Table 6

loans to the small business. When the small business loses its CEO (usually the president), the bank is very likely to recall a portion of the loan or decline to extend additional time or renew current loans until the future of the business is more certain. The bank knows that cash must be generated to pay existing high estate taxes, and if this capital is somehow taken out of the business by the heirs, it would increase the debt-to net worth ratio to the detriment of the bank's position. Bankers are required to protect the money they loan. We can validly conclude that banks are not a likely source of capital upon the death of a small business owner.

The problem of maintaining the viability of these small enterprises with average debt to equity ratios, which regularly exceed 100 percent, is often insurmountable without the added burden of a huge estate tax. The addition of a large tax liability to the already high debt structure of the typical wholesaling corporation would surely mean the sale or liquidation of a majority of these corporations.

In most cases, some life insurance proceeds are available. However, in our business perpetuation survey, information was requested to determine to what extent small companies hold life insurance on the life of the principal. Such insurance is used to facilitate the small corporation to buy out the interest or a large part of the interest from the heirs. This is particularly useful when the continuation of the business management will fall on others than the heirs.

Typically,

it is the case of younger employees who have minority stock interests. Out of the 5,000 firms which participated in the survey, only 1,800 firms responded to the question on life insurance. (Table 7) The survey concluded that relatively few owners, regardless of corporate net worth, have initiated substantial amounts of corporate-owned insurance on their own lives. For example, the table indicates that 59.76% of the respondents hold insurance payable to the corporation valued at less than $100,000. Such amounts would rarely be sufficient to purchase a departed CEO's interest from his heirs.

In view of the increasing difficulty of smaller business enterprises to continue due to the delay in reforming and updating estate taxation, we believe this Committee should give serious consideration to our recommendation to increase the

estate tax exemption to $200,000.

I have attempted to outline some of the difficulties currently encountered by smaller wholesaler-distributors in the area of estate taxation and business perpetuation. We note that some tax reform proposals introduced in the Congress do not contemplate any increase in the estate tax exemption, but rather propose another change the imposition of a capital Such a tax would

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gains tax on assets transferred at death.

sound the death knell for small businesses such as those engaged in wholesale-distribution.

Those who favor such a tax argue that unrealized appreciation of capital assets, regardless of kind, is income which currently escapes taxation when held until death. They maintain that this unrealized capital gain should be taxed as if it had been sold the day before death, as if it had been realized.

To the typical small wholesale-distribution firm, a tax on capital gains transferred at death, coupled with estate taxes due, would most probably preclude the business being transferred to the next generation. Our association has attempted to analyze the impact of the proposed legislation on specific firms in the wholesale-distribution industry. Let me give you an example of the operation of proposed tax legislation on one such firm typical according to IRS data and also a typical small wholesaler of refrigeration equipment. This firm was founded in 1948 with invested capital of $13,000. The firm has been continuously profitable throughout its existence, though its profits have

never been large either in relation to sales or net worth. The continuously growing capital requirements of the business necessitated that every dollar of profit be reinvested in the business. As a result of this pattern of reinvestment, the net worth of the business increased to $495,000 at the end of 1974.

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In Table 8, we attempt to portray the tax consequences for this firm under existing estate tax legislation, as well as those under one of the frequently mentioned proposals for tax change a capital gains tax on assets transferred at death. The principal owner, whose spouse died in 1971, has three prospective heirs, a son who is active in the business and two married daughters. Because the growing business has absorbed all of the firm's profits, the firm comprises virtually all of the owner's estate. For simplicity of illustration, we will therefore assume that the firm comprises the entire estate. You will note that, based on the existing estate tax structure, the heir would owe an estate tax of $124,900. Assuming that this estate were granted an extended period (i.e. ten years) in which to pay the estate tax due based upon a hardship finding, the first annual payment of estate tax and interest would amount to $23,731, or $6,131 more than the average annual after-tax profits of the firm over the past seven years. (I might observe that if the estate tax exemption and rate structure were adjusted to establish an "inflation-adjusted parity" with the tax structure legislated in 1942, the total