John Bradshaw
CEO and Owner
Portland Transmission
1016 Southeast Hawthorne
Portland, Oregon 97214

Statement for the Record

U.S. Senate Finance Committee

Federal Estate Tax: Uncertainty in Planning Under the Current Law

November 14, 2007

Chairman Baucus, Ranking Member Grassley, and members of the Committee, I am honored to present testimony about the Federal Estate Tax, or death tax, and its effect on my business.

In my experience as a business owner, it is practically impossible to adequately prepare for the death tax, even with thousands of dollars in CPA and legal fees. No matter how much time, money and energy is expended, the actual death tax liability is never fully known until death. This means that the surviving family can never be sure whether they have enough capital to pay the tax, or will be forced to take on burdensome loans, unload business assets, or even sell the entire business in order to produce the cash needed.

I believe that it is fundamentally unfair to burden families with such an onerous tax simply because the past generation has attempted to pass on a successful business. The death tax punishes hard-working business-owners who have already paid taxes on their earnings, built the local economy, created jobs, and contributed to the community. I should not have to waste my time and money simply to prevent my business from being sold when I die, and neither should any other business owner. This is not a minor flaw of the death tax – it is inherent to the tax’s legal structure. As long as the tax confiscates crucial business assets, businesses such as mine will be placed in limbo every time a generation dies. For this reason, the death tax will continue to cause headaches and grief to family business owners unless it is permanently repealed.

Portland Transmission was started by my father in the early 1930’s. After surviving the depression and civilian rationing during the 2nd World War, Portland Transmission became one of the first repair centers to work on automatic transmissions. Outside of our shop, there were no options for the first owners of vehicles with automatic transmissions.

While we continue to do innovative repair work, we have built our current success around our distribution operation. Today, Portland Transmission has become one of the primary distributors of transmission parts in the nation. We occupy a 32,000 square foot warehouse in Portland where we ship parts to repair centers around the world. In 2005 we were the winners of the Massachusetts Mutual “National Family Small Business of the Year” and in 2007 we won the Small Business Administration’s “Oregon Small Family Business of the Year” award. If things had gone differently with the IRS in the wake of my father’s death – as they nearly did – it is very possible that we would not have won those awards or even have been in business.

When my father died, the IRS demanded an unexpected and unavailable $189,000. As we learned the hard way, you always have more assets on hand than your calculations tell you. My family did not have the cash to pay this tax, nor did we have stocks or other easily liquid assets which we could sell in order to provide the cash. Our liability was almost completely due to the estimated value of the business, meaning payment would have to come out of the business. What most politicians do not seem to understand is that businesses like ours do not have considerable cash reserves on hand. We cannot simply part with nearly two-hundred thousand dollars.

In order to pay the tax, we were forced to take out a large loan and sell – at cost – an entire line of inventory. This is not simply an “inconvenience” for a family-owned business such as Portland Transmission. We cannot afford to take on debts which do not supply us with profitable merchandise or productive employees. As anyone knows who has taken basic economics, resources are scarce and cannot simply be made available because someone needs them. Loans are okay as long as they make the company stronger and lead to higher profits which can be used to pay off the loan. Obviously, the federal government has done nothing to increase our profitability. This means that paying the tax is a drain on our company’s revenues – the same revenues we use to pay our employees and maintain our equipment.

Just as we cannot afford to take on unproductive loans, we also cannot afford to sell products for less than the cost of producing them. When we are forced to sell a product at below market value, we lose money. Unlike the Hollywood depiction of the business world, companies do not simply “jack up” prices in order to get higher profits. We ask for the highest price that our clients will pay, and produce our product accordingly. We depend on that expected price to provide a steady stream of income. When we sell below our asking price, we lose the money which we depend on to pay our employees. We cannot simply raid a mythical “slush fund” to make cash flow and keep our company in the black.

Despite these losses, we have managed to withstand the first generation of death tax liability. Whether we will be able to continue to keep the company running after my death is another matter entirely. Because we think of our 21 employees above all else, we will do everything to maintain their jobs. After all, we depend on their hard-work for our current success. Letting go of even one employee would be a real loss to our company.

Our “options” for obtaining liquidity to pay the death tax include the sale of company land (currently held as collateral for productive loans), the sale of inventory and other assets, and possibly even the sale of my home. None of these are preferable options, which is why we continue to spend hours in discussion with our CPA and lawyer. Keep in mind that this is time that should be spent in productive activity to maintain and grow our business. While it is true that all taxes encourage some degree of economically unproductive activity, the confiscatory nature of the death tax is the worst. Because it threatens the very sustainability of a company, families like mine will spend hours agonizing over strategies to keep their business from becoming a liability. The alternative – losing the business – is to be avoided at all costs.

My story is very simple: the death tax is destructive to family-owned businesses. I see no reason to maintain a tax which provides Washington with a pitiful $24 billion, while putting otherwise strong companies through considerable financial duress. As my testimony is filed, families across America will spend the holiday season reviewing their assets and painstakingly shielding the family business from the death tax. This wasteful and anti-social activity should be reason enough for Congress to abolish the death tax immediately.

Members of the Committee, there is no way to ever have certainty with the death tax – except that it will certainly threaten businesses across America as long as it exists. Please take the time in this session to pass legislation to abolish this tax once and for all.