Gary Houlahan

CEO and Owner, Mutual Materials
605 - 119th NE
Bellevue, WA 98005

Statement for the Record
U.S. Senate Finance Committee

Federal Estate Tax:  Uncertainty in Planning Under the Current Law

November 14, 2007

Chairman Baucus, Ranking Member Grassley, and members of the Committee:

As a fourth generation private business owner, it is an honor to speak before you today concerning the matter of the federal estate tax, also known as the “death tax.”  I am the CEO and owner of Mutual Materials, one of the few remaining privately-held masonry companies in the state of Washington.  Mutual Materials was founded by my great-grandfather, Daniel Houlahan, in 1900.  Daniel, an experienced brick-layer, came to Washington to help rebuild Seattle after the great fire of 1889.  While there, he started his own nearby brick plant, Builders Brick Company, the predecessor to Mutual Materials.  Builders Brick Company supplied the majority of the bricks used to rebuild Seattle.

Daniel’s goal was to build a strong business which would provide long-term employment and income for his family.  Over the next 100 years, Mutual Materials did just that.  We survived the Great Depression, the brick industry downturn in the 1950’s, the “Boeing Bust” of the early 1970’s and the recession of 2001.  Today, with annual net revenue of $150 million, and 150 employees on payroll, Mutual Materials is the largest brick and block company in the state of Washington.  If all continues as planned, my son will soon become the 5th generation owner of Mutual Materials.

Strangely, the greatest threat to my company’s survivability might just be its success, which has substantially increased our liability under the death tax.  The death tax has already led to the demise of most of the private brick companies in the state of Washington.  Many of these companies were bought out by foreign-held corporations who then siphoned their wealth out of the U.S.  A host of foreign corporations have made clear their interest in purchasing Mutual Materials.  Six years ago, they almost got their chance.

In 2001 my mother passed away, triggering the death tax.  I was committed to working honestly with the Internal Revenue Service and did not waste time in preparing the necessary materials.  Despite my diligent efforts and good intentions, I was quickly accused of using an incorrect accounting mechanism and thrown into a three-year legal battle.  The focal point of this legal battle was the valuation of my company’s worth.  The IRS determines tax liability according to a complex valuation formula, which is based on a number of very subjective criteria.  The IRS rejected the two private valuations I requested, and demanded a third valuation with their own auditor.  This valuation was based on Mutual Material’s gross sales, which is a very strange way to calculate a company’s worth.  Few business owners are prepared for the headache of determining their business’s value in terms that only a Washington bureaucrat could dream up. 

Over the course of three years, I was forced to spend over $400,000 in legal fees and valuations, and countless days in discussion, negotiation, and courtroom presentations, before finally achieving resolution.  At no point was our business’s survival guaranteed.   If the IRS’s valuation had been accepted in court, I would have been required to pay $8 million in taxes, plus a $3 million “penalty” for not going along with the IRS in the first place.  Ultimately, a reasonable judge threw out the IRS’s valuation scheme, and with it their $11 million bill.  My final settlement was only $800,000.  

It bothered me to spend so much time and money to fight the death tax.  However, from the perspective of a 4th generation business owner, it was worth it if I could still hold on to the company at the end of the day.  To do this, I knew I would have to fight the IRS’s convoluted valuation methodology and its demand of $8 million.  There is no way I could pay this much tax without selling my business. 

Mutual Materials – like most other small, family owned operations – does not have significant cash reserves lying around.  Even paying $800,000 is not easy, though we have found a way to pay the tax.  In order to increase cash on hand, we doubled the size of our dividend payments.  While most of the family is enjoying increased benefits from their holdings in the company, my brother and I are using the extra cash to make annual payments to the IRS.  Obviously, we’d rather keep the dividend payments at their normal level, and keep the money in the business. 

For the time being, we are managing to make the payments and keep the business running.  However, the death tax has certain inevitability, meaning my son will one day have to deal with it.  If Mutual Materials continues to grow, then our liability under the death tax will substantially increase.  Moreover, I am well aware that the IRS may try to bill us according to some strange valuation formula again, and that next time we may not have a reasonable judge to depend on.  Obviously, I am doing everything possible to prepare for this reality so that the company will be preserved.  However, my experience of six years ago tells me that my efforts may very well not be enough.  My brother’s response to our troubles, only half serious, is to “die in 2010.” 

The lesson I’ve taken away from the death tax is that it is great for lawyers and those who make money off of non-productive effort.  It is destructive and inefficient for hard-working business owners such as myself.  Those who have worked hard their entire lives to build a strong business should not have to worry that their children will face this nightmare when they die.  For the sake of family-owned businesses such as Mutual Materials, I respectfully request the members of the Senate Finance Committee to support legislation to permanently repeal this tax.