under section 165 of the Internal Revenue Code should be excluded from the estate and gift taxes." In keeping with the policy expressed above, the following specific recommendations are advanced: An annual exclusion for gifts of future interests should be allowed. It seems improbable that Congress intended that the term "future interests" in the gift tax statute should be construed by the courts as broadly against taxpayers as has been the case. In any event, such narrow interpretations are working inequitably and this should be cured to the reasonable extent here suggested. Section 811 (k) should be amended to provide further means for deterinining the fair value of unlisted stocks having no readily ascertainable market. Such means should give appropriate weight to the interest-or lack of interest-of potential buyers of the stock. This is one of the most important elements in the determination of prices on a stock exchange. Whatever the book value or the earnings record in the past of a corporation may be, its stock in reality is worth only what a potential buyer will pay for it. The estate of a decedent should not be required to furnish cash at the rate of the estate tax on a stock based on book value or earnings record in the past if potential buyers are willing to pay only a lesser amount for the stock. Considerable uncertainty and litigation now result from lack of clarity in situations where a beneficiary, such as the widow of a decedent, is entitled to income for life from principal of a trust which passes on such beneficiary's death to charity, coupled with a possibility that such beneficiary may consume some part of the principal under powers for that purpose set forth in the instrument creating the trust. Some of the decisions appear to put considerable emphasis on the precise words used as the yardstick for whether such a power may be invoked and to what extent. It would appear equitable to permit the value of the charitable remainder interest to be deducted to the extent that it is established (under reasonable requirements therefor) from all the circumstances what the probable extent of the consumption of principal will be. That is, if it is so established that the consumption of principal will in all probability be negligible, if any, the full value of the remainder interest given to charity should be deductible. Furthermore, if it is so established that it is probable that only a part of the principal will be consumed, the value of the charitable remainder interest should be deductible less the extent of the probable consumption. If it proves difficult to provide practicable means for accomplishing this recommendation, then in all doubtful cases in which tax is required to be paid on the charitable remainder interest, the fiduciary should, on the death of the income beneficiary, be refunded an amount equal to that proportion of the tax paid on such remainder interest which the value actually passing to charity bears to the value at which the remainder interest was taxed. SUGGESTED REVISION IN INCOME TAX REGULATIONS SUBMITTED BY DAna F. Cole The Internal Revenue Bureau apparently concluded that a father realizes income when he makes gifts of raised cattle to his children (or to others). At least, the Bureau issued IT 3932 which stipulates that a cattle-raising farmer realizes income when he makes a bona fide gift of such cattle to his son, the amount of the income being the value of the cattle at the time of the gift. Also, the son acquires as his basis the fair market value of the cattle, according to IT 3932, and any income realized by the son will result only if he sells the cattle for a sum larger than the value of the cattle at the date of the gift. (Now that the cattle market is down, who knows what the rule would be if the children sell the cattle for less than the value at the date of gift?) The Department of Agriculture and various other agricultural agencies and public spirited citizens have been promoting 4-H Clubs As a part of this program fathers have been encouraged to make gifts of cattle and other farm animals to their children, with the idea that prizes in the art of animal husbandry will be awarded to industrious club members. If IT 3932 is to be followed, it certainly will discourage and help to nullify a very worthwhile program now being carried on in the 4-H Club movement. IT 3932 appears to be an attempt on the part of the Internal Revenue Bureau to usurp a function of the Government which should belong to Congress. After long study Congress enacted what it believed to be the correct policy in connection with taxing gifts and fixing the basis of such property in the hands of donees. IT 3932 asserts a principle which is the exact opposite of what the law provides and what Congress intended that the law should provide. It appears that the Revenue Bureau in issuing IT 3932 attempted to take over from Congress a tax levying task in addition to its regular work of administering the laws as passed by Congress. Perhaps this field of taxing gifts needs considerable study, but it is a legislative problem and not an administrative one. STATEMENT OF ROBERT B. DRESSER, PROVIDENCE, R. I., REGARDING GIFT- AND ESTATE-TAX PROBLEMS I. INTRODUCTORY STATEMENT My name is Robert B. Dresser. I am a member of a law firm with offices at 15 Westminster Street, Providence, R. I. I appear individually, in my own behalf, and not as a representative of anyone else. The continued existence of the capitalistic or private enterprise system is dependent upon an adequate supply of private capital. In order to operate successfully industry must have a steady continuing supply of new capital-billions of dollars each year-to start new industries and to maintain and expand existing ones on which so many jobs depend. On the average, it takes about $12,000 of investment in new plant and equipment to provide a job in industry for one worker. As many as 6 million new jobs may be needed to employ the 1960 labor force. That means new investment for net expansion in the meantime of some $72 billion. During the last 7 years, the total amount invested for this purpose has been only from $30 to $40 billion-in other words only about half this sum. It has not generally been realized that 80 percent of the investment for new plant and equipment during this period has gone for replacement of used-up capital values, at actual cost much above the depreciation allowances included in business accounts. Thus, only 20 percent of the $20 to $30 billion annually invested in new assets has provided for new jobs. Our present tax laws are drying up the sources of capital which are needed for this purpose. The taxes which have the most damaging effects in this direction are: (1) The heavy progressive income tax; (2) the confiscatory estate or death tax, with its companion, the gift tax; and (3) the capital gains tax. This presentation is confined to the estate and gift taxes. II. FEDERAL ESTATE AND GIFT TAXES A. The levying of estate and gift taxes by the Federal Government should be abandoned and this field of taxation should be left exclusively to the States Under existing laws the tax on the estates of decedents runs to a high of 77 percent, and the tax on gifts to 574 percent. These rates are manifestly confiscatory, and they have very harmful economic effects. They not only seriously impair the incentive to work, save, and invest, but they are extremely destructive of capital and will in the long run destroy the accumulations of capital that are so necessary for industrial activity and expansion with the resultant beneficial effects on our economy and the people as a whole. In its report on the Tax Problems of Small Business, published in June of this year, the Select Committee on Small Business of the United States Senate makes the following statements regarding Estate Taxes (pp. 21-23): "Your committee is deeply concerned with those forces which lessen competition and compromise the free-enterprise nature of our economy. Testimony which was given to the Taxation Subcommittee lent credence to reports that estate taxes often lead to the disappearance of small or medium-size independent businesses or their merger with the dominant segment of an industry." The report quotes the following testimony of a witness: "Since little companies are generally individually owned, death inevitably forces a substantial cash inheritance-tax demand on any small company owner's estate. Then the small organization that had managed to survive competition and income taxes must raise the cash to meet this tax, or be liquidated by sale or merger, which is happening at an alarming rate. "The effect, then, of the present system of taxation is to accentuate the trend toward concentration of economic power in the hands of a few, while the Department of Justice spends great effort prosecuting the monopolies that are forced into existence by our tax system." In its findings and recommendations the committee says: "The impact of death levies on many privately held small businesses all too often results in forced sales to competing firms in the same industry. Furthermore, the threat of inheritance and estate taxes provides a strong inducement for the principal owners of any such corporation to hedge against the possibility of death through such sellouts." Moreover, the heavy taxation of large estates compels the rich to seek comparatively safe, liquid investments in order to provide for the heavy taxes that will be imposed upon their estates at death, thus further reducing the capital available for hazardous business ventures which have done so much to improve the lot of the American people. It should be realized that rich men, such, for example, as the late Henry Ford, play a very important part in our economy. They and their families can personally consume and enjoy but a trivial part of their wealth. The balance is in effect held by them as trustees for the public. It is this wealth that has supplied in the past much of the venture or risk capital required by new and hazardous enterprises, such as the railroads, the automobile industry, the aircraft industry, and many others, as well as for the expansion of existing enterprises. By this means jobs and good wages have been provided for millions of workers. The automobile industry furnishes an excellent illustration. Based upon 1952 reports, the number of jobs created directly and indirectly by the automobile industry, which is only about 50 years old, is over 9 million. This is 1 out of every 7 persons now employed in all classes of employment in the United States. Such enterprises, however, are risky. Many of them fail and the investor loses his investment. Hence, he must have funds that he can afford to risk. Most people do not have such funds, and such holders of capital as banks and trust estates are not permitted to make such hazardous investments. High death rate as well as high income taxes destroy the incentive and the ability to incur such risks. Does anyone doubt that the wealth of Mr. Henry Ford was of far greater benefit to the people of this country in his hands than it would have been in the hands of the Federal Government? He used it to develop a great industry which has given employment at good wages, directly and indirectly, to hundreds of thousands of people. In the hands of the Federal Government the money would soon have been dissipated in the construction of nonproductive post offices and other Government buildings and in paying the costs of an unduly expanded bureaucracy. It is indeed significant that the Communist platform of Karl Marx contains the following plank: "Abolition of all right of inheritance." There should be no fear that the absence of a heavy Federal estate tax would lead to an undue concentration of wealth in the hands of a few. The rule against perpetuities, inherited by us from the common law of England, forbids tying up the ownership of property for a longer period than a life or lives in being and 21 years In other words, an estate must be divided among the heirs or beneficiaries in the second succeeding generation. From that time on the estate will be subject to a further subdivision with each generation, if it should happen that there is any of it left to be divided. If the large estates are to be broken up, it is obviously better that this should be done by natural forces than by taxation. In the first case the capital continues in the hands of individuals. In the second it is taken by the Government. Assuredly, the harm done to the economy by the present high rates is out of all proportion to the revenue produced, and cannot be justified by any argument based on fiscal needs. Even with the very high rates now in force, the revenue from these taxes is comparatively trivial. It is a little over 1 percent of the total budget-enough to pay the Government's expenses for between 3 and 4 days. I am advised that the revenue collected from these taxes in 1952 was $751 million from the estate tax and $83 million from the gift tax. The imposition of death taxes is not confined to the Federal Government. The individual States as well impose either estate or legacy taxes on death. The duplication of taxes by the State and Federal Governments has become a matter of grave concern, and it is important that steps be taken to end it. The field of taxation should be divided among Federal, State, and local governments in such manner as to eliminate duplication as far as possible. The field of death taxes should, I submit, be assigned to the States, the laws of which determine the right to dispose of property on death and the rights of inheritance. B. CONCLUSION The Federal estate tax is the least defensible of any of the taxes levied by the Federal Government. It is a direct levy on capital, its economic effects are exceedingly harmful, it produces but little revenue, and it invades a field of taxation already being used by the States. I, therefore, submit that the levying of such taxes should be abandoned by the Federal Government, and this means of taxation left exclusively to the States, where competition would tend to keep the rates within reasonable bounds. The gift tax is merely auxiliary to the estate tax, and both should be dealt with alike. STATEMENT OF THE NATIONAL ASSOCIATION OF MANUFACTURERS ON TOPIC 34, GIFTAND ESTATE-TAX PROBLEMS This is a field of taxation which was developed by and rightly belongs to the States. The laws of the separate States determine the rights to dispose of property on death and the rights of inheritance. The States also should have the exclusive taxing power in this area, and the association has so recommended for a number of years. Pending action to remove estate and gift taxes from Federal use, the rates of tax should be reduced and the levies on transfers between spouses should be eliminated. In addition, the following rules with respect to survivors annuities under pension plans should be adopted: (1) The value of pension benefits and any death benefits paid to a survivorbeneficiary through exercise of a joint and survivor annuity option, under any qualified or previously qualified pension plan, should not be subject to estate tax. (2) There should be no gift tax by reason of the employee exercising his right under a qualified or previously qualified pension plan to choose a joint and survivor option. GRAY & MARON, July 23, 1953. Hon. DANIEL A. REED, Chairman, Committee on Ways and Means, House of Representatives, Washington, D. C. (Attention: Mr. Russell E. Train.) DEAR SIR: In reply to your letter dated July 20, 1953, I very much regret that I will be unable to appear as requested therein, due to an illness which has seriously curtailed my activities for the time being. However, I notice that the proposed amendment, "to give the recipient of trust property transferred in contemplation of death a basis equal to the fair market value of the property on the date of the decedent's death to the extent that the property is included in the decedent's estate," has already been substantially noted and emphasized by various other individuals and groups concerned with problems of taxation. As I mentioned to you in a previous letter, in view of the gross inequity of the present law, I felt that in order to reduce such inequity as much as possible, the amendment should be made retroactive to all years not presently outlawed under the statute of limitations. This, I believe, is the least that can be done by our Congress to alleviate the existing hardship borne by such recipients at the present time. With my best good wishes, I remain COLMAN GRAY. NEW YORK 4, N. Y., February 25, 1958. Hon. DANIEL A. REED, Chairman, House Ways and Means Committee, DEAR CONGRESSMAN: I write to you as chairman of the House Ways and Means Committee with the hope that in that capacity you may be able to help bring about an amendment to the Estate Tax Law, which is necesary to rectify an apparent oversight of the Revenue Act of 1951. Section 607 of the Revenue Act of 1951 was amended to provide for a substantive change in the taxability of transfers subject to possibilities of reverter which were made between March 18, 1937 and February 11, 1939. The Revenue Act, however, although it changed the substantive provisions, did not provide for any procedure for the filing of claims for refund in estates which had been fully closed. Obviously in the light of the period affected by the amendment, this includes practically all estates of decedents who died then. The amendment was adopted to correct an inequity which existed during that period, since the regulations made certain transfers nontaxable, whereas the Treasury Department taxed them nonetheless and the Supreme Court justified such taxation. On October 23, 1952, I wrote to the Joint Committee on Internal Revenue Taxation, pursuant to a press release which they issued requesting suggestions for improvement of the tax laws. This letter gives the entire history of the problem. I also enclose a copy of a proposed draft of the substance of an act to remedy the omission, which was forwarded with my letter to the Joint Committee. Apart from receiving the proforma acknowledgment of the receipt of my communication, I have received no further word from the Joint Committee. I am, therefore, appealing to you, in view of your new position, with the hope that you can bring about some action on this proposal in the interest of carrying out the clear intent of section 607 of the Revenue Act of 1951 which, at the moment, has been frustrated by the undoubtedly inadvertent omission of procedural provisions in that act. For your convenience, I am enclosing this letter and the enclosures in duplicate, so that you may, if you wish, be able to pass them on for further action without the burden of recopying. I would be most grateful for any help that you can afford. SIDNEY J. SCHWARTZ. NEW YORK 4, N. Y., October 23, 1952. JOINT COMMITTEE ON INTERnal Revenue TAXATION, New House Office Building, Washington, D. C. GENTLEMEN: In accordance with the request of your staff heretofore published, I take the liberty of writing with respect to a specific problem arising under the Internal Revenue Code relating to the estate tax. The problem arises from the enactment of section 607 of the Revenue Act of 1951, which according to the Senate Finance Committee Report on the bill was intended to be remedial. The Revenue Act of 1951, however, did not provide for any extension of the time for filing refund claims or other procedure in order to enable taxpayers intended to be benefited to have a practical remedy under the statute. The result is that Congress has enacted a substantive relief provision but failed, undoubtedly through oversight, to enact appropriate remedy, with the consequence that the Commissioner of Internal Revenue has denied relief under the act. In order to present the problem to you concretely, I shall present the facts pertaining to a specific taxpayer whom I represent. Lester Field died a citizen of the United States on November 16, 1937. His estate tax return was filed in due course, and upon the audit thereof a deficiency was assessed, based upon the inclusion in the gross estate of a possibility of reverter under an inter vivos trust. The deficiency was assessed under the authority of Helvering v. Hallock (309 U. S. 106), and other cases holding to the same effect regarding the taxability of possibilities of reverter. The taxpayer appealed to the Tax Court, which affirmed the assessment of the Commissioner, then to the Circuit Court of Appeals for the Second Circuit, which reversed the decision of the Tax Court (144 Fed. 2d 62). The Commissioner appealed from the decision of the circuit court to the Supreme Court, which thereupon reversed the circuit court and affirmed the decision of the Tax Court (Commissioner v. Field (324 U. S. 143)). The tax deficiency so assessed was ultimately paid. The amount in controversy by reason of the inclusion of the possibility of reverter is $25,811.95. On June 6, 1952 the taxpayer filed claim for a refund on form 843. The claim for refund was based upon section 607 of the Revenue Act of 1951, which provides as follows: "SEC. 607. TRANSFERS CONDITIONED UPON SURVIVORSHIP. "In the case of property transferred by a decedent dying after March 18, 1937, and before February 11, 1939, the determination of whether such property is to be included in his gross estate under section 302 (c) of the Revenue Act of 1928 (44 Stat. 70) as a transfer intended to take effect in possession or enjoyment at |