Seeking Relief from Family Estate Taxes for Small Businesses.

We are all familiar with the financial obligation of having to pay taxes. Taxes have been part of our existence since early biblical days. They are collected and used to support our government at federal, state and local levels for civil purposes. Taxes are assessed to income, property and goods.

Among the taxes levied on Americans is the federal estate tax, which the government created to raise funds for war-related events. The first federal estate tax was enacted in 1797 to fund the nation's emerging Navy Once that goal was met, the government repealed the tax in 1802.

The federal estate tax was re-established as other national emergencies arouse, such as the Civil and Spanish American wars, then subsequently repealed. In 1916, the federal estate tax became a permanent fixture of our nation's tax code and was considered to be a luxury tax on the wealthy.

Currently the law effects any individual or business that has an estate valued in excess of $675,000. The tax is triggered by the death of the estate's owner, rendering those who inherit the estate to not only have to come to terms with the loss of a loved one, but, in the absence of an estate plan, also to deal with having to pay exorbitant taxes.

All assets and taxable gifts made during a lifetime are included in the valuation at the taxable rate of 37% as the minimum, and 55% as the maximum. It is important to note that the property income and possessions have been taxed previously; therefore, in effect, a second layer of taxation is assessed. Add to this the fact that, in most cases, some portion of the estate also is likely to face a capital gains tax.

Redefining 'Wealthy'

There was a time when $675,000 was considered a lot of money but by today's standard, it hardly seems likely that this sum would deem anyone wealthy With the accumulation of all assets, including any combination of the following: home, pension, IRA, 401(k), life insurance and any taxable gifts made during a lifetime, $675,00 may not be as difficult to attain as one might think.

As such, many families and small businesses find themselves in a position of having to sell most of their assets, or having to borrow money to pay federal estate taxes. As the law stands, families have little time to collect the needed funds: federal estate taxes are due nine months after the date of death and must be paid in cash.

In recognizing this onerous tax, NTCA began lobbying Congress more than a decade ago in an effort to have the federal estate tax repealed. NTCA believes that the complete elimination of the federal estate tax is vital to the preservation of its members - small locally owned and operated rural cooperative and commercial incumbent local exchange carriers (ILECs). The tax is counterproductive to the national economic goals, and NTCA holds that the nation should no longer foster a policy that forces a family owned business to be sold for the sole purpose of paying taxes.

NTCA also is a member of the Family Business Estate Tax Coalition (FBETC), represented by 100-plus organizations and consisting of more than 6 million members. The FBETC serves as the principle voice of family owned businesses, farms and ranches, and supports an aggressive phase-out schedule of the federal estate tax.

A Distressing Turn of Events

In case after case, small family owned companies have been forced out of business because they could not overcome the difficulty of obtaining the cash needed to pay the federal estate tax. And those that somehow manage to survive the tax often have to sell a portion of their business to come up with the funds. These businesses are faced with downsizing their operations by liquidating property or equipment and laying off employees.

This in turn increases unemployment in the nation and has a direct impact on the country's economy It is estimated that because of the financial burden brought on by this tax, more than 70% of family businesses do not survive into the second generation of owners, and approximately 87% of these small family businesses fold before the third generation can take the helm. So, to think of the estate tax as a tax for the wealthy is, in fact, a gross misconception. The plight of one Colorado family illustrates well the devastation this tax can bring to Americans. As reported by a local news station, when the father died, he left the family home, an 1,810-acre ranch near Glenwood Springs, to his children. However, as the father had no estate plan, upon his death, the children faced a tax assessment of more than $1.5 million. The heirs were taxed at 55% on the value of the estate, plus an additional 25% in capital gains.

Their inability to come up with this exorbitant sum forced them to auction off their home. The land was appraised at approximately $18 million, but sold to one bidder for a little more than $8 million. After paying taxes, attorney's fees, realtor costs and accountants, the family expected to net about $800,000, less than 5% of the property's value.

Small Pay-off for the Pain

Ironically the hardship that this tax puts on families and small businesses cannot even be justified by the money it brings into the federal coffers. A 1998 study conducted by the Joint Economic Committee, an advisory panel composed of members of the U.S. Senate and House of Representatives, showed that revenues from the annual estate tax were only 1.4% of total federal receipts. The study showed that the social and economic costs imposed by this tax on family businesses and the American economy greatly exceed the revenue it produces. Think about it: for all the damage this tax inflicts on countless Americans, the revenue it generates represents less than 2% of the total amount of taxes the federal government takes in.

It has been through the efforts of members like Sen. Jon Kyl (R-Ariz.) and Reps. John Tanner (D-Tenn.) and Jennifer Dunn (R-Wash.) that repeal of the federal estate tax has become prominent on the legislative radar screen and is receiving growing attention.

In the effort to repeal the federal estate tax in the 106th Congress, Tanner and Dunn co-sponsored H.R. 8. Their bipartisan bill would gradually phase out the federal estate tax over a 10-year period. On the other side of the Capitol, Sen. Kyl sponsored a bill (S.1128) to immediately repeal the federal estate tax. Both bills will be re-introduced to the 107th Congress. Sens. Richard Lugar (R-Ind.) and Wayne Allard (R-Colo.) also have individually introduced similar bills for estate tax relief.

NTCA also is encouraged that President George W. Bush plans to include estate tax relief in his 2001 tax cut package, and that Federal Reserve Board Chairman Alan Greenspan has cautiously embraced Bush's proposed tax-cut plan due to the slowing of the economy.

NTCA will continue to work closely with congressional members, as well as the Family Business Estate Tax Coalition, to successfully repeal the federal estate tax.

Tammie Logan is government affairs representative for NTCA.

                          DISTRIBUTION OF 1998
                            FEDERAL REVENUES
Individual Income Taxes   47.6%
Estate & Gift Taxes        1.4%
Payroll Taxes             33.8%
Corporation Income Taxes    11%
Excise Taxes               3.3%
Other Sources                3%
SOURCE: OFFICE OF MANAGEMENT AND BUDGET
Note: Table made from pie chart