.''
    Mr. Katz. That was an excellent point, Congressman.
    Mr. Chabot. Thank you very much.
    Mr. Katz. I certainly think that that goes without saying.
    Mr. Chabot. I have only got a couple seconds left, so I 
thank all the panel members here for their input in this. I 
know I have been speaking about this for a long, long time, and 
I would argue that you all know a whole lot better how to spend 
your money than the federal government does. And we ought to 
let you keep it and get this economy moving and hire more 
people. Thank you.
    Chairman Walsh. Thank you. I now turn to Mr. Bartlett of 
Maryland.
    Mr. Bartlett. Thank you. You know, if an enemy had the 
ability to an etherway to permeate our minds and induce us to 
do something really hurtful to ourselves he might find it 
difficult and do better than the death tax.
    Chairman Walsh and Ranking Member Schrader, thank you for 
allowing me to participate in this hearing. As we have heard, 
the state tax has disastrous consequences and is the most 
unfair tax that the government imposes. At a time when we in 
government should be removing obstacles to small business 
growth, the estate tax provides a roadblock to small business 
survival.
    But there are solutions, and I am particularly pleased to 
recognize Mr. Jack Fitzgerald, who is here today. Jack is a 
prominent Maryland businessman and friend of mine who studied 
the estate tax problem from the business point of view. He 
founded Americans Standing for the Simplification of the Estate 
Tax (ASSET) in 2010 in order to change the collection method 
for the estate tax. He believes that as long as the IRS 
requires the estate tax to be paid there is a simpler, more 
compassionate way to collect the tax that would reduce the 
impact of the tax and avoid the loss of the family-owned 
businesses at a time when they are already dealing with the 
loss of a loved one.
    I would like to congratulate him for putting together a 
grassroots group, which includes private businesses, family 
farms, and individuals. I think that the ASSET solution as a 
bridge to phasing out the estate tax is well worth studying, 
and I am pleased that the Committee has agreed to include it in 
the record of this hearing.
    In his testimony submitted for the record, Mr. Fitzgerald 
notes that he has paid nearly $700,000 a year in after-tax 
dollars for life insurance to cover the possible estate tax 
liability arising out of his automobile dealerships. Mr. 
Fitzgerald and others have maintained that many small 
businesses over purchase life insurance in order to prepare for 
the estate tax. In your experience, is this a common occurrence 
in the small business sector?
    Mr. Katz. I cannot say that I have a lot of clients who 
have spent that much on insurance every year but, yes, it is a 
common occurrence for people to look to find a way to create 
liquidity to be able to deal with estate tax obligations. And 
one of the most significant ways to do so is to acquire life 
insurance, properly owned life insurance, and to hold that life 
insurance to deal with the estate tax obligations.
    Now, not everybody is insurable and not everybody has that 
opportunity to buy insurance. Not everybody has the cash flow 
necessary to pay the insurance premiums each and every year. So 
while insurance is a solution, it is not the only solution to 
the problem.
    Mr. Bartlett. The case for tax reform is dramatically 
illustrated by reviewing the data cited by the Congressional 
Joint Economic Committee in May of 2006. And what they found 
generally was that the cost of compliance was just about equal 
to the revenues the federal government collected from this. 
Could there be a dumber tax than this where the cost of 
compliance equals the amount of money which the government 
collects from this? Can you please share with the subcommittee 
your assessment of the conclusions by the Joint Economic 
Committee?
    Ms. Rolnick. I personally do not understand where that 
number came from. I mean, I know that there are things that 
have to be done. There are things like trusts which should be 
done, whether there is an estate issue or not, which I have 
documented in my written testimony. There are documents that 
need to be done if they are doing partnerships. We have trust 
returns. But I know what estate tax returns cost and I have yet 
to file an estate tax return that costs more than the amount of 
tax collected.
    Mr. Bartlett. Well, I was quoting from their Cost and 
Consequences to the Federal Estate Tax page 17. And you might 
check that if you question their study.
    The Subcommittee has received testimony for the record from 
Mr. Jack Fitzgerald, founder of the ASSET Coalition, which 
advocates reform of the current estate tax on behalf of small 
business owners. In his testimony, Mr. Fitzgerald asserts that 
private capital is locked up in unproductive trusts to escape 
estate tax liability, meaning that many of the best business 
minds in our nation are forced to sit idly by and cannot create 
new wealth with their assets because they must lock them away 
for their heirs to inherit. In your experience, is this a 
common experience in the small business sector?
    Ms. Rolnick. Again, when the first person dies, we usually 
fund a B Trust. We call it a B Trust. And assets are put into 
that trust up to an exemption amount. There is a problem, as I 
see, when you have to fund that trust with a closely held 
business stock because you do not get the dividends passed out 
or the income passed out to the surviving spouse who may be 
looking for a way to supplement their income that they have 
lost when their spouse died. But there is no provision in the 
code that prevents that trust from owning another business, 
starting another business, or investing that in some way to 
help business growth.
    Mr. Bartlett. Thank you very much for letting me sit in on 
your Subcommittee. Thank you.
    Chairman Walsh. Thank you, Mr. Bartlett. Thank you all for 
participating today. The state tax is a critically important 
issue for small businesses. As evidence of that, the 
Subcommittee received numerous requests from associations 
representing small businesses, including the National 
Federation of Independent Business, the Food Marketing 
Institute, the American Trucking Association, the American 
Wholesalers Markets Association, the International Sign 
Association, and the Marine Retailers Association, that their 
statements about the negative impact of the estate tax be 
included in today's record.
    I ask unanimous consent that members have five legislative 
days to submit statements and supporting materials for the 
record. Without objection, so ordered.
    The hearing is now adjourned.
    [Whereupon, at 11:17 a.m., the Subcommittee was adjourned.]


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