AICPA testimony calls for moratorium on Section 2036(c) antifreeze provision.

AICPA TESTIMONY CALLS FOR MORATORIUM ON SECTION 2036(c) ANTIFREEZE PROVISION

Arthur S. Hoffman, chairman of the executive committee, and Thomas E. Reardon, chairman of the subcommittee on small business taxation, of the American Institute of CPAs federal taxation division, testified before the Senate Committee on Small Business on Internal Revenue Code section 2036(c) freeze provisions. They recommended the effective dates of the provisions be deferred for two years, until December 31, 1991, giving Congress and the Treasury time to study the issue.

They noted that under today's standard valuation methods a business needn't generate much income to be valued at the highest estate tax levels. Thus, estate tax liability can run as high as 60% of the value of a business and interest on the estate tax deferrals can tie up a business's income for years.

They said section 2036(c) precludes a freeze of the value of the founder's interest at the time he or she wishes to pass the business's operations, and its rewards, to family members before the company appreciates under their management. The founder could make a gift of the shares, "but the gift tax is as high as the estate tax, and cash in the necessary amounts is ordinarily not available to the prospective donor,"

Furthermore, they pointed out, the founder may need dividend income from the company to fund his or her retirement. "Consequently, under the current state of the tax laws, knowledgeable advisers are often obliged to recommend |sell now' to founders of successful businesses."

Hoffman and Reardon claimed one unfortunate resut of such advice would be to accelerate the consolidation of businesses across the country, with adverse effects on competition, community services and employment. They also pointed out that section 2036(c) was adopted "without hearings or debate," having slipped into the 1988 Technical and Miscellaneous Revenue Act at the eleventh hour.

Finally, they urged Congress to use the moratorium to "provide that freeze transactions be reported and the valuations of the interests involved supported by appraisals." They also called on the committee to "hold hearings and have the committee staff work with with professionals and business organizations to find practical solutions to the problems that caused the initial overreaction in the form of 2036(c)."

Frank Swain, the Small Business Administration chief counsel for advocacy, seconded the opinion of Hoffman and Reardon in his testimony before the Senate Small Business Committee. He labeled 2036(c) a "severe barrie for continuity of family-owned businesses" and said "tax laws should encourage family business continuity rather than cause families to sell their businesses to pay the estate taxes."