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FEDERAL ESTATE TAX: UNCERTAINTY IN

PLANNING UNDER THE CURRENT LAW

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

NOVEMBER 14, 2007

(

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

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

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

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

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

WITNESSES

Buffett, Warren, chairman and chief executive officer, Berkshire Hathaway,

Omaha, NE ........................................................................................................... 4

Teitell, Conrad, principal, Cummings and Lockwood, LLC, Stamford, CT ........ 5

Rhoads, Dean, rancher, Dean Rhoads Ranch, Tuscarora, NV ............................. 7

Sukup, Eugene G., chairman of the board, Sukup Manufacturing Company,

Sheffield, IA .......................................................................................................... 9

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Buffet, Warren:

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

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 39

Cantwell, Hon. Maria:

Prepared statement .......................................................................................... 40

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Rhoads, Dean:

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

Prepared statement .......................................................................................... 41

Responses to questions from committee members ......................................... 46

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 48

Sukup, Eugene G.:

Testimony .......................................................................................................... 9

Prepared statement with attachment ............................................................. 49

Responses to questions from committee members ......................................... 56

Teitell, Conrad:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 59

Responses to questions from committee members ......................................... 73

COMMUNICATIONS

American Family Business Institute ..................................................................... 91

American Farm Bureau Federation ....................................................................... 103

American Pacific Corporation ................................................................................. 108

Americans for Tax Reform ...................................................................................... 110

Anthony Timberlands .............................................................................................. 115

Associated Builders and Contractors ..................................................................... 118

Association for Manufacturing Technology ............................................................ 120

Bollinger Shipyard ................................................................................................... 123

Capitol Tax Partners ............................................................................................... 125

Dees, Richard L. ...................................................................................................... 129

Drummond and Company, Inc. ............................................................................... 166

Page

IV

Erie Press Systems .................................................................................................. 168

Forest Landowners Association .............................................................................. 170

GM Nameplate ......................................................................................................... 174

Grande Harvest Wines ............................................................................................ 181

Hancock Lumber ...................................................................................................... 183

Independent Sector .................................................................................................. 186

Institute for Research on the Economics of Taxation ........................................... 188

Institutional Jobbers Company .............................................................................. 196

Kartch, Loretta ........................................................................................................ 198

Marc Nelson Oil Products ....................................................................................... 199

Mavar Shrimp and Oyster Co., Inc. ....................................................................... 201

McCall, Gary ............................................................................................................ 203

Miles Fiberglass and Composites, Incorporated .................................................... 207

Muralt’s Travel Plaza .............................................................................................. 209

Mutual Materials ..................................................................................................... 211

National Automobile Dealers Association .............................................................. 214

National Cattlemen’s Beef Association .................................................................. 216

National Electrical Contractors Association (NECA) ........................................... 218

National Funeral Directors Association ................................................................. 221

National Newspaper Association ............................................................................ 225

New Voice, Inc. ........................................................................................................ 228

OMB Watch .............................................................................................................. 230

Portland Transmission ............................................................................................ 232

60 Plus Association .................................................................................................. 235

Star Cutter Company .............................................................................................. 243

The Swanson Group ................................................................................................ 245

United for a Fair Economy ..................................................................................... 247

U.S. Chamber of Commerce .................................................................................... 251

(1)

FEDERAL ESTATE TAX: UNCERTAINTY IN

PLANNING UNDER THE CURRENT LAW

WEDNESDAY, NOVEMBER 14, 2007

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

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

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

(chairman of the committee) presiding.

Present: Senators Rockefeller, Lincoln, Wyden, Cantwell,

Salazar, Grassley, Lott, Snowe, Kyl, Smith, Bunning, Crapo, and

Roberts.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The English philosopher, Francis Bacon, said, ‘‘Men fear death as

children fear the dark, and, as that natural fear in children is increased with tales, so is the other.’’ Many Americans feel that on

the day that they die, the tax man will coming knocking at their

family’s door. And, as with children’s natural fear of the dark, the

fear of the death tax has been increased with tales.

The estate tax is complicated and it is intimidating. It needs serious reform. I support repeal, but we need certainty in this area, so

we need a deal that can garner 60 votes. We need to provide predictability and relief for taxpayers like ranchers and farmers in

Montana.

But the fact of the matter is, 99 times out of 100, the tale is

worse than the tax. Less than 1 percent of all estates are currently

subject to estate tax. According to IRS data, out of nearly 2.5 million deaths in 2004, about 19,300 estates paid the estate tax. These

numbers have decreased as the exemption level has increased. The

tax will completely disappear in 2010, but then, as in the children’s

campfire tale, it returns, in the end, in 2011.

Many small business owners fear that their kids will have to liquidate the business to pay the estate tax. Once again, the tale

there is worse than the tax. The National Research Service reports

that very few family businesses are subject to the estate tax; in addition, very little of the tax is collected from family businesses.

In 2003, only a little more than three out of 100 businesses

where the owner died had an estate tax liability. The reason is

planning. Estates can eliminate the tax burden with a myriad of

tax provisions. One way to decrease the amount of the gross estate

is by electing a special use valuation. When certain conditions are

2

* For additional information on this subject, see also, ‘‘History, Present Law, and Analysis of

the Federal Wealth Transfer Tax System,’’ Joint Committee on Taxation staff report, November

13, 2007 (JCX–108–07).

met, an estate can revalue certain farm and closely-held business

real property at its special use value rather than a fair market

value.

The estate can further decrease its taxable state through deductions—the marriage deduction and the deduction for charitable giving, just to name a few. Families can also form family partnerships

and use different trust instruments in estate planning. Through

such planning, many taxpayers lower their estate tax, and some

even eliminate it.

But does estate tax planning need to be so complex? For many

smaller estates, the problem with the current estate tax is that the

law keeps changing every year. Estate tax law will change every

year from 2008 through 2011. It is easy to just say ‘‘plan,’’ but with

the state of the current estate tax laws, a family cannot have just

one plan; families must have multiple estate plans, and that is expensive.

Today we will hear about the complexity in estate tax planning

as a result of the changing law. It will appear that some estate tax

fears are like a child-like fear of the dark. We will see whether this

committee, at least, can resist the temptation to increase those

fears with campfire tales of our own, but rather try to find a solution, a durable solution, to this very vexing problem that is affecting so many people.*

I would like to now turn to Senator Grassley, ranking member

of the committee.

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman, particularly for

holding this hearing and for always being available to discuss and

work for reform of the estate tax—modernizing it—and voting with

us on several occasions. We have made significant progress

throughout the years, but all of our hard work will be undone in

2011 if Congress does not act before then.

Under current law, in that year, 2011, the estate tax will return

to a rate of 55 percent, and sometimes up to 60 percent of assets

above $1 million. The tax must be paid within 9 months of the

death of an individual. I believe that the estate tax is unjust from

a philosophical, and even technical, viewpoint.

From a philosophical perspective, I have always said that death

should not be a taxable event. There is something fundamentally

wrong when the government swoops in after a funeral to take a cut

of what that person had worked their whole life for and has already paid taxes at least once on. Any monetary benefit obtained

by any individual is either taxed or not taxed for a very specific

reason. As long as a person has accumulated an estate in accordance with the law, the government should not be able to profit just

because of the incident of death.

From a technical standpoint, and maybe more importantly than

the philosophical one, the death tax is fatally flawed in that, owing

to the due date 9 months after death, the estate tax forces surVerDate 11-MAY-2000 14:32 Oct 06, 2009 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 51778.000 SFIN1 PsN: SFIN1
3

vivors to liquidate assets in economically poor circumstances. Instead of the free market determining when assets are bought or

sold, the death tax makes that determination. As most people are

not privy to the exact date that they will hand over half of everything they own to the government, the death tax then is fundamentally not fair.

Whenever a discussion of the death tax comes up, especially on

the Senate floor, it is fashionable for some of my colleagues to talk

about the very wealthy, as if we should base our actions solely on

how they impact billionaires. According to Forbes, as of March of

this year, there were approximately 946 billionaires throughout the

world, and of course, many of them are not Americans. Even if all

of them were Americans, I believe that a few of the other 300 million people we collectively represent would like us to keep them in

mind as well as we consider this issue.

I want to mention some real people who live in Iowa, and who

have graciously agreed to be with us to share their stories. Not

only do they live in Iowa, they have devoted their entire lives, for

multiple generations, to build businesses and create good jobs for

the people of Iowa.

As I see at the table, Eugene and Mary Sukup started a grainhandling, storage, and manufacturing company in Sheffield, IA, a

very small town. Today, the Sukups and their two sons and their

families still headquarter there among a population of 938. They

employ 350 people in good-paying jobs, with good retirement plans.

Mr. Sukup will tell his own story, but we should all keep in mind

what he says as we contemplate what to do with the death tax.

Forty percent of a billion dollars is still a great deal of money,

but how we deal with the estate tax will determine whether Sukup

Manufacturing Company is able to survive and continue serving

their community.

I want to highlight a few numbers that the Joint Committee on

Taxation has made available for this hearing. The Joint Committee

estimates that in 2009, there will be 9,600 estates subject to the

estate tax. Of course, that number falls to zero in 2010, but jumps

up to almost 62,000, compared to the 9,600 in 2009, by 2011, and

will continue to increase very dramatically through the years.

I know for a fact that most of these 62,000 estates will not be

billionaires. I have consistently maintained that the death tax

should be completely repealed, but have also let it be known that

I am willing to compromise. What I am not willing to compromise

on is that we need to make sure that we are looking out for small

business owners and family farmers in order to ensure that what

amounts to a personal tragedy does not also amount to a government-driven fiscal tragedy as well.

I am sure that somebody is going to denigrate these efforts by

saying that not very many family farmers are caught up in this,

but that statement was made before the price of farmland almost

doubled in the last 4 or 5 years, mostly because of ethanol, I guess.

[Laughter.]

Thank you, Mr. Chairman.

The CHAIRMAN. Viva ethanol.

Now I would like to introduce the panel. The first witness is Mr.

Warren Buffett, chairman and chief executive officer of Berkshire

4

Hathaway; second, Conrad Teitell, who is the principal who specializes in estate planning at Cummings and Lockwood. We also

have Dean Rhoads, a State Senator from Nevada who is here

today, although he will be testifying as a rancher, giving his experience with estate tax. The last witness, as mentioned by Senator

Grassley, is Mr. Eugene Sukup, who is chairman of the board for

Sukup Manufacturing.

Thank you all for coming. The general rule here is, your written

testimony will be included in the record. I would encourage you

each to speak for about 5 minutes, then we will open it up for questions. Thank you all for taking the time and effort to come here.

I deeply appreciate it.

Mr. Buffett?

STATEMENT OF WARREN BUFFETT, CHAIRMAN AND CHIEF

EXECUTIVE OFFICER, BERKSHIRE HATHAWAY, OMAHA, NE

Mr. BUFFETT. Thank you, Mr. Chairman.

Mr. Chairman, Senators, I appreciate the opportunity to express

a few views on the estate tax. I will limit my remarks to three

points. The first relates to the intellectual dishonesty employed by

those who use the phrase ‘‘death tax.’’ This term is clever, it is Orwellian, and it is—if you will pardon the expression—dead wrong.

More than 2.4 million Americans will die this year. About 12,000

of them will leave an estate that will be taxed when the exemption

goes to $3 million, as Senator Grassley mentioned; it will be 9,600

estimated, and it was 19,000 when the exemption was higher.

That means that 99.5 percent of estates will be tax-free. You

would have to attend 200 funerals to be at one at which the decedent’s estate owed a tax. Indeed, far more people who die receive

a large tax benefit—I do not think that is generally understood—

namely, a stepped up basis on appreciated assets. If people insist

on renaming the estate tax, it would be more appropriately labeled

‘‘the death present.’’

The second point I would like to make is, in a country that prides

itself on equality of opportunity, it is becoming anything but that

as the gap between the super rich and the middle class widens in

dramatic fashion.

Here are a few figures on the Forbes 400. Other people save their

Playboy magazines, I save the Forbes 400 magazine. Twenty years ago, 1987, it took $220 million to make the list. Now it takes $1.3

billion, about a 6-for-1 increase. The total wealth of the list in 1987

was then $220 billion; now it is $1.54 trillion, exactly a 7-for-1 increase. Tax law changes have benefitted this group, including me,

in a huge way.

During that same period, the average American went exactly nowhere on the economic front. His income went from a median

$26,061 to $48,201, almost exactly the increase of the CPI during

the 20 years. He has been on a treadmill while the super rich have

been on a space ship. Dynastic wealth, the enemy of a meritocracy,

is on the rise. Equality of opportunity has been on the decline. A

progressive and meaningful estate tax is needed to curb the movement of a democracy toward a plutocracy.

Finally, I have a suggestion. Estate taxes now raise about $24

billion. It is one of the lowest percentages, incidentally, of total

5

taxes in the history of the tax system. As mentioned, about $24 billion will come from about 12,000 estates. Indeed, half of that sum

will come from only about 1,500 estates. The beneficiaries of each

of those estates will receive millions, in many cases tens of millions

or more. One point you never hear from proponents of estate tax

elimination is whom they would get the $24 billion from if they did

not get it from the 12,000 large estates. They just say ‘‘free us.’’

They do not say whom to further shackle. Here is the suggestion: keep the estate tax and its $24 billion. Reshape it if you will, but keep the estate tax and its $24 billion.

Then take a look at the bottom fifth of America. There are 23 million households in the United States with $20,000 or less of income. Many are paying payroll taxes that now total 15.3 percent.

That 15.3 percent alone is more than the rate on dividends for capital gains and more than the rate on carried interest. Let us give those 23 million households a $1,000 annual credit.

Every dollar of such a credit would effect real change in the lives

of the 50 million-plus people residing in the 23 million households.

Yet, the cost of this would be less than getting rid of the tax on

the 12,000 estates. Fifty million people would be helped in a material way. The beneficiaries of the 12,000 estates would still receive

what looks like a fortune to almost all Americans.

Leona Helmsley’s dog, Trouble, reportedly is inheriting $12 million. If Mrs. Helmsley’s estate is in the 45 percent bracket, Trouble

could, instead, receive $22 million if the estate tax was removed.

Alternatively, just from Trouble’s share of the Helmsley estate tax,

10,000 families making less than $20,000 annually could receive

$1,000 each to make their lives a bit better.

Even though Trouble probably heard Leona say, ‘‘Only the little

people pay taxes,’’ I do not think he would mind the estate paying

$10 million in order for him to get his 12 million. We need to raise

about 20 percent of GDP to fund the programs the American people

want from the national government. Further shifting of this requirement away from the super rich is not the way to go.

The CHAIRMAN. Thank you, Mr. Buffett.

Mr. Teitell?

STATEMENT OF CONRAD TEITELL, PRINCIPAL,

CUMMINGS AND LOCKWOOD, LLC, STAMFORD, CT

Mr. TEITELL. Mr. Chairman, Mr. Ranking Member, members of

the committee, I am Conrad Teitell. I am an estate planning lawyer with Cummings and Lockwood, based in our Stamford, CT office. We have over 50 lawyers who are involved in estate planning

day in and day out.

I also teach this stuff at a law school, and I write books and articles on this. Thanks to you, the IRS and the Treasury, I am continually and constantly updating and revising my books.

In ‘‘Gone With the Wind,’’ Margaret Mitchell said, ‘‘Death, childbirth, and taxes never come at a convenient time.’’ She might have

also added that those events never come at a known time. When

this Congress gave birth, in 2001, to the estate tax law, it enacted

a roller coaster exemption. All the troglodytes are aware that we

have a $2 million exemption this year, next year, 2009, it goes up

to $3.5 million, then in 2010 the estate tax is gone with the wind,

6

although, Mr. Buffett, at that time there is a carry-over basis for

that 1 year.

It is said that ‘‘the meek shall inherit the earth,’’ and they shall

do so with a stepped up basis, but not for the year 2010. Then in

2011 and later years, the estate tax blows back in with a $1 million

exemption and a 55-percent rate, and, as Senator Grassley mentioned, in some cases as high as a 60-percent rate.

My charge today was not to talk about whether there should be

a tax or whether there should not be a tax, but to talk about the

complexities in planning. My written statement goes into great detail. What I would like to do is just highlight a few of the points.

Some of the people that you have been talking about, perhaps the

millionaire next door, for married couples and families with an estate just between $1 and $2 million, we find it very difficult to plan

for them.

As Senator Baucus pointed out, we have to make three or four

plans. Then when we get some minor millionaires, people who have

a taxable estate of $5 million, let us just take a look at the arithmetic and see what happens over the next few years. Death in

2008 by the estate tax turns out to be $1.35 million. In 2009, it is

$675,000; 2010, it is zip, zero, but with carry over rather than a

stepped up basis. Then in 2011, that $5 million taxable estate, in that year, the tax would be $2 million. We live in a very complex society, and our tax

laws reflect the complexity of our society. But the tax law that the

Congress gave birth to in 2001 makes complicated plans even more

complicated.

Just to tick off a few of the areas that we have to deal with: life

insurance planning. Life insurance is part of an estate plan to provide liquidity and also to pay taxes. That has become very difficult.

Rodney Dangerfield once said that he gets no, what?

The CHAIRMAN. Respect.

Mr. TEITELL. Respect. Thank you very much. Well, the estate tax

law, when clients come into our office, and in my lectures throughout the country, the comment I hear is, how could the Congress do

that? There is no respect for the estate tax law. A disrespect for

one law, I believe, breeds disrespect for other laws, such as the gift

and the estate tax.

One of the problems we have is, some people say, let’s wait and

see what happens. Well, that may work out all right in some cases,

but in other cases delay can be hazardous to your wealth.

Now for a ray of sunshine, a bright note: charitable contributions

are not complicated at all. There is an unlimited estate tax charitable deduction, and that has been in the law for almost 100 years.

So whatever the Congress does, there is a great precedent for continuing that estate tax unlimited charitable deduction.

Thanksgiving is almost upon us. In our family, we, at Thanksgiving every year, have a tradition. We have a marathon Monopoly

game. It goes on all weekend. But this year, to make the game

more realistic for my grandchildren, I have indexed the game for

inflation. So, for example, if you were to land on Park Place and

you wanted to buy it, it now costs $5 million.

You know that card, ‘‘Chance—Pay Tax Collector $200’’? Well

now, if you get that card at 7 o’clock or 8 o’clock, pay $20,000. If

7

you get it at 9 o’clock, pay $10,000. If you get it at 10 o’clock, you

do not have to pay anything at all. But if you get it at 11 o’clock

or thereafter, why, then you have to pay $40,000. Now, this surely

will make our Monopoly game much more interesting, but our Nation’s tax laws should not be a roll of the dice.

The CHAIRMAN. Do you issue more money to your players?

[Laughter.]

Mr. TEITELL. Pardon me?

The CHAIRMAN. Do you issue more money to your players, too?

Mr. TEITELL. Like the government, we print it. [Laughter.]

The CHAIRMAN. Well said.

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

The CHAIRMAN. Mr. Rhoads?

STATEMENT OF DEAN RHOADS, RANCHER,

DEAN RHOADS RANCH, TUSCARORA, NV

Mr. RHOADS. Good morning, Mr. Chairman and members of the

committee. I am a rancher from Tuscarora, NV, which is 60 miles

northwest of Elkwood, NV. I have been involved in livestock industry activities my whole career as a rancher. I have also been a

State Senator since 1984. My State Senate district is the largest

in the United States, outside of Alaska, and stretches over 73,000

square miles.

My district is larger than 34 States and accounts for over twothirds of the land area of Nevada. Prior to serving as a State Senator, I served three terms in the Nevada State Assembly. I am the

past chairman of the Public Lands Council, an affiliate of the National Cattlemen’s Beef Association, and also the past chairman of

their Public Lands Committee.

Today I am here on behalf of all the ranches, farms, and small

businesses in my district, as well as those throughout the State of

Nevada. Although I am going to tell you the story of my family,

there are many others like me who have been generally impacted

by the estate tax.

Since shortly after my wife Sharon and I graduated from college,

we have lived on the ranch that was established by her parents in

1943. We now own the ranch. Our daughter, her husband, and our

two teenaged grandsons all work on the ranch. We also have a

nine-month-old grandson. Our other daughter, her husband, and

our granddaughter live on a ranch in southern Oregon.

My father-in-law came to Elkwood County in the 1930s when he

was 15 years old. He worked as a cowboy and a ranch hand, saved

his money, and eventually bought his first property over 60 years

ago. My father-in-law became a good friend of Bing Crosby when

he owned ranches in Elkwood County, including one adjacent to my

father-in-law’s ranch that we purchased in 1966. My wife and family lived there for 18 years.

I believe if we had a willing buyer, our ranch would be valued at about $2.5 million in today’s market, assuming it was not broken up or sold for water. My mother-in-law died in 1976. My father-in-law paid a total estate tax then of over $300,000. To do

this, he could not afford to keep the ranch where my wife and I

and our two daughters lived, the old Bing Crosby ranch. Losing

this ranch and our home was not only a personal blow, but it was

8

crippling to our operations. This was our primary hay ranch, and

at 6,000 feet in elevation, we need every bale of hay we can

produce. Losing this ranch meant we were forced to buy hay almost

every year since 1985.

When my father-in-law died in 1995, there was no more land left

to sell if we wanted to survive in the ranching business. Based on

the ranch’s value, the tax we now owed, with interest added, was

over $340,000. Therefore, we have been paying $18,000 in estate

taxes, plus interest, every year, which we are continuing to pay.

We have had to borrow money to make these payments. We pay

this money back through the revenues produced by our ranching

business.

Because of this, I can say without a doubt that we have not made

very many capital improvements to our ranch, nor have we been

able to take advantage of some expansion opportunities to plan for

the future when our grandchildren might want to continue the tradition started by my wife’s parents 66 years ago.

I appreciate the Senate Finance Committee holding this hearing

to investigate problems caused by the uncertainty of current law.

My family is a good example of what happens when the law does

not offer solutions. Hopefully, any future solutions will provide my

family, and other families like us, some relief down the road.

A current estimate of the value of our cattle would be about

$1,100 to $1,300 for a mature, pregnant cow with a calf at her side.

Understanding that the cattle market is not constant, we own

about $2 million worth of production units in our ranching business, in addition to our horse herd and the land value.

Let me illustrate the uncertainties of planning. Under current

law, if my wife and I were killed in a common accident in December of 2009, our family ranch would be valued at about $7 million,

counting all the land and all the animals. Because my wife and I

have tried to do some estate planning to divide our ranch assets

between us, my daughters should have a $3.5-million exemption on

my estate and a $3.5-million exemption on their mother’s estate.

They would not have to sell any land or cattle to pay the Federal

Government, assuming the ranch does not continue to increase in

value, and also assuming that the ranch was not broken up for the

water.

But if they were faced with dealing with our estates in January

of 2011, they would owe nearly $2.5 million within 9 months of our

death. That would be in addition to the over $640,000 we have paid

in estate taxes to the Federal Government. So how do we plan

without some certainty? Everyone in my family wants to continue

our ranching business.

Ranching is a tough way to make a living, but we can do it and

make a profit over time. It is difficult, but we can deal with the

variables of weather, drought, labor shortages, market conditions,

and day-to-day business expenses, such as the increase in the price

of fuel. But if you continue to add the specter of the burden of this

unfair tax, if we have to pay this much a third time as a family

for one ranch, I do not have much optimism for our future.

Thank you.

The CHAIRMAN. Thank you, Mr. Rhoads.

9

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

The CHAIRMAN. Mr. Sukup?

STATEMENT OF EUGENE G. SUKUP, CHAIRMAN OF THE

BOARD, SUKUP MANUFACTURING COMPANY, SHEFFIELD, IA

Mr. SUKUP. I would like to thank the Chairman and members of

the committee for offering me the chance to testify. My name is Eugene Sukup, and I am founder and chairman of the board of Sukup

Manufacturing Company. We are a small manufacturing company

located in Sheffield, IA.

I started Sukup Manufacturing Company 44 years ago while still

working on the farm. I bought my first grain bin to dry and store

shelled corn, but the process did not work quite right, so I came

up with a new design that worked better. Today, I am proud to say

that, 40 years after our first item was patented in manufacturing,

my sons, Charles and Steve, and I have expanded a single idea into

a worldwide company, employing over 350 workers in 7 States.

We now hold over 70 U.S. patents and produce a broad line of

grain handling and storage equipment. In addition to our plant in

Sheffield, IA, we operate six distribution centers in Arcola, IL, Aurora, NE, Defiance, OH, Jonesboro, AR, Cameron, MO, and Watertown, SD. We sell products all over the United States and into 50

foreign countries.

I firmly believe that one of the reasons and the key to our company’s success is our ability to hire and retain top-notch employees.

Over 30 percent of our workers have been with us for more than

10 years. We provide exceptional benefits, including health insurance coverage at no cost for our workers, and only $60 per month

for their family. In addition, we offer a 401(k) program, dental

health plan, and a profit-sharing program that was started back in

1973.

As the largest employer in Franklin County, IA, we have

watched the community grow around us. Today, we have a health

clinic, a dentist’s office, a chiropractor, a drug store, a bank, a grocery store, a restaurant, and a golf course. The growth of the town

can be seen by the new homes that are being built, and a church

that has overgrown its capacity and is making plans for a new one.

We believe in giving back to the community, which is why my

company is a major donor of the Sheffield Care Center for Senior

Citizens. We helped build a local swimming pool and a playground.

We also gave $1 million to help fund a child day care center that

cares for over 100 children in Hampton, IA.

Sukup Manufacturing Company contributes 10 percent of its taxable income for charitable contributions for local charities and contributions to the Sukup Family Foundation, which also contributes

to area charities. The Family Foundation does not build up a large

balance, but uses the money for charitable gifts. The Foundation

balances over $1 million with the over $500,000 that has been contributed from the Foundation in 2006. I am not bragging when I

tell you that businesses like Sukup Manufacturing are the backbone of our economy.

By the same token, when a business like ours is sold off, the loss

to the economy is great. If Sukup closed today, 350 people would

lose their jobs. But that is just the beginning. Without jobs, there

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is no reason for a child care center. As people move on to other

places, the restaurants and stores close down, the dentist’s office

moves to a bigger city with more customers. The loss would be felt

in Arkansas and South Dakota.

Now, to be clear, we are a growing company, so why would we

close down or sell off? I am here to tell you today that one of the

greatest threats to our family-owned business is the estate tax. If

my wife Mary and I died today, we estimate that our estate tax liability would be somewhere between $15 and $20 million. The only

way for my sons to pay that tax would be to sell off the business.

Folks will tell you that you can avoid the tax.

Well, maybe that is true in some cases, but it also involves extremely high financial planning costs, including expensive life insurance policies that businesses pay year in and year out. Money

that we put into life insurance policies and other financial planning

tools to avoid the tax is money that we could have put into the

business, hiring more employees and expanding to other States.

Furthermore, it is nearly impossible to plan for a tax that

changes every year. Under current law, the exemption for the tax

is $2 million, with a top rate of 45 percent. In 2010, the tax is repealed, but in 2011 the top tax rate goes back up to 55 percent and

the exemption drops back down to $1 million.

The uncertainty of the tax means that we have to plan for the

worst case, costing us even more money. Even if my sons are able

to somehow keep the business after we pass on, my grandchildren

will have to pay the same tax again when they take over the company. There is no limit to how many times our company will be

taxed. We are truly a family-owned business. I am fortunate to

have two sons working with me who are graduate engineers, two

grandchildren who have returned to the company full-time, and

two grandchildren who are still attending Iowa State University.

One of my grandsons is disabled and has been working at the

company running the robot welder. I cannot tell you how much it

means to me to be able to provide him a job that allows him to

make a real contribution to the company and to society. I built this

company. My sons helped me build it, and my grandchildren want

to carry it on. Is that not the kind of business that our government

should encourage? This tax discourages, it destroys family businesses, and it is unfair. I hope that you will all work to permanently end this unfair burden on family-owned businesses like

mine.

Thank you very much for hearing me today.

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

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

The CHAIRMAN. I am going to begin with Mr. Buffett and ask a

broader question. That is, as you look at our country and our tax

system, and at other countries, how do we compare with other

countries? The goal is clearly to enhance American competitiveness

to help raise American living standards—at least not lower them;

our tax structure is only a small part of all that.

But how would you suggest to this committee that we go about

looking at restructuring the tax code? I say that because I suspect

that next year, the next couple of years, this country will seriously

restructure our tax code. This committee is going to have very agVerDate 11-MAY-2000 14:32 Oct 06, 2009 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 51778.000 SFIN1 PsN: SFIN1
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gressive hearings next year on this subject. Whoever is elected

President clearly is going to have some significant suggestions in

2009 and 2010. But let us give that next President the benefit of

your views, and let us give this committee the benefit of your

views. What do you think? What should we do?

Mr. BUFFETT. Well, the Federal tax system has raised close to 20

percent of our GDP fairly consistently. I mean, it has varied a point

or two, but since World War II, I am counting all taxes, payroll

taxes and so on. In the 20th century, the United States had the

greatest economic period that any country has ever seen. The real

standard of living improved 7 for 1. So we do not have a broken

system in the United States. I am a bull on America over time. We

will have recessions from time to time and all of that. Many industrial countries, as you know, have had higher tax rates than the

U.S., but we have had, more or less, 20 percent.

Everybody who is taxed is unhappy about it, and they would

rather have somebody else taxed. As Russell Long said, ‘‘Don’t tax

you, don’t tax me, tax the fellow behind the tree.’’ We all feel that

way. But the country has worked pretty well with the 20-percent

allocation to the Federal Government.

If you asked me what my druthers would be, if I thought I was

designing a perfect system, I would have a very progressive consumption tax. I really think that would tax the people who use the

resources, who are making withdrawals from society’s resources,

and really not tax the people who are contributing, making deposits, to society’s resources. So I think that, in theory, a progressive

consumption tax makes the most sense, but I do not see how you

get there from here.

So, absent that, I would say that the level of revenues, which I

think should come close to approximating the level of expenditures—I mean, when you have decided on your expenditures, then

part of your job is to go out and get the money. I think 20 percent

is not a crippling level to assess the American people for all the

things that the American people demand of their national government. I would make it somewhat more progressive.

I would take that bottom fifth of the people. If you have 23 million households at $20,000 or less, I do not know how I would—

I mean, there are some tough problems around here, maybe, in

terms of family businesses and that sort of thing, but I cannot

imagine a tougher problem than living in the United States and

having a $20,000 income and having payroll taxes of $3,000 taken

out of that income. So, I would make it more progressive than it

is now.

The CHAIRMAN. How would you do estate tax reform? You do not

want to repeal it, so what would you do with the Federal estate

tax?

Mr. BUFFETT. I would not do anything that raised less than the

$24 billion. Like I say, that is a historic low, almost as a percentage of the revenues. I certainly would not have the capriciousness

of 1 year this, 1 year that. I think that is terrible, and I do not

know how anybody does plan for something like that. It just does

not make any sense to me. It may have helped on some scoring system a long time ago, but that is about it.

12

No. I would have a significant deduction, probably along the lines

of what happens in 2009, and I would have much more of a sloped

set of rates. I would not have it kick in at maximum rates at a low

level. I would say that is not in the tradition of America. Part of

what has made America what it is, is we have had more equality

of opportunity in this country.

I mean, you do not get to be quarterback of the Nebraska football

team this year because your father was quarterback 25 years ago.

You do not get to be on the Olympic team because your mother or

father was on it 25 years ago. The resources of society, I think,

should not pass along in terms of an aristocratic dynasty of wealth.

I think that has been part of the reason for the success of our economy—the people like Jack Welch, or something, where his father

was a train conductor, who can rise to command the resources.

So I believe in keeping equality of opportunity as much as you

can in the country. My kids are going to have it better than the

kids of a poor person no matter what the tax laws are. I mean,

they are around a different environment, they get to go to college,

all kinds of things. But when you have $45,000 of GDP per capita in the United

States, and that bottom fifth, 23 million households, 50 millionplus people, have $20,000 or less income, I think we ought to do

more for them, and I think we ought to take a little more out of

the hides of fellows like me. The Forbes 400, they have their $1.54

trillion, 7 for 1, and on average I think are paying a lower tax rate,

counting payroll taxes, to the Federal Government than their receptionists are—I think you ought to do something about that.

The CHAIRMAN. Thank you, Mr. Buffett. I have many more questions, but my time has expired.

Senator Grassley?

Senator GRASSLEY. Yes. As a matter of transparency, I want to

say that my farm has all Sukup grain handling equipment on it.

[Laughter.] So he is not only a good business person and I trust

him, he has also been a good friend and political supporter as well.

So, Mr. Sukup, your testimony reflects that you, your family, and

your employees have already used many of the estate planning

tools that Mr. Teitell talked about, but I understand you still may

have to consider selling the company because of the estate tax. I

know that you have discussed who could purchase a grain bin manufacturing company. Could you talk about the impact of that potential sale and who, or more importantly where, would the grain bin

manufacturing go if it perhaps would leave Sheffield, IA?

Mr. SUKUP. Senator, I think that this is a real problem, that we

could have to sell the business. Our sons might have to sell the

business. It will probably go to a competitor or somewhere overseas; you never know exactly where it will go. But for them to come

up with $15 to $20 million to continue is a real burden. It is something that they are not used to, borrowing money like that. It is

probably a competitor.

Mr. Buffett is one of our competitors. He owns Brock Manufacturing. So, consequently, if we had to sell in 9 months, as it goes,

I mean, that is a fire sale. That is what other people have made

their money on, buying small business companies when they are in

a fire sale like that.

13

Mr. Buffett, if you did buy it, would you leave it in Sheffield, IA

or would you move—[Laughter.]

Mr. BUFFETT. I would now, Senator. [Laughter.] Yes. As Mr.

Sukup mentioned, he is a terrific competitor. We own a company

called CTB, which is based in Indiana. We bought that about 5

years ago. They make hog and poultry feeding equipment, as well

as grain. They make a lot of grain bins. My son actually worked

with a grain bin company in Illinois, GSI.

We not only did not touch any plants—I mean, we expanded a

little—but every plant that was operating then, there are more people employed than before. The plants are all in the same place. And

you might find this interesting. We probably bought it 5 years ago.

I have never been there. Nobody from our office has been there, except probably auditors go occasionally.

The people run that business exactly as they ran that business

before, except they have even added resources behind them. We

have bought some other companies. They have generally been

abroad. So we actually are a domestic company that buys foreign

companies in that business.

Senator GRASSLEY. All right. Mr. Buffett, I want to take advantage of your being here to get your view on another issue that

sometimes comes before this committee. I am sure you are familiar

with the current debate surrounding carried interest. I am a strong

supporter of lower rates on capital gains. I am still studying the

carried interest issue; I have not made up my mind.

What are your views on whether carried interest received by alternative asset managers represents compensation for services or

capital gains? Second, are your views on carried interest influenced

in any way by your general views on the lower capital gains rate?

Mr. BUFFETT. Senator, from 1956 to 1969, for 14 years, I ran an

investment partnership. I had a carried interest in that. The rates

were higher then, but I had a carried interest. I was managing

money for other people. I could have managed it in a trust department and we would have charged them a fee. I could have managed it as an investment counselor and we would have charged

them a fee. I elected to go with a partnership form and, in effect,

I received a large percentage of my income from capital gains. The

rate was higher then, but there was a wide differential. So, I have

had a little experience with it.

I can tell you, whether I was managing money in a trust department or whether I was managing money as an investment counselor, or whether I was managing money as the general partner of

an investment partnership—sometimes called hedge funds—I was

doing the same activity, I was working the same hours, I was

working for the same people. Believe me, it is an occupation. If you

believe in taxing people as earned income on their occupation, I

think you should tax people on carried interest.

Senator GRASSLEY. All right.

Mr. Buffett, on another point of interest to me and this committee, there is a part of your charitable donations that does not

get much notice, but has caught my attention. You have been very

direct that the money that you give to foundations should be spent

within a set period of time and actually go to help those in need

and improve the community. You are basically requiring spending

14

of your gifts at far above the 5 percent minimum set by law. I commend you for your actions in this regard.

As I think you are aware, private foundations are required to

only pay out 5 percent and university endowments have no requirement to pay out anything. We are seeing a growing phenomena

that, in both cases, we are seeing billions and billions of dollars

stockpiled by foundations and university endowments all getting

very significant tax breaks, but only pennies actually going to charities or helping those in need.

What are your thoughts on this general subject, and what suggestions do you have for Congress in this area, both for foundations

and university endowments? Should we do more to encourage increased spending for charity?

Mr. BUFFETT. Senator, I will tell you what I believe on it. I

looked at the spending of the 30 largest foundations in the United

States. I have looked at it for several years. If you take the 30 largest, at least 27 every year—28 some years—spend right at the 5

percent or a little less. Now, it is astounding to me, frankly, that

the Congress should have been so wise as to pick exactly the right

amount for foundations to spend.

I mean, the idea that 5 percent should be the end result of a

foundation looking at its objectives, the reasons it was set up and

all that sort of thing, the time horizon of the problems that they

are working on, whatever, and that they would all come up with

the idea that exactly 5 percent of their principal is the right

amount to spend, strikes me as absurd. I mean, it is driven by the

tax law. It is not driven by the logic of philanthropic distribution.

I think if you set it at 3 percent, I think most of them would spend

3 percent.

I do not blame the people. It is what I call institutional dynamics. I mean, once any large organization gets set up and it gets

funding, it starts subconsciously probably thinking about just perpetuating itself forever. I see it in business, I see it every place. I

mean, it is not limited to philanthropy at all.

The CHAIRMAN. Thank you very much. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Gentlemen, I think it is pretty clear there is a tax code meltdown

coming very shortly. We are looking today at just the question of

estate taxes, but I think this has to come up in the context also

of income tax rates, capital gains, and dividends. Suffice it to say,

if this committee does not come up with a thoughtful response

here, there is just going to be chaos in the world of taxes. So, I

think it is obvious we want to promote growth, we want predictability, and we want certainty in terms of the next steps in taxes.

My question really revolves around the fact that in 1986, we had

a pretty good model of how to proceed. Ronald Reagan and Bill

Bradley came together and they said, here is something that gives

everybody the chance to get ahead, everybody. It is not class warfare. It is giving everybody a chance to get ahead.

So I have introduced the Fair Flat Tax Act. Essentially, the same

principles: get rid of the tax breaks, keep progressivity, clean out

the clutter.

15

My question for each of you—I will start with you, Mr. Buffett—

is would it not make sense to look at something like that, because

that also moves in the direction of what the small farmers and the

small businesses have been talking about? If you go to a fair, flat

tax, clean out all these special interest breaks, maybe make it

harder to add them back in, and then you have some certainty and

predictability which farmers and small business people want, and

the chance for everybody to get ahead.

Mr. Teitell, you will not be revising your planning books every

year if the Fair Flat Tax, or something like it, goes through. Would

that not be a pretty good model—we will start with you, Mr.

Buffett, and go down the line—to at least attack part of the problem that the farmers and small business people, I think, are very

legitimately talking about? Mr. Buffett?

Mr. BUFFETT. I chaired with Bill Bradley and it did not last long,

as you know. I do not believe in being flat all the way.

Senator WYDEN. Fair Flat Tax.

Mr. BUFFETT. Yes. It should be progressive. I liked the Bradley

plan. Like I said, it did not last long. I would say this. There is

one flat tax that quits. I mean, the payroll tax, which is a third

of our total budget, is flat, up to $97,500, and then it quits for me.

So at 15.3 percent right from the word ‘‘go,’’ and then that tax at

$97,500, 99 percent of my income does not get taxed at that. So,

I think anything you do should also consider the impact of the Social Security and the payroll tax, because that is a huge element

of what most people are paying in this country. But I am with you

in principle.

Senator WYDEN. Mr. Teitell?

Mr. TEITELL. Senator, may I answer your question by just

quoting a legendary politician to begin with, then I hope you will

see how this fits into my answer. He was asked his position on

whiskey and he responded, ‘‘If by whiskey you mean the devil’s

brew that has wrecked millions of marriages, taken the bread from

the mouths of hungry children, and has toppled countless men and

women from the pinnacle of righteousness, then I’m against it. But

if by whiskey you mean the oil of convivial conversation, the traditional expression of Christmas cheer, the source of millions of tax

dollars for orphans, disabled children, and the blind, then I am for

it. This is my position and I will not compromise.’’

Senator LOTT. Do you know who the author of that quote was,

sir?

Mr. TEITELL. If you go to the Congressional Research Service,

they have a wonderful book called ‘‘Respectfully Quoted.’’

Senator LOTT. Well, it actually came from a fellow named Soggy

Sweat, who was a lawyer and a judge in Mississippi. [Laughter.]

I just thought I would tell you where it came from.

Senator WYDEN. I was pretty sure, Mr. Teitell, it did not come

from Ronald Reagan and Bill Bradley. [Laughter.]

Mr. TEITELL. Thanks for the citation. To answer your question,

Senator, I am really of two minds. If, by the flat tax, you mean a

flat rate with no deductions——

Senator WYDEN. No. Something along the lines of what Ronald

Reagan and Bill Bradley put together, that went from 14 to 28 perVerDate 11-MAY-2000 14:32 Oct 06, 2009 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 51778.000 SFIN1 PsN: SFIN1
16

cent, essentially was fair to the person who worked for a wage and

the investor, and was paid for by cleaning out the clutter.

Mr. TEITELL. Well, what do you mean by ‘‘the clutter’’?

Senator WYDEN. The 16,000 tax breaks that have been added, 3

for every working day since Ronald Reagan and Bill Bradley did

that.

Mr. TEITELL. Do you mean the mortgage interest deduction, Senator?

Senator WYDEN. No. I protected that, health, and charities. But

there have been 16,000 tax breaks. Can we not clean some of those

out to hold down the rates and keep progressivity and give everybody a chance to get ahead?

Mr. TEITELL. Senator, I quite agree with you. I just remembered

one hearing when they were talking about reducing or disallowing

the deduction for the so-called three-martini lunch. Do you know

who came and testified to keep that deduction at 100 percent for

the business lunch? The waiters’ union. So, sometimes there are

side effects. I quite agree with you, we should clear out the clutter.

The CHAIRMAN. Senator Kyl?

Senator KYL. Thank you, Mr. Chairman. I think we could all

benefit by having these witnesses talk to us all day long. This is

most elucidating. I thank you for holding the hearing, incidentally.

Just let me note a couple of things I thought were especially interesting from testimony. Mr. Sukup, you said a couple of things

I thought were really important to just reiterate. The first is that

you could have, instead of putting a lot of money into estate planning and to purchasing of life insurance and the like, put that back

into your business and built it even bigger and have even more employees, and so on. Correct?

Mr. SUKUP. Senator, that is right.

Senator KYL. I will not ask you how much money you spend on

life insurance, but would you characterize it, at least in general

terms?

Mr. SUKUP. We did not spend a lot of money in life insurance.

We plowed our money back into the company. That is why we were

able to grow like we have been. It really concerns me that we

would have 350 people—we are in a local, small town—that may

have to move out to a different area in case our company would

have to be sold and was sent to a competitor or to someplace else

in the world.

Senator KYL. Right.

Now, you also said that you have kids and grandkids, and sound

very proud of them. You made the point that there is no limit on

how many times your business will be taxed.

Mr. SUKUP. That is right.

Senator KYL. I mean, each generation.

Mr. SUKUP. You can go to 45 percent or 50 percent, and when

Mary and I pass away, Charles and Steve will have to dig up $15

to $20 million. And the same thing is going to happen when it goes

to our grandchildren. We are so fortunate that we have grandchildren who want to come back to the company to run it. They are

there now and they are enthused about it, which may be unusual.

But we are very fortunate.

17

Senator KYL. Now, I think you all know the answer to this question, but Mr. Teitell, you are probably the most authoritative to

provide the answer. Do corporations pay taxes in a similar way at

the death of a CEO or some event like that?

Mr. TEITELL. Well, the corporation does not pay a tax. Of course

not.

Senator KYL. Right. But a family-owned business is generational.

In other words, the tax does apply each generation. Is that correct?

Mr. TEITELL. It applies to the owner of the business.

Senator KYL. At the time that the previous generational owner

dies—parent, grandparent, whoever it is—then it applies to those

who are left?

Mr. TEITELL. Senator Kyl, may I frame the issue that we are

all——

Senator KYL. Please describe it in more specific and humorous

terms than I did.

Mr. TEITELL. I would like to note, you have described it admirably all along. But I would like to frame the issue by going back

to that whiskey politician and just update it to what we are talking

about here today. So, if he were asked about his position on the estate tax, he no doubt would respond: ‘‘If by the estate tax you mean

a tax that punishes hard work, prevents people from passing the

fruits of their labor on to their heirs, and forces the sale of farms

and small businesses, then I am against it.’’

Senator KYL. Well, you can stop right there. [Laughter.]

Mr. TEITELL. If the Senator would yield, may I just finish?

Senator KYL. Sure. [Laughter.]

Mr. TEITELL. ‘‘But if by the estate tax you mean the source of essential revenues for the Federal Government to serve our citizens,

a crucial supplement to the funds needed by the States for the general good, and the way to prevent,’’ as you said, Mr. Buffett, ‘‘an

aristocracy of inheritance, than I am for it.’’ Basically, those are the

two sides of the argument. This committee, in its wisdom, has to

find whether you go one way or the other to make sure you do not

end up somewhere in between.

Senator KYL. Sure.

Just for the record, Mr. Buffett, you are talking about roughly 20

percent in taxation, 20 percent of our economy being revenue to the

Federal Government. Actually—and I just checked—the 40-year average is 18.2 percent, and we are currently collecting 18.8 percent.

On a $13.9 trillion economy, even 1 percent is a heck of a lot of

money.

Mr. BUFFETT. Yes.

Senator KYL. So part of it, too, I suspect, is a debate between

those who would have the government taking even more income

from our families and workers than it is today versus those—and

I count myself in the group—who would say the government does

not lack for money and that we should not be collecting an even

higher percentage.

Mr. BUFFETT. I do not disagree with you on that.

Senator KYL. All right.

And there is something else I know you do not disagree on, because you said it. I will quote from your most recent Berkshire

18

Hathaway letter to shareholders talking about a business that you

purchased, an electronics distributor from Ft. Worth.

You talked about how Paul loves running his business. He is a

remarkable entrepreneur. But not long ago, he happened to witness

how disruptive the death of a founder can be, both to a private

company’s employees and to the owner’s family. What starts out as

disruptive, furthermore, often evolves into destructive. You wrote

that to note how you had purchased his business and you purchased many other family businesses.

I appreciate the fact that you have kept those family businesses

going so the employees do not get laid off, but I also think you

would agree that in most of those cases the families would prefer

to run their own business than to have it purchased by somebody

else.

Mr. BUFFETT. Actually, that case I referred to, though, that was

squabbling among the family. That was not all by taxes.

Senator KYL. All right.

Mr. BUFFETT. Oftentimes they do not agree on which ones should

run the business subsequently. We bought one business in Seattle,

WA that has bridged the fourth generation. People have managed

their businesses, true. What I do find kind of interesting sometimes

is, if they do decide to sell their businesses to us, we look at the

figure they put on their estate tax return for the business, and that

is not the figure they think the business is worth the day after the

return is filed.

Senator KYL. It is the American way.

Thank you.

The CHAIRMAN. Senator Bunning?

Senator BUNNING. Thank you very much.

Mr. Sukup, I was inspired by your story about your invention

that led to the start of your business over 44 years ago. Some

economists have said that business owners do not care that much

about leaving a legacy or passing on a business to their heirs. They

say that business owners build wealth primarily for themselves.

But you testified today about your grandchildren and those in your

family whom you think would like to stay in the business and inherit the business from you, and your grandchildren are working

in the business also.

My question is, how many times do you have to pay the same

estate tax to retain the business in your family?

Mr. SUKUP. Senator, you would have to continue. It goes from as

soon as our sons pay the tax, the grandchildren will have to pay

the tax.

Senator BUNNING. Are they also in the business like you are?

Mr. SUKUP. Yes, they are. We are very fortunate. They are. We

have three of them working in the business now, two are in college,

and they are hoping to come back to the business.

Senator BUNNING. Well, I can give you chapter and verse on a

small horse farm in Scott County, KY that had a $12 million tag

on it. Four million dollars in estate tax. They tried to make it go.

Hawked the farm to a bank, 37 mares and a couple of brood mares.

And guess what? It did not produce enough income and/or interest

to pay the debt. The bank took over, and the $12 million estate was

19

completely lost because of the estate tax. Now, this was the original estate tax, not the improved estate tax that we now have.

But I do not believe the estate tax was ever designed to confiscate wealth like you have created and your community has prospered by.

Mr. SUKUP. Thank you.

Senator BUNNING. And I do not think anybody on this panel believes that that is the case either. We think you should be able to

survive as a small business person, but we need some direction, because, come 2011, if we do not have that direction, we are going

to go right back to where we were in 2000. So can you give us some

direction?

Mr. SUKUP. Just repeal the death tax.

Senator BUNNING. Repeal it.

Mr. SUKUP. That is it.

Senator BUNNING. Yes. Well, we cannot get that done. We have

been trying to make a compromise where we can get a certain

amount on the spouse and the owner at a certain level, and tax the

rest of the estate at a certain level also. We cannot come to a compromise. We ought to be able to come to a compromise, because I

do not think we were ever intended to confiscate the wealth that

has been created.

Now, certain members of our society are able to escape estate tax

because they have enough dollars and planning expertise to escape

all estate taxes. God bless them. I give them credit for that ability.

But the average American cannot. If only 12 percent is covered by

estate tax, then those 12 percent ought to be able to do something

in regards to their own estate.

You are absolutely right, Mr. Buffett. Very few people are affected. But when we go back in 2011, a lot more are going to fall

under those auspices of a million dollars and less.

Mr. BUFFET. I do not recommend going back, in 2011, to what

is scheduled. I think that was an abomination, actually.

Senator BUNNING. Well, I can remember when income tax rates

were at 70 percent. Can you all remember that?

Mr. BUFFET. I can remember when they were at 91 percent.

Senator BUNNING. Well, I only remember 70. I got stuck at 70 percent when I started in baseball. I can tell you this, $5,000 a

year—that was the minimum salary at the time—I got a big raise

to $14,000 a year because I won 20 games. That did not get me into

the 70 percent bracket right away. But if you got up to $40,000,

you were in the 70 percent bracket. That is unusual. We ought not

go back there because we do not think we should go past what Senator Kyl said, 18.2, 18.3 of the GDP coming in. I think that is a

fair amount to spend on our Federal Government expenditures.

Thank you. Thank you for your input.

The CHAIRMAN. Thank you.

Senator Smith?

Mr. BUFFETT. If I can just mention one figure on that. The 18

and a fraction is what comes in, but closer to 20 goes out. That is

the real amount the government raises, borrowing, plus taxes.

The CHAIRMAN. Thank you.

Senator Smith?

Senator SMITH. Thank you, Mr. Chairman.

20

Gentlemen, thank you all for being here. I must tell you, there

are probably few issues I have encountered in Congress that divide

the parties more than just the view about government’s role in redistribution. I will acknowledge my own bias. I think freedom redistributes better than government central planning, and usually

when money gets to the third generation it is redistributed through

profligate living. Whether that is better done by bringing it into

government, I guess we each have to make a value judgment.

My own experience as a small businessman, not unlike Mr.

Sukup, in a small, rural community in Oregon, has taught me that,

in order to pass on to my heirs what my wife and I have built, we

spend extraordinary amounts on lawyers, accountants, and insurance policies in the hope that there is something that, when we die,

will not be carved up by a big firm on Wall Street and leave a community very, very desperate.

I think, Mr. Buffett, I must say, I am a huge fan of yours and

I mean no disrespect in my views towards you. My concern, though,

is exactly the point between these two ends of the table, that big

Wall Street firms can go after companies like that and carve them

up and leave rural communities in very desperate shape. I have

seen it, and it is driven by the estate tax. I do not want to see it

any more in America.

I think that the money that I have spent in my life, if I could

spend it on some cows or doing something to keep investing in my

community, in my business, in the enterprise that employs 1,000

people, that that is money better spent than bringing it here, because it is going to go one of two places: it is going to stay home

or it is coming here. If you like how we spend it, bring it here. My

own experience is, it is better spent when it is left at home.

But that really brings me to you, Mr. Teitell. You are the expert.

We are trying to craft a compromise. I do not think Mr. Buffett

wants to take his company. I do not think that at all. But how do

I make sure somebody else does not take his company? What is the

compromise we ought to, as Americans—not as Republicans or as

Democrats—strike so that people in that situation, small businesses, are not forced because of debt to sell to big businesses?

Mr. TEITELL. Realistic exemptions, realistic rates. Under current

law, there is special use value for a farm or a ranch, and there is

also the ability to pay taxes if you meet certain tests on a small

business, or even a larger business, over 15 years, perhaps at a

lower interest rate in many cases, so perhaps that could be revisited. I was taken by the importance of passing down the business.

I know there is not a Senate committee that deals with this, but

what Mr. Buffett has done, and what the two of you have done

with your philanthropy, in addition to passing down the business—

I know in our law office we talk about all of the generation-skipping trusts, the grantor-retained annuity trusts, irrevocable life insurance trusts, and the like. But then we also talk about passing

down values, the value of philanthropy. There are family meetings

to talk about that. So I think, although that is not the charge of

this committee, I just wanted to say that. That is equally important.

Senator SMITH. Well, I hope you will help us write a bill. Mr.

Chairman, I really do think that, for the sake of small business,

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if America is about small business, we ought to be about coming

up with a deal on estate taxes, because I cannot think of many

things more disruptive to the growing of small businesses so that

they can become big businesses than the forced sale of small businesses to big businesses. I just think it is bad public policy. I really

think it is incumbent upon us to come up with a compromise.

I know Senator Kyl and you have worked on it. We ought to do

it, for our country’s sake. Thank you.

The CHAIRMAN. Thank you, Senator. You are right. This is an

abomination, the current situation. The sooner we correct it, in

some reasonable way, the better. Nobody is going to agree—not

with every ‘‘i’’ dotted and ‘‘t’’ crossed—but, in some reasonable way,

we need to get this thing handled.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I want to associate myself completely with what Mr. Buffett said,

associate myself with some confusion with what the rest of you

said, and make a couple of points.

First, is a philosophical one as far as I am concerned, which I

think you made. A couple of months ago, somebody asked me to go

to the 86th floor of some building in New York City. I walked in

to the room and he glared at me. Now, this was his invitation. I

sat down and he continued just to glare at me.

Somehow, we had to start a conversation, so I decided to start

it in the following manner. I said, ‘‘How much money are you going

to make this year?’’ And he said, ‘‘One hundred and eighty-three

million dollars.’’ And then he came back and said something very

interesting. He said, ‘‘But I could be making more if you people in

the Finance Committee would do something about deferred compensation.’’

I then said to him, in what was a total of about a 4-minute meeting, ‘‘How do I hold something called America in my hand, and you

are making $183 million, and I am sure you work hard for it, and

the average income of a family in West Virginia of four which pays

taxes, works extraordinarily hard, is always scared financially, is

around $26,500?’’

How do I do that? Do I call it income disparity? Do I say that

merit will always rise, and that, if you are born in West Virginia,

somehow you cannot? It is not true. We have Ray Lanes and people

all over the place who come from West Virginia and have done very

well. But to me it was a very interesting conversation about the

mood of America in these last 10 years.

The second thing I want to say is, I very much agree with what

Ron Wyden said when he was here, that there is going to have to

be some major tax readjustment. These last 7 years have done as

much damage to America as any that I can think of in my numbers

of years of life, in terms of infrastructure, research, medical discoveries, and all the rest of it.

To me, that has sucked the strength out of America psychologically, and out of entrepreneurship, out of investigation at the

NIH, the National Science Foundation, all the rest of it in gargantuan ways because we cut taxes because the war was going on

and that was taking a lot of attention.

22

So in the meantime, all these tax cuts were being passed which

benefitted, fundamentally, the people whom you have been talking

about, along with my Uncle David. Everybody forgot that there was

a whole other section of people out there who do not buy Bing Crosby’s ranch. My heart did not bleed a lot when you said that. They

are just struggling to make it.

I have a friend in West Virginia who, every year, comes up. He

is a farmer. He complains to me about the estate tax. Now, he does

not say ‘‘the estate tax,’’ he always says ‘‘the death tax.’’ I think

you have mentioned that, but I missed that part because I walked

in late. Well, that is a brilliant maneuver which is used by some

on this committee, because if you say ‘‘a death tax,’’ that means

that when you die you pay a tax. Of course, nothing could be necessarily further from the truth.

So after about 5 years of these visits, which never changed in

content, I said, all right, I am going to go to the IRS, the actual

IRS, and I am going to get out their books and I am going to turn

to the year 2005, because this happened in 2006. When he came

that year, in 2005, I said that I have not made up figures, I have

simply gone to the IRS.

In terms of their predictions—I guess it was 2006, looking back

at 2005. There were 100 West Virginians who would pay less if the

estate tax was repealed, that would benefit. Across the country of

300 million people, there were 9,000. I put this in letter form,

asked him to respond, to give his side of the argument. I never

heard from him.

The final thing I want to say is that, what nobody ever talks about is, if we did this, it would cost $1 trillion. Now, $1 trillion

is not much these days on tax cuts. We do it so regularly and the

lust for more tax cuts is always there. Unfortunately, it usually

goes to the people whom you and I are talking about and it does

not go to the people who, in my judgment, need it.

I come from West Virginia. I get very angry about that. I am not

talking from a broad, societal point of view; I am talking about the

people I represent. I get very, very angry when they get the short

end of the stick, when my friend—former friend—up on the 86th

floor is complaining about deferred compensation. And, yes, I am

almost finished.

So while we were doing all this, we got all these skipped years;

it fades in this year, comes back that year. Nobody paid any attention. We did it all just so that it could be sort of disguised in the

budget and not look too dangerous. I think this country is in real

trouble. I think we just happened to have reached that particular

point in our country where we have to remake pretty much the

general nature of our country, in education, in science, the values.

Thank you.

The CHAIRMAN. We will solve that in the future.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus.

Thank you for keeping your promise to hold a hearing on estate tax

reform.

I want to ask a couple of questions, first to Mr. Buffett. As background, let me just say that my own involvement in this, as a

farmer, rancher, with a family who has been on the same farm now

23

for 150 years, I am not sure that the estate tax, frankly, coined as

the ‘‘death tax’’ adroitly by some people who are opposed to the tax,

would ever hit 99.99 percent of our farms and ranches in Colorado,

including ours, because it just does not have that kind of value

where it is going to be that kind of a rate.

So, I agree with Senator Rockefeller that those who are opponents of this have been very successful in terms of putting a label

on it that essentially uses a lot of people in a political debate on

what really ought to be a good debate on the principles that we are

debating here, which include the issue of fiscal responsibility.

Also, Mr. Buffett, as you and I have talked about, my wife was

the owner/operator for a long time of a Dairy Queen franchise, and

still has the best ice cream in the country.

But let me ask you this, Mr. Buffett. The reality of it is, I do not

think there is going to be a repeal of the estate tax here, but there

is going to be a reform. I think that is what you have been an advocate of.

So, tell us what you would specifically recommend to this Finance Committee in terms of the components of that reform, which,

from my point of view, include: (1) the amount of the exemption for

an estate so small estates come out; (2) what the rate of the tax

should be in terms of whatever you think we ought to go for; and

then (3) any other issues, including the issue of indexing. How

would you advise us as a committee, and as the U.S. Senate, to

move forward on the issue?

Mr. BUFFETT. I would probably have, today, an exemption of about $4 million. I would certainly have it indexed. I would have

the slope be more gradual above that $4 million, but I would have

it end up at higher than 45 percent. I would certainly not have it

raise less than the $24 billion that it is raising now. In 1987, again,

there was one individual on the Forbes list that had more than $5

billion. There are now 63 that have more than $5 billion. If you invest $5 billion at 7 and a fraction percent a year—and these people

know how to do that—that is $1 million a day.

In terms of passing on dynasties of wealth, I really think the rate

ought to be a lot higher than 45 percent. But I would go much easier than the early stages above the $4 million exemption, and like

I say, I would have that indexed. I think you could do something

like that.

Well, 1,500 of the estates paid half the estate tax. So it is 1,500

people. These are people who are inheriting tens of millions of dollars, in those particular cases, so you would hit very, very, very few

people.

Senator SALAZAR. Let me ask you this question.

Mr. BUFFETT. Sure.

Senator SALAZAR. So we may end up moving forward in that kind

of a direction. I am sure we will see how this all turns out. But

in terms of people in the range of wealth who actually have to deal

with these issues of estate tax, do you think that we could get a

number of those people to support that kind of reform? Let me ask

you this question. Really, this is my question, the issue of certainty

and uncertainty. How big is that an issue for people who have to

deal with the estate tax issue?

Mr. BUFFETT. The issue of certainty?

24

Senator SALAZAR. Yes.

Mr. BUFFETT. I think it is enormously important. I do not think

people should have to guess at what year they are going to die.

Senator SALAZAR. And right now we are guessing. So it would be

much more important for us, whether it is reform, repeal, whatever

it is that we do, but we essentially have the long-term road map

for anybody to be able to plan.

Mr. BUFFETT. Yes. I would put it to bed for a while. I think there

has been enough uncertainty and confusion created, so whatever I

did, I would put it to bed for a while.

Senator SALAZAR. All right.

I do not want to run over my time too much here, but Mr.

Rhoads, as a rancher, one of the concerns I very much have is what

happens to family farms and family ranches and the situation that

I know a few examples of in Colorado, family farms and ranches

that had to be sold in order to pay the estate tax.

We had some kind of a reform along the way that Mr. Buffett

has testified to, along with an exemption that is specific to family

farms and ranches, so that, if they continue on as operational

farms and ranches by the heirs and we exempt those estates from

taxation, it seems to me that would be a useful move in the right

direction. And Senator Crapo, Senator Roberts, and Senator Feinstein and I have introduced legislation that would be specific as to

these farms and ranches.

What is your view on our move in that direction?

Mr. RHOADS. Yes. I would certainly support that effort, and I

have in the past. It is something that we fully need, because we

went through two generations now and have ended up paying

$640,000. When I die and my wife dies, we are going to go through

one more. So, I would certainly support something like that. I believe the National Cattlemen’s Association does also.

Mr. BUFFETT. Senator, can I make one suggestion on that?

Senator SALAZAR. Certainly.

Mr. BUFFETT. Just throwing out an idea. I am just coming up

with it now. But you could have the government assess at whatever

the normal rates would be at the time of death where it is being

left to a family. You could have interest on that accrue, but never

have it be collectible until the farm left the family. Now, at that

point, all this appreciation that takes place, and land and everything—the government would get its money, with interest, but get

it when it left the family.

Mr. RHOADS. I see. I could live with that.

Senator SALAZAR. Well, thank you very much. You have been a

stellar panel.

Thank you again, Chairman Baucus, for this very interesting

hearing.

The CHAIRMAN. You bet. Thank you very much.

Next on the list is Senator Lincoln.

Senator LINCOLN. Thank you, Mr. Chairman. I certainly appreciate you and our ranking member, Senator Grassley, for holding

this hearing. I have been passionate about this issue for years. I

think we in Washington have left far too many of our family businesses in a quagmire as a result of the erratic estate tax policy

that we set in 2001.

25

I think that much—certainty—is in agreement on this panel, as

certainty is an incredibly important part to any business, whether

it is a family-owned business or a large, huge business. But it is

critically important to our family-owned businesses and farms.

They have spent tens of thousands of dollars each year in planning

for the tax, and the status quo is unacceptable.

I hope that through what we are doing here in the committee,

both today and continuing onward, that we can come up with something that is going to lead ultimately to a committee product that

modernizes our estate tax portion of the code and really clears up

the current uncertainty in those rates and exemption structures

that are so important to have certainty to them.

My questions. I have several. Mr. Teitell, thank you for your testimony, in that you have kind of provided an overview of the numerous estate planning considerations that families currently face

when they go through this erratic estate tax policy. We recognize

that the largest number of estates that are filing estate tax returns

are in the $1- to $2.5-million range. I believe that around 70 percent of the returns that are filed are in that range.

Is it not true that, when you look at the vast majority of those

filers right now, they would not have to plan if we had a reasonable rate? I know Mr. Buffett has mentioned $4 million. But anyway, if we had a reasonable rate there, the key here would be that

we would take out the bulk of the individuals, particularly familyowned businesses, and what have you, that are really being

strapped by that.

The follow-up question to that would be, although the majority

of the filers are in the smaller estates, in terms of the actual estate

tax revenue, which I think Mr. Buffett seems to focus on as well,

that is coming into the coffers, more than 40 percent of it comes

from large estates, estates over the $10-million value. So, for those

estates which are not going to be protected by the exemption, it is

important that we set a fair rate. Mr. Buffett, I noticed you mentioned that you would not be supportive of going back to pre-2001

rates.

So to both of you gentlemen, if we come up with something reasonable, we knock out the majority of the 70 percent that are filing

now that really do not need to be and are spending a lot of resources that they could be investing in their businesses, as Mr.

Sukup mentioned, and then putting in a reasonable rate, is that—

I mean, I am hoping that is the direction you are going to tell us

to go in.

Mr. TEITELL. Senator, you have answered your own question.

Senator LINCOLN. I want you to answer it, though. I know where

I am. I have been fighting for it.

Mr. TEITELL. Well, for the estate of $1, $2, or $3 million, certainly a more realistic exemption would cover that and indexed, as

Mr. Buffett says, for inflation, because otherwise what is good

today might not be good 8 or 9, or 5 years from now. As far as the so-called ‘‘larger estates,’’ let us say $10 million and

way, way, way above that, in my travels around the country and

in our law practice, our wealthier clients, of course when they come

to our office they want to make sure they get their parking tickets

validated. So, they care about everything. But they like the exempVerDate 11-MAY-2000 14:32 Oct 06, 2009 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 51778.000 SFIN1 PsN: SFIN1
26

tion. That is nice, but that is really not important. There could be

a minus exemption as far as somebody who has $50 million or $100

million. It is really the rate. To paraphrase Shakespeare, the rate

is the thing. That is where you have your work cut out for you.

Senator LINCOLN. Oh, yes. Thank you.

Mr. Buffett, did I hear you correctly that you did not think we

should go back to pre-2001. Is that correct?

Mr. BUFFETT. Yes.

Senator LINCOLN. Mr. Rhoads, as the daughter of a 7th-generation farm family in our State of Arkansas, I am certainly appreciative of your testimony and understand the tremendous feeling of

pride that you must feel, not just for maintaining, but for building

upon the work of those who came before you. I watched my father

as a rice farmer in the Mississippi delta of Arkansas take tremendous pride in caring for his land and what he produced, and more

importantly, making sure it would be there for future generations.

I think that is really important. It is an important part of who we

are as Americans.

Mr. Sukup, the fact that you have two children and two grandchildren working in your business and who want to be there, I

think that that is tremendous. There is one thing my mother said

to me when I ran for Congress. She said, please do something up

there that will make our children want to stay at home in these

small, rural communities. Provide them the business and the

wherewithal to be able to stay here and not have to leave and go

to the big cities, and what have you.

So I was hoping that either one of you gentlemen might elaborate a little bit on how often you have to reassess your wealth.

The CHAIRMAN. Very briefly, please. Your time has expired, Senator. Very briefly.

Mr. SUKUP. We look at it every year or two to see what we can

do, the changes in the laws, things like that so we can update it.

Mr. RHOADS. We do it the same way. Every 2 or 3 years we have

another grandchild or something like that, and we try to include

them in. So that is about it.

Senator LINCOLN. Thank you, Mr. Chairman. I do not know if we

are going to have a second round.

The CHAIRMAN. Thank you, Senator. We will have some time.

Senator Cantwell?

Senator CANTWELL. Thank you, Mr. Chairman. Thank you, gentlemen, for participating in today’s panel. Mr. Buffett, thank you

for that investment in Washington State businesses, and thank you

for the pledge to a great use of your funds to the Gates Foundation

in the future. I think that is what it is, a pledge.

I am specifically interested in the impact of the estate tax on

family-owned enterprises. Recently, Copley Press in San Diego was

forced to sell off nine of its small newspapers in order to pay estate

tax liability. That is when their principal died.

What do you think we should do in reform as it relates to those

family-owned enterprises, specifically?

Mr. BUFFETT. They probably made a decision on selling that, for

example, rather than borrowing. If you have a business, take a

business worth $100 million. Like I said, the estate tax valuations

are not usually the asking prices for the businesses later on, but

27

take a business that is worth $100 million. It probably is earning

$8 million or something like that, at a minimum. If $45 million is

due on the estate tax, there are special provisions, as you know,

for the family-owned businesses. They can spread it out over 15

years. The interest costs on that, tops, would be $3 million a year, so there is still $5 million a year left over for the business. It is inconvenient, but when somebody wins a $100 million lottery and they

run the story in the paper, they also mention the fact that they will

probably have to pay $40 million in taxes.

Now, I send that person a congratulatory card, not a sympathy

card. If somebody wins the ovarian lottery and inherits a business

worth $100 million and has $40 million that they owe in tax, they

have a $100-million asset to work with. They may elect to sell off

part of it, like somebody may sell off some of the newspaper. They

may elect to borrow $40 million.

But in any event, they have the carrying capacity to do that. It

is true, when you get into farms and ranches—I have a son who

farms 800 acres in Illinois and it is worth $6,000 an acre now, but

it does not earn based on $6,000 an acre. So if you get an asset,

a piece of art that is worth a lot of money but does not produce

much income, that is one thing.

But with businesses, I look at businesses all the time. You are

not going to get a business valued at $100 million by the court with

an estate tax challenge that is earning less than $8 million. Like

I say, that will leave $5 million over after you set up the payments

to pay interest of $3 million a year, or actually less than $3 million

in the early years.

Senator CANTWELL. So you would make no reform as it specifically relates to family-owned businesses, from their structure? That

is a structure you think is manageable when you are dealing—I

mean, I am a great deal concerned about media concentration. We

have an FCC that is moving forward on that. It is becoming increasingly hard for family-owned businesses, particularly in the

newspaper industry.

It is a very complex structure to try to run an operation that

way, divvying up various assets and resources among family members and still running a business. I do not know. To me, that is a

very complex operation and a very big challenge, all because of the

estate tax.

Mr. BUFFETT. Well, they would like you to believe that. But if

you have a newspaper that is worth $500 million, it is probably

throwing off $50 million a year. That is why it is worth $500 million. If you borrowed $200 million, or $225 million to pay the estate

tax on that and your interest rate is 7 percent, that is $15 million

a year. You have $35 million a year left over. I mean, they would

rather not pay the tax, but I know of no newspaper owner that

owned a monopoly newspaper who, after the estate tax, ever ended

up leaving anything but a lot of money.

Senator CANTWELL. And let me ask you specifically, when you

make your donation at whatever point in time to the Gates

Foundation——

Mr. BUFFETT. I do it every July. They receive two installments,

each worth a little less than $2 billion.

28

Senator CANTWELL. But when you think about this investment,

the charitable contribution, you are making a decision about what

you think is the best use of your funds.

Mr. BUFFETT. Absolutely.

Senator CANTWELL. But here we are, basically incentivizing or

saying, from a tax structure perspective, you can make those charitable contributions. But if somebody wants to invest in their business, they have a——

Mr. BUFFETT. They have a lot of money to invest in their busi- ness. But we invested Berkshire Hathaway. We will pay $5 billion

of Federal income tax in 2007. We still have money to invest. We

have our after-tax money to invest in the business. We would have

$5 billion more if we did not have to pay any Federal income tax,

but we pay tax. We make a lot of money, we pay a lot of tax, we

reinvest the balance.

People with their newspapers can do the same thing. They might

prefer if they did not pay any tax, but they have the resources—

they have ample resources—to pay the tax. They have the earning

power to do it, and they will have plenty of money left over, money

the average American would only dream of.

Senator CANTWELL. And you do not think that there is anything

structurally about some of those smaller businesses as opposed to

Berkshire Hathaway that complicates that structure for them?

Mr. BUFFETT. Well, I think when you get down to the very small

ones, sure. I would have an exemption for those. But a business

that makes $8 million a year, is worth $100 million, that is a highclass problem. There are 23 million families in this country who

are making $20,000 a year or less that would just love to have that

problem.

Senator CANTWELL. Thank you, Mr. Chairman. My time is up.

The CHAIRMAN. Thank you, Senator.

I would like to ask Mr. Sukup and Mr. Rhoads the degree to

which you can live with the amounts suggested by Mr. Buffett. I

think everyone in this room knows we are not going to repeal the

estate tax. It is not going to happen in the foreseeable future. So

the next question is, what should the law be? What is reasonable?

What makes sense? We want certainty, we want predictability. But

what should the exemption levels and what should the rates be, et

cetera? I mean, this is not rocket science. It is pretty basic.

So the question is the degree to which you, Mr. Rhoads and Mr.

Sukup, can live with the broad parameters that were somewhat

outlined by Mr. Buffett. I do not want to put words in his mouth,

but he talked about a $4-million exemption. I assume that is an individual, with husband and wife, it is $8 million. I assume—I do

not know—that we are going to have a family-owned business exception here. If not, there would be some limits there.

But what can you live with, something along the lines of what

Mr. Buffett suggested? Indexed. Remember, indexed.

Mr. RHOADS. Yes. The ranches in Nevada are larger than any- place in the United States, so I think a $4- to $6-million exemption

would cover most family ranchers and farmers in my State.

The CHAIRMAN. Mr. Sukup?

Mr. SUKUP. It is hard for me to say. With our company, we would

like to have repeal of the death tax, but I cannot really say what

29

would help us out. I mean, anything is going to help, there is no

question about it.

The CHAIRMAN. It is not going to be repealed. I think that is a

given. So the question is, if it is not repealed, what is reasonable?

What makes sense here? Mr. Buffett gave a starting point. He

threw some numbers out for discussion.

Mr. SUKUP. I would like to see at $10 or $15 million, and a benefit in there for family-owned businesses that continue on throughout the years. I liked someone’s suggestion here when they mentioned, as long as it stayed in the company and was not sold.

The CHAIRMAN. Yes.

Mr. SUKUP. When it was sold, then you could levy the tax.

The CHAIRMAN. But what would happen to your business if, say,

it were $4 million for individual, a husband and wife, $8 million,

indexed, and you had the benefit of all the different kinds of estate

planning that Mr. Teitell and his folks have, would you have to sell

your business when you, unfortunately, pass away?

Mr. SUKUP. Would we have to sell it now?

The CHAIRMAN. Yes. Would you have to sell it at those levels, at

$4 million indexed, with all the planning devices that are available

today?

Mr. SUKUP. We probably would.

The CHAIRMAN. You would have to sell it?

Mr. SUKUP. Have to sell it.

The CHAIRMAN. And why is that?

Mr. SUKUP. Well, when you start to get the tax up that you have

to borrow $15 to $20 million, and it depends on when we pass

away——

The CHAIRMAN. I do not mean to get personal, but what is the

value that you think the estate might be? How much?

Mr. SUKUP. The value of our estate?

The CHAIRMAN. Yes.

Mr. SUKUP. Probably $70 million.

The CHAIRMAN. Seventy. Yes. And you think you would have to

sell?

Mr. SUKUP. This would be up to our sons whether they wanted

to accept the debt or not.

The CHAIRMAN. Yes. It is a tough situation. I am sympathetic.

This happened in our family. It is a question of my other brother

and sister taking over the family ranch. We had the same issues.

As you all know, these questions are very complex. There is a lot

to do with who really wants to stay in the business. Some children

want to do something else. Who wants to take on the debt, how

much debt to take on, can they handle the debt? You know, there

are lots of different options here. We worked it out. The ranch was

not sold off. But it was very, very difficult.

Mr. SUKUP. I am so fortunate, Senator, to have both sons—there

are only two sons in the family, and they are both in the business.

They go their ways in the business to run each division of it.

The CHAIRMAN. Right. All right. We have to find a solution here,

though, that is fair and can get 60 votes so we can get some predictability and some certainty here. That is the goal. Thank you

very much.

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I have to leave here, but, Senator Kyl, you are next. Senator Lincoln, if you want to chair the rest of this hearing.

Senator LINCOLN. You bet.

The CHAIRMAN. Thanks.

Senator KYL. Thanks again, Mr. Chairman.

Just a couple of points and questions here. I think the estate tax

amounts to about 1 percent of our Federal revenues each year. It

is loathed by anywhere between 60 and 80 percent of the people

who are surveyed, depending upon the survey, including those people who know they will never have to either pay it or plan against

it. The majority in Congress actually favor repeal. Last year, I believe there were two different votes where 57 members of this body

favored repeal or significant reform.

So one of the questions is, with that support for repealing it or

substantially reforming it, why can it not be done? One of the answers is, of course, that the insurance industry, which makes a lot

of money on it, lobbies very strenuously to retain the estate tax,

because they can sell people insurance, which is one way to shelter

some of the income. They have been lobbying very, very strongly

to maintain a 45-percent rate.

I know that, Mr. Buffett, you have spoken with passion about

what you consider to be a tax that can help end dynasties, so I

know this is a personal view of yours. But it is also true that your

company benefits greatly. In fact, you own several insurance companies.

Mr. BUFFETT. We own property/casualty insurance companies.

Senator KYL. And life insurance?

Mr. BUFFETT. We own a company that reinsures life. We do not

sell life insurance directly to the public.

Senator KYL. What percentage of your profits do you think are

made either on the insurance or the float from the insurance on an

annual basis? Just nominally, roughly speaking?

Mr. BUFFETT. Well, the life insurance company—the property/

casualty insurance company insures autos, insures homeowners. It

has nothing to do with life.

Senator KYL. No. I am just talking life and the float on the life.

Mr. BUFFETT. The life company is a reinsurance company. It

writes health insurance. I would say that it would be well under

half of 1 percent. That is all kinds of life insurance. People buy life

insurance for a lot of other things than——

Senator KYL. Sure. Sure.

By the way, one of the more famous companies I think you own

is GEICO. Is that correct?

Mr. BUFFETT. That is one.

Senator KYL. Great advertising on that, by the way.

Mr. BUFFETT. Well, that is where we make some money, yes.

Senator KYL. Do they sell any life insurance?

Mr. BUFFETT. No.

Senator KYL. All right.

But this industry, this life insurance industry, can make a lot of

money when one of the methods of sheltering income is the purchasing of life insurance. I kidded one of my friends who lobbies

for them that, if Congress magically came up with a way to end

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death, he would be in there, representing the undertakers, opposing it somehow or another.

I mean, it is just not fair, it seems to me, to take advantage of

people, or rather to urge Congress to keep a law in place so that

you can sell them something that they would not have to buy otherwise, and the only reason they buy it is to shelter income, because they clearly would prefer that it go to a charitable cause

rather than to the U.S. Government.

I just want to note—because there seems to be a big disconnect.

I appreciated Senator Cantwell’s comments. It is one thing for a

company that pays billions in taxes and another for a company

that may be worth maybe $5 or $10 million to consider their options. A real case in my home town of Phoenix involved a printing

company, and virtually all of the assets, the earnings, went back

into the company every year because in that business you either

bought the latest printer or you did not do well.

The person who started it came out from New York as an individual. He ended up with over 200 employees. When the estate tax

came due, they could not borrow enough because everything was

back in the business itself. The end result was, they had to sell this

business to pay the taxes.

The family wanted to stay in the business. The son-in-law continued to advise the purchasers for a couple of years. Eventually, however, they were bought by a bigger company, and then that company was bought by a bigger company, which then consolidated operations, sold off all of the equipment for whatever it was worth,

closed the business, and 200-plus employees were out of work.

The other point is, this family was one of the most charitable,

giving families in Phoenix. They had a great reputation for giving

to all sorts of causes. Of course, once the company was bought, not

another dime in contributions came from that company. So much

like in your community, Mr. Sukup, where you do contribute 10

percent and it is a big part of the community, that was the case

here. So it was kind of a heart and soul. The community lost out.

The employees all lost out.

The family that had great capability to run this business is not

running it anymore. In fact, the business got shut down. Those are

the kind of stories that we would like to end with reform of the estate tax. I agree with others who have spoken here, the votes are

not there to repeal it, notwithstanding its unfairness.

But I think we can make it much more fair and provide that, at

least for those estates that are in the lower range, maybe $5 to $10

million, something in that neighborhood, we should have to create

a situation where they do not have to worry about spending as

much on the estate preparation as they might actually have to pay

in the taxes.

By the way, a question for any of you. The estimate has been

that there is as much spent each year on estate planning, folks like

Mr. Teitell, on insurance and lawyers and so on, as the estate tax

actually collects, roughly $20 billion a year. Any contradiction of

that, to your knowledge?

Mr. TEITELL. Well, I can just tell you how some clients feel. One

client said, ‘‘Estate planning under the current law is the orderly

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and systematic transfer of a client’s wealth and assets into fees and

commissions.’’

Senator KYL. Beats paying it into taxes, I guess. Thank you all.

Mr. BUFFETT. I have lived with it for 50 some years, having an

estate that would be taxable. I would say the applicable portion of

the total attorneys’ fees I have had has not been more than

$25,000, and I have never bought any life insurance to take care

of it.

Senator KYL. You are getting a heck of a deal if you only paid $25,000, because I think some of these folks with a lot smaller estates pay a lot more than that.

Senator WYDEN. I thank our friend from Arizona. I think I want

to pick up with you, Mr. Rhoads and Mr. Sukup, on this question

of the calamity that this committee is going to be facing here fairly

shortly. I mean, there is really going to be chaos in the tax world

on a whole host of matters: income tax rates, capital gains, estate

taxes. I think you all have a very compelling case, and I am certainly trying to fit this in to my thinking on how to respond here

for 2010. The point Senator Kyl has made, I think, is very valid.

What I see at home in Oregon is a lot of our farmers, ranchers,

and small business people pour enormous sums into all of these exercises to try to figure out how to keep the axe from falling. They

are not plutocrats. They are not well-to-do people. They are just

people trying to run family businesses.

So for you two who are running businesses and ranches, if you

were on the Senate Finance Committee and you were facing this

tax melt-down and you had to figure out how to get people some

relief on the estate tax issue and deal with the capital gains question so as to promote growth and fairness, and the income tax

issue, how would you all, just from the seat of your pants, if the

roles were reversed and you were on this side of the dais, how

would you all approach it? Mr. Sukup?

Mr. SUKUP. This is a very difficult situation for you, Senator. I

appreciate all the work you are doing to try to solve this problem.

To satisfy everybody is going to be impossible. There is no question

about it. Some of us are going to be unhappy about it, I am sure.

But we do need the rate much higher than it is for our particular

company.

Senator WYDEN. On the estate tax?

Mr. SUKUP. On the estate tax.

Senator WYDEN. The exemption amount.

Mr. SUKUP. The exemption. And the 45-percent rate, we would

like to see that go down. If that could go down to 14 or 20 percent,

it would make it much more palatable.

Senator WYDEN. And from the standpoint of your business, that

is more important to you than potential changes on the income tax

side, capital gains, and the like, because that is what it is really

going to come down to. Frankly, that is why I am so interested in

going back to the philosophy of Ronald Reagan and Bill Bradley,

because I think they looked at the whole picture, figured out how

to give everybody a chance to get ahead—farmers, ranchers, and

people who work for a living—and that is why I am trying to bring

that philosophy back in the context of what the Congress is going

to be looking at.

33

But I gather that of the big three, in terms of estate taxes, capital gains, and income taxes, estate taxes is the one that you would

put as the big one?

Mr. SUKUP. That is the one we are facing and would be the

greatest. I think the committee is going to have to look at how

much the increase is in the farmland, in farmers, and that. Like

Mr. Buffett said, their land in Illinois, which used to sell for

$3,000, is up to $6,000 an acre now. This is going to rise tremendously. If we want to stay at the same amount of your $24 billion,

it is going to change your levels that you look at in there because

the whole economy out there is rising and going up 30, 40, 50 percent out there.

Senator WYDEN. We have small business people all over Oregon

who are in much the same situation you all are in Sheffield, and

we are going to try to figure out how to be responsive.

Mr. Rhoads, the same question. You have all these tax changes

coming, income taxes, capital gains, estate taxes. It all comes up

in the context of decisions that have to be made in this room, decisions that you have to deal with in a thoughtful way or there is

going to be a lot of hurt in our country.

How would you approach it?

Mr. RHOADS. I am on the Senate Finance Committee in the State

of Nevada, and I know the problems about taxes and all that.

Senator WYDEN. There you are.

Mr. RHOADS. I think I would agree with the gentleman who

spoke before me. I think the estate tax is the number-one tax that

is hurting us in the livestock industry, in farms, and small businesses in the State of Nevada. As you know, we have no inheritance tax, no Nevada State inheritance tax. I think most of us could

live with a $4- to $6-million exemption.

Senator WYDEN. What is your sense—I think Mr. Sukup got

pounded on this one earlier. What is your sense on what a typical

small business will have to spend on insurance and all of the efforts to try to keep from getting clobbered by estate taxes?

Mr. RHOADS. Yes. I am afraid I cannot answer that. Perhaps you

could. Off the top of my head, I——

Senator WYDEN. We will leave the record open so that if there

is any information you can give us—because I think, frankly, in our

efforts to reform the estate tax, I have been like a lot of Senators

here. I voted for repeal in the past. I voted for changes. I have now

come to the conclusion that I think that this has to come in the

broader context of tax reform.

It is why I think that the model of keeping some progressivity,

cleaning out the clutter, holding down rates for everybody, at least

gives some certainty and predictability, which I have heard farmers

and business people talking about. But if we are going to do this

right, and Senator Lincoln has put a lot of time into this as well,

we have to get a sense of how much small business people are paying today for these insurance and planning kinds of tools.

Do you want to add anything, Mr. Sukup?

Mr. SUKUP. Yes. I would just like to say that it is the individual

that is in the company, and probably our company did not spend

enough on life insurance and other things to avoid the estate tax,

which I wanted to apply back to the company. I had wonderful emVerDate 11-MAY-2000 14:32 Oct 06, 2009 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 51778.000 SFIN1 PsN: SFIN1
34

ployees and they were doing a great job, so we bought the very latest equipment for them instead of putting it in life insurance. Now

we are going to pay the price.

Senator WYDEN. Mr. Buffett, only one comment. I have enjoyed

talking with you about tax reform over the years. The tall Democrat, 20 years ago on the Finance Committee, wanted to be part of

a bipartisan effort to fix the tax code. I went to school on a basketball scholarship. My jump shot was certainly not as good as Bill

Bradley’s. But I hope that you and other business people will keep

saying, that is the model that we ought to pick up on.

We can have debates about the specifics about how to do it, but

we have had 20 witnesses before the Finance Committee and Budget Committee, and I have asked each of them, with all different

philosophies, whether they think the basic structure that Ronald

Reagan and Bill Bradley talked about 20 years ago was right, and

19 out of those 20 witnesses said that they did.

I appreciated your supportive comments this morning. If you can

be part of an effort with business people around the country to

keep drilling that message home, I hope we can have another bipartisan tax reform effort, much like Ronald Reagan and Bill Bradley did in this room, coming up.

Thank you, Madam Chair.

Senator LINCOLN. Thank you.

I think I am bringing up the rear here. I have just a few more

questions, if I may. I would like to follow up a little bit from Senator Cantwell in her discussion about the family-owned newspaper

businesses, Mr. Buffett. I know on your company’s website you

have a link to an owner’s manual for your investors. On that page,

I think there is a document where you make a statement. You say,

‘‘On my death, Berkshire’s ownership picture will change, but not

in a disruptive way. None of my stock will have to be sold to take

care of the cash bequeaths that I have made, or for taxes.’’

I think looking at the other end of the table, Mr. Sukup would

love to be able to say that in his business. Whereas your businesses

are really parts of your business, for other small business owners,

particularly Mr. Rhoads, and I would think Mr. Sukup, too, it is

their heritage.

So it is a little bit of apples and oranges in terms of how those

things are dealt with and in terms of the generations that would

depend on them in that perspective of being able to take that family heritage and continue to provide for the next generation and the

generation after that.

So I think that is an important thing that we have to understand

as well if we want to maintain the entrepreneurial engine of the

small businesses and the family-owned businesses in this country,

and I think that we do.

It is also an issue we have to deal with in terms of particularly

family-owned farms and ranches. We are debating the farm bill

right now. The fact is, whether it is land prices, whether it is trade

issues, whether it is tariffs, we are denied access to markets in

other countries, and a whole host of things, we are seeing a decline.

Probably in the next couple of years, for the first time in the history of our country, we will see a trade deficit in agriculture.

35

That is going to make it more and more difficult to keep those

family farms. But then on the other side, we have all these huge

arguments about corporate farms, and nobody really can define

those. Most of them are family farms that are incorporated between fathers and sons, daughters, and what have you. So I do

think that that is an issue that we kind of have to take a little time

and really think through.

There are two questions that I have left on my mind. One is, I

think we had hoped that we would have a representative from the

insurance industry here today. They have been vocal in their opposition or concern about what it does to their industry. From your

website, again, I noticed that there is a tremendous amount, or at

least 49 percent of your businesses there, that are in insurance,

Mr. Buffett.

Mr. BUFFETT. Practically none from life insurance though,

Madam Chair.

Senator LINCOLN. Is that right?

Mr. BUFFETT. No. Practically none.

Senator LINCOLN. No life insurance there?

Mr. BUFFETT. There is some life reinsurance, but it is practically

none. It is not as good a business as property/casualty is.

Senator LINCOLN. Oh. All right. Well, you are a good businessman though, we know that.

But following up on Mr. Sukup, because I know that in our own

family business and farm my dad was very cautious and wanted

to make sure that there was life insurance, but he also wanted to

reinvest in the farm and he wanted to buy more property and to

have the ability for my mother to have that as a retirement to fall

back on.

But I guess, to all of you all, we hear a lot about, when we talk

about family farms and other things, the farms not necessarily

being sold in order to pay estate tax. Well, a lot of those family

farms and businesses are paying insurance and they are paying

into those insurances and it is taking away their ability to reinvest.

Mr. Sukup has made a different decision. In his sense, he has

tried to split the difference there. I do not blame him, because he

wanted to build that business and be an active part of what he was

able to give to his children. But it does strike me as a little bit unfair and costly to the cash flow and their competitiveness in terms

of the marketplace for family-owned businesses. They have to pay

an insurance company for years, kind of, in those premiums to protect the integrity of their farms or their businesses.

My question to you would be, if the value of that money that is

paid into that insurance company—and it may not be life insurance, but you have a lot of annuities, do you not?

Mr. BUFFETT. No. We are not big in the annuity business at all.

Senator LINCOLN. No?

Mr. BUFFETT. No.

Senator LINCOLN. All right.

Anyway, what if we were able to give to the small business or

the family-owned business or farm the ability to pre-pay that estate tax in a way that you were actually kind of self-insuring, and

then you still had those resources as an annuity or as a capital investment or as a resource that you could use as your backing in

36

terms of reinvesting in yourself, as opposed to giving those dollars

to the insurance industry where they are going to take it, invest

it, and make the money off of it, to give small businesses and others the ability to pre-pay some of their estate tax and then use that

as a collateral in the needs that they have to grow.

Mr. BUFFETT. Madam Chair, I have no objection to any—I think

you would not get too many takers on a pre-paid fund, but I would

have no objection to that. I should mention, incidentally, that Ted

Turner is the largest land owner in Nebraska by some margin. My

guess is, he will be able to pay his estate taxes in fine shape. But

I empathize. Like I said, my son would never give up farming. He

loves it. They will never sell an acre, unless he has to.

Senator LINCOLN. But that is the point. He does not have to.

Mine did.

Mr. BUFFETT. Well, he does not have a lot of money. He ran for

office one time. I told him he should put his name in small letters

on the ballot because he is Buffett with no capital. [Laughter.] But

I do think what I just pulled out of the air a little while ago actually addresses this problem. I would have no problem with somebody with a family-owned business or a farm, which is a familyowned business of a specialized sort——

Senator LINCOLN. Sure.

Mr. BUFFETT [continuing]. If, on their death, the tax is computed,

interested is accumulated on it but it is not paid, but it does not

become due until the farm or the business leaves the family. In effect, the government would collect its money, plus interest. Nobody

would have to sell a thing. Nobody would have to give up any dollars of working at improvement.

Nobody would have to move their plants. They could do it for

generation after generation. In the end, the government would

have gotten original, plus interest, on it, and nobody has suffered

in between as long as it is in the family.

If that farm is worth $200 million some day and they sell it and

the accumulated obligation now is $60 million, then the heirs get

$140 million when they decided to sell the family farm.

Senator LINCOLN. But I think the biggest problem—and you all

correct me if I am wrong—that we have run into in that is in terms

of the cost, because when we go to do something like that, to make

a carve-out like that, it gets scored at an enormous cost.

Mr. BUFFETT. Yes. In 2006, taxable estates were $116 billion. In

that $116 billion, there was $770 million of farm assets, six-tenths

of 1 percent of all the assets. If I die tonight, I have a farm. I am

not a farmer, so even some of the six-tenths of 1 percent would not

be a huge item. The government would have an asset. It would

have this claim which it was eventually going to collect, with interest.

Senator LINCOLN. I have certainly been supportive of the carveouts for family farms and some of what we have talked about. The

concern we always get presented when we start talking about that,

from the estimates that we get, is the enormous cost that we see

and what it does to the cost of what we are trying to do, because

we are trying to be fiscally responsible in how we move forward in

estate tax reform and what it costs us.

37

I do not have any further questions. I appreciate so much all of

you all bringing to the table your particular expertise. I hope that

you will not go far, because I think you have found that there are

many of us here on the committee who feel a tremendous passion

about doing something and moving forward and making things

right, and we are certainly going to need your continued interest

and continued input into this issue.

Thank you so much. The committee stands adjourned.

[Whereupon, at 12:03 p.m., the hearing was concluded.]

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