Witnesses: Keep or Dump the Estate Tax,
Just Give Small Business Owners Certainty

By Heather M. Rothman

Regardless of the future construct of the estate tax, tax planners and business owners urged lawmakers at a May 31 hearing to give small business owners the certainty they need to allow them to engage in long-term planning.

Witnesses testifying before the House Small Business Subcommittee on Economic Growth, Tax and Capital Access spanned the spectrum in support of options for estate tax law, but regardless of whether they sought total repeal or an extension of current levels, they told lawmakers small businesses need clarity and certainty.

“If Congress could establish rules that business owners could be assured would survive for a period of 10 to 15 years then they would at least have a chance-albeit a difficult battle-to plan for the tax burden,” said Neil Katz, managing partner at Katz, Bernstein & Katz LLP in Syosset, New York.

The estate tax world created since the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) “has created an unworkable scenario for business owners,” he said.

In December 2010, President Obama signed into law a tax package that set the estate tax for 2011 and 2012 at a 35% rate and a $5 million exemption level per person.

But absent further action, the tax rate in 2013 will revert to its pre-2001 level of 55% and an exemption level set to drop to $1 million per person.

Fast Plan Urged

Witnesses urged lawmakers to come up with a plan-and to do it fast.

Because the estate tax had expired at the end of 2009 and the new law was not enacted until Dec. 17, 2010, estates for individuals who died in 2010 could choose to either follow the 2010 law of no estate tax but still using the carryover basis rules, or to use the 2011 estate tax law.

Calling the mid-December enactment of major tax law “chaos,” Katz called on Congress to come up with a plan sooner, saying planners and business owners cannot operate well under those circumstances.

“Whatever Congress ultimately decides … just pick something and that let that be the rule,” he concluded.

Michael Flesher, testifying on behalf of the American Rental Association, said ARA supports eliminating the estate tax. But recognizing that is “not politically achievable,” the organization has modified its position in favor of certainty.

“The need for certainty has led us to a position of supporting a current extension of current law,” he said.

Subcommittee chairman Rep. Joe Walsh (R-Ill.) concluded that “nothing is certain but uncertainty.”

Repeal Equals More Money for Business

Karen Madonia, chief financial officer of her family's Illinois-based business, Illco Inc., said if the estate tax were repealed, small business owners could put more money into their own business, employees, and vendors.

Testifying on behalf of Heating, Air-Conditioning & Refrigeration Distributors International, Madonia said her business already pays enough federal and state taxes annually.

“I personally find it fundamentally wrong to place a tax on death,” Madonia said. “If a person is able to accumulate wealth through hard work, and if that person pays his fair share of taxes on his income as it is earned, I do not understand how the government can justify taking a significant portion of what he has left simply because he opted to save and re-invest rather than consume.”

Rep. Bobby Schilling (R-Ill.), whose family owns a pizzeria in Moline, Ill., insisted it be called a “death tax,” not an estate tax, and said it takes away from what businesses can add to the economy.

Madonia agreed, saying estate tax planning and worrying takes time and resources away from expanding, hiring, and buying more equipment.

“There isn't a big bank account somewhere with the money to pay for the estate tax. You have to come up with the money,” she said.

Madonia said if something happened to her father, the owner, “we would literally have to sell parts of the company in order to pay” the estate tax.

“It is cruel and diabolical to put families through this and also to make death a taxing situation,” said Rep. Steve King (R-Iowa).

Few Affected by the Tax

But Thala Taperman Rolnick, owner of a Phoenix, Ariz., accounting firm where she specializes in estate, trust, and gift taxes, said lawmakers and the public need to remember that only a small number of businesses are affected by the tax.

“Over the last 10 years, a number of extremely wealthy families have done an excellent job of convincing small business owners … that they will lose their businesses to the estate tax,” she said. “In reality, at its current level, it affects very few individuals.”

She said that in 2010, 2.4 million people died and of those, according to the IRS, 15,191 were required to file an estate return.

From that amount, she said, 6,711 paid federal estate taxes. Continuing to break down the numbers, she said of those paying the estate tax, 4,425 returns included general partnerships, sole proprietorships, closely held C corporation stock, farms, and S corporation stock.
However, if Congress allows the exclusion to revert to $1 million, based on 2002 numbers, nearly 26,000 small business owner estates would be subject to the estate tax and “this now does become a major small business issue,” Rolnick said.

While the House Small Business Committee has jurisdiction over general small business issues, it does not have jurisdiction over the Internal Revenue Code. Subcommittee ranking member Kurt Schrader (D-Ore.) said the panel could make recommendations to the tax-writing Ways and Means Committee.