John R. Woloshen
Owner
RATA Associates, LLC
1916 Boothe Circle
Longwood, FL 32750

Written Statement for the U.S. Senate Finance Committee
Hearing on March 12, 2008
“Alternatives to the Current Federal Estate Tax System”

Chairman Baucus and Members of the Committee: I simply find it hard to believe how short-sighted some policymakers and interest groups are. The inheritance tax presented today as an “alternative” to the current death tax will affect no change in the tax burden experienced by small-businesses such as my own.

Any form of death taxation will, without a doubt in my mind, eat up my entire estate since I own a small but very successful business. Regardless of whether the tax is applied to my children or to me, the burden of the tax will fall on the business and its 14 employees. When I die, my business will undoubtedly have a tax bill greater than all of my other assets combined based on the money it generates, even though it is so specialized that it has a very low, possibly ‘zero’ market value. My two grown children who have been running it and making it grow for more than 10 years without my help will not inherit anything and the business will go down the tubes, putting both of them out of work along with 14 high-paid technical employees.

My business, RATA Associates was founded in 1989 to provide software support for compliance with certain federal housing regulations. I believed in my ability to make this business successful, and initially worked 70-80 hours a week to get it going. My effort was rewarded, as the service turned out to be a profitable niche market and provided substantial revenue, most of which was reinvested in software improvements. However, the same boutique specialty that makes the business successful has also made it effectively worthless as market value is concerned. My main “assets” are the minds of the employees who understand the complexities of our software, the regulations of the Home Mortgage Disclosure Act, Fair Lending, and Community Reinvestment Act, and the proprietary services that we have developed to help banks and lending institutions achieve compliance with these regulations. As a result, the IRS most likely will value the business very high based on past and expected future profits, but there is not enough tangible assets or property which could be sold to raise the cash needed.

An inheritance tax which taxes the individual bequests to my son and daughter, rather than my estate, would still leave my children in a bind. After taking a small exemption, perhaps $2 million a piece, they would still be forced to pay over half of the value of the business in taxes. This could easily come to $10 to $20 million. The only way to pay this would be to sell the business, or take out a loan that would make running the business more of a chore than those two bright individuals deserve. In fact, it is likely that the highest loan I could take out would be $1 million, which would not be enough to cover the likely death tax levy.

The federal government will possibly have a short term tax windfall by taking everything I own and/or forcing the sale of houses and office building at ‘fire sale’ prices to make them sell quickly. However, in about 5 years time or less, it will have taken in less than it would have if the business were to keep running and growing, just from the income taxes paid by my two children and the 14 (possibly more by the time I pass away) employees.

My employees are some of the most intelligent, hard-working and loyal individuals I have ever known. Many of them have been with me from the start, and they have stuck with the company through slow periods and rough patches. They do not deserve to have their employment – and for that matter, retirement – security, thrown into a tail-spin due to a tax which neither I nor my children will be able to afford.

Honorable Senators, I am very frustrated. I am also somewhat angry that this insidious tax is still with us when simple ‘COMMON SENSE’ says it should have been repealed long ago. The IRS has already taken 30-40% of my business’s earnings through the income tax. Is it too much to ask that my children be allowed to keep running the business, preserving my employees’ jobs and providing long-term income tax revenue?

I realize that some people think that all businesses possess the liquidity of Bill Gates or Warren Buffett, and therefore face no serious burden with the death tax. Unfortunately, this is not the case for me. I cannot set up foundations, hire a legal team specifically for the purpose of rearranging my assets, or otherwise take advantage of the many benefits open to individuals such as Gates and Buffett. When I die, absent a repeal or significant reduction of the existing death tax, my children will definitely be forced to try to sell the business.

Right now, it seems the prospects for positive legislation are low. I fear we will go into 2010 with a ‘recipe for murder’ in place, and come out in 2011 with what we have now or worse. Members of the Senate Finance Committee, I ask that you prevent this from happening by supporting legislation to repeal the death tax or substantially reduce its rate. This is the only appropriate “alternative” to an unfair and destructive tax.

I’m sure that my situation is not unique. There are tens of thousands of small businesses who face the same problem. This tax is a nightmare for people like me who are trying to live the American dream. Thank you for your time and for your efforts to deal with this threat to my livelihood and that of my family.