Our problem is faced by all sizes of firms, but it is a particular one for small- and medium-sized firms. There is a way around the problem for larger firms who perhaps can afford to pay off entirely the equity or debt that might stem from the firm to the retired partner, in which case this test would not apply. But many smaller firms cannot do this. They do not have the financial resources to do it, so if anything, it creates a greater inequity for them. I would like to comment on one point made by Commissioner Driver earlier which one of the prior speakers touched on. That was the revenue effect, if that is a good way to describe it, from this part of the proposal. Commissioner Driver indicated that the revenue cost would be $36 million, but he did not say that that is the first-year cost. By his own figures, if you will look on page 17 of the committee's statement, the revenue cost in subsequent years is considerably smaller, ranging from $14 to $17 million. One final point is not addressed by this legislation. A companion problem exists with respect to the imposition of the self-employment tax. In other words, not only do these retirement payments restrict and limit the amount of social security benefits, but to add insult to injury, those same payments are subject to self-employment tax. It is a pleasure for us to present our views to you. Mr. Taplick? STATEMENT OF ROBERT TAPLICK, CPA, ON BEHALF OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS Mr. TAPLICK. Good afternoon, Mr. Chairman. As I said earlier, my name is Robert Taplick. I am a partner of Taplick & Co., Madison, Wis., a firm of certified public accountants. We have 6 partners in our firm and a professional staff of 30 people. I have been with the same firm for 48 years and have been a partner in the firm for 38 years. In the interests of time, I will summarize my prepared remarks. I would request that my prepared statement be incorporated into the official, printed transcript. Senator NELSON. It will be printed in full in the record. Mr. TAPLICK. I am here today to support the passage of H.R. 5295. I elected to start my retirement in May 1979 and shortly thereafter I found, to my surprise, that the social security law as amended in 1977 would deny me social security benefits in 1980 and 1981. In addition, my retirement benefits would continue to be taxed as self-employment income, even though I performed no substantial services. I computed that the cost to me would be approximately $24,000 in after-tax dollars. I have discussed this situation with several partners of my age group and other partnerships in Madison and Milwaukee and found that they also have the same problems. I believe that the legislation that you are working on here today will remove the inequities of the law as it is now written and place retiring partners on an equal basis with others whose working careers have come to an end. You have a copy of my complete statement for the record and I thank you for permitting me to appear here today. Senator NELSON. I am very pleased to have you here today, Mr. Taplick, and we appreciate your taking the time to come. Ruth? STATEMENT OF RUTH E. KOBELL, LEGISLATIVE ASSISTANT, NATIONAL FARMERS UNION Ms. KOBELL. It is a pleasure to be here today and we appreciate your interest in this subject. We have been vitally interested in the social security program over its 45-year history, although it took a while for farmers to get coverage. We believe that 1 of the fundamental questions facing Americans is whether the character of social security will be preserved as we have known it, and as Congress intended. The social security system is the central pillar of retirement planning for farmers and the changes in the 1977 law affected them in several ways, the most obvious of which is that, as you recognize, a farmer may become eligible for social security coverage and decide to retire from farming in 1 calendar year but hold part of his production for sale at a later time. We believe that receipts from such sales should be recognized as preretirement income and not applied against the earned income limits allowed under the annual retirement test as interpreted by the Social Security Administration. When farmers sell such produce they remit social security tax and Federal income tax on such income. The pattern of holding production of storable commodities from the year of production to a later, more profitable time, sometimes- Senator DOLE. They may have to hold it a long time. Ms. KOBELL. They may have to hold it a long time, but it is a part of their investment in their whole history of earnings. It may also provide needed additional social security contributions for farmers who, because of low farm prices, may have had years of low or nonexistent net farm income on which to pay social security thus lowering the level of social security retirement income which they do receive. Inflation has rapidly increased the cost of farm production, which is not reflected in prices received. It is estimated that inflation has added three times as much to farmers' production costs as to the prices they receive for that production and therefore net income on which farmers pay social security tax may be less than enough to provide full social security retirement coverage. I know that you are pressed for time and I want to cut my presentation as short as possible. We do believe that it is only equitable that the adverse effects of the 1977 amendments be corrected. We would urge that passage of 5295, which recognizes the prior income aspects of such farm production. There are other things that do affect farmers, farm families, and social security. We would like at some time to talk about the special effect of lack of social security coverage on farm women who often contribute on an equal basis to farm production yet do not earn social security coverage. But we recognize that your hearing today is focused rather closely on this one issue of the retirement test and we appreciate the opportunity to present our views. Senator NELSON. Thank you very much. STATEMENT OF CHARLES EICHENBAUM, CHAIRMAN, STANDING COMMITTEE ON RETIREMENT OF LAWYERS, AMERICAN BAR ASSOCIATION, ACCOMPANIED BY JAMES O'HARA, CHAIRMAN, SUBCOMMITTEE ON LEGISLATION OF THE STANDING COMMITTEE ON RETIREMENT OF LAWYERS, AMERICAN BAR ASSOCIATION Mr. EICHENBAUM. Mr. Chairman, Senator Dole, we appreciate the opportunity to be present this afternoon. We are here at the request of the president of the American Bar Association to urge the enactment of H.R. 5295 and the Senate counterpart. Mr. James O'Hara, who has introduced himself, will indicate to you the views of our association. Mr. O'HARA. Thank you. I appreciate that you are pressed for time, so I will keep my remarks brief and summarize the written statement that we have already submitted for the record. As you all know by now, H.R. 5295 is noncontroversial. It passed the House on a 383-to-0 vote. We think one of the advantages that we strongly supported is section 3 of that bill that achieves tax parity as between the self-employed and the employees. As the Commissioner of the Social Security Administration mentioned earlier, section 3 simply recognizes an unintended change in the 1977 amendments. What it does is it enables the self-employed retired individual to receive maximum social security benefits in part of the year following his retirement, despite the fact that after his retirement he may be receiving some distribution from his former partnership which related to prior services. This places him on an equal footing with his counterparts in the corporate sector. Under the present law, he would be losing all or substantially all of his social security benefits despite the fact that if he were incorporated, or a lawyer down the hall who was incorporated who was in the same position would be receiving social security benefits merely because of the fact that he was a part of a corporate law firm, whereas the unincorporated, self-employed individual would be losing his benefits. As I mentioned, section 3 would rectify this unintended change in the 1977 amendments by allowing him to demonstrate that his postretirement earnings were with respect to preretirement services that gave rise to the right to receive income. That would enable him to be treated as having earned the income when the services were actually performed rather than under present law, being treated as receiving them only on actual receipt. We also support section 4 of this bill that rectifies another change in allowing a 1-year grace period for people without any knowledge or basis for expecting that the law would change in 1977 had made prior grace period elections and now, with this change, would be allowed, as with any other individual, to elect one more grace period after the effective date of this bill. The ABA wholeheartedly supports and urges enactment of H.R. 5295 and has adopted a resolution to that effect in one of its meetings in the fall of 1979. We thank you for your support. Senator NELSON. Thank you very much, Mr. O'Hara, and I thank you all for taking the time to come and present your statements. Thank you. [The prepared statements of the preceding panel follow. Oral testimony continues on p. 210.] SUMMARY OF PRINCIPAL POINTS STATEMENT OF WILLIAM C. PENICK Social Security Act Amendments of 1977 (P.L. 95-216) contained an apparent drafting error which resulted in the unintended reduction or loss of Social Security benefits to certain categories of retirees, including CPA's. Inadventently, there has been a resultant reduction or loss of benefits to retired partners or sole proprietors who had retained a debt or equity interest in their firm after retirement, because of the payment of retirement benefits. The American Institute of Certified Public Accountants (AICPA) supports the provisions of H. R. 5295, a bill to amend Title II of the Social Security Act. Section 3 of H.R. 5295 would effectively remedy the unintended and adverse result, as previously described. H.R. 5295 appears to be the most comprehensive and cost effective solution to the problem. The AICPA continues to urge modification of Section 1402 (a) (10) of the Internal Revenue Code so that a retired partner would not have to pay self-employment tax on retirement income where no services are performed but where debt or equity in the firm is maintained. Subcommittee on Social Security April 21, 1980 |