Company Addresses Impact of Debt-Equity Regs on Small Businesses

Today, we respectfully submit our comments regarding the Notice of Proposed Rulemaking [REG-108060-15] which proposed new regulations under § 385 of the Internal Revenue Code. We write to you on behalf of Union Concrete & Construction Corporation from West Seneca, NY. We are a small family business that has been building roads, highways and bridges across the western part of New York State since 1950. We are organized as an s corporation and harbor grave concerns over the impact of the proposed § 385 regulations on our company, and countless other small family businesses like ours.

As we understand them, the proposed § 385 regulations enable debt between a "modified expanded group" to be reclassified as equity. This rule would have an extremely negative effect on our company because we have several different legal entities that are used to conduct our business. For example, we have both an operating company, Union Concrete & Construction Corporation, as well as an equipment leasing company, Center Lake Equipment LLC. We set up Center Lake to provide liability protection to our main business when we rent equipment to third parties. This arrangement between Union Concrete and Center Lake would likely be considered a "modified expanded group" under the proposed § 385 regulations. As such, any lending between the two entities would be reclassified as equity.

Such an equity reclassification would be devastating because we are currently taxed under the rules of Subchapter S of the Internal Revenue Code. Subchapter S status allows us to avoid double taxation and enables us to reinvest more of our profits back into our company. However, to qualify for Subchapter S status, a corporation can only have one class of stock. Yet, an equity reclassification under the proposed § 385 regulations would result in an additional class of stock and cause the loss of our Subchapter S status.

The proposed § 385 regulations do not just threaten our current business model, they also gravely put at risk our ability to continue as a viable business. Our company is fast approaching a transition from second generation family ownership and leadership to that of the third generation. To effect this change we are considering transitioning all of the company's equipment and operations into separate companies. Such an arrangement would allow our third generation family members to run and own the operating entity, while our second generation would keep all of the equipment in the leasing company. This would enable them to receive lease payments to fund their retirement. The § 385 proposed regulations would ensnare this operating and leasing company model and prevent its use. In the construction industry, it is very hard to sell smaller companies because of the riskiness and cyclicality of the industry. As such, without an operating/leasing company model, our current second generation owners would likely have no other option but to liquidate the company in order to fund their retirement. Such an event would mean the destruction of a sixty-six year old family business and the loss of countless jobs.

Union Concrete is solely a domestic company. We do no work internationally, and even do not operate outside of New York State. We have done nothing to contribute to the un-patriotic and immoral practice of corporate inversions and earnings stripping that your Treasury Department says were the target of the new regulations. Yet, we may be profoundly affected by its response to such activities. The potential devastating impact to our business is simply unconscionable.

We are not alone with our concerns regarding the proposed § 385 regulations. The majority of firms in our industry are small businesses organized as s corporations and partnerships. Countless numbers of these firms face a similar ownership and leadership transition as their baby boomer owners seek retirement. The destruction of the operating/leasing company model, a widely used succession planning technique in the construction industry, may force many of our peers into liquidation. The resulting loss of thousands of jobs could be devastating to the economy.

We kindly ask that you seriously consider the huge impact that the § 385 proposed regulations would have on countless domestic small businesses, like Union Concrete, and modify the proposed § 385 regulations to protect those that just operate domestically.