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55–312—PDF 2008

S. HRG. 110–1019

OUTSIDE THE BOX ON ESTATE TAX REFORM:

REVIEWING IDEAS TO SIMPLIFY PLANNING

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 3, 2008

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)
C O N T E N T S

OPENING STATEMENT

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

WITNESSES

Belcher, Dennis, partner, McGuire Woods, LLP, Richmond, VA ......................... 2

Kovar, Shirley L., attorney, Branton and Wilson, APC, San Diego, CA ............. 4

Sawyers, Dr. Roby B., professor, Department of Accounting, North Carolina

State University, Raleigh, NC ............................................................................ 6

Aviv, Diana, president and chief executive officer, Independent Sector, Washington, DC ............................................................................................................. 7

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Aviv, Diana:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 33

Responses to questions from committee members ......................................... 41

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Belcher, Dennis:

Testimony .......................................................................................................... 2

Prepared statement with attachment ............................................................. 48

Grassley, Hon. Chuck:

Prepared statement .......................................................................................... 119

Kovar, Shirley L.:

Testimony .......................................................................................................... 4

Prepared statement with attachment ............................................................. 120

Responses to questions from committee members ......................................... 137

Sawyers, Dr. Roby B.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 142

Responses to questions from committee members ......................................... 146

Schumer, Hon. Charles E.:

Prepared statement .......................................................................................... 151

COMMUNICATIONS

American Family Business Institute ..................................................................... 153

National Cattlemen’s Beef Association .................................................................. 159

(III)

(1)

OUTSIDE THE BOX ON ESTATE TAX REFORM:

REVIEWING IDEAS TO SIMPLIFY PLANNING

THURSDAY, APRIL 3, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:07 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Lincoln, Salazar, Kyl, and Roberts.

Also present: Democratic staff: Bill Dauster, Cathy Koch, Tiffany

Smith, Bridget Mallon, and Tom Louthan; Republican staff: Elizabeth Paris, Chris Condeluci, and George Boone.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

A Chinese proverb says, ‘‘Planning lies with men, success lies

with heaven.’’ That is certainly true with the estate tax. No matter

how hard people plan, the estate tax a family will pay can be largely a matter of chance. It can pretty much be up to heaven.

Current estate tax law is complicated. It lacks certainty for

American families. The law changes, and changes, and changes. We

seriously need reform. This is the third hearing that the Finance

Committee has held to tackle these issues. In November, witnesses

testified about the difficulty that the changing law causes estate

planning. Witnesses testified that, depending on the year, you

could have a large estate tax liability or you could have no estate

tax liability. That is because the law changes every year from 2008

to 2011.

Last month, we focused on alternatives to our current estate tax.

Witnesses identified proposals to simplify our estate tax system.

This hearing we will focus on some more possible reform proposals.

We will discuss the liquidity problems of small and family-owned

businesses. Current law allows qualifying small businesses to defer

paying estate tax if they pay in installments, but the law is overly

complex and subjective.

We will discuss the exemption for couples under current law.

When a person dies, the exemption is either used or it is completely lost. So today we are discussing portability. Portability

would allow a spouse to transfer any remaining exemption to the

surviving spouse. That would give the couple the full exemption.

We will discuss reunifying the gift and estate taxes. Prior to

2001, tax changes for gift and estate taxes were unified and they
2

* For more information, see also, ‘‘Taxation of Wealth Transfers Within a Family: A Discussion

of Selected Areas for Possible Reform,’’ Joint Committee on Taxation staff report, April 2, 2008

(JCX–23–08), http://www.jct.gov/publications.html?func=startdown&id=1317.

had a single graduated rate schedule. The estate and gift taxes

were also combined into a single unified credit. That meant that

taxpayers could use their gift tax credit while they were alive, but

if taxpayers did not use their entire unified credit amount while

they were alive, their estates could use the remainder of the credit

to eliminate or offset estate tax liability. Now, the amount that the

transferors can transfer tax-free while alive is substantially less

than the amount that they can transfer tax-free at death.

We will discuss charitable giving under transfer taxes. Estate tax

law allows for an unlimited exclusion of charitable bequests. We

will discuss how various reform proposals would affect charitable

giving.

I hope that these hearings will spark a good policy debate. And

I hope that the debate will lead to a bipartisan estate tax compromise, because whether you can leave something to your kids

should not be entirely up to Heaven. The operation of our estate

tax laws should not be entirely a matter of chance, and Congress

needs to do a little better planning.*

I’d now like to introduce the panel. The first witness is Dennis

Belcher, who is a partner with McGuire Woods in Virginia. Mr.

Belcher is also chairman of the American Bar Association’s Task

Force on Federal Wealth Transfer Taxes.

The second witness is Shirley Kovar, who is an attorney with

Branton and Wilson in San Diego, CA. Ms. Kovar is also a fellow

of the American College of Trust and Estate Counsel and chairs the

Transfer Tax Study Committee.

Next, Dr. Roby Sawyers, who is a professor of accounting at

North Carolina State University. Mr. Sawyers is also the chair of

the American Institute of Certified Public Accountants’ Transfer

Tax Reform Task Force.

Finally, we have Diana Aviv, who is president and chief executive officer of Independent Sector.

Thank you all for coming. As is our regular practice, your prepared statements will automatically be included in the record, so

please use your 5 minutes to summarize. I will hold you pretty

close to 5 minutes. If you go over a minute or two, we are reasonable here.

So, why don’t you proceed, Mr. Belcher?

STATEMENT OF DENNIS BELCHER, PARTNER,

McGUIRE WOODS, LLP, RICHMOND, VA

Mr. BELCHER. Thank you, Chairman Baucus, Ranking Member

Grassley, and distinguished members of the committee. I am Dennis Belcher, and I have submitted earlier my written testimony, so

what I will do today is to summarize my testimony.

But first I want to give you why I have developed my testimony.

It is based on my experience of 30 years in the practice of law of

representing clients, primarily closely held business owners. My

testimony is also based on being chair of a task force that developed a report on the Federal wealth transfer tax system. I am

president-elect of the American College of Trust and Estate Coun-
3

sel, and I am past chair of the American Bar Association’s Real

Property, Trust, and Estate Law Section.

But I am also a member of a family business. I grew up on a

farm in the Shenandoah Valley of Virginia, and my family had a

trucking company and a family farm. I am proud to say that, notwithstanding that my father died in 1985, because of the benefit

of the installment payment provision that Congress allowed under

section 6166, we still have that farm and we still have that family

business.

I applaud this committee’s efforts to try to bring a solution to the

uncertainty that we have in the estate tax law. In my meetings

with clients, it is extremely difficult to explain to them what they

should be doing, as the chairman pointed out, with the numerous

changes in the exemptions over the next 4 years. That makes it

very expensive for these taxpayers.

You will hear today many recommendations for simplification

that will take many taxpayers out of the estate tax planning business, and I applaud this committee’s efforts to try to do that. The

task force report, which we have submitted to the members of the

tax writing committee—and we have had discussions with the

staff—goes a great deal toward trying to take people out of the estate planning business.

Ms. Kovar will talk about portability, which will eliminate the

need for many married individuals to have estate planning. Dr.

Sawyers will talk about the reunification, which will also mean

that taxpayers will not have to resort to expensive lawyers and accountants to make sure that their assets pass with a minimum

amount of tax.

My testimony focuses mainly on the installment payment provision allowed by Congress under section 6166 of the Internal Revenue Code. That section allows a deferral for 4 years with interest

only, and then the estate tax attributable to the closely held business is paid in 10 annual installments. Notwithstanding that the

exemption will increase to $3.5 million next year, many closely held

business owners will still be subject to estate tax.

Without the benefit of an installment payment provision, the successors to the business owner will have to liquidate the business

or raise funds at probably the most inopportune time to do that,

when the founder of the business has died, when the business may

be in turmoil, or when there may be a downturn in the economy.

What the deferral payment provision allows is an individual’s

family to plan for the payment of the estate tax, either through the

earnings from the business as we did in our family or, second,

through a liquidation over a period of time where the family can

be assured of maximizing the benefits that the founder worked so

hard to accumulate.

You will see in my written testimony that businesses that have

a family emphasis generally do very well when compared to their

peers in the public sector. Why do they do that? Because they are

able to take a long-term view. I represent families that are in some

very difficult businesses now, such as transportation, with the rising fuel costs, and also in the media, with what is going on with

newspapers. If these individuals had to report on a quarterly basis,
4

they would make different business decisions than when they take

a long-term view.

Taxpayers do need the benefit of the installment payment provision authorized under the Internal Revenue Code. That provision

needs some modifications, as I set forth in my report. I again applaud this committee for their efforts in trying to resolve this situation, and I encourage the committee and its staff to speak with

members of the task force report as they go forward.

Thank you, sir.

The CHAIRMAN. Thank you, Mr. Belcher, very much.

[The prepared statement of Mr. Belcher appears in the appendix.]

The CHAIRMAN. Ms. Kovar?

STATEMENT OF SHIRLEY L. KOVAR, ATTORNEY,

BRANTON AND WILSON, APC, SAN DIEGO, CA

Ms. KOVAR. It is an honor to appear before this distinguished

committee to testify regarding the portability of the estate tax exemption to a surviving spouse. I will address how portability would

simplify estate planning for married couples without creating any

new tax benefit.

Although I am here as an invited witness in my individual capacity, I am also authorized to speak on behalf of the American College of Trust and Estate Counsel, also known as ACTEC, with respect to the legislative proposal that appears as Exhibit A to my

written testimony. That proposal was prepared by ACTEC’s Transfer Tax Study Committee and was approved last month by

ACTEC’s board of regents.

Portability has already received significant attention in Congress, first by the House in H.R. 5970, and then as set before the

Senate last year as part of the effort of a number of Senators to

work out a compromise on the future of the estate tax.

In my remarks today I will first describe portability and then

discuss the reasons that compel me and the members of the American College of Trust and Estate Counsel to recommend passage of

estate tax legislation that includes portability.

First, what is portability? Simply put, portability is the transfer

of a deceased spouse’s unused estate tax exemption to the estate

of the surviving spouse. Take as an example a married couple with

a combined estate of $4 million upon the death of the surviving

spouse. Assume the exemption is $2 million per person. I use

$2 million because that is what the law currently provides in 2008.

Also assume the husband dies first, as statistics show is usually

the case, and he transfers his estate to his surviving wife. Under

current law, the husband’s $2 million exemption simply disappears

when the surviving wife dies.

Presumably, some day I am going to be a surviving wife, based

on statistics. Her estate contains the remaining assets of both

spouses, but the estate of the survivor will only have her single

$2 million exemption. Under current law, there are only two ways

for a married couple to make use of both exemptions. One, the deceased spouse can transfer assets to someone other than the surviving spouse, but that is rarely a popular technique, particularly

in smaller estates.
5

Two, the deceased spouse can, in a will or a will substitute, establish an irrevocable bypass or credit shelter trust which in effect

divides ownership between the surviving spouse and the children

of the marriage. That division results in complex trust administration at best, and litigation nightmares at worst.

In short, a credit shelter trust is not a technique that a married

couple would use, except for the benefit of preserving the exemption of the deceased spouse. The first reason then that we favor

portability is that it satisfies client desires to transfer the estate

of a deceased spouse outright to the surviving spouse, while at the

same time making use of the exemption of both the deceased

spouse and the survivor.

In addition to carrying out client preferences, we recommend

portability for three more very important reasons. These are:

(1) simplify estate planning; (2) achieve greater consistency with

existing tax policy; and (3) importantly, accomplish by statute the

same tax result that a married couple may achieve now, but only

with complicated planning and estate administration.

With regard to simplification, which is probably the most obvious

feature of portability, it would vastly simplify current estate planning and administration. First, with portability, a married couple

can side-step the complexities of a credit shelter trust plan which

include a will or trust that contains a complicated formula to maximize use of the exemption, which only an estate planner or other

professional can understand. Two, they can avoid the use of three

separate taxpayers, namely the surviving spouse as an individual,

the credit shelter trust, and an administrative trust to hold the

combined estates until the bypass trust is funded. Third, it eliminates the division of assets between the surviving spouse and the

credit shelter trust, which is made all the more difficult in an illiquid estate such as a small family business or family farms and

ranches and, importantly, the frequent need for the spouse with a

higher net worth to transfer assets to the other spouse during lifetime in order to ensure that each spouse has sufficient assets to

use the exemption. With portability, the estate tax is applied on

the combined estate at the death of the surviving spouse, so it is

unnecessary for each spouse to hold assets equal to the exemption

amount.

A second reason portability makes sense is that it is consistent

with other ways the tax law recognizes a married couple as, in effect, a single economic unit. For example, in 1981, when the marital deduction for transfers between spouses was made unlimited,

the Finance Committee stated that ‘‘the committee believes that a

husband and wife should be treated as one economic unit for purposes of estate and gift taxes, as they generally are for income tax

purposes.’’ Enacting portability then would fulfill the promise of

combining the exemptions of a married couple that was implicit in

the policy forming the basis of the unlimited marital deduction.

A third compelling reason to make portability a reality is that a

married couple can already use both exemptions with the use of a

credit shelter trust. The impact of portability then would simply accomplish by statute what now requires careful and sophisticated

lifetime planning; number two, complex administration after the

first spouse’s death; and number three, denial of the non-tax goals
6

of the married couple to provide security and flexibility to the surviving spouse.

In conclusion, in my view portability is the best estate planning

idea for married couples, particularly those in traditional families,

since the unlimited marital deduction. Portability is, in short, a

great idea. I sincerely hope that, with the support of this committee, portability will be a great idea whose time has come.

The CHAIRMAN. Thank you, Ms. Kovar, very much. I appreciate

that. It makes good sense.

[The prepared statement of Ms. Kovar appears in the appendix.]

The CHAIRMAN. Dr. Sawyers?

STATEMENT OF DR. ROBY B. SAWYERS, PROFESSOR, DEPARTMENT OF ACCOUNTING, NORTH CAROLINA STATE UNIVERSITY, RALEIGH, NC

Dr. SAWYERS. Thank you for the opportunity to testify today on

issues related to simplification of the estate and gift tax, but particularly the reunification of the estate and gift tax exemption

amounts.

In addition to being a professor, I am a practicing CPA. I am also

a member of the American Institute of CPA’s Tax Executive Committee, and I chaired the AICPA’s Transfer Tax Reform Task Force

and was a contributing member of the Joint Task Force on Federal

Wealth Transfer Taxes. Much of my testimony today comes from

the previous reports issued by both of those task forces.

In order to provide certainty to taxpayers, AICPA encourages

Congress to make permanent changes to the estate tax prior to its

scheduled repeal in 2010. A written statement for the record outlining the AICPA’s priority list of suggested reforms was provided

to this committee for consideration following last month’s hearing

on alternatives to the Federal estate tax system.

My testimony today focuses on three issues surrounding the decoupling of the estate and gift tax exemptions. First, taxpayers and

tax practitioners face planning difficulties as a result of the decoupling that occurred back in 2004. Under the law prior to the Economic Growth and Tax Relief Reconciliation Act, the estate and gift

tax exemptions were unified and could be used to offset both lifetime gifts and transfers at death.

The advantage of that policy was that it was well-understood by

taxpayers, and it simplified estate and gift tax planning by simply

reducing the number of tax and non-tax variables that a taxpayer

had to consider when deciding whether or not to make a transfer

during life or a transfer at death. However, under current law,

while the estate and the generation-skipping transfer tax exemptions stand at $2 million and will increase to $3.5 million in 2009,

the gift tax exemption remains at $1 million.

Second, as a result of the decoupling, taxpayers, including small

business owners, may be discouraged from making orderly lifetime

gifts of property, and in fact to engage in business succession planning at all. Historically, the gift tax has been less expensive than

the estate tax, providing an incentive for taxpayers to make intrafamily transfers during life. That policy has several advantages, including a potential for increasing tax revenues to the government.
7

But the primary advantage is that it encourages lifetime distribution of family capital to younger generations. It encourages

small business owners to plan for the orderly transfer of management and control of their businesses to younger generations, and

it encourages, in fact, all taxpayers to make gifts of cash and other

property to younger generations.

It is these younger taxpayers and younger generations who need

the capital in order to buy new houses, in order to raise and educate their children, and in order to buy other goods and services

in the marketplace. Reunification of the estate and gift tax exemption should result in a greater propensity to make both taxable and

non-taxable gifts and provide a stimulus to the economy.

The third issue is a direct result of the uncertainty surrounding

the future of the estate tax. Donors making both taxable and nontaxable gifts often reflect prudent tax planning in the face of a future estate tax, however the prospect of no estate tax in 2010 may

make individuals reluctant to make taxable lifetime gifts that otherwise would be sensible for both tax and non-tax reasons, including business succession planning. It also puts CPAs and other professional advisors in an awkward position, as properly advising a

client as to the benefits of making lifetime gifts requires an assumption as to whether or not there will be an estate tax in the

future.

In summary, the AICPA suggests that the estate, generationskipping transfer tax, and the gift tax exemption amounts be reunified. Reunification will accomplish three things: it will simplify

planning for taxpayers and avoid all the cumbersome numberjuggling that is now required in our planning; it will provide an incentive for small business owners to make business succession

plans; and it will provide an incentive for all taxpayers to make

intra-family transfers of wealth during life.

We hope that you and other members of Congress will consider

these suggestions in the debate about estate tax reform. We look

forward to working with Congress to achieve simplicity, efficiency,

and effectiveness as you consider changes to the current estate and

gift tax system.

Thank you for the opportunity to share these views.

The CHAIRMAN. Well, thank you, Doctor, very, very much. I appreciate that.

[The prepared statement of Dr. Sawyers appears in the appendix.]

The CHAIRMAN. Now we have Ms. Aviv.

STATEMENT OF DIANA AVIV, PRESIDENT AND CHIEF EXECUTIVE OFFICER, INDEPENDENT SECTOR, WASHINGTON, DC

Ms. AVIV. Chairman Baucus, Ranking Member Grassley, and distinguished members of the committee, thank you for your invitation to talk about how the estate tax supports the services provided

by charitable organizations and how we might work together to

prevent abuses of our laws regarding the estate tax and charitable

giving.

I serve as the CEO of Independent Sector, which is a national

coalition of 600 members that collectively represents tens of thou-
8

sands of public charities, private foundations, and corporate giving

programs.

America’s 1.5 million charities and foundations are substantially

aided by people who give their time and resources to help individuals and communities. Americans are motivated to contribute for

many reasons, but research shows that tax policy has a considerable impact on when, to whom, and how much they give.

The estate tax has been critical in motivating Americans to give

back even more to the causes that they support. The Congressional

Budget Office found that the estate tax leads affluent people to donate greater amounts than they otherwise would because such donations, whether made during life or as bequests, sharply reduce

estate tax liability. The CBO estimated that, if the estate tax had

not existed in 2000, contributions to charities would have been reduced by between $13 and $25 billion, which added up to more

than the total donations made by all corporations in that year.

The President’s budget estimates that eliminating the estate tax

would result in the loss of nearly $522 billion in Federal revenues

over the next 10 years, marking an end to countless programs that

serve all Americans and help to strengthen communities.

In seeing the estate tax as a vehicle for ensuring that every citizen begins life with an equal opportunity to succeed, President

Theodore Roosevelt endorsed the inheritance tax and stated, in

1906, ‘‘A man of great wealth owes a particular obligation to the

state because he derives special advantages from the mere existence of government.’’

Like other Americans, the very wealthy benefit from government

investments in areas such as defense, security, national parks, and

infrastructure, and they rely on government’s protection of individual property rights. America has a longstanding expectation

that the people who prosper the most in this society have an obligation to help preserve it for future generations.

As with any tax system, the estate tax can be manipulated by

unscrupulous individuals to provide inappropriate financial benefits to themselves and their families. Independent Sector has stood

shoulder to shoulder with this committee to support the identification and punishment of those who abuse charitable resources for

personal gain and to encourage charitable organizations to institute

practices to prevent such abuses.

We have recently become aware of ways in which the estate

planning device known as the charitable lead trust makes possible

tax deductions to donors and their heirs without providing the

promised returns to charity. Used properly, the charitable lead

trust has helped to generate considerable contributions that have

generated substantial benefits for individuals and communities.

However, the current statutory formula and timing for calculating

tax liabilities creates the potential for overstated charitable deductions and understated tax liabilities for beneficiaries.

There are three specific ways Congress can help deter abuses associated with estate planning and charitable organizations. First,

Congress should ensure that the IRS has sufficient resources to

maintain a strong oversight, enforcement, and education program

to enhance compliance by all taxpayers.
9

Second, Congress should pass legislation permitting the IRS to

require electronic filing of nonprofit annual information returns

and of estate tax returns. Electronic filing would increase compliance by providing immediate feedback on incomplete and potentially inaccurate information. It would also permit Federal and

State regulators to devote more resources to oversight, education,

and enforcement instead of cumbersome manual processing of

paper returns.

Third, Congress should make necessary adjustments to the statutory formula and timing for calculating tax liability for charitable

lead trusts to help ensure that tax deductions are not taken for

promised donations that never materialize and that there is a more

reasonable calculation of the projected value of any remaining

amount at the end of the trust period.

Reforms of the estate tax must not benefit the few at the expense

of the many. A robust estate tax would ensure adequate Federal

revenues and encourage charitable contributions to help nonprofits

provide services vital to our communities. We urge you to protect

individual legacies while safeguarding the promise of a better future for all.

Thank you.

[The prepared statement of Ms. Aviv appears in the appendix.]

The CHAIRMAN. Thank you, all of you, very much.

I am going to begin with Mr. Belcher. Do you have any significant changes you might recommend for further installment information that is provided for closely held companies?

Mr. BELCHER. Yes, sir, Mr. Chairman. I put that in my written

testimony. The first thing that I point out is that Congress should

modernize the installment payment provisions. What I mean by

that is that the section was enacted in 1976 and business entities

have changed in the last 30 years. For example, limited liability

companies are not mentioned as a business form that would qualify

for the benefits of the installment payment provisions. Many, many

clients will use the limited liability company business form for conducting business, even very large businesses.

So clients come to us and they say, well, will a limited liability

company comply with the provisions of the installment payment

provisions or do I need to form a corporation? They would much

rather use a limited liability company, but we have to tell them

we’re not sure whether a limited liability company would comply.

The CHAIRMAN. Would a limited liability company fall from the

intent of the provision?

Mr. BELCHER. It is not specifically mentioned. But fortunately, in

my experience, the Internal Revenue Service has been liberal in its

use of that. But many times you will run into what we refer to as

an outlander Internal Revenue Service agent that will use this as

the ability to say you do not technically qualify. So I think, Mr.

Chairman, that the modernization is very important.

I mentioned several other things about holding companies because, for example, some of my farm clients will put their real estate in one limited liability company, their cattle and equipment in

another limited liability company, and then they will use them all

in the same operation. But the question is, is it an active business?

There are certain provisions that allow that to occur, but clients
10

will have to consult with a fairly sophisticated and knowledgeable

tax lawyer when they are trying to make transfers to their children.

The CHAIRMAN. Do you think the 4-year deferral and the 10-year

installment periods are about right?

Mr. BELCHER. I think, in many instances, it is right. The reason

I say that is that you have time during which to gather assets to

pay the taxes. For example, think of this. When your estate consists primarily of a closely held business, how are you going to pay

the principal on that tax? Are you going to pay it on income or are

you going to sell assets? If you can pay it on income, it is going

to take you a while to use after-tax income. So, I think that clearly

the 4-year deferral is extremely helpful.

The CHAIRMAN. And the 10-year installment is about the right

period of time?

Mr. BELCHER. Yes, sir.

The CHAIRMAN. All right.

Mr. BELCHER. That is correct.

The CHAIRMAN. Ms. Kovar, your portability suggestion. Basically

what happens? A couple signs a document making the full exemption available to the surviving spouse? How does that work? What

do they do?

Ms. KOVAR. Yes. As I indicated, upon the death of the deceased

spouse—let us say it is the husband, because they do usually go

first—there would be a $2-million exemption that that spouse

would have, but typically at that level there is going to be a transfer of all of the assets to the surviving spouse.

The CHAIRMAN. Right.

Ms. KOVAR. And that $2 million exemption just disappears.

The CHAIRMAN. So what is the simple way to take advantage of

it?

Ms. KOVAR. The simple way is portability, which is already in

5970, although the American College of Trust and Estate Counsel

does have a few recommendations with regard to the change of

5970.

The CHAIRMAN. And portability is what? Is it a document? Is it

a statement?

Ms. KOVAR. Portability is a statutory transfer of the unused estate tax exemption of the deceased spouse.

The CHAIRMAN. It is a statutory transfer.

Ms. KOVAR. Correct.

The CHAIRMAN. All right. From the deceased to the survivor.

Ms. KOVAR. Correct.

The CHAIRMAN. All right. Can you think of any reason why we

should not just make that change?

Ms. KOVAR. Absolutely not. I think, as I indicated, we have lots

of reasons to do it: simplification; it is going to conform to existing

tax policy; and, most importantly, the wealthy can already do it by

hiring a lawyer to make it happen, whereas if you have, for example, Dennis’s family that has a family business, and maybe there

is a family that was not so lucky to have Dennis, and as a result

there is a transfer of the family business directly to the surviving

spouse, there is no credit shelter trust, there is no planning that

has gone on, and they are going to have to sell that business.
11

The CHAIRMAN. What strikes me is that all four of you basically

are suggesting changes within the regime, the realm of the current

system. That is, large, huge, major changes. That is, modify the deferral transfer period, make portability, reunify, figure out how to

get these charitable lead trusts that are being abusive and so forth.

Do any of you think there should be a major change? I mean, you are basically saying that the $3.5-million exemption by 2009 is all

right, I guess. I do not know if you are saying that or not. The 45-

percent rate is all right. If you are saying that, I do not know. But

what major changes would any of you recommend?

Mr. BELCHER. Mr. Chairman, when we were working on the task

force we looked at alternative systems. I know that this committee

had some hearings on alternative systems.

The CHAIRMAN. Right. Right.

Mr. BELCHER. And what struck me about alternative systems is

that the first issue you look at is, when do you impose a tax, assuming you are trying to be revenue-neutral? Do you impose it at

death or when a transfer occurs? Well, imposing it when a transfer

occurs makes more sense than imposing it at death, but that

means you are going to have to have carry-over basis. That is the

box you are in.

What we could do, if we were starting with a whole new system,

we would not have the system we have. We would probably use

something like carry-over basis. But I think that would be so disruptive because many people would think——

The CHAIRMAN. Have carry-over basis as a transfer and no estate

tax.

Mr. BELCHER. Yes. And the reason why I say that is, in my situation I give assets to my wife. She has carry-over basis. She pays

an income tax. My wife has had a tax increase, even though she

would not have a taxable estate.

So you say, well, what we will do is give $2 million, $3.5 million

of free bases. Now you are right back in the soup of complexity

about how you do the allocations.

The CHAIRMAN. So because of that box, that is a big enough barrier to prevent us from going down that road, do you think? Or to

say it differently, work with and tinker with the current system?

Mr. BELCHER. I think that the carry-over basis, the modified

carry-over basis system that was put in with the 2001 Tax Act has

some significant problems and would require even more planning

than what we have today, because you have a system that only 2

percent or 1 percent of the population is subject to, and they are

used to it. It has been around so long.

The other issue that you always talk about and hear about is

valuation and how difficult valuation is.

The CHAIRMAN. Right.

Mr. BELCHER. Well, you are going to have that same issue with

whatever alternative system you have.

The CHAIRMAN. Right.

Ms. AVIV. If I can.

The CHAIRMAN. Yes.

Ms. AVIV. May I just add that, since I have noted in my oral testimony and in my written testimony that we think that the estate

tax—it may not have been the intended benefit—has the unin-
12

tended benefit of supporting in a significant way charitable contributions and is a profoundly important part of the charitable sector’s income. We think that the proposal that you offered last

month, the changes, the modifications, is the right way to go at

this point in time. We would be deeply worried if there were further cuts either to lower the tax rate or to have a higher exemption

level, that that would have adverse consequences on the charitable

sector’s ability to do its work.

The CHAIRMAN. All right. Ms. Kovar and Dr. Sawyers? Very

briefly, because I am way over my time.

Dr. SAWYERS. Mr. Chairman, one other issue that the AICPA is

very concerned about is reinstating the full State estate tax credit.

As a result of getting rid of the State estate tax credit, a number

of States have decoupled and instituted their own systems. That is

complex for taxpayers and advisors as well, so we think it is important to reinstate that credit or have some other mechanism like a

surtax that could then be shared with the states in an equitable

way to avoid dealing with potentially 50 different State systems.

The CHAIRMAN. Yes. Well, it is unfortunate, I think, the decoupling there, and also separating gift and estate, which basically are

revenue raisers. Congress wanted the money. As so often happens,

the decision is made on a budget basis, not on a policy basis. Basically you are all saying we ought to go back and look at the policy,

which makes a lot of sense.

Ms. KOVAR. I would just say one final thing, very short.

The CHAIRMAN. Yes. Yes.

Ms. KOVAR. Which is, this may be a small step for Congress, but

it is going to be an enormous leap for surviving spouses.

The CHAIRMAN. I hear you. [Laughter.] And you intend to survive. [Laughter.] Thank you.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus. You

had promised that we would have hearings on the estate tax, and

you have carried through with that promise. This is now the third

time that we have had a hearing on how we might move forward

with respect to permanent estate tax reform, and I appreciate your

leadership very much on this issue.

I am pleased that we are devoting time and energy to this matter

because, in the case of Montana, Colorado, Kansas, and Iowa, we

have issues that have been of concern to me, especially with the

ranching and farming community where it is very easy to be assetrich and very cash-poor. It does not take a lot of land in the State

of Montana, or even in the State of Colorado, to be able to be in

a position where the estate tax can, in fact, force you to have to

sell your ranch or your farm.

So, I have been pleased to join with Senator Roberts in a proposal that would provide some relief to family farmers and ranchers, so long as they continue to stay on their family farm and on

their family ranch. So, I appreciate the work of this committee, and

I appreciate your ideas here this morning.

From my point of view on the estate tax, we have to, number

one, provide some certainty for the future, because no one knows

whether they are going to die in 2009, 2011, or 2015, so I think

those of you who are affected by it or those of you who are involved
13

in helping clients plan for the future and their estates have a difficult time when you do not know what the rules are going to be.

Second of all, I think we should do everything we can to preserve

going concerns, including family farms, ranches, and businesses, instead of forcing them, by our tax laws, to basically break up a

going concern.

Third, I also think we need to be responsible to the fiscal realities that we deal with here in Congress every day. The fact is, we

have gone into a mode, especially the last 10 years, it seems to me,

where we have created a mountain of debt that continues to grow

and grow. I do not want us to move forward with estate tax reform

that is going to add inordinately to that mountain of debt.

So let me ask a question of any of you. That is, if we were to

deal with segments of the estate population, is that something that

would make sense? If we were to—for example, the proposal that

Senator Roberts and I have deals specifically with only farmers and

ranchers, and the condition there being that the estate can continue to be used as an ongoing family farm and ranch. Is that the

kind of targeted reform that might make some sense, short of a

broader kind of reform that we might undertake?

Why don’t we start with you, Mr. Belcher, and just move across.

Mr. BELCHER. Yes, sir. Our task force report did not address targeted relief. We felt that was a policy issue and it was up to this

committee and other committees to look at that. Personally, I think

targeted relief is good, but it adds complexity to it. The proposal

that you have is very similar to the old business exclusion that creates complexity. I work with many clients that have to go through

special use valuation under section 2032(a).

The worry I have is that the targeted relief needs to be significant enough to make a difference. In other words, if you look at the

Joint Committee proposal where they go through how targeted relief under special use valuations does not solve problems, it is because, as the exemption moves up, the smaller relief is less significant.

What will happen is that clients will have to look at those provisions carefully, look at the material participation and make sure

that they are complying with that, and it needs to be significant

enough so it can be worth their while to do it. But I would applaud

the committee to look at targeted relief.

Senator SALAZAR. Do Ms. Kovar or any of the other witnesses

have a comment on that?

Ms. KOVAR. Just that, with regard to portability, I think it will

help farmers and ranchers in the same way that it will any other

small business or any smaller estate, so I do not think there ought

to be any distinction made between farmers and ranchers with regard to portability.

Senator SALAZAR. Is your spouse here today?

Ms. KOVAR. No, he is not. [Laughter.] And after 37 years, maybe

he will not be! [Laughter.]

Senator SALAZAR. I am very interested in your assumption of this

longevity of women versus men and what it does to Senator Roberts and all of the rest of us.

Ms. KOVAR. That is statistics.

Senator SALAZAR. The facts are the facts.
14

Let me ask a second question to all of you. If we were to move

forward with a tax rate for estates into the future and to index that

tax rate, do you have a recommendation on what that tax rate

should be for an estate?

Dr. SAWYERS. Not a specific recommendation, though I think I

would ask Congress, if the intent of the estate tax or one of the

reasons for the tax is to serve as a backstop to the income tax, that

perhaps it would make sense to tie the top estate and gift tax rate

to the top income tax rate.

Ms. AVIV. Again, as I said in my earlier comments to Chairman

Baucus, I thought that his proposal of 45 percent was the right

level. The reason for our thinking on that relates to the commitment of individuals to give money to charities, and being able to

do that at levels that would continue to support the work of the

charitable community.

Senator SALAZAR. Do you think there would be a difference between the 45-percent rate versus a 35-percent rate?

Ms. AVIV. We do. We say that based upon what we have seen in

the last number of years. Our experience with tax incentives for

charitable giving or the opportunity for people to, in lieu of paying

taxes, give to charities, is that people always give, but the rate, the

level, and the amounts that they give and the time that they give,

it is substantially affected by these rates. So, yes.

Senator SALAZAR. Thank you very much.

My time has expired, and I know Senator Roberts has been waiting.

Senator Roberts?

Senator ROBERTS. Well, thank you, Mr. Chairman.

Senator SALAZAR. I will note, Senator Roberts, that you have

moved up in seniority very fast. I am still at the very end of the

table, and we came here at the same time less than a year ago. You

are already almost to the front.

Senator ROBERTS. Yes. I am just happy to be ranking. [Laughter.] I know the chairman has left on a temporary basis to go check

on his estate tax. [Laughter.] I thought, under the circumstances,

you being chairman, you could ask unanimous consent that the

committee report the Salazar-Roberts Estate Tax Repeal as passed,

the third meeting be waived, and that the bill receive priority consideration on the floor of the Senate this week and be deemed as

passed by the Senate. [Laughter.] If you would say ‘‘without objection,’’ I think we are way ahead of the game. [Laughter.]

Senator SALAZAR. I do not have the gavel. [Laughter.]

Senator ROBERTS. Man, just grab it. [Laughter.] You have to take

advantage of these things. According to the witness, we are not

going to be here very long. [Laughter.] You do not have to applaud

at that, for goodness sake. [Laughter.]

Senator SALAZAR. I am afraid it would endanger our farm bill.

We need to get our farm bill across the finish line.

Senator ROBERTS. Well, I will tell you what. We could write one

pretty doggone quick, I know that. But at any rate, I think we had

better go back to regular order. There is an old Chinese proverb,

as the chairman has indicated: be careful what you ask for. That

has nothing to do with a Chinese proverb, but I thought I would

toss it in. [Laughter.]
15

I have a question for Mr. Belcher. Thank you for all the work

that you have done, and thank you for your personal example with

your dad. I am very happy that you have the family farm still within your control. I am glad that anybody has a family farm these

days under their control.

But I would like to focus on the issues you raised about the installment payment provision. As I understand it, a business that

has elected to pay its estate tax liability in installments has up to

5 years to begin doing so, with the possibility of a 4-year extension

for ‘‘reasonable cause.’’ It is that definition, that explanation of a

reasonable cause, that I am interested in. Could you explain what

qualifies as a reasonable cause for such an extension?

Also, is there any provision we should consider that would recognize that, even though a very small business owner or farmer is

working hard to make either the interest or installment payments

in a timely manner and has been granted a time extension, the

government still has the option to take the business or the farm

if the owner falls on hard financial times and cannot keep up with

payments? Is there any remedy here?

Now, in Colorado, Kansas, Montana, other States, we have had

drought for 3, 4 years. We had a blizzard, then we had a tornado.

I do not know what is next. I do not know what we did to Mother

Nature, but Mother Nature has really done a lot to us. Maybe a

plague of locusts is next, I do not know. But that worries me, so

if you could maybe give us your expertise in regards to what qualifies as a reasonable cause, more especially that the government can

still come back in and take the business from the farm.

Mr. BELCHER. Thank you, Senator Roberts. First, I see ‘‘reasonable cause’’ in the installment payment provisions used rarely.

Now, why do I see that? It is because you have the 4-year interest

only. This gives the family the time to figure out what they want

to do. Will they be able to pay the installments out of operating income or will they have to sell an asset? If so, they have that 4-year

period to do it.

So Congress, by giving families the installment payment provision with a 4-year deferral of just payment only of interest, has

given the family the opportunity to plan. I mean, many of our clients, unlike Ms. Kovar, believe that they are not going to die and

so they put off planning until the last minute.

Senator ROBERTS. I am planning on 2010, by the way. [Laughter.]

Mr. BELCHER. That will make your children happy.

Senator ROBERTS. Yes.

Mr. BELCHER. In those instances where we use reasonable cause,

it has been my experience that the Internal Revenue Service has

been fairly liberal in granting it. That is where you do not meet

the installment payment provisions and you are dealing with real

estate that was not used in a farm and you have to pay the tax

right away, and you are in an economy right now where it is difficult to sell real estate and realize the actual value of the property.

The Internal Revenue Service has been fairly liberal in granting

the 1-year extension. You cannot count on it. We tell clients that

they had better assume that it is not going to be granted, because

if it is not granted the tax is giving it away.
16

Now, protecting the tax payment. The Internal Revenue Service

can apply a lien to the property, so if the farmer/rancher/business

owner cannot pay the tax because the children cannot run the business the way the father did, or they just made some bad decisions,

or they had some bad luck, the Internal Revenue Service has a lien

and can exercise on that lien.

I pointed out in my testimony that there are some issues with

the way that lien has been applied. I recognize that the Internal

Revenue Service needs to have the protection to make sure the installment payment of tax is paid. But what happens is, I have an

interest and stock in a business. If I die, the stock is includable in

my estate. My executor elects the installment payment provision.

Then the IRS comes in and my estate can either put up a bond,

which you are not going to get a bond for a 15-year period, so you

will have to put up property. You would think you would put up

the stock because that is what is taxable in my estate. Many Internal Revenue Service agents accept that. Some are saying, no, I do

not want the stock, I want the assets in the company. I want hard

assets. I want the real estate. By doing that, that inhibits the ability of the business to raise operating capital.

Senator ROBERTS. Why is there not a consistent method of handling this? If you have someone at the IRS saying I want something tangible, and you have others that are working with people,

I do not understand why IRS does not have a consistent policy

here.

Mr. BELCHER. The Service had a consistent policy of not getting

a lien until about 4 years ago, and then there was a report from

the Comptroller of the Internal Revenue Service that recognized

there were a lot of unpaid installment payments and that there

were no liens. So, immediately the Service came up and said, well,

we are going to collect that and we are going to impose a lien, and

you can either have a bond, which you cannot get a bond for a 14-

year period. Insurance companies just will not issue them. I mean,

if you have the collateral to do that, you can pay the tax.

Senator ROBERTS. So that is not an option.

Mr. BELCHER. And so it is the lien. What happens is, there is

very limited guidance issued by the Internal Revenue Service on

what type of lien, how it should be administered. What I recommend is that the lien would be on the asset that is taxable in

the individual’s estate.

Senator ROBERTS. Well, that makes sense.

My time is up. Senator Baucus is expected momentarily, so we

will have a little sing-along. [Laughter.]

Ms. Aviv, first of all, thank you for sharing your insight into

charitable giving. I do not know of anybody who is opposed to charitable giving. I am encouraged by the numbers that you cite in

terms of the amount people do contribute to their communities, as

well as the amounts they are given.

But the thing I do not understand is, if the estate tax were to

be repealed or reformed to impose a lesser burden on families and

small business owners, why would Americans not continue to donate to the charities they have spent their lives supporting and

promoting? I do not get that. If you drop the guillotine in regards

to estate tax, it seems to me that, if you would reform it or repeal
17

it, you would have more money to go to the charities. Simply because people do not have a concrete number in terms of donated

dollars to reach in order to eliminate their estate tax liability,

would Americans not continue to have a very deep interest in supporting their long-preferred charity, or church, or organization?

Ms. AVIV. Senator, our experience and the experience in looking

at the data on this very issue seems to show that Americans are

always generous and that they have always given, but the level at

which they give, the amount they give, is affected by the tax incentives that are available to them.

We thought, for example, with the proposal that you supported

and you introduced last year on the IRA charitable roll-over that

had not been available to people before to use, that with the availability of that incentive, there were tens of millions of additional

dollars that were raised and given to all kinds of communities

across the country and for all kinds of issues that were needed. The

kind of people who used the IRA roll-over were different than the

kinds of people who have used the opportunity to use their estate

to donate to charity.

In the case of the estate tax, to avoid that liability, it has been

largely very wealthy donors who have used that opportunity to give

to charities. In the case of the IRA charitable roll-over, to our surprise we learned that folks who qualify for that of all income levels

used it to give to charities. So what we find in our experience is

that different kinds of incentives induce different people in the population to give at much greater levels than was otherwise the case.

Then I would like to say that what the Congressional Budget Office’s study showed us in 2000 was that, if the estate tax had been

eliminated at that time, that charitable organizations, they estimate, would have lost somewhere between $13 and $25 billion,

which is a huge chunk of income to the charitable community.

Senator ROBERTS. Did Teddy Roosevelt, when he charged up San

Juan Hill, tell his men, ‘‘Men, let’s take the hill and don’t worry

if you pay the ultimate sacrifice, I’ve made an arrangement that

everything that you have earned in regards to service to our country will be going to government programs and to charity as opposed

to your widow?’’ I am being very facetious here. [Laughter.] I think

he inherited an awful lot of money before he charged up San Juan

Hill.

Ms. AVIV. My interpretation, Senator, of his view was, for those

who had been lucky enough to benefit from immense wealth, that

they have a responsibility to give back.

Senator ROBERTS. I think that should be on an individual basis.

I do not think my dad thought about that in regards to Iwo Jima,

or for that matter any situation I may have had in the Marine

Corps. But I am getting way off the subject here.

By the way, we passed the Salazar-Roberts bill, Mr. Chairman.

[Laughter.]

The CHAIRMAN. Did you also pass the farm bill? We need that.

Senator ROBERTS. Sir, that is up to you and up to the esteemed

chairman of the Agriculture Committee. I am just here to give you

advice and whatever else that I can offer.
18

Thanks to all the witnesses. Thank you very much. You have all

really provided us with some very detailed information that we

need as we go forward on this very important issue.

Mr. Chairman, thank you so much for your leadership on this.

We came awfully close a year or two ago. It was an 8:8 vote, as

I recall.

The CHAIRMAN. Right.

Senator ROBERTS. And that was a shame. These people could

have been doing other things this morning, in fact, if that had not

happened.

But thank you.

The CHAIRMAN. Needless to say, I think they could still be doing

a lot of things.

Senator ROBERTS. Well, they are in the full-time business of apprising us of how to do that.

Thank you, sir.

The CHAIRMAN. Thank you, Senator Roberts.

I would like to know, Ms. Aviv, if you have pondered a little bit

about the degree to which any changes in Federal estate tax law

might help nudge more charitable giving to rural areas as opposed

to urban areas. That is not quite directly the focus of this hearing,

but it is a concern of mine. Essentially, these foundation grants in

my State average about $20 per capita. In the top 10 States, the

average is $147 per capita. Charitable giving is skewed toward

urban areas. Just give us your thoughts on how to balance that out

a little bit.

Ms. AVIV. This has been an issue close to your heart, and I know

you have done a lot of work and have met with a lot of good foundations to encourage them to do that. I have met with some of your

colleagues who work in your office to talk about these issues. It

seems to me that it is quite difficult, in my experience, to tell foundations how to give their funds. I am trying to tell them all the

time and they do not listen to me as well as I hope they would.

I think that there are large numbers of very wealthy people who

have benefitted from the recent windfall on Wall Street who are

not yet giving, and there need to be ways for us to incentivize them

to give.

I think it is much easier to go to those who are of immense

wealth who have yet to give to make the case, and our organization

would be happy to work with you to find a way to encourage those

folks who ought to be stepping up and giving back some, to be

thinking in a broader way not only about where they live, but in

communities that need them greatly, such as the rural communities that you mentioned.

The CHAIRMAN. I have thought, actually, it is like a lot of things

in life: seeing is believing. If we can get people out from behind

their desks and their office buildings and going out into the country

and seeing what is going on, it makes a big difference.

Ms. AVIV. When I look at what the Lilly endowment is in Indiana, by creating many, many community foundations in local communities and then getting those local community foundations to

raise local dollars, by creating that kind of program that allows for

that whole State an opportunity for local people to give in the area,

I think that that is one of the ways to look at that sort of solution.
19

The CHAIRMAN. Many people say Federal estate and gift tax

law—and he is here, the man who has said that many times—

forces estates to sell a lot of their property to pay the tax. You just

cannot manage it in a reasonable way to keep the operation, keep

the business in the family. With aggressive tax planning, aggressive estate planning, they may have to pay a few dollars to an attorney, but you save much, much more by preventing the sale,

forced sale, of property in order to pay the Federal estate tax.

So the question is, in your experience, all four of you, how often

do you see a business, a family-held business, sold or a significant

portion of it sold in order to pay off Federal estate taxes? My question is going to lead more into, like, the rates and the exemptions

up to $3.5 million per person in 2009, let us assume that stayed

permanent. It is indexed with a step up. Under those circumstances, with unification—I do not know if that is terribly relevant. But how many, in your judgment, places would have to be

sold? How many businesses would have to sell a large portion?

Dr. SAWYERS. I think the numbers are relatively small, but it

does happen. I think the difficulty is figuring out sometimes whether those small businesses and farms are sold in order to pay for

the estate tax or whether for other reasons, or a combination of

those two. Certainly there is evidence that it happens, but I think

it is relatively rare.

The CHAIRMAN. Mr. Belcher?

Mr. BELCHER. Senator, that is a very good question. Most of my

clientele are closely held business owners. I have had families sit

in the office and say, well, we want to keep the marketable securities and we will sell the business. It is the age-old family that said,

we are tired of picking apples, let us cut the apple tree down and

sell it for firewood. But I have seen some sold because of the estate

tax.

But think of the allocation of capital. I mean, just in my stepfather’s situation, we have a trucking business and we are paying

estate tax instead of buying trucks. We are paying interest on estate tax instead of buying trucks. You are exactly right that a wellplanned estate can plan for that burden, but is that the proper allocation of capital?

I am dealing with a situation now where—and this feeds right

into Ms. Kovar’s point that the husband dies first—this individual

died of pancreatic cancer 2 weeks ago. He was 55 years old. He did

not do any planning. He was a self-made entrepreneur. His estate

is $5 million, and it is illiquid. He has debt against real estate that

he had just bought to use in the business. His son is 31 years old,

and his son is trying to hold onto the business.

Now, in that estate with $5 million, there is going to be about

a $1.5-million burden put on that estate. Think of what that is

going to do for that struggling business. If it were not for the estate

tax or if it were not for the installment payment provision, that

family would have to sell. But Dr. Sawyers is right, it is not an everyday occurrence, but it also involves the allocation of capital.

The CHAIRMAN. So you would extend out the installment period

a longer period of time, or a deferral for more years or whatnot?

There are other problems?
20

Mr. BELCHER. Yes, sir. I think that is exactly right. If you are

using revenue to solve problems, other issues—I mean, when a client comes to me and they say, what other options do I have instead

of the installment payment provisions, I say, well, you can go to a

bank and most of them will give you 5 to 7 years, and they are

going to lock up all of your collateral and they will give you all of

these covenants, or you can use certainty under section 6160,

under the installment payment provision, provided that you qualify.

The CHAIRMAN. What about life insurance?

Mr. BELCHER. Life insurance works for those people who plan,

but for the individual who does not plan, it does not work. You are

exactly right. If a client comes to me and says, I am going to have

a very successful business and I am just getting ready to get started, I can structure it so he will not be subject to estate tax. But

is that fair for the person who comes to me later and says, wow,

I wish I would have talked to you 10 years ago? So you put to that

person the choice of buying life insurance, and is that the right allocation of capital? We are forcing people do things. Also, in some

instances people are uninsurable.

The CHAIRMAN. Right. Well, we are trying to make some sense

of all of this. I do not think a full-out appeal is in the cards in this

Congress, but at least some way to relieve the burden. That is the

goal here. Thank you very much.

Senator Kyl?

Senator KYL. Thank you, Mr. Chairman. I appreciate your calling the hearing. You may know, those of us on the Judiciary Committee, which includes Senator Grassley and Senator Hatch, were

called to the Judiciary Committee to make a quorum this morning

for some very important business, and as a result we could not be

here, and I regret that.

I thank all the people on the panel. I have reviewed summaries

of your testimony, and I am looking forward to reading your testimony in full.

Mr. Chairman, I appreciate you holding the hearing.

Let me get back to the conversation that I just heard. And I

apologize that I did not hear what the rest of you all said. But it

is something that I have had some, both personal experience with,

and then also in past years we have had testimony. Part of it deals

with this question of the proper allocation of capital.

In other words, the basic question of whether it serves good public purpose to risk the possibility that businesses either have to sell

off important assets or the entire business to pay an estate tax, or

whether, as a matter of public policy, it is better for that money

to be put back into the business or kept in the business in some

way. I am personally familiar with cases in which the entire business had to be sold, and other cases where property had to be sold

off.

In either case, it seems to me that this question of proper allocation of resources is the way to go, that liquidity is not just a matter

of whether you have bags of cash to hand to Uncle Sam, but rather

how you have to put limits on your business, or expansion of your

business, or hock your business, or restrain your business in some

way in order to pay Uncle Sam.
21

That goes back to the basic question of whether the public policy

in favor of a tax which hits businesses like that is outweighed by

the need for Federal revenue, with the tax collecting something a

little over 1 percent of Federal revenue, or whether there are better

ways to do it.

Senator Baucus and I have struggled over the years to try to find

a sweet spot here to compromise both principles, the fact that the

government could generate revenue, but that we do not impinge

upon the businesses, in terms of marginal impact, that are most at

risk. This argues for a higher amount of exemption or unified credit, and hopefully after that a lower rate than we currently have.

I think there has been a general recognition in Congress that

both of those are worthwhile goals. There are also some technical

changes that the committee has proposed to be dealt with, and I

gather were discussed in this hearing. Those are useful to examine

too because they do help to define whether, at the margin, you are

making it possible for people to continue to operate.

One question I would like to ask you is, several years ago Alicia

Munnell did some work and gave us an estimate that about as

much money is spent each year on estate planning, insurance acquisition, lawyers, accountants, and others, all toward the object of

avoiding paying some of the tax, or all of it, or planning around it,

as the Federal Government ends up collecting in the tax.

That, too, is an expense that a tax like this puts on the system.

Some taxes are pretty efficient: you make money, you pay, and that

is it. Others, there are so many ways that you could try to deal

with it, and the tax is deemed to be so unfair and has such a big

impact, that people are motivated to spend a lot to try to avoid it.

One of the things we are trying to get at here is whether this is

such a tax, at least with respect to the larger percentage of filers

that have to either file and end up paying, or file and perhaps not

end up paying. I am not talking about the ones at the higher level,

because they clearly are going to have to pay something.

What is your experience—just starting at this end of the table,

and I would like to hear from all of you. I realize all of you somewhat benefit, or most of you benefit somewhat from this situation,

but clearly you are in a position to know how much people have

to pay for this. So could you give me your ideas or your evaluation

of how much is spent compared to what is eventually taken in?

Mr. BELCHER. Senator Kyl, I saw that study when it came out,

and it surprised me because, just from my talking with other tax

professionals around the country, it did not reflect that. But once

you add in insurance costs, which is an investment—I mean, I have

clients who have no need for liquidity to pay estate tax, but they

will buy insurance for a lot of different reasons, primarily because

it is a good investment, tax benefits, certain things of that nature.

So I think if you look, I believe that there is not that much spent

on planning to avoid the tax. I will agree with you that it is an inefficient way of collecting tax. I mean, any time you have to do

evaluation, you have to submit a very lengthy report, and you have

to have an audit to make sure that everything is correct and you

have a complicated system, it is inefficient.

But one thing that I applaud this committee for is taking the

moderately wealthy out of the estate planning business. I mean, it
22

makes no sense for a client who has a house and a retirement account to go see a lawyer who is knowledgeable and experienced in

estate tax planning—which means expensive—to plan their affairs.

I think that raising the exemption, and Ms. Kovar’s point on portability, will take a lot of the moderately wealthy out of the estate

planning business.

Senator KYL. Thank you.

Ms. KOVAR. Just to reemphasize what Mr. Belcher just said, the

easiest way to reduce the amount of time that estate planning lawyers, including myself, spend writing credit shelter trusts for clients in the $2- to $4-million range, is portability. At $2 to $4 million, for example, a client can come in, I can explain that, well, the

credit shelter trust is going to protect appreciation, but if we can

gauge that by the time of the death of the surviving spouse that

the estate is not going to exceed $4 million—and I use $4 million

because that is the exemption right now for two people—then you

do not have to have a credit shelter trust. They are not going to

be using that exemption on the first death to give it to children and

grandchildren because surviving spouses—yes, like me—need the

entire estate.

On the other hand, if you are talking about estates above the $4-

million or above double the exemption, then there is going to still

have to be planning. But when you realize the number—and I do

not know the number in that $2- to $4-million range, or double the

exemption, whatever that is—it is a huge step, I think, in reducing

the amount of attorney time talking about tax issues. I would much

rather spend the time with my client talking about their special

needs child, or there is drug abuse in the family, how are we going

to deal with that, there is disability, there is asset protection. It

goes on and on and we do not spend enough time on those non-tax

goals.

Senator KYL. Thank you. That is another angle on it that is very

important too. Thank you.

Dr. SAWYERS. Thank you. With respect to the amount of planning, I think it is interesting to look at the number of taxable returns and the size of the gross estates for those individuals who actually paid estate tax. In 2006, there were some 23,000 taxable returns filed. There were only about 4,500 of those estates that had

gross estates exceeding $5 million. So, you can certainly reduce

planning and complexity for a large number of folks who are currently affected by the estate tax by increasing that exemption

amount a bit, or doing things like portability.

It is also interesting to note that the 4,500 folks who had gross

estates over $5 million paid about two-thirds of the $25 billion of

estate tax that was paid in 2006. So, two-thirds of the revenue

comes from the top 4,500 estate tax returns that were filed in 2006.

The CHAIRMAN. I am going to have to leave now, but Senator Kyl

and Senator Lincoln will stay. Senator Lincoln will take over

chairing this committee. I regret, I have to manage a bill on the

floor of the Senate. I want to thank you very, very much for your

testimony. I have learned a lot, and I think this committee has

learned a lot. Thank you very, very much.

Senator Lincoln? Senator Kyl, were you finished? Why don’t you

finish up, Senator Kyl?
23

Senator KYL. Well, my time is up. But if we can just have the

last panel member comment.

Ms. AVIV. Thank you, Senator Kyl.

Senator KYL. I think we have time, and the two of us can stay

for a little bit longer. Thank you, Mr. Chairman.

Ms. AVIV. Thank you. The focus of my testimony has been on the

estate tax and charitable communities, and charitable giving in

particular. Our experience from that aspect, particularly when one

looks at the very large nonprofit organizations that have the ability

to access and meet with major donors who are thinking about their

estates, that in those cases the planning of the estates is not related to avoiding of taxes—it may be, but that is not the only reason—from our perspective, that planning is to help them decide

and for them to think about to which causes they want to give, how

much they want to give to family members, and all of the rest.

They find that kind of planning extremely useful. Also, the nonprofit community is a beneficiary of that kind of planning, so of

course they welcome it.

Senator KYL. Blanche, do you want to go ahead?

Senator LINCOLN. Well, I, first of all, want to thank the chairman

and the ranking member, Senator Grassley, for holding this hearing today and allowing us to focus on a few issues that will be very

important, I think, in the weeks ahead as we craft a permanent solution to the estate tax. I think it is so important. I think many

of our hopes are that we will wrap up our hearings and move forward to a mark-up, because we do hear an awful lot at home. I

apologize for being late. I was just at a hearing about the price of

gas, which I also hear a lot about at home.

But this is probably one of the second most important issues,

along with health care, because people know that we face a cliff in

2010 and 2011. For our family-owned businesses and farms, in

preparation for that, the unknown is the most frightening for almost any of us as human beings. So, I hope that we will use these

hearings and move forward in coming up with a mark-up.

The portability of the exemption between spouses is certainly a

long overdue concept and one that I think will be most helpful to

our smaller estates that might not realize current law requires

complex planning to ensure the estate is appropriately organized

between the spouses, and that is going to be important for States

like Arkansas.

We should definitely include a portability provision in an estate

tax reform package, and I appreciate many of the comments that

you all have had. I know, Dr. Sawyers, you just mentioned portability in your comments there.

Similarly, the reunification of the estate and gift tax is good policy. We all know that, I think; certainly the cost of it has been

somewhat of an issue. But we should also look for ways to modernize section 6166, which allows some of our closely held businesses to pay their estate tax liability in annual installments. The

last panel we had, we talked about prepayment in some instances.

Does that make it better for either the IRS, for some of our colleagues, or anybody else in terms of how we look at trying to structure estate tax and make it more viable and predictable for family

businesses? Again, a special thanks to the chairman. I do hope that
24

the committee will move quickly. We appreciate it so much. I know

Senator Kyl and I have had great passion on this issue for quite

some time and we do want to see some results. We feel like our

constituencies are at that jumping off point where they really do

feel like they need to have some certainty as to what they can expect.

Just a couple of questions for you all. Mr. Belcher, in your testimony you did briefly mention a laundry list of provisions in the

code that were implemented in an effort to benefit closely held

business owners, section 303, 2032(a), 2057, and 6166, as I mentioned.

As you noted, most of those provisions have stringent requirements for individuals, which I think makes them somewhat cumbersome for our smaller estates to plan for and to take advantage

of, and that becomes difficult. They end up spending a tremendous

amount of money in seeking out the legal assistance that they need

to make those plans.

But in years past, I have looked at ways to expand on those provisions to provide more relief for our family-owned businesses and

farms. Most recently, I filed an amendment during the consideration of the farm bill that would have set the 2032(a) cap at the

same level as the general estate tax exemption. I still think that

is a pretty good idea, and I will certainly look for opportunities to

expand the 2032(a) as our reform discussions continue.

But, unfortunately, in section 2057 I have found that family businesses across my State particularly feel it was so complicated and

difficult to use, that they would prefer we focus instead on implementing a reasonable exemption level and a tax rate and leave the

niche provisions that have limited applicability out of the discussion as much as possible.

Maybe you could kind of give me your opinion about this, I guess

particularly in regard to 2057. Do you think the repeal of the

Qualified Family-Owned Business Interest (QFOBI) that happened

in 2001 was the right thing to do, or should we revisit that decision?

Mr. BELCHER. Well, Senator Lincoln, thank you for the question.

From a personal standpoint, I wish section 2057 had not been repealed.

Senator LINCOLN. You wish it had not?

Mr. BELCHER. Had not, because I learned so much about it.

[Laughter.] And it became as useless as a buggy whip. But from

dealing with my clients and in working with that, the complexity

would overcome them, tying their hands because the benefit was so

limited. Earlier, Senator Salazar asked a question about targeted

relief. My comment was, if you are going to put in targeted relief,

make it worthwhile so that, when they go through the hoops, when

a client or taxpayer goes through the hoops, it is worth doing. But

I think you are exactly right to focus on the exemptions and the

rates rather than the complexity of the QFOBI under section 2057.

Senator LINCOLN. Well, following up on that, from what Senator

Salazar had talked about and your response, what I found in my

conversations, with the Joint Committee on Taxation particularly,

that has modeled the different variations for me to try to come up

with, how do we do this in a way that makes sense is, if you make
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the targeted relief too significant, then so many of the estates that

would not otherwise use it will. They will structure themselves so

that they qualify for that generous targeted relief. If it is not

enough, it is not worth it. If it is too much, everybody does it. Then

all of a sudden, it ends up costing tons.

Mr. BELCHER. I think that is right. Well, I think that is a possibility. But, for example, I do not see people restructuring their affairs to materially participate in a farm and create the effort that

it does.

Senator LINCOLN. Because farming is too hard.

Mr. BELCHER. Well, it is. My father told me when I was growing

up, he said, ‘‘Dennis, if you’ve got a friend, give him a farm. If

you’ve got an enemy, give him two farms.’’ [Laughter.]

Senator LINCOLN. That is right.

Mr. BELCHER. So I think that there is the possibility of targeted

relief being abused. I mean, I was convinced, for example, that, if

QFOBI relief goes up significantly, that you are going to find Wall

Street pushing a product that would turn every securities portfolio

into an active business.

So, I think that certain targeted relief, you have to be very careful about. But under 2032(a), special use valuation, if you have a

member of the family who is out there materially participating, I

have not seen any abuse. I do not have clients who say, well, I am

going to cash in my portfolio and buy a farm just so I can save estate tax.

Senator LINCOLN. Yes. Well, materially contributing, I think is

what you used. It has been unbelievable, the conversations we have

had over this farm bill as to who is contributing to the farm operation. Somebody who is keeping the books, who is booking the commodities, who is doing everything except getting their hands dirty

is all of a sudden finding themselves, like my 80-year-old mother,

on a tractor in order to be able to qualify as somebody who is actively participating. So, those are good definitions for us to try to

look ahead for as well.

One question I would just pose to all of you. That is, maybe because I am an optimist, I also tend to be more energized, in many

instances, just because I feel like we should be getting things done

in a more timely way. I think time is of the essence, particularly

for the practitioners who are here on our panel. You are all very

well aware of 2010 and what that cliff means. It takes us back to

2001. I have been saying for more than 3 years now that time is

of the essence, and I am hearing it at home.

I do not know how many other members are hearing from constituents who are afraid of the unknown and do not know what we

are going to do, and would much rather have something that they

could at least predict. It is one of the reasons Senator Kyl and I

have certainly, in the committee, really encouraged the committee

to move forward on that. We need to get some kind of permanent

reform in place. Our family-owned farms and businesses have to

plan for the future. They are one of the biggest groups that produces jobs in States like mine, family-owned small businesses.

Would you agree that the sooner we get permanent law into

place the better off our families are going to be? Do you think that

if we just kind of keep talking about, what is the best—I have al-
26

ways told people, I did not come here to create a work of art, I

came here to create a work in progress. Yet, this is a place where

people want to create art, and it takes us forever. Any comments

on the timing?

Dr. SAWYERS. Certainty is certainly critical. We as practitioners,

as well as taxpayers, would benefit greatly from being able to know

with certainty whether there will be an estate tax or not. I hope

that any changes that are made, though, would be positive and follow the lines of some of the things that we have mentioned today

dealing with portability, reunification, and essentially increases in

the exemption amount which we think would really benefit small

businesses and farms and make it more likely that small business

owners would undertake business succession planning during life.

We want there to be an incentive for small business owners to plan

their affairs during life rather than to, as Dennis mentioned earlier, unfortunately, come to them when they are faced with an illness and not having done any planning.

Ms. AVIV. Senator, from the point of view of the charitable community, I think that the point you make is absolutely critical. We

have large organizations who work with donors who say, let us

wait and see what happens and are not prepared to plan their estates at this point in time because they do not know.

With charities facing hard times right now, with donations coming in at a much slower rate, in smaller increments, the idea that

there is an opportunity here where, with certainty, people would

know what the possibilities are and what the options are and could

plan accordingly, would make an immense difference. So, we support moving on this in an expeditious way, but also in a wise way.

Senator LINCOLN. Your comment earlier was that it does not

really distract from people giving, what it distracts them from is

from their planning and making decisions. I think that is an important thing.

Ms. AVIV. And also the level at which they give. Our experience

is that people will always give, but, if there are incentives and opportunities that incentivize giving, they will give that much more.

So, we are for policies that will support greater incentive for giving,

which is why we are so appreciative of your supporting the IRA

roll-over.

Senator LINCOLN. Yes.

Ms. KOVAR. I would just say, the sooner the better. 2008 would

be terrific. But if it cannot be done, then 2009 is better than 2010.

Senator LINCOLN. Yes.

Mr. BELCHER. If you think you have been hearing complaints

from your constituents this year, wait until next year when they

get letters from their lawyers saying that the estate plan they have

done is out of date, they need to do a totally new estate plan for

2010, and then come back in 2011 and do another one.

Senator LINCOLN. Yes.

Mr. BELCHER. I mean, what a waste of effort.

Senator LINCOLN. Well, and what a waste of resources in the

sense that, to have three different estate plans in three different

years when they could be funneling those resources into job creation. I look around my State, and these small businesses, they are

our number-one employer. We are working hard on health care.
27

Senator Snowe and I have been working on providing small businesses and the self-employed access to better health care at a lower

cost. I mean, they have unbelievable costs to them already. This is

not something we need to lay on the back burner. So, I appreciate

that.

Senator Kyl?

Senator KYL. Well, thank you, Senator Lincoln. Could I just

piggy-back on that and thank you for all the work you have done

in this area? Small businesses create the bulk of the jobs in our

country. Obviously they are in a tough competitive position with

corporations that do not have the same problem. So when you have

a small business and a death and you face the death tax, the corporation does not have anything like that. We really want to promote small businesses, the creation of small businesses and their

perpetuation. Obviously we have to do something about this, and

the sooner the better.

Let me just close with three questions based upon a premise

here. I think, Dr. Sawyers, you articulated—no, Mr. Belcher, I

guess, talked—well, all of you have. But the bottom line is to take

as many people who really should not have to worry about this out

of the estate planning business in the first place.

Dr. Sawyers, you did comment on that. When we talked about

the moderately wealthy not having to pay the expense and worry

about this, I think that is our goal here. Maybe roughly stated, to

sort of end the estate planning requirement for the bottom twothirds or so of filers, stated in a very, very rough way based upon

your statistics.

A very good friend of mine back in Phoenix, AZ who does some

of this work said it is really a shame. There are several very bad

planning ideas that professional planners talk people into because

of the uncertainty that attends this whole thing, most of which are

either not necessary or not good ideas, but they all cost money. One

of them he talked about was the perpetual trust. As we consider

this, I hope that we can both eliminate the need for most of these

folks to have to worry about it, but also address the fact that they

are still going to have folks coming after them trying to sell them

products, and that there are some other things we can do at the

margins and on some of the technical estate planning issues, and

we are going to need the advice from at least three of you on this.

That might be useful, too.

Let me just ask you about three specific things. If we are going

to try to take most of these folks that should not have to worry

about paying the money out of that game, there are a couple of

things we could do, it seems to me. One thing to do is to create a

$5-million exemption or unified credit rather than $3.5 million. Another would be to certainly index whatever the unified credit is,

index it for inflation. That seems to me to be an absolute nobrainer, and we have always had, I think, unanimous agreement

in the Senate on that.

Then another idea, because homes are now going up in value so

much, I mean, obviously that is one of the things we are facing

right now. We are talking about taking the FHA lending limits up

because the value of homes is now so much higher than it used to

be. Maybe taking homes out of the equation, just exempting homes
28

from the value of the estate like we do with a homestead exemption, would be another way so a lot of folks whose primary wealth

is in their home just would not have to worry about it.

What do you all think of those three ideas to try to create a larger exemption so that you just take folks out of the game of having

to worry about it, indexing the credit for inflation, or the unified

credit, I should say, and just providing, in effect, a principal residence exception? Just go on down the line.

Mr. BELCHER. Thank you. Senator, in looking at those three

ideas, I think the first two are well worthy of implementation. I

have a little issue with the third, which is exempting principal

homes. One thing that I worry about with my clients, when you

were talking about your friend in Phoenix saying clients are doing

things they should not do, not only do we need to take people out

of the business, we need to keep them from making artificial decisions because of the estate tax law.

Senator KYL. Right.

Mr. BELCHER. With the graying of America, you will get many

individuals who will be moving into assisted living or some other

type of facility. You would hate to sit there and say, well, you have

a very expensive house, you are much better off not to move into

that facility, or keep that facility just because of the estate tax. So,

I worry that what we do would create artificial behavior.

Senator KYL. Excuse me. Of course, one way to deal with that

is to provide the exception, if you move into assisted living, then

the proceeds from the sale are not counted, too.

Mr. BELCHER. Yes. But I think you would have to do

something——

Senator KYL. I get your point.

Mr. BELCHER [continuing]. To prevent the artificial behavior.

Senator KYL. Yes. Yes. Good. Thank you.

Ms. KOVAR. Yes, Senator. With regard to your first question, the

larger exemption, a real easy way to do that is to have portability,

because what portability does is double the exemption in the survivor’s estate, with all of the other comments that I made with regard to why we should have portability. That is an easy way and

a fair way to increase the exemption.

Second, with regard to indexing for inflation, I would only say

that when we do that it ought to be for the estate tax, the gift tax,

and the GST or generation-skipping tax. Right now, the GST is the

orphan because the estate tax and the gift tax in the existing bill

provide for portability. That is not true for the GST. Even though

some people say, well, is that not just for the super wealthy, actually I think it is counter-intuitive that the GST helps only the

wealthy.

The reason for that is that the wealthy are going to use the GST

exemption on the first death—not on the second death but on the

first death—to be able to move assets down from the surviving

spouse, who is already provided for in the very wealthy families.

That means a credit shelter trust. So, these are not going to be the

people who are going to use it.

Instead, you have the model that I have been using, the $2- to

$4-million exemption. What happens there is, these folks cannot afford to use the GST exemption on the first death. We need port-
29

ability to get it to the second death. On the second death, there are

a lot of non-tax reasons for which the surviving spouse may want

to use more than only her single exemption to benefit her children

and grandchildren.

For example, when I talked before about drug abuse, they want

to skip that child, make the grandchildren the beneficiaries. Maybe

they do not approve of that child’s lifestyle and as a result they are

going to skip that generation, or for other reasons. As a result, I

think indexing is great, but only if we do it for all three.

I agree with Mr. Belcher with regard to the principal residence

exception. It would treat people, I think, unfairly depending on

what State you live in. I have lived in California for the last 34

years, and yes, it would be terrific if we could completely exempt

principal residences from taxation.

But would it really be fair for my mother, who lives in Oklahoma

and where I am from, where housing is not nearly as expensive?

So I think it would be working counter to the comment that many

people have made with regard to small businesses, farms, and

ranches, where perhaps, at least in many cases, the value would

not be as much as another State’s.

Senator KYL. And one way you could deal with that is simply

have a cap on the value.

Ms. KOVAR. Correct.

Senator KYL. Yes. Thank you.

Dr. Sawyers?

Dr. SAWYERS. I would agree with the previous responses, and

just note that targeted relief, regardless of whether it is for a personal residence or small business, can be problematic and unfair.

We can always come up with examples of illiquid estates that perhaps should also have relief from the estate tax at death. I think

a better way to provide relief for illiquid estates is through things

like increasing the exemption amount, portability, providing for the

same exemption amount for estate and gift tax purposes.

Ms. AVIV. Senator, on indexing for inflation, we certainly think

that that is right. It almost goes without saying that that is absolutely necessary. We have not thought about this in detail. Obviously the notion of trying to protect what needs to be protected on

the one hand, and then on the other hand making sure that there

is a fairness across the board. There are people in major cities who

cannot afford to buy homes. For them, there may be some equity

issues raised.

So, we would certainly want to think it through to make sure

that, in the course of doing this, the goal of protecting what needs

to be protected is achieved across the board, regardless of how

Americans live their lives given the circumstances of their birth.

In regards to the larger exemptions, we worry, which is one of

the reasons why we have been supportive of being very careful

when proceeding with the larger exemptions. We worry that the

way in which this will cut into charitable donations will be so deep

as to undermine the ability of this sector to serve the people of our

society in the way that they need to.

So, as you mentioned earlier, there is a balance of competing

principles, and we probably would want to come back to that bal-
30

ance of competing principles and make sure that they do not favor

the one at the expense of the other.

Senator KYL. Let me just say, and then I will close, that I appreciate it. All of you have had some important things to say, and I

really do appreciate your ideas. I think they really help to provide

some momentum for us as well.

I just want to comment on your last point. I have never liked

charitable giving to be based upon the force of the government: we

are either going to take your money or you can give it to charity,

which do you want to do? I just do not like that as a concept. The

other thing is, I think—I know—it works both ways. I have told

this story to friends before—Blanche has heard me talk about it—

about some very good friends of my wife and mine who were huge

charitable givers in our community. They had a small business that

produced a good income, a couple hundred employees.

They finally built it up to the point where they were among the

biggest givers in the community. He had a Boys and Girls Club

named after him just before he passed away. They were always

there for the community. Well, the tax required that they sell their

printing business. There was no way they could get liquid. Everything that they had, they put back into the expensive equipment

that you need in the printing business to stay competitive, and so

they had to sell the business.

Of course, they sold it to a big corporation which, after a few

years, left the community. It never gave a dime to the community.

So, it does work both ways. You get some successful small businesses, they are going to be contributors to the community. They

do not do it because of estate planning, they do it just because they

want to. Then you force the sale of a business, and it is all gone.

So, I think that is a fact that we have to take into account, too.

But, again, thank you. I really appreciate the wisdom of this

panel. Thank you, Senator Lincoln.

Senator LINCOLN. Thank you, Senator Kyl. Just, I, too, appreciate your input into this. Without a doubt, Dr. Sawyers, your last

comments, bringing about the issue of liquidity and how we deal

with that with increased exemptions and rates that are reasonable,

and certainly portability for family businesses, because from our

standpoint, coming from an agricultural State, land values are incredible.

I have to tell you, you do not make a lot of money farming these

days. But with the land values it is not because you are making

so much money that the land values have gone up, it is because

there are more people and less land. It is more in demand for a

multitude of different things. So, that is an issue for us. Certainly

in small businesses, I know, Mr. Belcher, I have these multitudes

of family businesses where they put their heart and souls, but they

have also put every ounce of investment that they have into the infrastructure.

They are the ones whose name is in the backdrop of the Little

League park, they are the ones who are paying for the band uniforms at the school, they are the ones who are keeping their local

community foundation going with the endowments that make a difference. When they have to sell because every ounce of those dollars was put into investment in that company, growing that com-
31

pany, growing those jobs and they are not liquid and they have to

sell it to a bigger corporation, Senator Kyl is right, then it is not

them that is back there supporting that community, necessarily.

Sometimes they do, but more often than not they do not.

So we really appreciate your input. We look forward to further

conversation, but more importantly, we look forward to moving forward and getting some certainty for our constituency. Thank you

all for joining us. We will look forward to visiting with you more.

The committee is adjourned. Thank you very much.

[Whereupon, at 11:51 a.m., the hearing was concluded.]

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80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
(153)

COMMUNICATIONS
154
155
156
157
158
159
160

Æ