[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
HEARING ON CASH VERSUS ACCRUAL: THE POLICY IMPLICATIONS OF THE GROWING
INABILITY OF SMALL BUSINESSES TO USE SIMPLE TAX ACCOUNTING
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC, APRIL 5, 2000
__________
Serial No. 106-49
__________
Printed for the use of the Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
65-508 WASHINGTON : 2000
COMMITTEE ON SMALL BUSINESS
JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
DONALD A. MANZULLO, Illinois California
ROSCOE G. BARTLETT, Maryland DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey CAROLYN McCARTHY, New York
SUE W. KELLY, New York BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania DONNA M. CHRISTIAN-CHRISTENSEN,
DAVID M. McINTOSH, Indiana Virgin Islands
RICK HILL, Montana ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania TOM UDALL, New Mexico
JOHN E. SWEENEY, New York DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota GRACE F. NAPOLITANO, California
MARY BONO, California BRIAN BAIRD, Washington
MARK UDALL, Colorado
SHELLEY BERKLEY, Nevada
Harry Katrichis, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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Page
Hearing held on April 5, 2000.................................... 1
Witnesses
Mikrut, Joseph M., Tax Legislative Counsel, United States
Department of the Treasury, Washington DC...................... 5
Mieras, Shane, Project Manager, Mid-Ceitling and Drywall,
Rockford, Michigan............................................. 28
Wulkopf, David E., CPA, Treasurer, Beckner Painting Midwest,
Inc., St. Louis, Missouri...................................... 30
Harris, Roger, President, Padgett Business Services, Athens,
Georgia........................................................ 33
Olson, Pamela F., Chair-Elect, Section of Taxation, American Bar
Association.................................................... 34
Satagaj, John S., Managing Partner, London and Satagaj,
Washington, DC................................................. 36
Schneier, Abraham L., Partner, McKevitt & Schneier, Washington,
DC............................................................. 40
Appendix
Opening statements:
Talent, Hon. James........................................... 50
Velazquez, Hon. Nydia........................................ 53
Manzullo, Hon. Donald A...................................... 55
Tubb-Jones, Hon. Stephanie................................... 56
Prepared statements:
Mikrut, Joseph M............................................. 61
Mieras, Shane................................................ 68
Wulkopf, David E............................................. 73
Harris, Roger................................................ 77
Olson, Pamela F.............................................. 82
Satagaj, John S.............................................. 93
Schneier, Abraham L.......................................... 103
Additional material:
Written statement of American Dental Association............. 108
Written statement of the Associated General Contractors of
America.................................................... 113
Written statement of Anthony Shaker, President, Air
Conditioning Contractors of America........................ 116
Written statement of the Plumbing-Heating-Cooling
Contractors-National Association........................... 122
HEARING ON CASH VERSUS ACCRUAL: THE POLICY IMPLICATIONS OF THE GROWING
INABILITY OF SMALL BUSINESSES TO USE SIMPLE TAX ACCOUNTING
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WEDNESDAY, APRIL 5, 2000
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360 Rayburn House Office Building, Hon. James M. Talent,
[Chairman of the committee] presiding.
Chairman Talent [presiding]. We will now call the hearing
to order. I want to welcome our witnesses here today and take a
moment to thank, in particular, Mr. English and Mr. Manzullo
and Mr. Sweeney of the Committee for their legislative efforts
on the small business issues before us today.
It's easy for our eyes to glaze over when we hear the terms
``cash versus accrual'' or ``installment method of
accounting.'' These terms are the rules that govern and
determine when, not if, small businesses and other taxpayers
have to pay taxes on their income.
The cash method is a simple method of accounting allowed by
the tax code that most closely mirrors the way many small
businesses operate. It allows them to pay taxes on income in
the year that they actually receive the income. This is, at
best, a brief deferral of tax, not any special exemption or
waiver.
In contrast, forcing small businesses, including small
contractors and service providers and, especially including
small contractors and service providers, to switch to the
accrual method of accounting means that they have to pay now
and collect later on their accounts receivable. In reality,
most small entities are willing to forego deductions to use
simple accounting and have used the cash method consistently
for years, if not for decades. An example is Beckner Painting,
a constituent of mine who will testify later today, who has
used cash accounting consistently since 1965.
Accounting issues have become increasingly important and
controversial because of the underlying implications of recent
Treasury proposals and consequent IRS enforcement activities
that are hurting small businesses. We will explore these policy
implications and the pending regulatory guidance that the
Treasury Department plans to issue on who must use accrual
accounting.
Unfortunately, the Treasury Department's recent policy
statements and proposals demonstrate an increasingly aggressive
position designed to deny American small business taxpayers the
ability to use simple and lawful tax accounting, including the
installment method repeal successfully advocated into law by
the Treasury Department last year.
Similarly, the Treasury Department has announced it will
soon issue guidance regarding the rules related to the cash and
accrual methods of accounting. Specifically, the Department
intends to issue guidance regarding when merchandise used by a
taxpayer requires the use of inventories and, thus, the accrual
method of accounting. The Treasury's plans, therefore, are
critical in determining whether small businesses will find real
relief or increasing controversy in their ability to use simple
accounting in paying their taxes.
When testifying here today and moving forward on any
regulations, I urge the Department to keep in mind that tax
policy is distinct from financial accounting. Many important
considerations, including fairness and simplicity, outweigh the
need, if any, for mathematically precise matching of income and
expenses for tax collection purposes.
Moreover, what you may consider in your accounting changes
inside the Beltway harshly affect the lifeblood of small
contractors and service providers, their cash flow. Having to
pay taxes on income small entrepreneurs have not received
strangles their cash flow and their businesses. Accordingly,
the use of Treasury and IRS resources to litigate and audit
small business contractors and service providers who regularly
use cash accounting seems both cost ineffective and
unreasonable.
Congress has made great strides in the last few years to
provide tax relief for small businesses and to reform the
Internal Revenue Service. I may say this Committee has been at
the forefront of those efforts. The Committee appreciates the
new direction the Commissioner is obviously taking the IRS in
its responsiveness to the small business community. I hope any
new policies, regulations, or legislation that the Treasury
Department proposes and the Congress considers will make this
important job easier.
In this regard, I want to make two more points. First of
all, I appreciate Treasury's recognition of the damage last
year's installment change is causing small business. I believe
its policy position on installment sales is fundamentally
flawed. I urge the Department to support H.R. 3594 to fully
reverse last year's repeal of the installment method of
accounting for accrual basis taxpayers.
This bill would restore the ability of small businesses to
sell their businesses without losing between 5 to 20 percent of
their value, 8.2 percent on average. In many cases, this value
represents the small business person's life's work and
retirement savings, which are now unexpectedly slashed.
Two, I urge the Treasury to support a proposed legislation
to allow small businesses with gross receipt of $5 million or
less to use the cash method of accounting without limitation.
In the current law, Congress explicitly recognizes that
allowing small business C corporations to use cash accounting
outweighs any inherent distortions in the timing of their
income and expenses. Setting a lower-than-$5 million threshold
for other small businesses, including sole proprietors,
partnerships, and S corporations makes no sense and would lead
to additional and unnecessary complexity.
I'm happy now to recognize the distinguished gentlelady
from New York for any comments that she may wish to make.
Ms. Velazquez. Thank you, Mr. Chairman. Over the past few
years, America has experienced an unprecedented economic boom.
And no one can deny the importance of small business in
creating this growth and supporting our communities. Our
nation's entrepreneurs provide jobs and represent the major tax
base for our schools and roads, embodying the spirit of
entrepreneurship that has made this country great.
However, too often small businesses lack the capital they
need to grow or they don't have the money at the end of the day
to make being their own boss a reward. One reason for this is
that our tax system often creates road blocks for our nation's
small businesses.
Today's hearing is a continuation of what I believe is one
of the most important roles that this Committee plays to
educate the rest of Congress about the tax challenges facing
our nation's small businesses.
I would like to commend the Chairman for bringing before
this Committee an issue essential to small businesses, the
issue of tax simplification and specifically the cash versus
accrual methods of accounting.
With no two small businesses facing the exact set of
issues, the sides on this debate are clear. Many small
businesses argue that the accrual method is too complicated and
requires many small businesses to retain an accountant, tax
expert, or hire a full-time employee who is skilled enough to
use this accounting method.
I believe that there is one component of this debate that
the Committee specifically has a responsibility to highlight,
because it is a perfect example of the rule of unintended
consequences, that is the repeal of the installment method of
accounting, a variation of cash accounting.
The issue arose last year when Congress passed the Work
Incentives Improvement Act. This legislation has many vital tax
provisions, like the R&D tax credit, work opportunities tax
credit, and alternative minimum tax credit, all significant
provisions. As an offset to pay for this, the installment
method was done away with.
The result was to force most small businesses to use the
accrual method. Unfortunately, this change created more
problems than it solved. Forcing small businesses to use the
accrual method placed an especially disproportionate burden on
those small business owners attempting to sell their
businesses.
Unlike the installment method that allowed the owners to
pay the taxes as the payment was received, the accrual method
forces them to be liable for the full amount immediately, even
if they only have partial or no payments. This has created an
unintended burden on the business owner and a disincentive for
business sales.
I am pleased Congress recognized this and corrected it
through the repeal of the prohibition on the installment
method.
Clearly, given this chain of events, we need to do much
more educating our colleagues about the tax challenges facing
small business owners. We need to continue to push for a tax
system that is progressive but does not place the
disproportionate burden on small business.
One again, I would like to thank the Chairman for holding
today's hearing. Creating a fair and equitable tax structure
for our nation's small businesses is crucial to their long-term
success. At the same time, we must work to ensure that, by
solving one problem, we do not create a more serious problem
elsewhere. I look forward to hearing the testimony of today's
witnesses and I thank the Chairman again for his hard work on
this issue.
[Ms. Velazquez's statement may be found in appendix.]
Chairman Talent. All right. Before we get to our first
panel, and while it's our practice for only the ranking member
and I to have opening statements, in this case, Mr. Manzullo,
who does chair the Tax Subcommittee wanted to make a brief
opening statement, so I'll allow him to do it.
Mr. Manzullo. Thank you, Mr. Chairman. I commend you for
holding this hearing today. As Chairman of the Tax
Subcommittee, I realize this issue is perceived by some as
being very dry, but it's really a matter of life and death for
thousands of small businesses which have to sell some product
associated with their services or at least use a product
associated with their services.
I first became aware of this issue in 1996 when a dentist
in the district that I represent became an IRS, ``test case,''
forcing him to move from the cash method of accounting to the
accrual method. This changeover required him to pay cash on
income he had not even received. Medical professionals have no
problem paying taxes on what they collect on their billings,
but they object to paying taxes on outstanding invoices,
particularly unpaid bills. This is another illustration of the
IRS trying to collect taxes early.
In 1998, I offered legislation to give physicians and
dentists the choice to remain with the cash method of
accounting. It was reintroduced as H.R. 1004 in this Congress.
I ask unanimous consent that the Chairman include in the
hearing record a written statement of the American Dental
Association on this issue.
[American Dental Association's statement may be found in
appendix.]
Mr. Manzullo. Over the past few years, I've learned that
this issue impacts more than the small business community, such
as landscapers, building contractors, and plumbers. That's why
I'm proud to be a cosponsor of your bill, Mr. Chairman, that
would allow any small business with gross receipts of up to $5
million the choice to remain with the cash method of
accounting.
I could not have said it better than Judge Power when she
reached a decision by the U.S. tax court. She said the IRS,
``abused its discretion when it required the contractor to
change from the cash method to the accrual method of
accounting.'' I was pleased to have a few conversations with
Commissioner Charles Rossotti. I observed he was sympathetic to
the plight of small business owners on this issue.
I understand from previous testimony, the Treasury
Department announced that small business owners with gross
receipts of $1 million or less will be free to use the cash
method of accounting. Mr. Chairman, it's a good step in the
right direction, but I trust, after this hearing, that the new
administration policy will be more in the direction of Chairman
Talent's bill.
Chairman Talent. I thank the gentleman. And the gentlelady
from Ohio has sought recognition. I'm happy to recognize her.
Ms. Tubbs Jones. Mr. Chairman, thank you. I was seeking
unanimous consent to have an opening statement on this issue
submitted for the record.
Chairman Talent. I thank the gentlelady and, without
objection.
And without objection, any member who wishes to submit an
opening statement, it will be entered into the record.
And I truly thank the members for their interest in this
issue which is vital to small business. And we'll just
introduce the first panel and we have one witness on the panel,
Mr. Joseph M. Mikrut, who is the tax legislative counsel for
the United States Department of the Treasury. Mr. Mikrut, it's
your first time before the Committee. We're pleased to have you
and thank you for coming in. You can give us your statement.
STATEMENT OF JOSEPH M. MIKRUT, TAX LEGISLATIVE COUNSEL, UNITED
STATES DEPARTMENT OF THE TREASURY, WASHINGTON, D.C.
Mr. Mikrut. Thank you, Mr. Chairman. Mr. Chairman, Ranking
Member Velazquez, distinguished members of the Committee, thank
you for inviting me today.
I appreciate not only talking about this issue, but at the
Treasury we have come to understand the importance of tax
issues for the small business community and we hope this will
be a continuing dialogue to discuss these matters with the
Committee.
I especially appreciate the opportunity to discuss with you
today the important topic of the proper method of accounting as
applied to any small business. Indeed, the choice and use of a
method of accounting is one of the most fundamental aspects in
determining a taxpayers' tax liability and these matters,
although some may have described them as dry and uninteresting,
are matters of great concern to the taxpayer.
This morning, I would like to focus on four main topics.
One, I would like to discuss with you the current law and rules
regarding the choice of accounting method; two, the tax policy
rationale of such rules; three, the administrative guidance
that we and the IRS are developing in this area; and four,
recent developments with respect to the installment method.
Items of taxable income and deduction generally are taken
into account by a taxpayer in a taxable year based on the
taxpayer's method of accounting. Code section 446 requires that
the selected method clearly reflect the taxpayer's income and
grants the Secretary of the Treasury broad discretion in
determining whether a method of accounting clearly reflects
such income. Once a method is established by the taxpayer, the
taxpayer must continue to use that method until he secures the
consent of the Secretary to change.
Permissible methods of accounting include the cash receipts
and disbursements method, known as cash method, accrual
methods, or any other method or combination of methods
permitted under Treasury regulations.
In general, there are two main methods, those being the
cash method and the accrual methods. The cash method is the
method under which most individuals operate. The cash method of
accounting generally requires an item to be included in income
when actually or constructively received and permits a
deduction for when the expense is paid.
In contrast, an accrual method of accounting generally
requires that an item be included in income when all events
have occurred that give rise to that income, in other words,
when the event occurs that gives rise to the income. And
similarly, a deduction is allowed to the accrual-method
taxpayer when all of the events have occurred that give rise to
the liability that gives rise to such expenditure.
Certain restrictions are imposed on the use of the cash
method. Long-standing Treasury regulations provide that, in
order to clearly reflect income, taxpayers that are required to
keep inventories for a particular trade or business must use an
accrual method of accounting. Inventory accounting is required
whenever merchandise is a significant income-producing factor.
Therefore, a taxpayer who is required to keep inventories is
also required to use an accrual method of accounting.
Exceptions are provided for farmers, even though such taxpayers
generally are engaged in the production and sale of
merchandise.
In addition, certain statutory provisions restrict the use
of the cash method of accounting. Section 448 enacted by
Congress in 1986 requires that C corporations and partnerships
that have C corporate partners and have more than $5 million of
average annual gross receipts may not use the cash method of
accounting. An exception is provided for certain qualified
professional service corporations that are owned by the
employees.
Legislative history of the 1986 Act makes it clear that
taxpayers that are not specifically, quote, ``prohibited from
using the cash method of accounting,'' for example, taxpayers
with less than $5 million gross receipts, are not automatically
eligible to use the cash method. On the contrary, legislative
history clearly states that these taxpayers remain subject to
other requirements, that their methods of accounting clearly
reflect income, and that an accrual method must continue to be
used by sellers of inventories.
The tax policy rationale underlying the use of an accrual
method of accounting is relatively straightforward. Accrual
methods of accounting, when compared to the cash method, are
acknowledged to better reflect economic income and comport to
generally accepted accounting principles for financial
accounting purposes.
The clear reflection of income standard is demonstrated by
the matching principle. Under the matching principle, gross
receipts from sales must be matched with related costs of goods
sold. In order to achieve such a matching of cost to revenue,
it is necessary to keep an inventory account reflecting the
cost of goods available for the sale so that these costs are
not automatically deducted when paid, but are deferred until
the year when the merchandise is sold.
Further, the taxpayer must report income under an accrual
method to ensure that the income from the sale, like the
related inventory costs, are reflected and matched with the
year's sales. Treasury regulations issued in 1918 and have been
continued in force ever since, have contained these
requirements. Their validity has been upheld by the Congress
and the courts several times.
However, as you mentioned in your opening statement, Mr.
Chairman, there are several factors that may override a tax
policy rationale for the use of an accrual method. The relative
simplicity of the cash method justifies its use by small, less
sophisticated, taxpayers where an accrual method may be
burdensome. In addition, the cash method addresses the
liquidity concerns of small businesses in that it provides for
payment of tax at the time that the taxpayer is most likely to
have the cash and ability to pay the tax.
Although long-standing Treasury regulations require that
inventories and accrual methods of accounting are required in
order to clearly reflect income when merchandise is an income-
producing factor, uncertainty exists as to when a taxpayer, and
particularly a taxpayer that provides both goods and services,
is selling merchandise and when the sale of merchandise is an
income-producing factor. In addition, several small,
unsophisticated, taxpayers that do not use an accrual method of
accounting for financial accounting have complained that the
requirement to account for inventories and to use an accrual
method is burdensome.
As you mentioned, Mr. Chairman, we intend to publish
administrative guidance that will address these concerns.
Specifically, we will issue an exception for the use of the
cash method of accounting when the average gross receipts of
the taxpayer are less than $1 million.
We believe such a rule is justified in that these taxpayers
with less than $1 million in gross receipts are generally less
sophisticated, less likely to use an accrual method of
accounting for other purposes, and that the results of using a
cash versus an accrual method of accounting will not vary very
much. In addition, the resources of the IRS will be saved by
not having to examine the returns of these taxpayers.
We believe that this $1 million threshold will cover the
majority of small business. In 1997, the most recent year for
which we have data, approximately 78 percent of all C
corporations, 85 percent of all S corporations, and
approximately 95 percent of all partnerships and sole
proprietorships had gross receipts of less than $1 million. I
would point out that this data that I just gave you is on a
non-aggregated level, so that if one taxpayer engaged in
multiple businesses, there would be some double accounting.
Finally, Mr. Chairman, I would like to discuss with you the
installment method of accounting. The installment method of
accounting provides an exception to the general rules regarding
accrual and cash methods, by allowing the taxpayer to defer the
recognition of income from the disposition of certain property
until payment is received.
Under the installment method, a taxpayer recognizes the
gain resulting from a disposition of property proportionately
as payments are received on an installment note. As such, the
installment method more closely resembles the cash method. It
is primarily for this reason that the Administration proposed
and the Congress passed, as part of the Ticket to Work and Work
Incentives Improvement Act of 1999, to limit the use of the
installment method to cash method taxpayers.
After the 1999 Act was passed by Congress, small business
groups began to express concerns that the repeal of the
installment method for accrual method taxpayers negatively
impacted the sales of small businesses. It is clear that the
extent of the impact of the provision on the sales of small
businesses was unforeseen by policymakers and potentially
affected taxpayers and their advisors during the legislative
process.
Treasury's Office of Tax Policy has met several times with
interested industry groups, including the NFIB, NAM, AICPA,
Small Business Legislative Council, and the U.S. Chamber of
Commerce, and listened to their concerns about the effect of
this recent legislative change. These groups have requested
clarification on the effect of the installment sales provision
on particular transactions. We intend to issue such guidance in
the near-term.
In addition, these groups have expressed a need for an
exception for small businesses. We believe that a $1 million
exception--that we believe is a much broader approach that
would deal not only with the cash versus accrual method of
accounting, but also with the installment sales provision--will
provide much of this relief. However, we understand and we
believe that to go further will require legislation.
Overall, we believe the policy underlying the installment
sales provision enacted in 1999 is appropriate. The installment
method is inconsistent with an accrual method of accounting.
Indeed, Congress has several times cut back the use of the
installment method, most significantly in 1986 and 1987, when
it disallowed the use of the installment method for sales of
inventory.
We now understand, however, that the legislation passed
last year has imposed financial burdens on small businesses
that may override this basic tax policy concern. As such, we
are eager to work with Congress to provide a legislative
solution to alleviate this unforeseen impact of the provision.
Any legislative response should be targeted to address the
legitimate concerns of affected taxpayers. For example, to
address the liquidity concerns facing sellers of small
businesses, we would suggest continued use of the installment
method, perhaps with an interest charge, as provided under
present law, for a certain defined class of small businesses,
regardless of the sellers' method of accounting. There are
other proposed solutions that we would be happy to work with
Congress to address.
Mr. Chairman, this concludes my prepared remarks. I ask my
entire written record be submitted for the record. We look
forward to working with Congress in developing legislative
proposals in these and other areas. And I'd be happy to respond
to any of your questions.
[Mr. Mikrut's statement may be found in appendix.]
Chairman Talent. I'm going to withhold my questions. But,
thank you, Mr. Mikrut. I'm going to withhold my questions for
now and defer to the gentlelady from New York for questions.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Mikrut, many of
the small businesses, the small business advocates I hear from,
talk about the $5 million exception for businesses that want to
use the cash method of accounting. Yet it is my understanding
that the IRS does not interpret the law as containing a
specific $5 million exception. I would like for you to shed
some light on this issue. From the Treasury Department's
interpretation of the current law, is there a $5 million
exception for businesses who want to use the cash method?
Mr. Mikrut. Ms. Velazquez, I've heard the same comment. In
1986, Congress enacted section 448 and what section 448 says is
that if a C corporation, which is a separate corporate
taxpayer, or a partnership that has a C corporation as a
partner, has gross receipts in excess of $5 million, that
entity must use an accrual method of accounting. Some have
interpreted that to mean that if you're under $5 million in
gross receipts, that you may use the cash method of accounting
or you are no longer subject to requirements to use an accrual
method of accounting.
However, when one looks at the legislative history to the
1986 Act, and this is contained in the House report of the Act,
the Senate report to the Act, the Conference report to the Act,
as well as the General Explanation prepared by the Joint
Committee on Taxation with respect to section 448, it is clear
that Congress only meant to affect taxpayers with gross
receipts in excess of $5 million. And they made it very clear
that an exclusion did not apply if taxpayers were subject to
then-current law.
And Congress recognized at that time that then-current law,
pursuant, again, to Treasury regulations that had been issued
since 1918, provide that if merchandise is an income-producing
factor in a trade or business, that that trade or business must
use an accrual method of accounting.
So I think that the current state of the law, as provided
in Treasury regulations and based on legislative history, is
that corporate taxpayers in excess of $5 million must use an
accrual method of accounting and all other taxpayers must use a
method of accounting that clearly reflects their income and if
merchandise is a significant portion of that trade or business,
then an accrual method is required.
Ms. Velazquez. Do all the principals within the
administration support the $1 million threshold for small
businesses who wish to use the installment method?
Mr. Mikrut. Yes, we do. Again, we have been trying to
develop, in the last several years, several safe harbors and
exceptions to be used with respect to small businesses in order
to alleviate their tax compliance concerns.
I think it is generally agreed that taxpayers with gross
receipts of $1 million or less, and this is average annual
gross receipts, so that as an averaging concept so if you have
over $1 million one year, you're not automatically off, that
those taxpayers have particular needs that may override general
tax policy concerns. And their compliance needs may mandate
that they should be eligible to use the cash method of
accounting in certain instances.
Ms. Velazquez. How, then, do you reconcile this $1 million
threshold with the $5 million threshold under current law for
use of the cash method?
Mr. Mikrut. That's a very good question, Ms. Velazquez.
Current law in section 446 requires that a taxpayer's method of
accounting must clearly reflect income. And that we think that
taxpayers that have gross receipts up to $1 million, that the
results that they would obtain in using a cash method, versus
an accrual method, are very similar. So the use of the cash
method for those taxpayers, in many instances, will clearly
reflect their income.
Once you get to taxpayers that have greater gross receipts,
approaching $5 million, it is less clear that the use of a cash
method, particularly when they hold inventories, will clearly
reflect their income. And, therefore, if Congress wanted to
change that result, there should be a legislative change.
We think the tax policy considerations are such that the
clear reflection of income standard is very important and that
I think Congress should go carefully in considering such
legislation. We do recognize, however, that it will create
greater simplicity. The Administration is concerned with the
complexities of tax compliance. In 1997, for instance, we
proposed and Congress enacted a provision that took businesses
with less than $5 million of gross receipts off of the
corporate AMT and that provided considerable simplicity.
However, with respect to the overall method of accounting,
one has to wonder if many of these businesses use an accrual
method for other purposes: for purposes of reporting to their
shareholders, to their owners, for purposes of applying for
bank loans. It is often the case that a financial institution
will ask them what their accounts receivables are, what their
accounts payables are, and what their inventory accounts are.
So, again, to the extent that tax conformity is an issue,
perhaps for taxpayers that use accrual methods for other
purposes, it is appropriate to use them for tax purposes as
well.
Ms. Velazquez. You spoke before about the fact that you
will be issuing guidance to all qualified small businesses with
annual gross receipts of $1 million who continue to use the
installment method. Can you tell me if the Treasury Department
or IRS consult with representatives from the small business
community prior to developing the rules?
Mr. Mikrut. Yes. Both last summer and last fall, the IRS
and Treasury had joint meetings with representatives of the
small business community to discuss the cash versus accrual
issues. In addition to IRSAC, which is an IRS advisory
committee--a group of practitioners and advisors that advise
the Commissioner--we discussed this issue with them several
times, and we discussed the use of the installment with the
small business community several times. And all of these
discussions went into our calculation in trying to develop
guidance in these areas.
Ms. Velazquez. Can you tell me the specific concerns by the
small business groups when you met them?
Mr. Mikrut. Well, I think their specific questions are
contained in my testimony: the relative simplicity of the cash
method of accounting, and their liquidity concerns. These are
the ones that arise the most.
Ms. Velazquez. And what about the $1 million?
Mr. Mikrut. We have not had specific comments on that yet.
We have not yet published the guidance. We're also looking if
we can develop anything else in this area. We'd like to come up
with a complete package. But we would expect that, as soon as
we publish this package, this will go through the normal
process of notices and proposed rulemaking so we will take any
comments that they have into consideration.
Ms. Velazquez. And you would tell me that the guidance that
you will be issuing will reflect the concerns that have been
raised?
Mr. Mikrut. I believe the $1 million threshold will address
many of the concerns. As I mentioned in my testimony, the great
majority of these businesses are under the $1 million
threshold.
Ms. Velazquez. Mr. Chairman, I'll have some other
questions, but I'll make them later. Thank you.
Chairman Talent. Thank the gentlelady. I'll follow in line
and then defer to other members.
Let me go back to the legislative history of section 448,
which was passed in 1986. First of all, Mr. Mikrut, the Act of
1986 was supposed to be a tax simplification Act. I mean, that
was the thrust of it, wasn't it?
Mr. Mikrut. Yes, there were several simplification
provisions in the Act.
Chairman Talent. Congress was interested in simplifying
taxes. Now, whether they actually did that or not is something
we can all argue about, but I mean that was--I remember
watching at the time and it was a big bipartisan deal and it
supposed to simplify taxes.
You made a point that the legislative history, I think you
said, clearly reflects that you still have the authority to
impose the accrual method on small businesses. I'm going to
take you through the legislative history and particularly a
part that I think takes that authority away from you. And for
the convenience of the members, can we distribute this page
that I'm going to be working from? Make sure Mr. Mikrut has a
copy of it also.
Because I'm going to work through this and just what seems
logical to me. I'm trying to put myself in the shoes of our
predecessors and maybe somebody--I don't know if anybody here
was here then or not. I don't think so.
This is Congress' explanation of what it was trying to do
with section 448. And what section 448 says, for the members
who have not looked at it, is that it, on its face, appears to
say that C corporations above $5 million in receipts can't use
the accrual method unless it's a farming operation or a
personal service operation like a lawyer or a doctor or
something like that.
And on its face when I read it, I thought it was intended
to say that a C corporation below $5 million could
automatically use the cash method, at least if they had been
using it in the past. Now the Treasury believes that what I
think and I believe Congress intended as an extra measure of
freedom and simplicity and certainty for taxpayers was actually
a prohibition. Mr. Mikrut, and I don't want to put words in his
mouth, is saying, no, what Congress was trying to do was
prohibit taxpayers with above that amount using it, not make it
clear that taxpayers with below that amount could use it. See?
So let's look at the legislative history and the reasons
for the change. If you look at the bottom of the first column,
that paragraph there, and I won't read all of that, basically,
it's a statement of Congress and an understanding that the cash
method of accounting may not technically reflect a perfect
match of income and expenses. And Congress is saying we
understand that the accrual method might technically match this
better and so, from the strict accounting principle, yes, we're
conceding to the Treasury that this might be better from that
standpoint.
Then look under the exceptions point. On the other hand,
and remember this is a tax simplification bill, ``the Congress
also recognizes that the cash method generally is a simpler
method of accounting and that simplicity justifies its
continued use by certain types of taxpayers and for certain
types of activities.'' That Congress believes--look at this
next sentence. I draw your attention of the members to this--
``that Congress believes that small businesses should be
allowed to continue to use the cash method of accounting in
order to avoid the higher costs of compliance which will result
if they are forced to change from the cash method.''
A pretty clear statement from Congress saying yes, we
understand, Treasury, that in the policy role of Treasury among
the big eight accounting firms, this maybe doesn't fit, but
we're not representing you all only; we're also representing
the small businesses. And, for simplicity's sake, at least if
they've been using it, they should be allowed to continue to
use the cash method. Okay? And that's what it appears to say.
Now you were saying, no, it doesn't say that. Tell me why
I'm wrong in saying that. Why?
Mr. Mikrut. Well, I don't believe you are wrong, Chairman
Talent, because it says that for taxpayers that have used the
cash method of accounting, nothing in this Act changes that.
That if they were properly using it before and if they're under
$5 million, they can continue to use it.
I would point to a statement that I believe----
Chairman Talent. Now you use the word ``properly.''
Congress didn't say, ``if they'd been properly using it.''
Congress says, ``Even if it's improper, according to technical
accounting.'' That was the whole lead-up. Congress was saying,
look, we recognize that sometimes, according to technical
accounting principles and technically matching this and that
and the other thing, it might not be proper. On the other hand,
Congress is saying it's our decision to overrule those that say
if they'd been using it, they can continue to use it, even
though it's not proper.
Mr. Mikrut. I don't believe, Mr. Talent, that section 448
stands for the proposition that taxpayers that were using an
improper method of accounting could continue to do so. In fact,
I think I would turn the page, which isn't here, but somewhere
else in the technical explanation, it says that under prior and
present law, taxpayers for whom the production, purchase, or
sale of merchandise is a material income-producing factor are
required to keep inventories and to use an accrual method of
accounting with respect to inventory items.
So I can reconcile those two statements. And the
reconciliation is that certain taxpayers have traditionally
been able to use the cash method of accounting and nothing in
the 1986 Act disturbs that. And that, in addition, certain
taxpayers have been required to use an accrual method of
accounting and nothing in the 1986 Act disturbs that.
So the question, then, is which taxpayers have
traditionally been required to use accrual methods of
accounting and which are allowed to use the cash method of
accounting? And this, again, harkens back to the regulations
that have been in force since 1918 that say that if merchandise
is an income-producing factor, such taxpayers must use an
accrual method of accounting.
Chairman Talent. No. What you're saying, in essence, is
that the sentence, ``The Congress believes that small
businesses should be allowed to continue to use the cash method
of accounting or to avoid the higher cost of compliance,'' that
the term ``should be allowed'' is not strong enough to overrule
the other evidence in the legislative history which you cite. I
would say there's a conflict there.
Mr. Mikrut. No, I think they're reconcilable. Again, I look
at the word ``continue,'' which suggests to me that if they
were allowed to use it before, nothing in the 1986 Act says
that they cannot continue to use it. The question is: were they
allowed to use it before? And I think the legislation makes it
clear that the regulations that were then in force will
continue to be in force--that if merchandise is an income-
producing factor, Congress recognizes an accrual method is
appropriate and required and did not change that area as well.
Chairman Talent. Now the next sentence says, ``Congress
believes that farming businesses, other than farming tax
shelters and certain corporate farming businesses required to
use an accrual method under the law, should be able to continue
to use the cash method in order to avoid the complexity.'' Same
language: ``should be able to continue to use the cash
method.''
And then it says, ``Finally, the Congress believes that
individuals, whatever the size of activities,'' and this is, by
the way, I think the reason why we didn't mention S corps,
because S corps report as individuals. So I think Congress is
saying, look, C corps are covered by the first paragraph here.
And then S corps, S corps individuals, should be able to
continue, okay? Whatever the size of their activities, should
be able to continue to use the cash method.
Is Treasury taking the position that you can force the
accrual method on farming operations?
Mr. Mikrut. No, we are not.
Chairman Talent. Okay.
Mr. Mikrut. I think it is the long-standing policy that
farmers are allowed to use the cash method of accounting unless
they are subject to section 447 which requires the use of the
corporate form----
Chairman Talent. You're not going after personal services
corporations either, right?
Mr. Mikrut. No, they're not.
Chairman Talent. No changes. Because what you're doing in
the last three years is new. Now it may not be that--it's a new
application--you're saying it's a new application of an old
policy, but as far as small business is concerned and as far as
the Congress in 1986 would have been concerned, this is new.
What you're doing is new.
Now I guess the question I've got for you is if that
language is not adequate to make clear that Congress intended
small businesses to be able to use the cash method if they had
been using it, even if it's not proper, under your thinking,
okay, then why haven't you been able to go after the farming
businesses now or personal services corporations? Because we
used the same language in the legislative history with regard
to all three and this was a tax simplification bill.
You have read out the juxtaposition that Congress put in
here. We recognized that, yes, it may not be proper, okay, but
we want to allow it anyway. And now you're saying we only
intended to allow it when it was proper.
Mr. Mikrut. I think what the legislative history indicates
is that whether a cash or accrual method was allowable was once
determined under regulations since 1918. Congress decided to
overturn those regulations for corporations with gross receipts
over $5 million, but preserved the regulations for all other
taxpayers.
And I think the interpretations----
Chairman Talent. I know what you're saying. You said, in
fact, Congress intended by this Act to restrict what you had
been doing, to pull back from cash accounting. What you're
saying, basically, is that your regulations had been generous
in certain instances as regards C corporations and big ones and
this offended the Congress, so Congress is now pulling back and
is restricting taxpayers.
And I think you've turned it on its head. This is clearly
intended to provide some greater measure of freedom and
simplicity to some set of taxpayers, the small ones, which
Congress went ahead and defined as $5 million; now you're
trying to redefine as $1 million.
And you're reasserting exactly the same considerations
Congress considered and rejected. It said we understand that
you all, you know, the very smart people like you and
accountants who understand all this stuff, it may not fit your
world precisely, but we're going to let small business people
do it anyway.
And I don't know how much more clear we could have made it.
Certainly your statement is at odds with this, your statement
that it's clear Congress didn't intend to permit this is an
overstatement.
Mr. Mikrut. I don't think so, Mr. Talent, no. Because,
again, I look at the words ``continue to use'' and I believe it
was congressional recognition of when the two methods were
appropriate under the existing law.
Chairman Talent. Well, and I'm not on the Ways and Means
Committee. And that's what's frustrating because you think you
do something here and then you turn around and you find out you
didn't do it.
I'll recognize Ms. Kelly. And then, on our side it's Mr.
Sweeney and Mr. Manzullo. And then on the Democratic Ms.
Christian-Christiensen, Ms. McCarthy, Mr. Pascrell. And then
the rest of them are gone. Okay.
Mrs. Kelly. Thank you, Mr. Chairman. Mr. Mitrut, I am
looking at what you're offering here and talked about. From the
standpoint of having been a small business owner, as a small
business owner, one of the most important things I could do for
my business was help it to grow.
And when I looked at the $1 million cap that you have, I
know full well that it's the small businesses that are driving
the economy and you know this. This is driving the good, solid
economy of the United States right now. The increase in the
economy and the increasing number of jobs is being caused by
the ability of the small businesses to grow.
If you cap this at $1 million, I don't see why that doesn't
act as a chill factor on the small businesses. Because what you
then do is kick the small business, $1 million is small
business, when you kick them in having them file in the same
manner that some large corporation does, you're costing them a
lot of money. And what you do is you cut into their
profitability because they have to hire somebody, then, to fill
out an additional packet. It's an additional, basically, acts
as an additional tax burden on them.
I want you to defend against what I just said. Because I
don't see that in anything you've said in your statement.
Mr. Mikrut. Mrs. Kelly, I may have been unclear in my oral
statement. What the $1 million, as you said, cap is meant to be
is relief. What we are saying is that, notwithstanding Treasury
regulations and notwithstanding what may be in the legislative
history, if a taxpayer is under $1 million in gross receipts
and even if they generally maintain inventories and if
merchandise is an income-producing factor, the IRS will not
question the use of a cash method of accounting.
In other words, the $1 million is a safe harbor. We are not
changing the law with respect to taxpayers over $1 million or
requiring them to use an accrual method of accounting. We're
saying for those taxpayers that are under $1 million of average
annual gross receipts, we will not question the use of the cash
method with respect to their operations.
Mrs. Kelly. Mr. Mikrut, what's your statutory authority for
the $1 million?
Mr. Mikrut. I think there are areas where--the Commissioner
has general discretion. His discretion is generally embodied in
446 that requires a clear reflection of income. There is a----
Mrs. Kelly. I'm sorry, sir, but I do not believe that the
Commissioner's discretion allows the Commissioner to create
law. A cap of $1 million, arbitrarily, pulled out of the air,
is essentially creating law and flies in the face of exactly
what the Chairman was talking about.
Mr. Mikrut. Yes, but the $1 million is a safe harbor. If
the Congress believes that the Commissioner doesn't have that
authority, doesn't have the authority to provide that safe
harbor and has to repeal the $1 million, that will force
certain small businesses that maintain inventories to use an
accrual method of accounting. That is something that we're
hoping to avoid, both for purposes of taxpayer compliance and
IRS administrative concerns.
There has been developed in the case law what is known as
the SIR test which is Substantial Identity of Results test.
And, basically, what the SIR test says is that if you compare
your accrual method to a cash method and get relatively the
same answer, that the Commissioner shouldn't change that
taxpayer's method of accounting. And we think taxpayers that
have less than $1 million of gross receipts generally will
qualify for the SIR test without having to go through all the
calculations to make that determination.
So, again, the $1 million is a safe harbor. It is, we
think, a significant liberalization of law and not a tightener.
Mrs. Kelly. The test you're talking about only applies if
you've got inventory, if I understand. I'm sitting here with
the tax code sitting in front of me and I read it last night.
And I want to tell you, it's really good bedtime reading. But
it seems to me, from the court decisions that I've read, there
seems to be confusion about inventory that I don't see any
clarity and I don't understand what you mean by simplicity and
I don't understand how you call this a safe harbor since it
seems to me nobody really knows, right now, what the courts and
you are calling inventory.
Mr. Mikrut. I think that, Mrs. Kelly, that's why, with the
$1 million test as it is, you don't have to make those
inquiries. You don't have to make a determination of what is
inventory, what is merchandise, when is it an income-producing
factor. As long as you're under the $1 million threshold, the
taxpayer can choose his method of accounting.
Mrs. Kelly. But a lot of small businesses don't have
inventory. My husband and three of my kids are in businesses
that don't qualify for inventory. But my husband's business,
for instance, would be over your gap. And so all of a sudden
you kick my husband and two of my kids into a situation where
you are arbitrarily changing the law and I really think that
you're making law here in a way that--I'm very concerned about
the way you're interpreting section 448 (b) and (c). Because,
depending on how you interpret that, I think you could allow
that $5 million and not bring it back down to $1 million. And
that's really what I'm getting at.
Mr. Mikrut. I'm sorry, Mrs. Kelly, but let me be clear.
Just as we believe that the 1986 Act provision requiring
corporations with more than $5 million gross receipts to use
the accrual method, had no negative inference to taxpayers
under that, our $1 million cap, so that if taxpayers are under
the $1 million they can use the cash method, it will not have a
negative inference to say that if you're over $1 million, you
must use an accrual method of accounting.
We think present law will continue to apply in those cases
and that determination is made under current law and current
regulations.
Mrs. Kelly. Mr. Chairman, I'm going to yield back the
balance of my time. I still feel I've got a lot of questions
here, but I don't want to belabor the issue right now. I am
going to submit some questions to you and I want some real
answers because I still don't feel that you're doing anything
with this except making law. And I think that's the right of
Congress.
Chairman Talent. I thank the gentlelady. Ms. Christian-
Christensen's next.
Ms. Christian-Christensen. Thank you, Mr. Chairman. One of
the next panelists, I believe it's Ms. Olson, in her testimony
is going to say something to the effect that merchandise is
still an unfair term because it's not clearly defined and it
keeps changing and that should justify raising that ceiling.
Was the fact that merchandise is still an unclearly defined
item that is changing currently, was that something that was
considered when the ceiling was set and do you think it could
justify changing the ceiling?
Mr. Mikrut. I believe that that was one of the main
considerations. Just the general simplicity of cash versus
accrual would probably be important enough to liberalize the
use of the cash method. I would agree that recent case law has
made it less clear when something is or is not merchandise.
And we are continuing to look at trying to provide
additional safe harbors through some guidance in that specific
area. And, again, we would hope to try to address all of these
as a combined package of items so not only would we use a $1
million liberalization, but also try to provide more specific
guidance in the merchandise area.
Ms. Christian-Christensen. And you mentioned also and you
mentioned it again just now that you are considering additional
exceptions and safe harbors that would allow the use of the
cash method. What would some of those be?
Mr. Mikrut. Again, this would be, in determining what is
merchandise and in determining when merchandise is significant.
If we could provide certain safe harbors so that taxpayers meet
those safe harbors, they wouldn't have to go through any
further analysis. I think that would be welcome relief. And
that's what we're trying to help along.
Ms. Christian-Christensen. Thank you, Mr. Mikrut. I yield
back the balance of my time.
Chairman Talent. I thank the gentlelady. We have on the
second panel an expert from the ABA who will be happy to
clarify this for us, I'm sure. And will do it, by the way, for
nothing, whereas if she was being hired to do it, it would cost
hundreds of dollars per hour, so it's one of the advantages we
have as Members of Congress.
I'll recognize the gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you very much. I would have a request,
Mr. Mikrut, that you remain present when this panel testifies.
Could you do that?
Mr. Mikrut. Unfortunately, Mr. Manzullo, there is a markup
in the Ways and Means Committee this afternoon and I'll have to
be on hand.
Mr. Manzullo. But this is 11:00.
Mr. Mikrut. Well, okay, I really can't.
Mr. Manzullo. I would like you to stay here. I think you
need to hear what these people are saying. I think you need to
hear about a lady from Rockford, Michigan, whose small company
got fined $80,000 in penalties and interest based upon the fact
of the confusion at IRS as to whether or not she's on the cash
method of accounting. You need to hear these stories.
The purpose of this hearing is so IRS hears the clear
message that you are hurting the little people in America. Do
you understand that?
Mr. Mikrut. We have met several times, Mr. Manzullo, as I
mentioned----
Mr. Manzullo. Can you change your afternoon so you can stay
here?
Mr. Mikrut. I do not believe I can reschedule the Ways and
Means Committee.
Mr. Manzullo. What time is that hearing?
Mr. Mikrut. It's at 1:30.
Mr. Manzullo. What do you have to do before that?
Mr. Mikrut. I have to sit in for the Assistant Secretary of
Tax Policy who was supposed to attend the mark-up. And I'll be
sitting in for him at the desk. So I have to review the
statutory language, the revenue forecasts, and prepare for the
questions that may come up at the hearing, at the markup.
Mr. Manzullo. What really bothers me is the cavalier
attitude of the IRS in all of this and you reflect it. I have
thousands of small businesses in the congressional district
that I represent. Small people. Some earning under $1 million a
year who have been terrorized by the IRS in this cash versus
accrual business. And you readily admit, don't you, Mr. Mikrut,
that there's confusion as to whether or not something is
inventory or merchandise. Didn't you say that?
Mr. Mikrut. Yes.
Mr. Manzullo. Would the IRS consider a regulation, waiving
any interest or penalties on a company that has been audited
which, in good faith, operated on a cash basis which you say
should have operated on an accrual one? Wouldn't that be fair?
Mr. Mikrut. Mr. Manzullo, I think that the proposal we put
forth addresses that specific concern so that if you were,
again, as you said, less than $1 million, this would become a
non-issue and you will be able to use whatever accounting
method you are allowed to use.
Mr. Manzullo. What about over $1 million, though? $1
million to $5 million?
Mr. Mikrut. Again, I think, looking at the authority that
we do have----
Mr. Manzullo. Do you have the authority to waive any fines
or interest on people who have in good faith and grossing
between $1 million and $5 million who are forced to go from a
cash method to an accrual basis based upon an IRS audit? Do you
have the authority to waive the interest and penalties?
Mr. Mikrut. We have the authority to waive penalties, but
Congress has restricted the ability to waive interest.
Mr. Manzullo. Thank you. Would you be in favor of Congress
restricting the ability to collect interest in a situation like
that?
Mr. Mikrut. It's funny that you mention it, because the
markup this afternoon is on the interest and penalty provisions
of the Internal Revenue Code. And when one looks at interest,
there is a distinction between interest and penalties and it is
appropriate that penalties be waived for reasonable cause. And,
quite frankly, more penalties are waived than imposed.
With respect to interest, however, interest is a function
of time, value, and money. So, to the extent that a court, for
instance, determines that a taxpayer's liability is higher than
it is, it seems appropriate to charge interest to that
taxpayer, to treat him as fairly as a taxpayer that was----
Mr. Manzullo. That's really fair. She's going to testify
it's cost her $100,000 in interest because of the confusion of
the IRS whether or not her business should be based on the cash
or the accrual system. And you are sitting here justifying the
imposition of interest in that situation. Is that correct?
Mr. Mikrut. What I'm saying is that there is no ability for
the IRS currently to waive interest in that situation.
Mr. Manzullo. Would you take a position that IRS should be
able to waive the interest if Congress gave you that authority?
Mr. Mikrut. I think each case, with respect to the
interest/penalty provisions, stand on their own. The IRS has--
--
Mr. Manzullo. Let me reiterate this. You've got a business
here between $1 million and $5 million dollars. These people
are strictly honest. Books are open. They've done nothing
wrong. All of a sudden, they get audited by the IRS that says,
oh, by the way, you should be on the accrual method and not the
cash method. You never cheated on your taxes and no one's
saying you did anything wrong. And we're going to impose
$80,000 in fines plus $100,000 in interest.
And you can sit there and you can justify the imposition of
that interest? That's what you just did.
Mr. Mikrut. Well, Mr. Manzullo, not knowing the other facts
than those you just said----
Mr. Manzullo. That's the facts. That's all you need to
know. That's what's going on here nationwide. When I met with
Commissioner Rossotti on this issue, I told him this dentist
was a test case to put all dentists on the accrual system
because the little bit of gold that they may use and some of
the dentures that they may use. And it's part of a nationwide
pattern because now the IRS is test-casing MDs throughout the
nation, trying to force everybody to go on the accrual system.
I'm saying here today that this is your mission to put as
many people on the accrual system as possible to collect as
much money upfront as possible and, sir, that is bringing
terror into small businesses. And I would suggest that you, if
you issue more regulations and issue more guidelines, all you
have to do is say, look, we're just going to back off. We're
going to make a recommendation that anything under $5 million,
we're going to leave the small business people alone.
Do you realize how much easier that would make life in
America for the hundreds of thousands of small business people?
Mr. Mikrut. I think in developing our proposal at $1
million, we did take that into account. Again, I believe the $1
million threshold takes care of the bulk of them.
Mr. Manzullo. When you met with the small business groups
when you formulated the last policy, you mentioned that, which
groups were those?
Mr. Mikrut. I believe the last time we met was, again, it
was on the installment sales provision which was the last time
we did meet. It was the NFIB, it was Chamber of Commerce, the
AICPA----
Mr. Manzullo. Did you contact the Journal of Small
Businessmen?
Mr. Mikrut. No, we did not.
Mr. Manzullo. You didn't. The dentist in my State that you
forced to go on the accrual system is earning under $1 million.
So the IRS, and I want you to listen very closely, the IRS is
forcing small business people earning under $1 million to go on
the accrual system. I want you to take that back to
headquarters. Thank you.
Chairman Talent. I thank the gentleman. Let me state for
the record, because it's just confusing, I don't know that in
my opening statement or the gentlelady's we laid out maybe as
well as we should have why this makes a practical difference to
small business people.
If you're, say, an asphalt contractor, you've probably been
using the cash method of accounting, which means that you
report income as you actually receive it, not at the time when
you're entitled to receive it. And what the Department is now
saying, as I understand it, is that if the asphalt you use is
more than 15 percent of your receipts in a given year, then
that's merchandise or inventory so that you are required to
report your income as if you were a store, as if you were a 7-
11 or a Walgreen's or something. Which means that you have to
report the income when you're entitled to receive it.
Now, this makes a difference when an account receivable is
acquired in a different year than the cash is actually
received. So, if you're entitled to payment on December 1st but
you don't get it until January 15, then under the cash method
you report that income in the following year; in the accrual
method you report it in the previous year. That doesn't matter
so much if it's only applied prospectively in that sense.
But this is the point Mr. Manzullo was making. They come in
and audit and then they go back a few years and say, ``Oh, you
reported income in 1998 that you should have--or 1999 that you
should have reported in 1998. So, you owed it for 1998.'' Even
that is not so bad, but in the interest in penalties then add
up to tens and tens of thousands of dollars.
The other problem is if you report--then those businesses
are forced to treat that as individual rate, and the accrual
method is a harder method from an accounting standpoint. It is
more expensive, it is more complex, particularly since it
doesn't really fit the inventory thing. And, so it is just
another hassle.
And, Mr. Mikrut, we are still searching here for some
overriding policy reason that is advanced through some reason
of equity or something other than what accountants learn about
matching income with expenditures that requires doing this to
these people. Again, if this was some kind of fraud or quasi-
fraud that you needed to--this was a preventative method, you
know, we're going to make certain they don't run. But
nobody's--you're not claiming that, are you, that these are
people trying to get out of it?
[Mr. Mikrut shakes head no.]
Chairman Talent. So, it comes down to some fairly technical
things about--for the record, the witness shook his head saying
no on that; he is not saying it is a fraud. So, what is the
reason to put these people through all of this?
Mr. Mikrut. I think, again, the statutory impetus behind
methods of accounting are under section 446. Section 446
requires that the method of accounting clearly reflect income.
There are certain instances where the use of the cash method of
accounting will clearly reflect the income of the taxpayer.
However, financial accounting literature, which has been
developed well before tax accounting rules, generally
acknowledge that an accrual method of accounting better
reflects income, particularly where inventories and merchandise
are involved, and I think that has been the evolution of the
law, again, since the very beginning of the income tax.
Chairman Talent. I recognize Mr. Hinojosa for questions he
may have.
Mr. Hinojosa. Thank you, Mr. Chairman. I am going to
refrain and ask my questions after I hear the second panel.
But before I do that, I do want to echo the same concerns
that my friend, Mr. Manzullo, has voiced for the small business
community. We are in the 21st century, and Mrs. Kelly also
pointed out to you that the economy is as strong as it is
because of so many small businesses stepping in and starting up
new businesses and expanding them to create the jobs and give
us the economic boom that they contribute to.
I hope that when this Committee finishes with this issue
that we can come forth with a national policy that will make
this a much more friendly environment for the small business
firms, and that the IRS is cut down to size so that they will
not be the big giant that oftentimes imposes their authority on
small businesses and keeps them from doing their job.
So, again, I am going to wait until we finish with the
second panel, Mr. Chairman, and ask the questions then.
Chairman Talent. I will finish up with a couple of
questions, one of them I alluded to. And, first of all, Mr.
Mikrut, let me just say that one of the kind of joint
objectives we have on the Committee is to prevent--oh, I am
sorry, Mr. Bartlett. I didn't see you there, Roscoe, you are
normally so much more vocal. I am sorry, Mr. Bartlett, let me
recognize him.
Mr. Bartlett. Thank you very much.
In another life I was a small business person. I ran a land
development home construction company. At the end of the day
when I liquidated my company, would I have paid any more or
less total taxes regardless of whether I reported on an accrual
basis or a cash basis?
Mr. Mikrut. Mr. Bartlett, that would have depended on
whether tax rates had changed over the course of your business.
Mr. Bartlett. That is correct, but presuming that tax rates
did not change, at the end of the day I would have paid exactly
the same amount of taxes no matter which way I reported,
correct?
Mr. Mikrut. That is correct. What we are discussing here is
a timing issue.
Mr. Bartlett. Okay. I built spec homes and sold them. If at
the end of the year I had five spec homes sitting there that I
had not been able to sell and I had to use an accrual method of
accounting, I would have to go borrow money to pay those taxes.
I didn't have the money. Isn't it true that in the long run the
taxpayer, the IRS, the totality of taxpayers will get as much
money regardless of which accounting method is used? That is
true, is it not?
Mr. Mikrut. Yes.
Mr. Bartlett. Then, why in God's Earth do we want to harass
these small businesses? Because at the end of the day--you
know, next year we are going to have as much trouble balancing
our budget as we did this year. Why do you want to harass these
small businesses when at the end of the day we are going to get
exactly the same amount of money from them no matter which
accounting method is used? Why do we want to harass them? I am
having difficulty understanding this.
Mr. Mikrut. Mr. Bartlett, that was one of the
considerations again with the broad relief.
Mr. Bartlett. But my question is, why do you want to harass
them? At the end of the day you get exactly the same amount of
money no matter which accounting method is used. Why do we want
to harass them and increase their costs of doing business,
which is what you are doing?
Mr. Mikrut. Mr. Bartlett, in a case that you just
hypothesized where you had five homes built but did not sell,
would you have to pay taxes on that? The answer would be no,
because you hadn't sold the homes yet. It is only in the case
where you have sold the homes where you have to pay.
Mr. Bartlett. But I improved the value of those homes. They
are there. You could call them inventory.
Mr. Mikrut. They would be inventory. We would not, though,
however, require a market-to-market type system where the value
that was in those homes would be subject to tax. We would not
require taxation until the homes were actually sold and a
realization had occurred. However, again, it is when the event
occurs is at the crux of the issue of a cash versus accrual
method of accounting.
Mr. Bartlett. On several of those homes that I sold I held
the mortgage. I didn't get that money except by little dribs
and drabs over a 30-year period. If I was on an accrual method,
then I would have to pay the tax on that total sale at the time
of sale, wouldn't I?
Mr. Mikrut. Whether you are on a cash or accrual method, if
you took back paper, which you did in your case, it would be a
constructive receipt, and you would have had to pay tax in
either event, cash or accrual.
Mr. Bartlett. How can I pay taxes on money I haven't
gotten? If I sold all those and held the mortgages myself, I
would obviously have no money with which to pay the taxes. But,
again, my question is, why do we want to throttle the most
important part of our economy, small businesses? At the end of
the day your responsibility to the taxpayers is achieved--
because exactly the same amount of money is extracted from
these small businesses, whether you harass them or not. Now,
why don't we just let them alone and use what accounting method
they wish, realizing at the end of the day we get exactly the
same amount of money from them?
Mr. Mikrut. Mr. Bartlett, nothing we are proposing today or
any other guidance would restrict use of the cash method of
accounting. If anything----
Mr. Bartlett. Well, then you need to sit through our next
witnesses here. You really do need to sit through and see what
is happening to them as a result of what you are now doing.
Mr. Mikrut. Again, what we are now doing is trying to
provide guidance, broad guidance, that would allow the use of
the cash method to address some of the concerns we have raised.
Mr. Bartlett. One of the witnesses will be a drywall
contractor. I build houses. I know who drywall contractors are
and what they do. He now owes you, you say, $80,000. It may be
$100,000 when it is finished, because he chose to use the cash
method rather than the accrual method of accounting. You found
nothing else wrong with his books, nothing wrong with his books
at all. Now, I don't understand why we are doing this to small
business. At the end of the day you get exactly the same amount
of money from them no matter which method they use. Why don't
we just let them alone?
Thank you, Mr. Chairman.
Chairman Talent. Let me just inquire of a couple areas as
we wrap this up for this panel, because we do have another
panel waiting.
One of them is the $1 million figure in your proposed
regulation. Now, Congress thought fit to use a $5 million
figure as a cut-off, and whatever that cut-off was intended to
signify, and I understand we disagree with that, clearly
Congress intended a $5 million figure to be the cut-off between
the small businesses for whom simplicity more likely would be
allowed to override other concerns depending on how we
interpret that. Congress felt the $5 million figure was good.
We have in the Small Business Act certain definitions of
what a small business is, and it varies depending on the
sector. I am not familiar with $1 million as a test in any
statute of which I am aware. So, would you enlighten me and
tell me where you got the $1 million figure?
Mr. Mikrut. Again, looking at the $1 million, we looked at
the number of taxpayers in existence, and again, $1 million
covers the bulk of those. We also had an income test called a
Substantially Identical Results Test, and we thought $1 million
would comport with that. We also looked at taxpayers as they
get larger, in excess of $1 million, often use the accrual
method for financial accounting purposes, and we thought full
tax conformity might be achieved in those cases.
Mr. Manzullo. I don't believe that; I am sorry.
Chairman Talent. Let us let the witness finish. I mean I
understand that--a lot of this is, if I can say, is a cultural
thing. I mean you develop your policy over at the Treasury, and
it is important to have all these considerations in mind. And,
of course, we are dealing, I think it is fair to say, on a more
regular basis with the real people who are having to deal with
this. So, Mr. Mikrut is trying to do what he thinks is right
from his perspective also.
So, you go ahead and finish. If you have an additional
question, Don, I will recognize you.
Mr. Mikrut. And, finally, Mr. Manzullo, I do believe
because it was Congress that put in the $5 million threshold
for purposes of corporations required to use the accrual method
of accounting, that this is something that would be best
handled legislatively, and I understand you and other Members
have bills, so this is something that is clearly, I believe,
within the purview of Congress to provide a threshold as far as
$5 million.
The $5 million threshold has been used in many instances.
For instance, the Administration proposed, and the Congress
passed, the $5 million exemption from the corporate AMT. So, I
mean $5 million is----
Chairman Talent. Well, why don't we just use $5 million. I
mean $1 million--there is no reference point for getting $1
million, and it comes out thin air. And I will tell you, our
experience has been, and I understand why you can't--typically,
I will also say in defense of the witness because we have given
you a hard time, we don't tell people to come and be prepared
to stay for the second panel. It would be nice if somebody from
Treasury were here to listen. And I understand Ways and Means
is the Committee you typically report to.
But Congress did use the $5 million. The $1 million comes
out of no place, and our experience has been that people that
you would just instinctively think of as small business
people--do the old Justice Stuart test, we will know them when
we see them--often have receipts above $1 million. I think both
witnesses on the second panel who have really been hurt by this
have receipts that are above $1 million.
So, since that is what Congress used, and that is, as you
mentioned just a minute ago, that is a test that is out there
for a number of different things, for simplicity's sake, if we
don't overrule this, you may want to consider the $5 million.
And if the point is to make this simple and consistent, that,
seems to me, would be better. The $1 million comes out of no
place. I mean there is no statutory reference to a $1 million
figure, is there?
Mr. Mikrut. No, there isn't. Again, the statutory reference
is to a clear reflection of income. We thought that taxpayers
under $1 million, whether they use cash or accrual, their
income would be clearly reflected in either event.
Chairman Talent. Yes, and of course, just I will say for
the record, it is something for Congress to deal with, and it
is my position that that is exactly what Congress did in 1986,
and your interpretation of it is incorrect, but I understand we
have a difference of opinion there.
Let us go to the installment method issue, which I don't
think we have had many questions on, and is of even greater, I
think, immediate and urgent importance in the small business
community. You recognize we have a problem out there with small
businesses not being sold that we want to be sold from a policy
standpoint because of this installment change. You recognize
there is a problem, don't you?
Mr. Mikrut. Yes.
Chairman Talent. And the Department recognizes that. And I
will tell you that I had a--after we do this, it is quite
embarrassing, because this is something Congress did, and I
smiled when I read my opening statement, because my staff was
kind enough to say that the Department recommended this and got
us to do this. But Congress did it, and we should have caught
it, I think, and not done it last year as a revenue raiser. A
fellow came up to me, and he has got a classic thing. He has
got a plumbing wholesale business. He wants to sell it, and he
can't now. Because you recognize that very often small business
people sell to other small business people, right? If you want
to say yes, you----
Mr. Mikrut. Yes, I'm sorry.
Chairman Talent. Okay. And the purchaser is not able to get
a bank loan financing to buy the whole business all at once;
you understand?
Mr. Mikrut. Yes, sir.
Chairman Talent. And, so therefore they pay in installment
notes, or notes with the installment payments to the original
owner; you understand that? In essence, the owner finances it
and gets a stream of payments over time. And the record will
show the witness is nodding for all this. I am going to start
asking some other questions like, aren't we right about all
these things? [Laughter.]
And, so the effect of the law Congress passed is to make
people pay taxes on the whole amount of the sale when they have
only received a fraction, like 10 percent. That is the problem,
right?
Mr. Mikrut. That is the problem.
Chairman Talent. And I just suggest to you that here there
is no reason even in accounting principles to do this, because
just because you are an accrual taxpayer in an ongoing
business, we want to match income and expenses. When you are
selling the business and shutting it down, from your
perspective, there is no reason, is there, from an accounting
standpoint to require that you treat the whole amount as paid
even though only a downpayment has been paid. Even from an
accounting standpoint that is not necessary, is it?
Mr. Mikrut. Mr. Talent, I think the effects of the repeal
of the installment method for accrual method taxpayers upon
small business was unforeseen, and I think that is something
that is appropriate for us, and working on that is something
where I think the legislation is very clear, that we need them
simply----
Chairman Talent. Well, I agree. This is not something where
you have discretion, but--and if this is above your pay grade,
just tell me--but can't the Department just come out in favor
of repealing this?
Mr. Mikrut. I think we, too, believe that the installment
method is very much like a cash method. It should be restricted
to cash method taxpayers. However, we do believe that that
overriding tax policy--that type of tax policy concern can be
overridden by the concerns of small businesses. We think there
are going to be concerns, as you mentioned. Liquidity concerns
override tax policy concern, so we look forward to working with
you to develop something to take small businesses out of last
year's bill.
Chairman Talent. Was that a yes?
Mr. Mikrut. That is a long yes.
Chairman Talent. A long yes, very good. Well, with that in
the record--and I will just say that I can't believe that if I
had Secretary Summers here or if the head of the
administration, the President, were favoring us with an
appearance here that he would not say yes. I mean this is just
this unintended negative hit on people, accrual and other kinds
of taxpayers. I mean these are people who have accrued, they
have done all this. They are not involved in all the rest of
this stuff, and all they want to do is sell their business, and
they have to treat large amounts of--they get large amounts of
tax bills, and they don't have the money. I don't have to tell
you it is quite embarrassing to go home in a town hall meetings
and other meetings, Kiwana or rotary meetings, and have these
people come up to you and have to say we didn't foresee this.
Can you tell me why--and Congress shares in this--why we didn't
foresee this? I mean to me it would seem to me to be obvious.
Mr. Mikrut. It is hard for me to prove the negative, Mr.
Talent.
Chairman Talent. Yes. Well, you all have pushed this, and I
just think we have--when did this get in, in the Conference
Committee? The House didn't do this, did it? Well, the Senate
did this; that explains a lot. [Laughter.]
All right. Don, did you have a further question you wanted
to ask?
Mr. Manzullo. I have a follow-up question. You stated, Mr.
Mikrut, that one of the policy reasons underlying the use of
the accrual methods is that a small business person will sign
for a loan, and the loan application provision will rely on the
accrual method. You said that.
Mr. Mikrut. I believe what I said, Mr. Manzullo, was that
one of the policy considerations on whether to pick a cash or
accrual method of accounting is simplicity, and to the extent
that a taxpayer is not using an accrual method for other
purposes, it would seem that simplicity would indicate they
should that tax method for tax purposes as well. But to the
extent that they perhaps are using an accrual method for other
purposes----
Mr. Manzullo. What are these other purposes?
Mr. Mikrut. Financial accounting purposes, reporting to
shareholders, reporting to creditors.
Mr. Manzullo. Do you have actual proof of that?
Mr. Mikrut. Well, I do not get involved with an individual
taxpayer applying for a loan, but, yes, I have----
Mr. Manzullo. I mean do you have actual proof of what you
just said?
Mr. Mikrut. Yes, there are instances where creditors will
ask for supplemental statements with respect to the accrual
method of accounting.
Mr. Manzullo. Creditors.
Mr. Mikrut. Yes.
Mr. Manzullo. Well, what has this got to do with the small
business person? Do you think he determines the questions that
are asked of him by his creditors?
Mr. Mikrut. No, Mr. Manzullo. I was just stating that there
are instances where the accrual method is used for purposes
other than tax purposes.
Mr. Manzullo. State that again for me.
Mr. Mikrut. The accrual method is generally accepted--
comports with generally accepted accounting principles. It is
generally used to report the financial results of a business.
Mr. Manzullo. Wait a second. Financial results? Now, this
is a business under $5 million.
Mr. Mikrut. I believe the accrual method is used and
inventory methods are used for businesses under $5 million,
yes.
Mr. Manzullo. This is for a widely held corporation.
Mr. Mikrut. They are mandated for widely held corporations.
Mr. Manzullo. There are a lot of widely held corporations
that have assets, sales under $5 million. There are just
millions of them across this country, would you agree?
Mr. Mikrut. No, I would not.
Mr. Manzullo. Yes. Well, that is the whole point. So, what
you have done is you have taken a few isolated occasions where
someone may have used the method other than the cash method,
and you penalize that small business person. That is what you
have just done.
Mr. Mikrut. Well, Mr. Manzullo, I was simply suggesting
that there are instances where full book and income tax
conformity are appropriate, and accounting methods are one of
those instances. And that can be done on a case-by-case basis,
not----
Mr. Manzullo. But you said that as a matter of policy. You
said one of the reasons that you want to impose an accrual
system is that many of these businesses use an accrual system
for purposes other than filing their income tax returns. You
made that statement.
Mr. Mikrut. The statement I made was that an accrual method
of accounting, if it is used for book purposes, does not
require any additional complexity for a small business, at
least not for tax purposes.
Mr. Manzullo. I want you to refer to a document in writing
with your name on it the number of companies in this country
that are using a cash method of accounting to the IRS, at the
same time using an accrual method of reporting anything else to
their shareholders. Do you have any idea how many there are
across the nation?
Mr. Mikrut. I can provide you with information as to how
many taxpayers are using the cash method or the accrual method
for tax purposes, but that does not necessarily then tell us
for financial----
Mr. Manzullo. You don't have the answer to my questions,
and you have just made a very bold statement that a policy
reason for using the accrual method is that people on the cash
basis are out there using the accrual methods for something
else, and you have no proof. You have none.
Mr. Mikrut. Mr. Manzullo, I do not believe that is what I
said.
Mr. Manzullo. I know what you said. I want you to furnish a
letter to my Subcommittee on Taxation and put--write this
down--down the number of small businesses in this country that
have receipts under $5 million, gross receipts under $5
million, that are on the cash method, and then the number that
are on the accrual method. And those that are on the cash
method, how many outside activities they are doing including
whatever you mentioned that they are using the accrual method
of taxation.
Chairman Talent. If the gentleman will yield. I think it is
a fruitful line of questioning. We have another panel. So, what
I would ask the gentleman, encourage him to do is to file in
his Subcommittee, and maybe I am sure Mr. Mikrut would be
pleased to come back and appear before----
Mr. Manzullo. I will have you meet my Subcommittee along
with the drywall man, along with the tax lady from the ABA.
Chairman Talent. And then follow that up, and I would
encourage the gentleman to do it. And this is something that
the Committee is going to pressure on, both without and within
the Congress.
Mr. Mikrut, thank you for coming and for your patience, and
we will look forward to working with you in the future.
And I will adjourn the first panel and ask the witnesses
for the second panel to come forward.
[Recess.]
What I am going to ask the witnesses to do is to summarize
your testimony if your written testimony is of any length. And
that is not because we are not interested but really because we
are, and members are going to want to ask questions and have
plenty of time for that. So, I imagine the questioning here may
be a little bit less adversarial than it was in the last panel.
Our first witness today is Mr. Shane Mieras, a project
manager for Mid-Ceilings and Drywall in Rockford, Michigan, who
is here on behalf of the Associated Builders and Contractors.
Mr. Mieras.
STATEMENT OF SHANE MIERAS, PROJECT MANAGER, MID-CEILINGS AND
DRYWALL, ROCKFORD, MICHIGAN, ON BEHALF OF THE ASSOCIATED
BUILDERS AND CONTRACTORS, WASHINGTON, DC
Mr. Mieras. Good morning, Mr. Chairman, and members of the
Committee. My name is Shane Mieras, and I am co-owner of Mid-
Michigan Ceilings and Drywall, located in Rockford, Michigan.
Associated Builders and Contractors is a national trade
association representing more than 22,000 contractors,
subcontractors, material suppliers, and related firms from
across the country including all specialties in the
construction industry. ABC has 82 chapters across the country.
Chairman Talent. Shane, if you put the microphone a little
closer to you, it would be better.
Mr. Mieras. Mid-Michigan Ceilings and Drywall has been a
member of ABC for approximately three years. We would like to
thank Chairman Talent and House Small Business Committee
members for hosting this hearing today.
Mid-Michigan Ceilings and Drywall is a small commercial
drywall company that was established in 1990. I currently
employ 22 people. I came to Washington today to testify on my
real-life experience of currently being audited by the Internal
Revenue Service based on my company's use of the cash method of
accounting. As many of you know, the cash basis method allows
deductions for expenses to be taken in the year paid and
reporting of income in the year the cash is received.
Approximately two years ago, the IRS called on Mid-Michigan
Ceilings and Drywall and initiated an audit for tax years 1996
and 1997. Our sales at the time of audit were only $1.7
million. We have always kept our books on the cash basis,
because it is a simple and easy method of accounting. There is
really no need to hire outside professional accountants when
using this method. My business never had any intention of
converting to the more complex and time-consuming accrual
method, because we are such a small company.
In October 1998, the IRS informed us that we owed
approximately $80,000 in interest and underpayments as a result
of using the cash method of accounting. Our case is in the
final stages of appeal, and I have been advised that the final
assessment could be as high as $100,000.
At Mid-Michigan Ceilings and Drywall we keep a clean set of
books. No other tax problems were identified during the audit
other than the fact that we were using the cash method of
accounting. The IRS' reason for this assessment on Mid-Michigan
Ceilings and Drywall is because they feel we are merchandisers.
We disagree. We are not merchandisers. We install commercial
drywall and have never sold drywall to the public without
installing the drywall. The IRS concedes that we do not have
inventory on hand. However, that is not good enough to refute
the IRS' use of the merchandise argument.
What is troubling is that the IRS can force small
businesses to change from a legal, simple accounting method to
the accrual method. Mid-Michigan Ceilings and Drywall is a
small business and pays taxes on cash we collect minus expenses
paid. By forcing us to the accrual accounting method, we will
now incur an added expense of having to hire professionals to
maintain our books. Speaking of professional help, we have also
hired a tax attorney to fight this unfair assessment by the
IRS. This has resulted in approximately $5,000 in legal fees to
date, in addition to the assessment made by the IRS.
Of course the obvious problem now for my company is
determining how we are going to pay the IRS. Since this money
is not available to us through the business, we will have to
seek a bank loan to pay the assessed taxes, penalties, and
interest. The bank interest payments alone will cost us between
$10,000 and $15,000 per year. A $100,000 tax burden is a huge
sum of money to a small business such as ours. This huge
arbitrary assessment by the IRS will definitely hurt my
company's growth potential and limit my ability to hire new
employees.
A couple of goals we have set up for year 2000 are now in
jeopardy. We need to purchase new work trucks, and new
equipment such as scaffolding and tools. Most importantly, we
would like to build our own building so we can expand the
business, and hopefully hire more employees. This tax burden
imposed by the IRS will take away money that we could use for
growing the business. Our bank also is withholding a line of
credit to the tune of $50,000 until the final outcome of this
case is determined.
We all know that business investment is what is driving
this economy right now. We will be forced to sit on the
sidelines due to lack of capital because of this unfair tax
assessment. Lastly, this tax payment will make it harder for us
to improve our wages and benefits to our employees and is also
forcing us to rethink charitable giving until our financial
solvency is determined.
I understand that any corporate business that does over $5
million has to use accrual accounting. Someday at Mid-Michigan
Ceilings and Drywall we hope to reach $5 million threshold and
will plan on converting to the accrual method at that time.
Right now it is unfair to treat Mid-Michigan Ceilings and
Drywall any differently from other small businesses by
converting us to big business accounting.
The IRS' position on which businesses should be using the
cash method or accrual accounting is not based on any specific
section of the Internal Revenue Code, but on a series of court
cases successfully litigated by the service. Hence, the IRS is
not enforcing the law, they are making it. Congress should
amend the Internal Revenue Code to clarify that small
businesses can keep using the cash method of accounting even if
the IRS argues that they have inventory or merchandise as a
material income-producing factor.
Two legislative proposals before Congress would permit
small contractors like Mid-Michigan Ceilings and Drywall to
continue to use the cash method of accounting without fear of
audit, penalties, and interest. H.R. 2273, introduced by Small
Business Committee Chairman Talent and Ways and Means Committee
member, Phil English, and S. 2246, introduced by Senate Small
Business Committee Chairman Christopher Bond and Senate Finance
Committee member, Charles Grassley, have both been endorsed by
the ABC National Tax Committee and would provide relief to
small businesses like Mid-Michigan Ceilings and Drywall.
Mid-Michigan Ceilings and Drywall joins ABC in urging
members of the Committee to advance these proposals in the next
tax bill considered by Congress. Small businesses are the
backbone of the economy and our country's economic engine. We
urge you to enact this legislation into law to ensure that
small contractors can operate their businesses without living
in fear of the IRS.
I would like to thank Chairman Talent and the Committee
members for allowing me to present Mid-Michigan Ceilings and
Drywall's concerns regarding this important issue. I stand
ready to answer any questions the Committee may have.
[Mr. Mieras' statement may be found in appendix.]
Chairman Talent. Thank you, Mr. Mieras. If you pay the
whole $80,000, you at least have the pleasure of knowing you
kept the Federal Government open for a nanosecond.
Mr. Dave Wulkopf, who is a CPA and the treasurer of Beckner
Painting, where he began working as a painter in 1986,
continued working the summers until 1992, and now handles all
tax and accounting issues. And you were promoted to treasurer
in 1993. Appreciate your coming here, David.
We'll go ahead with this. We haven't had the second bell
yet, have we? I don't think so. Go ahead, and we may have to
recess this in the middle of your testimony, but go ahead,
please, David.
STATEMENT OF DAVID E. WULKOPF, CPA, TREASURER, BECKNER PAINTING
MIDWEST, INC., ST. LOUIS, MO
Mr. Wulkopf. Okay. My father is actually the owner of the
company. I am the treasurer.
Chairman Talent. Go ahead.
Mr. Wulkopf. Beckner Painting was founded--we are a small
painting company located in St. Louis, Missouri. The primary
focus of our work is interior and exterior apartment painting.
We also do some limited residential and commercial work. We
employ up to 80 people in the summers and as few as 15 during
the winter months as the workload slows down.
Since the company was founded over 30 years ago, we pay our
taxes on the cash basis of accounting, as permitted by section
446 of the Internal Revenue Code. The company has annual
revenues of $2 million to $3 million, and we do not maintain
inventories. Therefore, at least we thought the company
qualified as a small business, as defined by section 448, and
we thought we were permitted to use the cash method of
accounting.
In 1995, we were the subject of a random audit of our 1992
Federal income tax return. The IRS did not find any changes
that needed to be made as a result of this audit. Then again in
September of 1998 we were notified that we were going to be
audited on our 1996 Federal income tax return. Once again,
there were no changes that needed to be made with the exception
of this cash basis issue that is before us today.
The reasoning behind the proposed changes is kind of a
stretch. Even though we provide a service and do not sell
anything directly to the public, because our material cost,
such as the paint, is more than 15 percent of our revenues, the
IRS claims that we have merchandise which is an inventoriable
item. Since we have an inventoriable item we are required to
use the accrual method of accounting even though we do not
carry any physical inventory.
The reason for the change can be masked in a number of
different ways, but the bottom line is obvious. The motive
behind the Treasury Department policy is to speed up the
collection of tax revenues and to collect the tax on the
accounts receivable. If we had accounts payable that were
higher than our accounts receivable, we would not be in a
position of having to defend ourselves from this proposed
change.
It is understandable that the Treasury Department would
want to expedite the collection of tax revenues, but it seems
no thought is given to how unfair this policy is to small
businesses.
Chairman Talent. Well, David, what they basically did was
they took an enactment, section 448, which was intended to make
clear that businesses like yours could use the cash method if
you had intended to do it, interpreted it as saying that you
can only use the cash method when they would otherwise have
said you could use the cash method anyway, and then changed
their interpretation of when you could use the cash method so
as to substantially restrict it and treat people who are not in
the business of merchandising or do not have an inventory as if
they do. So, they interpreted the law and are trying to make it
consistent with their practices, and then they changed their
practices in order to go back and fleece you out of, what,
$200,000?
Mr. Wulkopf. Yes.
Chairman Talent. That is a good days work. Go ahead.
Mr. Wulkopf. Under this new policy, accelerating the
collection of tax revenues is done at the expense of small
businesses who have been allowed to report on a cash basis for
years. These companies are currently being selected for audit
and forced to change accounting methods. This change in
accounting methods causes an enormous tax liability that is a
result of years of cash basis reporting to come due. Most small
business do not have large sums of cash available to pay taxes
on money that is not yet received.
The effects of this proposed change would be devastating to
Beckner Painting. We operate in a very competitive industry,
and cash flow is always a concern. There are numerous sole
proprietors in the painting industry that operate with little
overhead and can undercut the prices of established companies
like Beckner Painting. As an established company we do offer
higher quality work and tend to be more reliable, but if our
prices get too high many customers will switch to these sole
proprietors in order to save some money.
Therefore, we must constantly keep our costs down and our
cash flow is usually tight. There is rarely a payroll period
that goes by that we are not concerned about having cash needed
to make the payroll. With the minimum wage increasing seemingly
everyday, this cash flow gets even tighter. In addition, the
company has to continually repair and replace painting
equipment, like power washers, sprayers, ladders, trailers, and
vehicles, and these costs further limit cash flow.
Should the IRS succeed in making us change our method of
accounting, the amount of tax due is well beyond the cash we
have on hand. Therefore, we would be required to borrow money
to pay the tax. Not only is forcing the company to borrow money
to pay tax fundamentally unfair, but it would put us in a very
vulnerable position. The amount of money we would need to
borrow, close to $200,000, would max out our borrowing
resources and put us a bad year away from bankruptcy.
The primary unfairness of this new policy is that we have
paid our taxes on a cash basis since the company was founded.
We were not even asked to change during the 1992 audit. Then in
1996, when our receivables had grown, we were told that we
needed to change accounting methods. The difference between
paying our taxes on a cash basis versus an accrual method is
minimal year by year, but it is the one-time hit of the change
that is damaging.
Our case has not yet been resolved. It has been going on
for more than a year and a half now, and the time and money
spent on trying to defend the case has put a serious strain on
our resources. We have spent countless hours examining
invoices, preparing schedules, and researching position
guidelines. We are afraid to invest in any new equipment,
because we may need the money to try to pay the tax resulting
from the proposed change.
Beckner Painting has grown from a small summer hobby to a
successful small business. Being a small business it is hard
enough to comply with the seemingly endless stream of Federal,
State, local, and industry regulations. Policies like this
makes it even more difficult. Small businesses face many unique
challenges in defending themselves from policies such as this.
It is not only unfair, but it could jeopardize our continued
existence. That is why we are here to support Congressman
Talent's bill, H.R. 2273.
[Mr. Wulkopf's statement may be found in appendix.]
Chairman Talent. All right. I have to thank you, David. I
have to recess the hearing now, because I have got to go vote,
but as soon as I think Mr. Sweeney gets back we will just have
him reopen the hearing, and then you all can begin testifying
so we can expedite this.
I recess the hearing.
[Recess.]
Mr. Manzullo [presiding]. We are reconvening the hearing.
The next witness is Roger Harris, who is president of Padgett
Business Services in Athens, Georgia.
Mr. Harris.
STATEMENT OF ROGER HARRIS, PRESIDENT, PADGETT BUSINESS
SERVICES, ATHENS, GA
Mr. Harris. Thank you, Congressman Manzullo. It is a
pleasure to be here and to have the opportunity to speak to the
Committee about cash versus accrual and the installment sale.
As you mentioned, my name is Roger Harris of Padgett Business
Services, and we have been providing accounting and tax
services to small business for over 30 years. I have been
involved in that for over 25 years. We have about 15,000
businesses that we represent, and the topic of this hearing has
become of great importance to our clients.
I don't think we can have any discussion about this topic
without reiterating what has been said before. What we are
talking about here is nothing but an issue of timing. Income
and expenses will always get reported under any method of
accounting. And I think we also have heard this morning that
there is no debate about the fact that the cash method is a
much simpler method of accounting. Therefore, it seems strange
to me that there is any argument that when all we are talking
about is timing, why are we not looking for a way to have a
broad definition of business that can use the simplest method
of accounting as opposed to trying to find a way to narrow the
definition.
I think the problem we face today in most taxation is
complexity, and yet we are hearing arguments that we should
make things more complicated for some unknown reason when taxes
are not really the issue. It is just the timing of paying the
tax. We became aware of the difficulties in this area when we,
through our foundation, did a survey of our client base to look
at the effect that the current regulations would have, which is
based on the 30-year old Wilkinson-Beane case, and we found
many cases where people would be forced to change their method
of accounting if the current regulations were continued to be
enforced. That has a short-term cost, as you may have heard
here, in taxes, interest, and penalties, but it also has a
greater long-term cost in the complicated accounting procedures
that must go on forever.
Another thing I find interesting that we have not heard
here today in any of the testimony up to this point is that
changing from cash to accrual can also produce a refund. It is
very possible that the change can have an effect that lowers
income. I would challenge anyone here--if the IRS and Treasury
are so concerned about the accurate reflection of income,
produce the number of cases where they forced a change that
produced a refund. I think you will find very few, if any, of
those cases.
So, I am not sure that the reflection of income is the real
issue. I am also amazed when I listen to the inside the Beltway
explanation from Treasury that a clear reflection of income
requires our clients to pay tax on money they don't have yet. I
don't think they will understand that logic.
I also have to refer directly to--Mr. Manzullo, you asked a
question about two sets of record, one for lending
institutions, one for the business, and the answer related to
the fact that this is done to report to the shareholders. I
think that shows a clear lack of understanding in Treasury
about how small business operates. In most small businesses,
all the shareholders live in the same house. It doesn't require
a separate set of statements to explain how the business is
doing. They live it, and they breathe it. And I know in our
client base it is extremely rare that we produce a second set
of records for a bank. Small business operates a lot of
different ways, and they don't have to produce two sets of
records except in very rare occasions.
I want to change the subject a minute to the installment
sale, because, clearly, this was something that when the rule
changed in December, created a real ripple effect through our
offices and small businesses in terms of how serious an effect
this change could have. As everyone, I think, recognizes on
this Committee, people sell their business as part of their
retirement. And it is very difficult to find someone who will
pay cash for a small business. Financing over a number of years
is almost a necessity.
But in the meetings when I hear Treasury state that since
you are using the accrual method of accounting, the only
accurate way to bill your business is to report all the income
up-front in the year of sale. I don't understand why they don't
understand that selling an inventory item off the shelf and
waiting 30 days for a payment is nothing like selling their
business and waiting 10 years to get paid. I think the only
real fix to this serious problem is the repeal of the
installment sale bill that was passed, and go back to something
that had worked extremely well for a number of years.
I see my time is about up. I realize I deviated completely
from what I had written, but I welcome any questions that you
many have. Thank you.
[Mr. Harris' statement may be found in appendix.]
Mr. Manzullo. Thank you very much.
Our next witness is Pamela Olson, who is the Chair-elect of
the Section of Taxation of the American Bar Association. She is
also partner in the Washington law firm of Skadden and Aarps.
Ms. Olson.
STATEMENT OF PAMELA F. OLSON, CHAIR-ELECT, SECTION OF TAXATION,
AMERICAN BAR ASSOCIATION
Ms. Olson. Good morning. Thank you. I appreciate the
opportunity to be here.
My name is Pam Olson, and I am Chair-elect of the ABA
Section of Taxation. I am testifying today on behalf of the
Section of Taxation. I have another tax expert with me. Her
name is Helen Hubbard. She is the immediate past-Chair of our
Tax Accounting Committee and was a principal drafter of our
testimony.
We appreciate the opportunity to appear before the
Committee today to address issues causing both considerable
complexity for small business and continuing controversy
between small businesses and the IRS. Our prepared statement
addresses both the use of the cash method of accounting by
small business and the repeal of the installment method of
accounting.
Since the House has passed legislation retroactively
reinstating the installment method, I am going to limit my
remarks this morning to small business use of the cash method
of accounting, but I would be happy to respond to questions on
either topic.
Over the past year, the Tax Section has testified twice on
simplification of the tax law. In February, we joined with the
AICPA Tax Division and TEI in releasing a list of proposed
simplification items. Permitting the use of the cash method of
accounting for small business, which we would define as those
with gross receipts of $5 million or less, was included in our
testimony and on our February list of proposed simplification
items.
The Treasury Department recently announced that it intended
to issue guidance permitting businesses with gross receipts of
$1 million or less to use the cash method of accounting. We
applaud the Treasury Department for taking this step, but we do
not believe $1 million in gross receipts provides sufficient
relief from the complexity the accrual method of accounting
creates. So, we would go further than they have gone.
Requiring small businesses to use the accrual method of
accounting subjects them to complex rules and recordkeeping,
substantially increases the cost of compliance for these
taxpayers, and creates cash flow problems. The characterization
of a taxpayer's income as income from the purchase, production,
or sale of merchandise requires that the taxpayer use the
accrual method, which increases income for the year of change
by the excess of the taxpayer's accounts receivable over its
accounts payable, and follow the inventory accounting rules,
which defer deduction of the cost of merchandise on hand. If a
change to the inventory and accrual methods is required on
audit, small businesses are likely to face substantial
adjustments attributable to the deferral of deductions and
acceleration of income, plus, as we have heard this morning,
interest and, in many cases, penalties.
Generally, the permissibility of the cash method varies
depending on the type of entity, the business and activities of
the taxpayer and the gross receipts of the taxpayer. Current
law requires businesses that purchase, sell, or produce
merchandise to apply the inventory accounting rules and use the
accrual method of accounting. Although taxpayers and the
Service have spent considerable resources contesting whether
particular items constitute merchandise, the issue has never
been consistently resolved.
For example, last week, in a case that was noted earlier
this morning, the tax court in a deeply divided opinion held
that concrete used by a construction contractor was not
merchandise. This result may have appeared obvious to the IRS
following the Tax Court's decision, we noted in our prepared
statement, but it was not in fact obvious to them. It was also
not obvious to the six judges of the Tax Court who dissented in
two separate dissenting opinions. If the Tax Court cannot agree
on whether a particular item constitutes merchandise, imagine
how difficult it is for small businesses to make this
determination.
This problem will only increase with the growth of the new
economy. For example, is electronic information inventory or is
the business providing a service? If the business is providing
a service, are its materials supplies or are they merchandise?
There are other complications. Under the regulations, any
taxpayer receiving any income from the production, purchase, or
sale of merchandise must use the accrual method of accounting
for its purchases and sales unless the Commissioner determines
that another method of reporting will clearly reflect income.
But the courts have compared the cost of merchandise with the
taxpayer's total gross receipts in determining whether
merchandise is an income-producing factor.
The decisions suggest that de minimis inventory purchases
do not necessarily make merchandise an income-producing factor.
While this provides relief for some taxpayers, it also adds
additional complexity and is a source of controversy between
companies and the IRS trying to figure out whether or not they
fit in that category. The result of all of this is some
businesses cannot easily determine if they have merchandise
inventory that requires them to keep inventories and
consequently whether they must use the accrual method of
accounting.
We have several recommendations in our prepared statement.
I would just note that we do recommend that small business be
allowed to use the cash method. We also recommend that small
businesses not be required to keep inventories and not be
subject to the rules of section 1.162-3 of the regulations that
defer the deduction of supplies.
We believe the adoption of these proposals would achieve
considerable simplification for small businesses and eliminate
the considerable controversy that currently exists between
taxpayers and the Service regarding inventory accounting and
the use of the accrual method of accounting.
We appreciate your interest in this matter. We would be
pleased to answer your questions and to work with the staff.
[Ms. Olson's statement may be found in appendix.]
Mr. Manzullo. Thank you very much. Our next witness is John
Satagaj?
Mr. Satagaj. Satagaj. I have been a witness for the last 20
years, and no one has gotten it right, Mr. Congressman.
Mr. Manzullo. Well, try Manzullo. I was 14 before I could
pronounce it myself.
Mr. Satagaj. That is right. My wife kept her maiden name,
25 years.
Mr. Manzullo. Okay. All right, that is good. Anyway, John
Satagaj is the managing--you have got a name like Talent that
is very easy. Do you want to introduce the next witness?
[Laughter.]
Would you like to pronounce--why don't you pronounce his
last name.
John Satagaj is the managing partner from London and
Satagaj in Washington, on behalf of the Small Business
Legislative Council.
Mr. Satagaj.
STATEMENT OF JOHN S. SATAGAJ, MANAGING PARTNER, LONDON AND
SATAGAJ, WASHINGTON, D.C., ON BEHALF OF THE SMALL BUSINESS
LEGISLATIVE COUNCIL
Mr. Satagaj. Thank you very much.
Mr. Manzullo. Thank you.
Mr. Satagaj. Mr. Chairman--see that is how you get around
it. I am happy to be here. As you noted, I am John Satagaj,
president of the Small Business Legislative Council, and also a
tax lawyer. Unlike Skadden and Aarps, our firm is London and
Satagaj, and we are the two partners. So, we are on the other
end of the size spectrum of a tax law practice.
I want to address a couple of specific issues that we
talked about here today rather than what is in my statement.
Pam just mentioned a moment ago about one tax case that was
recently decided and the precedent that was set in that case,
all regarding this whole issue of the inventory.
There has actually been three cases recently on this. There
was a case in November in the medical field, there was this
case that involved the concrete construction company, and there
was another one the day after. The concrete case was released
on Thursday; there was another case reported on Friday of a
sand and gravel hauler that came out in favor of the IRS. The
first two decisions were in favor of the taxpayer; the third
one was in favor of the IRS. The court is split, each half
feels very strongly a different way. It does illustrates that
you can't fix this by the regulations, the administrative
process, or letting this go through the courts, because it just
is an unresolvable issue. That is why we have asked Congress to
set the bright line, make the decision, and say this is the way
it is going to be. We are kidding ourselves if we think we are
ever going to resolve this through the courts.
Interestingly enough, and it brings me to my second point,
in all three of those cases, guess the size of the taxpayer.
Between $1 million and $5 million. All three of them are in
that area. And that brings me to the point about the $1
million. First of all, we never heard a clear explanation today
of how you can do this administratively at $1 million--and you
went along this line of questioning--but not do it for $5
million. And the truth of the matter is when you put the faces
on these businesses such as we got right next to us, these
businesses between $1 million and $5 million, a very important
part of the small business constituency.
The administration talked percentages, the number of
businesses that would be exempt under $1 million. There are a
million, business taxpayers, between a $1 million and $5
million--a million taxpayers. That is a lot of taxpayers. But
more importantly, not only are those, just by their numbers,
important, those are the ones you see in the Kiwanas, the
rotary, the local chamber, the ones who are creating the jobs
in your communities. Those are the ones who are going to be in
this no-man's land between $1 million and $5 million.
There are another 750,000 with between $500,000 and $1
million in receipts. Those are all the businesses that Ms.
Kelly was talking about who will look and say, ``Do I grow my
business?'' Seven hundred and fifty thousand taxpayers with
gross receipts between $500,000 and $1 million. So, you have
got a million seven hundred fifty thousand, and those are the
small businesses that you see in your district.
Chairman Talent [presiding]. Let me jump in, John, because
I am going to have to leave, and I wanted to ask the
witnesses--and you will have a chance to give your statement
too, and you can answer this too--is my reading--in your
judgment, is my reading of section 448 correct, that Congress
already tried to address this? Ms. Olson, if you would like to
jump in on this too. I mean what is----
Mr. Satagaj. Abe and I were here in 1986. Unfortunately,
the bad news, we have been representing small business a long
time, and I would say your reading is what we believe to have
happened. But it also illustrates how we can argue this thing
till the cows come home, and they are never going to concede
the point and why we need your legislation. Because we will
debate this forever. We believe, like you, that is what it was,
but there is no sense in beating them over the head.
Chairman Talent. Well, I am going to talk to Mr. La Falce
who was here and I am sure he took an interest in this issue
and would be able to give us his opinion.
Ms. Olson, do you have an opinion on what section 448 is
intended to do, and don't hesitate to----
Ms. Olson. I must admit that I actually think that section
448 was intended as a revenue raiser; in other words, that it
was supposed to provide clarity as to when people had to be on
the accrual method as opposed to permission. So, I am afraid I
sort of fall into Treasury's view on that.
Chairman Talent. Sure, that is all right. I recognize that
there are other points of view, although I am kind of looking
at it less from a legal stand as if I were there at the time.
And I am reading that language and I am thinking the sensible
thing would have been to establish these bright line tests, and
also there is some language in there that just is not
consistent really with believing that it was intended to
restrict the ability of taxpayers rather than free taxpayers.
Abe, do you have a comment?
Mr. Schneier. Mr. Chairman, I happened to bring my tax
reform and a conference report, and as you were reading this
morning, it is a section from the Conference Committee report:
The House bill generally provides that the cash method of
accounting may not be used by any C corporation, by any
partnership that as a C corporation was a part of any tax
exempt trust. Exceptions are made for foreign businesses,
qualified personal service corporations, and entities with
average annual gross receipts of $5 million or less for all
prior taxable years. I didn't think it had to get much clearer
than that.
Chairman Talent. Yes, and this was a point I tried to make.
The same language is used with regard to the farmers and the
personal service corporations as is used with regard to C
corporations under $5 million. So, if the service is correct,
or the Department is correct, it didn't provide any extra
rights to C corporations under $5 million, then it certainly
did not provide any extra certain rights or certain safe
harbors to the farmers or personal service corporations, which
means they can go after farming operations next under that
theory. But they haven't done it. They are starting to go after
the personal service corporations like the dentists.
So, maybe that is their view, but, clearly, I would say--
knowing how this Congress typically feels about agricultural
operations, I don't think--you know, when we need to find a
safe harbor for the farmers, by heaven, we provide the safe
harbor for the farmers. And I read all three of those the same.
And, so let us just get rid of this issue. And I understand how
they get into the corporations--Mr. Harris, do you have----
Mr. Harris. Yes, I think you can also look at the repeal of
the installment sale provision. I remember when it first passed
and everybody ran around and said, ``How could you do this to
small business?'' The common answer we were given was that if
your revenues were under $5 million, you are case basis,
therefore you are exempt. So, when it is convenient, I think
that is a good definition to use.
And that would be why counsel over at Ways and Means would
have felt this would not have a big impact on small business.
If they are assuming that everybody under $5 million is cash
basis that would explain, why they felt it would not have a big
impact, and I don't have any gripes about the Ways and Means
staff, they are not telling us something they didn't believe.
And that would explain it, wouldn't it. Because they are
thinking if you are under $5 million, you are reporting on the
cash basis anyway, so the installment repeal doesn't apply to
you.
Mr. Satagaj. The important thing I think about the law is
what you talked about regarding the interest and the penalties.
Aside from how we interpreted it all and whether they meant
that or not, look at all the taxpayers that have been following
that rule as the way of doing business. Literally hundreds of
thousands of small businesses continued on the cash accounting
since 1986, and now they get whacked. They get hit with the
interest and the penalties. So, even aside from our
interpretation, just look at the practical impact on those
businesses since 1986 that have continued with that type of tax
accounting.
Chairman Talent. Yes, you guys can jump in if you want.
Abe, I guess we will let you give your statement at some point,
and I want to hear what you have to say. I think we all
understand the issues pretty well, and I think we understand
what we need to do with regard to both issues.
Mr. Satagaj. Do you want me to continue finishing up my
statement.
Chairman Talent. Oh, I am sorry. Yes, John, you can.
Mr. Satagaj. Okay. I will be quick.
I just want to make a couple of other points. We just
talked about the audit. I want to talk about the installment
sale method briefly, because there has been continuing
confusion. It was mentioned again here today why don't we use
this $1 million test also for use of the installment sale
method. This is mixing apples and oranges. When you sell the
business you are talking about the sales of assets. What we are
talking about in their debate on cash accounting is gross
receipts in a year. There is no way to compare these two
things, and in fact to the case of installment sales of the
business even the $5 million limit doesn't make sense.
I prefer repealing the installment repeal outright. But if
I was going to do something I would look at IRC section 1202
where there is a definition, for venture capital purposes, of
small business: the limit is $50 million, based on assets. If
you are going to do limit asset sales, let us use a definition
based on assets. That would make more sense than $1 million or
$5 million. Repealing the darn thing would be best.
Chairman Talent. By the way, can this raise any revenue? I
don't think it is going to raise revenue, is it, because people
just aren't going to sell or they are going to find some other
way to sell.
Mr. Satagaj. You are going to structure around it. We all
know the advice we start giving to folks when this happens. It
is not the best way. You are losing some money or you are going
to lose a little bit of a premium.
Final thing I wanted to bring up is I did sit in on a
couple of meetings at the IRS about cash accounting, not the
installment method repeal. This has gotten blurred here. I can
tell you when the idea of $1 million was brought up, we said
there is no way this makes any sense. We believe you must go
with the $5 million limit. It makes the most sense for many
reasons. We believe they should have done so in 1986 and
perhaps drafted a little more clearly.
And that concludes my statement, Mr. Chairman.
[Mr. Satagaj's may be found in appendix.]
Chairman Talent. Abe, we will go on to you.
STATEMENT OF ABRAHAM L. SCHNEIER, PARTNER, MCKEVITT & SCHNEIER,
WASHINGTON, D.C., ON BEHALF OF THE NATIONAL FEDERATION OF
INDEPENDENT BUSINESS
Mr. Schneier. Thank you, Mr. Chairman.
Mr. Chairman, my name is Abraham Schneier. I am a partner
in the firm of McKevitt & Schneier, and I am a consultant on
tax issues to the National Federation of Independent Business.
On behalf of the 600,000 members of the NFIB I appreciate the
opportunity to present the views of small business owners on
this short subject of the cash method of accounting.
I would like to address a couple of points that were made
earlier. First of all, in terms of Mr. Mikrut claiming that 97
percent of all small businesses fell into the category of $1
million or less, the problem with Treasury statistics of income
is they are highly aggregated. The real measure includes many
part-time businesses and many businesses that have no
employees. If you really look at the number of small businesses
that have employees, you come up with a population closer to
six million in total, and of that population I think we would
find that the numbers would diverge quite a bit from that $1
million threshold.
The $5 million number was clearly what we thought we
achieved in 1986. It was clearly the intention of the proposals
that took place during the committee. I was as distressed as
anybody to find out later on that, well, the provision did not
mean exactly what we thought it meant.
In terms of how the regulations are being pursued, the IRS
has, obviously, an enforcement issue involved here, and I think
that the biggest point we can make is that enforcement would be
assisted by a clearer line. The last thing the IRS can afford
right now is to have a lot of agents who are just focusing on
these very small accounting method issues. They really need to
be focusing their resources in areas that are more productive
in terms of policy issues and their impact on small business.
This approach does not gain the IRS, it doesn't gain the
Federal Treasury anything. As we have said several times here
today, we are talking about timing shift, whether the inventory
is deductible in 1999 or 2000. The typical small business owner
in these circumstances clearly believe that cash flow is their
biggest problem, day-to-day, week-to-week operations. He is
looking to pay his rent; he is looking to pay his employees; he
is looking to pay for supplies; he is looking to pay for the
needed costs of running his business. Cash flow is where he
goes.
The accrual method of accounting puts him in a very
difficult position, especially as you get to the end of fiscal
years where you have artificial numbers coming into play,
creating an artificially high tax situation. We believe, as you
do, that the $5 million threshold really should be where the
line should be drawn and that the rules, as they apply to
businesses under $5 million, should be much clearer than they
are right now. The efforts in terms of trying to define when a
business actually has inventory, whether or not to impose
percentages of gross profit as some kind of a line of
demarcation really would help specific industries, but I think
we need to really sort of clarify it across the board for all
small businesses.
I would be happy to answer any other questions. We have
covered so much ground. And I want to compliment the members of
the Committee for an excellent discourse on this issue, which
can be pretty complex, and, frankly, I haven't heard as good a
discussion on the Ways and Means Committee.
[Mr. Schneier's statement may be found in appendix.]
Chairman Talent. All right, I will recognize the gentlelady
from New York, and thank her for her patience.
Ms. Velaquez. Sure. Thank you, Mr. Chairman.
Mr. Harris, in your testimony you indicate that the $1
million gross receipts threshold, which is being proposed by
Treasury, is inadequate to prevent hardship to small
businesses, and that even a $5 million threshold may not be
suitable in some cases. What standard would you propose or
recommend?
Mr. Harris. Well, certainly, there has to be a reality
check of what is reasonable, but revenue is not always the best
way to determine the size of the business. That, in large part,
has to do with what it is that you sell--the smaller the item,
the smaller the price. I think total assets could be used, it
could even be a combination of things: Assets of under a
certain amount, sales of under a certain amount. You meet one
of two tests.
And I think the danger is that we try to find a very simple
solution to a very complex issue of what is a small business,
and I really don't know where $1 million came from. That just
came out of nowhere. I guess if I was going to be stuck with a
revenue number, I would use $5 million, because there is
already some precedent. But I think we should look for a real
definition of how to define a small business, and I think
assets may be better in some cases, as I mentioned in my
testimony, that an insurance agency could have $25,000 worth of
assets and one employee and do over $1 million in revenue, and
that is not a large business under any definition. So, I would
like to see a definition that truly defines small business and
doesn't eliminate a true small business.
Ms. Velaquez. Thank you.
Mr. Schneier, with regard to installment sales, do you
believe it necessary to repeal the restriction on the use of
installment method as proposed in H.R. 3594 or would you
support trying to find some sensible middle ground? For
example, can we say that businesses with gross sales of less
than $5 million should be allowed to choose whether they can
use the installment method?
Mr. Schneier. Given the confusion that this provision has
sort of engendered, I believe that repeal really is the way to
go. The $5 million threshold only creates, I think, an
additional barrier for some businesses in terms of
understanding where they are going to be when they go and sell
their business. The issue for most businesses is who can I sell
to? And I can only sell to another small business owner who is
going to pay me over a period of time.
You don't want to create a situation where the small
business owner is going to be taxed on income he has yet to
receive, and I think the $5 million threshold really doesn't
achieve that for a large number of small businesses who would
not fall into that category.
Ms. Velaquez. Thank you.
Mr. Satagaj.
Mr. Satagaj. Satagaj.
Ms. Velaquez. Thank you. Is it a problem with regard to the
cash versus accrual accounting method and now an issue that
primarily affects businesses which do not have large
inventories of goods for sale or is it broader?
Mr. Satagaj. Well, it certainly affects a lot of folks in
that it goes beyond the people who commonly think if they have
goods, because when you get into, for example, the osteopathic
case I mentioned earlier, the one in the fall, or a
veterinarian who is giving a shot to an animal and the IRS
considers the material in the needle as merchandise. Never in
their wildest mind would they think that that material is at
issue here. It would have never occurred to them. So, the
answer is it is much broader than just folks who would normally
think of themselves as selling merchandise.
Ms. Velazquez. If Congress were to legislate in this area,
are there competitive implications where our decisions might
either tip or level the playing field in a particular field of
owners?
Mr. Satagaj. That is a good question. The answer is
probably no in that this is a timing issue primarily, not
competition vis a vis another business. This has to do more
with your personal survival. Abe talked about cash flow, and
this is the ability of a particular taxpayer to be able to pay
his/her taxes when he/she has to pay them. So, I don't know if
it has a competitive advantage or disadvantage. It is more
related to the direct survivability of that particular firm.
Ms. Velazquez. Thank you.
Ms. Olson, as a tax expert, are there cases where you would
recommend to small business clients that they use the accrual
accounting method instead of the cash method? And can you give
specific examples of where the use of the accrual method might
be beneficial to a small business?
Ms. Olson. Quite frankly, no, I cannot think of a situation
when I would recommend that a small business use the accrual
method of accounting.
I also want to note that there were questions about
companies keeping books for financial purposes that would be
kept on the accrual basis versus the cash basis. And I just
want to note that for financial accounting purposes there are
very different rules that apply to how you accrue your income
and expenses versus what the tax rules are. And so just because
a company may be keeping some financial books and records on
the accrual basis for purposes of showing a bank or whatever
wouldn't necessarily mean that those books and records would be
the books and records that they would need in order to properly
prepare their tax returns on the accrual basis.
So, the answer to your question is no, and I also wanted to
add that other highlight.
Ms. Velazquez. I want to address resolve the non-taxed
costs associated with the small business using the accrual
method of accounting as opposed to cash method. From your
experience, is the average small business equipped to handle
the necessary paperwork that goes with it?
Ms. Olson. I think the answer is no. Most small businesses
are not equipped to either do the accrual accounting or to keep
the inventory accounting or to keep the supply accounting that
might be required by the section 162 regulations. And that is
why we recommended that small businesses be allowed to use the
cash method and to not keep inventories and to not inventory
supplies as well.
In addition to the costs of doing so, the controversy costs
have to be taken into account, because to the extent that you
end up at some point fighting with the IRS about whether or not
you have to do it, you also obviously significantly increase
the cost to small business.
One other point I want to note is that with regard to the
question about section 448 and what Congress thought they were
doing in 1986, the IRS' administrative practice doesn't always
stay constant; in fact, it probably generally doesn't stay
constant. So some of the things that I think are going on today
that have excited the gentlemen at the table with me probably
weren't happening in 1986, because I don't think the IRS at
that point in time was aggressively pursuing dentists or
veterinarians or contractors.
So while Congress may have done one thing in 1986, they
might not have appreciated what the IRS might do with those
rules subsequently, and so we may end up with different results
today were Congress to look at what is happening today in IRS
administration rather than what was happening in 1986.
Ms. Velazquez. Can you tell me if a small business is
forced to seek assistance from a tax lawyer or a CPA to comply
with the accrual basis accounting requirements, what other
kinds of additional expense would that person incur?
Ms. Olson. I wonder whether this gentleman might not be in
a better position to answer that question than I am.
Mr. Harris. Are you talking about the direct cost of the
service that they would incur versus the----
Ms. Velazquez. Yes.
Mr. Harris. Certainly, the size of the business would have
a lot to do with it, but I think it is very unlikely that a
small business owner is going to understand accrual accounting
well enough to do most of what is needed. Maybe they can do
some basic internal recordkeeping. But, clearly, at the end of
the year and on a regular basis they are going to have to
solicit an outside firm to make all the proper adjustments and
end up with statements that they don't understand, because they
understand the in and out of money, the money in the checkbook.
And when all of a sudden you bring them a set of financial
statements that have no bearing whatsoever to their money in
their bank account, they wonder what they just paid for.
Ms. Velazquez. Mr. Olson, can you tell us what will be the
average payment if a person has to seek a tax expert or a tax
lawyer or a CPA to comply?
Ms. Olson. Yes, to prepare the return? I am not sure--
again, we probably should have had somebody here from the AICPA
to try to answer that question, but I would guess that the fee
is going to be something between--for a very small business,
something between $5,000 and $10,000, probably closer to the
high end of that. And that is probably a minimum kind of
number. It might in fact be considerably more than that.
Ms. Velazquez. Thank you. Thank you very much.
If the person is doing the work, using the cash method, how
much it would be instead of the accrual?
Ms. Olson. So, it is the difference between keeping it--I
mean I think that to a certain extent there is probably not a
real big difference in the cash method versus the accrual
method. The additional work is probably going to be
attributable to the recordkeeping that that taxpayer had to do
him or herself in order to make sure that they have all of the
additional information.
So, what you are probably talking about is, as opposed to
somebody who, as he mentioned, can pretty much look at their
checkbook and say, okay, it is December 31, this is my balance,
therefore, this is my taxable income for the year. Instead you
have got to keep all the records on the accounts payable and
the accounts receivable and perhaps inventory, perhaps
supplies, and factor those in as adjustments to what you see as
the balance in your checkbook. So, I think it is going to be
more of a burden on the taxpayer, him or herself, to keep
records as opposed to the additional cost for the accounting.
Mr. Harris. Yes, I would just like to second that, and say
I think the real cost is during the year internally as opposed
to the actual preparation of a document or tax return at the
end of the year. And the only way I think you would see a
substantial increase there is when people have not done a good
job during the year, and now it is left to the firm to come in
at the end of the year and correct all the mistakes. But I
think the real cost is during the year as opposed to at the end
of the year.
Mr. Satagaj. I might make one point on this. One of the
great ironies is you can have what I call phantom inventory.
You can actually begin and end the year with no inventory and
have the internal responsibility in the course of the year
because the IRS says even if you have zero liability you still
have to do this during the course of the year. So, you can be
incurring this cost, the internal cost, of maintaining
inventory. Mr. Bartlett was talking about his five houses. You
could clean your inventory out. You could have zero houses at
the beginning of the year, zero at the end of the year, but go
through the year and still be required by the IRS to be on
inventory accounting. So, you still get to go through that
whole game for zero at the end of the year.
Ms. Velazquez. Thank you.
Chairman Talent. Dave, did you want to respond to that same
question? Here is a guy, grew your family business and became a
CPA, and now you are going to law school to fight the IRS.
Mr. Wulkopf. I was just going to say----
Chairman Talent. Especially with a name like David.
Mr. Wulkopf. For a cash basis taxpayer, it is just like
paying your individual taxes. A person who can do their taxes
regularly can probably do the cash--their business taxes on a
cash basis. But when you have to convert to an accrual basis
where you have to report prepayment of expenses, accrued
vacations, and you have to accrue expenses and payables and
receivables, it gets a little complicated, and the average
taxpayer probably could not, and that is when you are going to
have to hire the outside counsel which is going to cost at
least $5,000 to $10,000.
Chairman Talent. That would be during the course of the
year to keep those records----
Mr. Wulkopf. You could have a firm come in on a quarterly
basis or monthly basis and help you out, but if you convert it
at the year end, that is a $5,000 to $10,000 expense every year
that you have to incur just to report. And like we said all
along, there is no difference in the amount of tax that is
going to be paid. This is all a timing difference.
Chairman Talent. I want to ask a question of Ms. Olson, but
before I do that, Dave, I am sorry that I missed your
testimony. I was running off to exercise my constitutional
obligation to vote on that particular rule that we had. My
understanding is that the IRS has come against--this is your
family painting company?
Mr. Wulkopf. Correct.
Chairman Talent. And how many employees do you have?
Mr. Wulkopf. During the summers, we can get up to around
80, 90 painters, but in the winter months it is pretty lean,
probably around 15, maybe 20.
Chairman Talent. And they want $200,000?
Mr. Wulkopf. Correct.
Chairman Talent. Including interest?
Mr. Wulkopf. They have said that they know it is a gray
area, so----
Chairman Talent. Have they waived penalties?
Mr. Wulkopf. They waived the penalties, but they are not
going to waive the interest.
Chairman Talent. So, they can't waive the interest.
Mr. Wulkopf. Correct.
Chairman Talent. Because of the United States Congress. I
would be interested in knowing if somebody could research the
amount of penalties and interest that the IRS has collected
from attacking cash payers that it forced to go from the cash
basis to the accrual basis. Does anybody have any idea how
much--just on this table here, Shane, it is $100,000 for you;
David, it is $200,000, and, Shane, I have referred to you as
the drywall man, forgive me--but you have 22 employees.
Mr. Mieras. That is correct.
Chairman Talent. And, David, you have normally 15, blossom
up to 80 with the college painter signs and everything. That is
$300,000, and you guys are little. But I would be interested in
finding out how much is out there, and maybe that is what the
IRS is trying to do. Where they make the money is not on the
cash versus the accrual basis but on screwing the taxpayer with
the interest and the penalties.
Mr. Wulkopf. And it is the one-time hit. I mean they have
let us report on a cash basis for years and your accounts
receivable continue to grow, and then all of sudden they want
the tax in one lump sum payment, which is close to $200,000,
which obviously most small businesses don't have that kind of
money laying around.
Chairman Talent. Don't keep that on hand.
Pam, my question here is--could you expand on the tax
section simplification recommendation to allow small businesses
at or below $5 million to use cash method even if they use
merchandise or inventory? This is Mr. Talent still. Do you
understand my question?
Ms. Olson. Yes. Well, for purposes of simplifying the law,
which is something that the ABA Tax Section has tried hard to
be an advocate for, for a number of years, and we are making a
big push again now, because we really think that people have
become just overwhelmed by the complexity in the law, we think
that the value to small business of being able to essentially
look at that business checkbook on December 31 and know what
their taxable income is for purposes of figuring out how to pay
their taxes is the right way to go. Now, granted, they will
have to go through and segregate things for purposes of putting
them on the tax return, but we really think that is the right
way to go.
And we also think that inventory accounting is too
complicated, that most small businesses just don't keep
adequate records in order to properly do that. We think that
the questions that have been raised over the last few years, in
particular about whether or not things that might be called
supplies in fact are merchandise and therefore require
inventories, could be taken care of by eliminating the
requirement that small businesses keep inventories.
And then the final piece is the regulations under section
162, which would defer deductions for supplies. We think that
similarly should be addressed, because you don't want to end up
with the IRS reversing course from saying, ``well, it is
merchandise, and therefore you have to keep inventories, and
since you have to keep inventories, you have to be on the
accrual method of accounting'', to saying, ``well, okay, but we
still got you on the supplies, because really these things
aren't merchandise. Now we think they are supplies, and so
since they are supplies you can't deduct them under section
162''.
There is obviously some possibility for people to play
games in this area, but we, frankly, don't think that the
possibility is significant, because there are too many costs.
If you are on the cash basis, you have to shell out the cash in
order to buy the inventory. You have to defer getting the
payment. We don't think that people are going to incur over $1
in expense in order to save 35 cents in taxes. We just don't
think that is going to happen. So we really think you could
achieve significant simplification for small business by going
this way.
Chairman Talent. I appreciate that.
Let me ask you a question about our friend, the dentists.
There is really no one from the IRS here. No one has been here
from the IRS that knew anything today or answered any questions
except of trying to come up with these different explanations
as to what Congress intended. But do you feel that if a dentist
is forced to go on the accrual system that this is going to
make him less willing to do pro bono cases? I mean people that
come in that he ordinarily would do as charity, they are going
to say, hey, your services are done. You are entitled to be
paid, and whether or not you get paid for a person who is
indigent that is totally irrelevant.
Mr. Satagaj. Interestingly, if you apply the textbook, you
would end up with a liability in certain cases, I suppose an
offsetting deduction later on for a charitable contribution of
some kind.
Chairman Talent. But you can't use your service, render it
as a charitable contribution, obviously.
Mr. Satagaj. Right, and there would be no way to do it,
therefore it would be ridiculous.
Chairman Talent. When I practiced law years ago, probably
20 to 30 percent of my practice was pro bono. I mean these were
just very unfortunate people who lived literally across the
track. They couldn't afford an attorney, and if I had to report
my income based upon the value of my services to them as
finalized, that would make me less willing to do it. But I
think this a real hit on professionals that want to help out
the people that are faced with real problems in society.
Mr. Harris. I think the real danger there if people are
going to be required to report their income when they provide
the services, there are people who could come into the dentist
office and say, ``Look, I need this work, but I can't pay you
today,'' the dentist won't accept them, because they are going
to have to report the income even though they did not get any
payment. They are only going to be able to accept people who
either have insurance that will provide full payment or people
that have the capability to provide full payment. It is going
to discourage the dentists ability to work with people that
need time to pay for the dentist services. I think that the
real danger is that these people will find it very difficult to
go out and have services provided, because they don't have the
ability to pay for it up-front.
Mr. Satagaj. There is an interesting point here with this
also in the African trade bill. There is a provision about
eliminating the ability of accrual taxpayers to write off based
on experience some bad debts. And when we talk about pro bono,
we are essentially talking about what would be a bad debt.
Right now, in the current tax law, if you are on accrual, you
do have a cash-like provision that allows you to write off a
certain amount of bad debts based on what your experience is.
The provision in the African trade bill eliminates that for
many folks.
So, now here is the kicker: If we move all these taxpayers
that are currently taxpayers in the $1 million to $5 million
range, from cash to accrual, not only do they go on accrual,
they find out that they have lost the ability which you had in
the past to adjust for that bad debt. So, you have double
whammy, as if it were, because with cash bad debts don't matter
from a tax standpoint.
So, that is one of the ironies of this thing, how complex
it is getting. Not only are we changing it here, but it will
have that effect on that accrual provision in the African trade
bill. We have the impact on the installments sales, so it is
getting pretty complicated in terms of where we are driving
these businesses and what they are willing to do, and I think
the net result would be as you suggest, that you are going to
look hard at whether you are going to provide any lenient terms
for anybody that comes into your business, because you are
going to say, ``Wait a minute. I am an accrual taxpayer, and I
can't write off the bad debt. Forget it, I am not providing
service unless you can pay for it.'' So, I think you have got a
good point.
Mr. Manzullo. In the case of Shane with the drywall,
someone would give you a call and say, ``I need--'' is it
commercial or residential?
Mr. Mieras. It is commercial.
Mr. Manzullo. Commercial. They would say I want my building
done. And you would keep no drywall on hand.
Mr. Mieras. None.
Mr. Manzullo. None whatsoever. You have no storage, because
essentially you operate the business out of a home if you
wanted to.
Mr. Mieras. Yes, you could. We would call a supplier and
they deliver the materials, and we place them.
Mr. Manzullo. And does the supplier bill directly the cost
of the drywall to the owner of the building?
Mr. Mieras. No, that is billed to us.
Mr. Manzullo. That would be billed to you. Would the
situation be different if there had been a direct bill from the
supplier to the owner of the building? Suppliers don't want to
do that, because they want to get paid, of course, and they
rely upon you. But would that have made any difference in the
kind of value of that drywall as inventory? Anybody?
Mr. Satagaj. From the interpretation of the law, the issue
is timeliness. You wouldn't have to include it in an inventory
if it was truly billed directly to the consumer or the
customer, because it wouldn't come into your inventory. But
that means he doesn't take any title. Most of it is drop-
shipped.
Mr. Manzullo. Yes, you just show up.
Mr. Satagaj. And it shows up, and it is under the case law
here that is considered taking title in that case. So, only if
it went straight to the site and was billed directly to the
owner of that building or whoever is building it, then it would
not show up.
Mr. Manzullo. But if it was billed directly to the
contractor, then the contractor would have to show that as
inventory, and it would be shift from the sub to the
contractor.
Mr. Satagaj. Exactly, exactly.
Mr. Manzullo. So, everybody gets screwed.
Mr. Satagaj. Right. It gets even worse. And, actually,
under current circumstances that is a little bit of the
problem, building down the process.
Mr. Schneier. This also shows the importance of the
regulatory process and how it affects the law, how the
regulatory review process is so important to small business to
be involved when the IRS is going to reinterpret a particular
area, saying whether or not inventory is applied here or
whether or not it should be applied in this particular
circumstance. And the concern that we have had over the years
of the fact that IRS has always exempted itself from the
regulatory review process, claiming that they were simply
interpreting the statute. Obviously these changes in
interpretations have the effect of changing the law in many
circumstances.
Mr. Satagaj. That is a commercial message for Congressman
Talent bill stuck in the House. Let us move that one forward
too.
Mr. Manzullo. That is what we were discussing here. I am
trying to think back as to when I practiced law from 1970 to
1992 when I was elected to the House of Representatives. And I
represented a number of small business people. I am trying to
look back at the qualitative and quantitative distinction as to
what difference does it make if you have inventory on hand? I
mean, it just sits there. We have problems back home--McHenry
County is the fastest growing county in the State of Illinois;
it is in my congressional district. And we do have lots of
nurseries, and you nod your head.
Mr. Satagaj. One of my favorite clients, keep going.
Mr. Manzullo. And there they are with their stock on which
they have to pay taxes even though it is stuck in the ground
growing for six months. Is that correct?
Mr. Satagaj. Well, they actually have a whole separate
provision. I have been fighting that for 20 years. The IRS
would like to shut that down as well. No inventory whether they
are on cash or accrual. They are not required to inventory,
because it is impossible to do it. So, they have a special
exemption.
Mr. Manzullo. Okay. Well, I would--if any of you has any
questions that you would like me to convey in my official
letterhead to the IRS witness, please contact Phil Eskeland
from my staff or Ligia here, and I will be glad to work with
Mr. Talent to formulate questions, not with regard to
particular cases but perhaps general principles and answers
that they have never given you. I would like to see how they
would respond to a Member of Congress who asked that same
question.
Did you have anything further?
Ms. Velazquez. No.
Mr. Manzullo. Okay. Well, listen, we really appreciate your
coming here, appreciate your sitting through the bells and our
voting. Don't give up. You can tell that this really is a non-
partisan movement in order to bring some resolution to this
problem. I would encourage you to continue to stay in contact
with your member of your House of Representatives and your two
Senators to keep this issue hot and not to stagnate it.
This Committee is adjourned.
[Whereupon, at 12:50 p.m., the Committee was adjourned.]
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