Fairness, the IRS and Family Feuds -- Part I
If we assume our society will continue to oppose confiscation of property, we can safely assume our success will create an accumulation of material things. It's a fact of economic life.
Wealth, in some senses, is like scrap and waste. Waste disposal is a problem in our society because we generate tons of garbage and trash. Primitive societies don't really do anything that generates enough waste to talk about. But our society does. We face the same kind of problem with wealth - we have to plan on how we're going to dispose of what we have created, good or bad.
The vast majority of people in this society leave very little - maybe a house, a TV set or two, a couple of cars, and the family jewelry. The value isn't great, in general, but there's a lot of strong emotion involved. People have the most horrible fights over who's going to get Mother's napkin ring or the chipped mirror in the basement. The value in economic terms doesn't really matter. It's the intense emotion that fuels violent struggles over inheritable property.
Now consider the small percentage of our society who has something very significant to leave behind. In these cases, high value is added to strong emotion and the fire is fanned into an inferno. If the struggle is fierce over Dad's old railroad watch that hasn't worked for years, consider the battles that can rage over "control" over major material wealth and the means to generate it: a business.
Wealth isn't destroyed when the wealthy become deceased. It won't just go away, so it has to go somewhere, and there are only so many options. It can be distributed by default, of course, by simply doing nothing to settle the estate. In that case, it's essentially given to the Government, a persistent, greedy partner who will maximize his take in direct proportion to lack of attention that is given to him. Uncle Sam, under those circumstances, takes his considerable share, and then distributes those bits and pieces that remain to the common law pecking order of widows, children, second wives, cousins and so forth.
More often, however, at least some planning is done, however minimal it might be. The founder, forced to make decisions based on a tax law he doesn't understand, puts the future of the business in the hands of a series of professional Rasputins who may or may not give him good advice. This is called "estate planning," and it's one of the major growth industries of the decade.
Every day I see more printed material on tax shelters, gimmicks, tips, advice, strategy and the like than an army of bookworms could work through a year. Most of this material is aimed at tax avoidance, the name polite society has for "chiseling Uncle Sam."
I have no quarrel with trying to minimize tax liability in itself. That's an important factor in management and planning. What I do object to is the obsession some people seem to have with minimizing taxes to a point that the subject of the future good of the business fades from their consciousness. It's really simple to cut your tax bill. All you have to do is run the business into the ground, fire the employees and padlock the doors. Stop making money, and you'll never pay another tax dollar as long as you live. Neither will your heirs. You will finally have the IRS off your back.
Ol' IRS UThere are other ways to look at taxes and the IRS besides with horror, although most of us don't seem to realize this. Everywhere I go, whenever business owners talk together about the great threats that are destroying American free enterprise, I hear the word "taxes," and the grumbled letters, IRS.
There's little doubt present tax laws are not the happiest we could have, and some major redesigning may be necessary. There's also no question Uncle Sam is one of the greediest and most long-lived relatives any of us are likely to see in our lifetimes. He seldom hesitates to loot estates with the impunity and glee usually attributed to Attila the Hun.
But, in fact, the tax laws and the IRS have probably saved more businesses than they have plundered since the 16th Amendment was added to the Constitution. For one thing, the IRS provides business owners a required course in accounting. Left to his own devices, the founder would probably have settled for a cheap notebook and some dull pencils, but the IRS has little patience with smudged notebooks and eraser crumbs. It requires accounting, not simple record keeping. The business owner, with a lot of weeping and gnashing of teeth, eventually is forced to acquiesce and comply with those "unreasonable" requirements.
The lesson often doesn't take, however, because the business owner resents it so much he never graduates to an understanding of how much good an accounting system can actually do for him other than to confuse the IRS. Although every business founder is forced to attend classes at Ol' IRS U, like most unwilling students, he spends most of his time figuring out ways to pass the course with minimum effort and, consequently, comes out with minimal education.
This is a shame for a number of reasons. For one thing, accounting is the only language through which a business can be understood, discussed, and defined with any objectivity and accuracy. Tax accounting may only be one dialect in this language, but it's better to have a dialect than no language at all. In many businesses, we have the IRS to thank that managers can speak "business" at all.
But the education from the IRS doesn't stop with accounting. The tax people also offer a course in social studies. It may not be as immediately effective as the accounting course, but it covers some very critical issues that are important to business transition.
The tax people take a dim view of corporate Rolls Royces and two-week board meetings on the Riviera. This may seem, on the surface, to be an unmitigated invasion of privacy and prerogative, but it often has the beneficial effect of saving the golden goose - the business - from prolonged and potentially fatal bloodletting.
The IRS also has this prejudice against paying people more than they're worth on the open market. The tax people can be fooled, of course, but on the whole, their presence on the economic scene provides some necessary and healthy discipline for any business. Taxes are a major factor in estate planning, but screwing Uncle Sam should be anything but its major objective - he's not really the business's worst enemy. In fact, in his own peculiar way, he constantly encourages some pruning of the family tree.
There's a family-owned business in the Southeast in which the three working brothers are paid equally. There's no question that their individual contributions to the business are as unequal as they could be, but since each holds 25 percent of the stock, the reasoning is that each should get equal benefit from the business. The other 25 percent of the ownership rests in the hands of a sister who works part-time in the office. She's married to the head of the parts department, and her salary, together with her husband's, is carefully adjusted so the sum of the two amounts equals what each of the brothers gets. That adjustment is usually upwards.
The objective may be to be fair, but it's no way to set compensation. You can bet once this situation comes to attention of the IRS, they are going to have some strong opinions about how "fair" it is in their eyes.