or after his death, shall be made in conformity with Treasury Regulations in force at the time of his death."

The following comments upon this enactment appear in a Senate Finance Committee report:

"The provisions of the Technical Changes Act of 1949 apply only with respect to decedents dying after Febrary 10, 1939, the date of enactment of the Internal Revenue Code. In the case of such decedents, property is included in the gross estate by reason of the retention of a reversionary interest in a transfer made before October 8, 1949, only if the reversionary interest is expressed and is worth more than 5 percent immediately before the decedent's death.

"On March 18, 1937, Treasury Decision 4729 was issued by the Treasury Department, providing that property should not be taxed by reason of the retention of a reversionary interest. In order to treat the estates of decedents dying before February 11, 1939, and after March 18, 1937, in accordance with the law then in effect, section 607 of your committee's bill provides that property transferred by a decedent dying in such period is not to be included in the estate of the decedent because of a possibility of reverter if the regulations in effect at the time of the death of the decedent did not provide for the inclusion of property so transferred."

Treasury Regulations 80, 1937 edition, in effect at the time of the decedent's death, provided in article 17 thereof as follows:

"ART. 17. Transfers conditioned upon survivorship.-The statutory phrase, ‘a transfer * * * intended to take effect in possession or enjoyment at or after his death,' includes a transfer by the decedent (other than a bona fide sale for an adequate and full consideration in money or money's worth) whereby and to the extent that the beneficial title to the property (if the transfer was in trust), or the legal title thereto (if the transfer was otherwise than in trust), remained in the decedent at the time of his death and the passing thereof was subject to the condition predecent of his death. If the tax applies, it does so without regard to the time of the transfer, whether before or after the enactment of the Revenue Act of 1916.

"On the other hand, if, as a result of the transfer, there remained in the decedent at the time of his death no title or interest in the transferred property, then no part of the property is to be included in the gross estate merely by reason of a provision in the instrument of transfer to the effect that the property was to revert to the deredent upon the predecease of some other person or persons or the happening of some other event.'

Decedent died after March 18, 1937, and before February 11, 1939. The transfer in question was, therefore, not taxable as a transfer intended to take effect In possession or enjoyment at or after decedent's death under the Treasury regulations in force at the time of his death. The transfer was not taxable under any other applicable provision of the Revenue Act of 1926, as amended, or any other applicable regulations.

Under date of October 13 the Commissioner of Internal Revenue disallowed the refund claim by letter, a photostatic copy of which is hereto attached. Prior tc filing the refund claim the Commissioner was solicited as to his opinion regarding the applicability of the statute of limitations for the filing of refund claims under section 607. A photostatic copy of his answer under date of June 30, 1952, is also attached hereto. From the Commissioner's position it is apparent, therefore, that two obstacles exist in the nature of technical procedure in affording actual relief to the taxpayer entitled to relief under the statute. One is the Statute of Limitations, the other is section 911 of the Inernal Revenue Code. In order, therefore, to carry out the intent of Congress as evidenced by the enactment of section 607 of the Revenue Act of 1951, a further step should be taken by adding a provision to the act permitting refund or credit upon application filed within a given period after the enactment of such bill. We have drafted a proposed act, accomplishing this by following generally the phraseology adopted in connection with similar relief provisions under the Technical Changes Act of 1949. A draft of this proposed amendment is submitted herewith. We believe that this would be appropriate since the enactment of section 607 of the Revenue Act of 1951 was intended to extend the relief provisions of the Technical Changes Act of 1949 and therefore the same remedies should be afforded. We trust that your committee will agree that the omission of a remedy from the Revenue Act of 1951 was unintentional, since unless there is a remedy the enactment is illusory in view of the fact that practically all estates that can benefit therefrom must necessarily have been fully closed many years ago.

Respectfully yours,

SYDNEY J. SCHWARTZ.

PROPOSED DRAFT OF SUBSTANCE OF ACT TO PERMIT FILING OF REFUND CLAIMS UNDER SECTION 607 OF THE REVENUE ACT OF 1951

Section 607 of the Revenue Act of 1951 (- Stat. -) is hereby amended by adding thereto the following matter:

"If refund or credit of any overpayment resulting from the application of this section is prevented on the date of the enactment of this Act or within one year from such date by the operation of any law or rule of law (other than section 3760 of the Internal Revenue Code relating to closing agreements and other than section 3761 of such code relating to compromises) refund or credit of such overpayment may, nevertheless, be made or allowed if claim therefor is filed within one year from the date of the enactment of this Act. No interest shall be allowed or paid on any overpayment resulting from the application of this section with respect to any payment made prior to the date of the enactment of this Act."

STATEMENT OF AMERICAN FEDERATION OF LABOR, RE TOPIC 34, GIFT- AND ESTATE-TAX PROBLEMS

The gift- and estate-tax provisions of the Revenue Code have been amended during the past 10 years to the point where they are much less ineffective as producers of needed revenue than they were. Revenue from gift and estate taxes through changes sanctioned by Congress is therefore now much less than it should be in a period when economic conditions would argue that they should be much more substantial. The American Federation of Labor would therefore favor strengthening of these laws by (1) integration of estate and gift tax laws, (2) tavation of trusts and life estates to prevent avoidance of estate taxes by use of trusts, (3) lower exemption, (4) increase rates.

The American Federation of Labor would oppose any move to abolish the Federal estate tax and return it to the States.

STATEMENT BY ADDISON B. CLOHOSEY, ESQ., ON BEHALF OF RESEARCH INSTITUTE OF AMERICA, NEW YORK, N. Y., RE TOPIC 34

Many proprietors of small business have left their life savings tied up in machinery, plant and equipment. Upon their death, the Department of Internal Revenue demands cash, which, in many cases, is not readily available. The result, liquidate or sell out to big business and, at a sacrifice. Life insurance is not always readily available.

A very unfair provision in the present laws is the provision that the cost basis of property received as a gift is the original cost basis of the donor. I believe the cost basis to be used by the donee should be the valuation for gift tax purposes.

Gift and estate tax exemption should be raised. Method of valuation should be revised so that the value to the beneficiary is no more than the depreciated valueto the donor. Any gain would be taxable to the beneficiary on disposal.

STATEMENT OF W. W. FINDLEY, LITTLE ROCK, ARK., ON BEHALF OF THE WEST SIDE LUMBER ASSOCIATION AND THE CITIZENS OF THE STATE OF ARKANSAS, RE TOPIC 34, GIFT- AND ESTATE-TAX PROBLEMS

Under the gift-tax laws covering gifts of property, are taxable, and gift tax returns must be made for all gifts made during any calendar year, and the tax paid.

Gifts have been made to children, of partnership interests, and the gift tax paid on such gifts.

The Bureau of Internal Revenue, however, has denied the fact that the gift has been made and the gift tax paid thereon, and the property transferred to a minor child, a citizen of the United States, and has maintained that the income from the gift made to the child is income of the parent, and the parent has been compelled to pay income tax on the income of the child, added to his own income. The income tax paid on the child's income-tax return on the income from such. gifted property has been refunded. This method being an additional tax collected from the grantor of the gift on the income from such gift.

It is impossible to accept the reasoning of the Bureau of Internal Revenue in cases of this kind, since the denial of the income being the property of the donee and the income tax paid by the donee on income from gifted property is a denial of the constitutional rights of the citizens of these United States.

Constitution of the United States,

Article I, paragraph 8,

Article I, paragraph 10,
Article IV,

Amendment X,

Amendment XIV.

The Internal Revenue Code, and other laws pertaining to taxation, should be corrected to fully state the rights of citizens of these United States as to the payment of income taxes and gift taxes on gifts made by a parent to a child, particularly in the question of a gift of a partnership interest, the partnership interest being recognized by the Bureau of Internal Revenue and the laws as property which may be gifted, sold, or purchased.

In the matter of gifts to minor children, the laws of the State of Arkansas state:

"The parents of a minor, jointly with equal authority, if they be husband and wife living together, or the survivor if one be dead, or the competent parent if one be incompetent, or the other parent if one be imprisoned for a felony, or the parent to whom the custody of the child has been awarded by a court of competent jurisdiction if the parents be divorced or living apart, shall be the natural guardian of the person of each unmarried minor child of such parents, and shall have the care and management of the estate of each such minor derived by gift from the parents or either of them, without the necessity of Judicial appointment; provided that, upon the showing of a necessity therefor to protect the interests of such minor, the court may appoint a statutory guardian of the estate of the minor, and when appointed and qualified the statutory guardian shall have exclusive control over the estate of the minor. The court may appoint the natural guardian as guardian of the estate of the minor" (Digest of the Statutes of Arkansas, 1949, title 57, par. 57–646).

STATEMENT OF DEL R. PAIGE, CHAIRMAN TAXATION COMMITTEE, GEORGIA STATE CHAMBER OF COMMERCE, Atlanta, Ga., RE TOPIC 34, Estate TaxeS

The Federal Government should discontinue the collection of death taxes, leaving this source of revenue to the States.

STATEMENT OF THE AMERICAN TAXPAYERS ASSOCIATION, WASHINGTON, D. C., RE TOPIC 34, ESTATE AND GIFT TAXES

Under present laws the tax on the estates of decedents runs to a maximum of 77 percent and the tax on gifts to slightly over 57 percent. These rates not only seriously impair the incentive to work, produce, and save, but they are openly destructive of capital and eventually will destroy accumulations of capital necessary for industrial activity and expansion.

These high rates compel the wealthy 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 business ventures which have resulted in the development of this country and the advancement of the American people.

Furthermore, the amount of revenue from the estate and gift taxes is but a small part of the total budget. 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.

The duplication of these taxes by the Federal and State Governments has reached grave proportions and steps should be taken to correct it. Since the States determine the right to dispose of property on death and the rights of inheritance, this field of taxation might conceivably be assigned exclusively to the States.

37746-53-pt. 3——10

STATEMENT OF AMERICAN LIFE CONVENTION, CHICAGO, ILL, AND LIFE INSURANCE ASSOCIATION OF AMERICA, NEW YORK, N. Y., RE TOPIC 34

Mr. Chairman and members of the committee, the following suggestions for revision of the Internal Revenue Code are submitted on behalf of the life-insurance business and are based on studies of joint committees of the American Life Convention and the Life Insurance Association of America. The composition of these associations was described at the time of our appearance before the committee on topic 14.

ESTATE TAXATION—ELIMINATION OF PREMIUM-PAYMENT TEST (SEC. 811 (G) (I. R. C.)) The present statute provides for estate taxation of proceeds of life insurance (1) if the decedent possessed any incidents of ownership in the policy at his death, or (2) if the decedent had paid the premiums on the policy either directly or indirectly. There can be no objection to the first standard-possession of incidents of ownership in the policy-because under it life insurance is treated like other forms of property for the purpose of the estate tax.

The second criterion-the premium-payment test-however, singles out life insurance for unique and discriminatory treatment under the estate tax. There is no other form of property which becomes inevitably subject to the estate tax, even though the decedent has given it away completely and at his death does not own such property or any interest therein.

Take

The premium-payment test discriminates as between individuals, depending on their ability to provide differing arrangements for premium payments. for example two policyholders each of whom gives a policy of life insurance to his wife. Neither retains any incidents of ownership in a policy. The first policyholder continues to pay premiums thereon, or gives his wife a sum of money as a gift with which to pay the premiums. On his death, the entire proceeds are taxable to his estate. The second policyholder, however, either has a rich wife and can arrange to have premiums paid out of her own funds, or if he has sufficient assets himself,can give her a sizable piece of property which she may sell or the income from which is sufficient for the purpose of paying premiums. When this second policyholder dies, nothing is taxable to his estate.

Accordingly, we recommend that this discriminatory premium-payment test be eliminated by amending section 811 (g) so as to strike out paragraph (3) thereof, and to amend subsection (g) (2) thereof as follows:

"(2) RECEIVABLE BY OTHER BENEFICIARIES.-To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent [(A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premium paid for the insurance, or (B)] with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. [For the purposes of clause (A) of this paragraph, if the decedent transferred, by assignment or otherwise, a policy of insurance, the amount paid directly or indirectly by the decedent shall be reduced by an amount which bears the same ratio to the amount paid directly or indirectly by the decedent as the consideration in money or money's worth received by the decedent for the transfer bears to the value of the policy at the time of the transfer. For the purposes of clause (B) of this paragraph, the term 'incident of ownership' does not include a reversionary interest.] If the only incident of ownership possessed by the decedent at his death consists of a possibility that an interest in such a policy may vest in the decedent or his estate, and if such possibility could have been defeated during decedent's life, by anyone other than the decedent, through the exercise of a power of appointment (as defined in Section 811 (f) (2)) which in fact was cxcrcisable immediately prior to the decedent's death, the deccdent, for the purposes of this paragraph, shall not be considered as having possessed at his death any of the incidents ow ownership."

The language suggested above to be added at the end (i. e. the underlined words) would clearly establish that under the incidents of ownership test of taxability, the treatment of a reversionary interest would parallel that applicable to transfers of other forms of property under the estate tax provisions of the Internal Revenue Code. In line with the last sentence in Internal Revenue Code section 811 (c) (3), as amended, the proposed amendment would consider a reversionary interest as subjecting the insurance to tax only if it could not have been defeated by the exercise of a power prior to the death of the insured.

RESOLUTION ADOPTED BY THE COUNCIL OF STATE CHAMBERS OF COMMERCE WITH REGARD TO TOPIC 34, GIFT- AND ESTATE-TAX PROBLEMS

"In recent years the Federal estate- and gift-tax rates have been carried to excessive heights which return relatively little revenue. Fortunately, by its 1948 enactments, the Congress has taken steps to equalize and moderate the estate and gift taxes of married couples in community and noncommunity property States. It would be desirable, in the opinion of many observers, for the Federal Government to withdraw from estate and gift taxation if proper safeguards could be provided to prevent the creation of tax-free areas in some States.

"If the Government continues to tax estates, as it apparently is determined to do, the Federal finance committee of the Council of State Chambers of Commerce recommends that the basic and additional taxes should be combined in one structure with an adequate credit allowed for the payment of State death taxes. The tax rates on the part of estates in excess of $10 million should not exceed 50 percent. The gift-tax rates should not exceed three-fourths of the estate-tax rates and a proportionate credit should be allowed for the payment of State gift taxes. By appropriate technical amendments, the estate and gift taxes should be made consistent with the Federal income tax to the end that the duplicate taxation which now exists may be eliminated. Proposals for the integration of the estate and gift taxes should be rejected."

The Georgia State Chamber of Commerce endorses the above resolution of the Council of State Chambers.

Excerpt from letter of Arch M. Cantrall, Esq., on behalf of the West Virginia State Chamber of Commerce, reads as follows: "The additional estate tax should be repealed."

The Los Angeles Chamber of Commerce, Los Angeles, Calif., re gift- and estate-tax problems:

"(1) That the proceeds from life-insurance policies payable to beneficiaries other than the estate be excluded from decedent's gross estate in cases in which the decedent, in a transaction not in contemplation of death, transferred all the incidents of ownership to another.

"(2) That the election to value the estate at the time of death or as of a date 1 year after death be made revocable.

"(3) That, in the case of the estate and gift taxes, the Commissioner be given authority to enter into an agreement with the taxpayer to extend the time within which the tax may be assessed.

"(4) That each donor under the gift tax provisions be given a single $3,000 annual exemption for all gifts of future interests made by such donor in the taxable year.

"(5) That the statute of limitations on assessing gift taxes be broadened to prevent the Commissioner from changing values for years on which the statute has run.

"(6) That the credit for gift taxes against the estate tax be broadened to allow, as a credit, the full amount of the gift tax paid on any property included in the gross estate."

TOPIC 35-EXCISE TAX PROBLEMS

The CHAIRMAN. We come to topic 35, excise tax problems.

The first witness under this topic is Mr. J. A. C. McGann, assistant tax attorney, the Western Union Telegraph Co.

Mr. McGann, we are glad to have you here. Do you have some associates with you?

STATEMENT OF J. A. C. McGANN, ASSISTANT TAX ATTORNEY, THE WESTERN UNION TELEGRAPH CO., ACCOMPANIED BY ROBERT DIERKS, DIRECTOR, FACSIMILE AND PRIVATE WIRE SERVICE, THE WESTERN UNION TELEGRAPH CO.

Mr. McGANN. Yes; Mr. Robert Dierks, director of our facsimile and private wire service, who can answer any technical questions. The CHAIRMAN. You may proceed.