emptions. His employer, using the percentage method, computes the tax to be withheld as follows: Step No. 1 Amount of one withholding exemption___ $13 Multiplied by number of exemptions claimed on Form W-4-- X3 (b) Amount shown in next to last column of table for weekly $21 Balance shown in Step No. 2 (a)_. $41 21 (a) Balance_. $20 (b) Amount shown in last column of table for weekly pay- $9 Balance shown in Step No. 3 (a). $20 Amount shown in last column of table for weekly pay-roll 9 Where the withholding is computed for a "miscellaneous" pay-roll period, the wage and the amounts shown in the percentage method withholding table must be placed on a comparable basis. Thus the wage may be placed on a daily basis by dividing the total wage by the number of days in the period. computation of the tax on a daily basis using the steps indicated above, the amounts so found multiplied by the number of days in the period is the amount to be withheld. After In the case of any employee who has no Withholding Exemption Certificate in effect, or an employee who has claimed no exemption, use no exemptions for purposes of Steps Nos. 1-5, inclusive. In determining the amount of tax to be deducted and withheld, the last digit of the wage amount may, at the election of the employer, be reduced to zero, or the wage amount may be computed to the nearest dollar. Thus, if the weekly wage is $37.43, the employer may eliminate the last digit and determine the tax on the basis of a wage payment of $37.40 or he may determine the tax on the basis of a wage payment of $37. The CHAIRMAN. Mr. Schoeneman, your staff has been in touch with the joint staff? Mr. SCHOENEMAN. Yes, sir; it has. The CHAIRMAN. These matters have been matters of discussion between them? Mr. SCHOENEMAN. They have been. The CHAIRMAN. And I assume that will continue. Mr. SCHOENEMAN. I am sure it will. The CHAIRMAN. Are there any other questions? If not, thank you very much indeed for your presentation, which, I assure you, will be commended to the earnest consideration of the staff. Mr. SCHOENEMAN. Thank you very much, Mr. Chairman. The CHAIRMAN. The next witness is William A. Sutherland, of the taxation section of the American Bar Association. Will you give your full name, address, and occupation to the reporter. STATEMENT ON BEHALF OF THE AMERICAN BAR ASSOCIATION BY WILLIAM A. SUTHERLAND, CHAIRMAN OF THE SECTION OF TAXATION OF THE AMERICAN BAR ASSOCIATION, WASHINGTON, D. C. Mr. SUTHERLAND. My name is William A. Sutherland, and my address is Washington, D. C. I am a practicing lawyer and chairman of the tax section of the American Bar Association. The CHAIRMAN. Proceed, Mr. Sutherland. Mr. SUTHERLAND. I want to take only a few minutes here. I am speaking in connection with the provisions of the present bill [H. R. 4790] for equalizing income, estate, and gift taxes as between community-property and non-community-property States. The technical phases of the American Bar Association's plan for equalizing these taxes will be covered by members of the tax section's committee on equalization of taxes in community-property and common-law States, who have given more time to it than I have. However, I am glad of the opportunity of making a brief statement about the work that the American Bar Association has done in connection with the plan because I think that an understanding of the screening process through which these proposals went before they were submitted to the Congress will demonstrate, certainly much more clearly than any brief analysis of the bill which I might make, the absolute fairness with which the estate- and gift-tax provisions have been worked out, and the substantial equality that they must work as between the citizens of the two types of States. Incidentally, I think a full understanding of this proposal and the. way it was developed by the American Bar Association may do a good deal to persuade this committee to pay considerable attention to the numerous other suggestions we will have to make when the general subject of tax revision comes before the committee. The problem of equalizing taxes as between the two types of States has long perplexed the lawyers of this country who have recognized the inequality in the present system. The first step by the American Bar Association in developing our present proposal was taken at the Atlantic City meeting of the association in 1946. At that time the association decided to recommend the split-income proposal with which you are so familiar, and which I need not discuss here. That proposal came from the American Bar Association. We realized at that 1946 meeting, before that amendment was finally adopted by the tax section and submitted to the house of delegates and it was urged upon us by the people from the community-property States-that there was great unfairness which would remain in the estate- and gift-tax fields against the people in the community States, unless the estate and gift taxes were equalized also. Representatives from the community-property States felt, particularly since they were in a minority, that the bar association should not recommend the equalization of the income taxes without at the same time recommending the equalization of the other types of taxes. We all realized that the problem of estate- and gift-tax equalization was much more complicated and that we could not possibly hope to solve it at that meeting. Therefore, in deference to the wishes of the community-property representatives and I thought with complete fairness-we did pass a resolution, which was approved by the house of delegates, which provided that the bar association should recommend the repeal of the 1942 amendment pending the working out of a comprehensive plan of equalization. The tax section then appointed a committee which was given the sole task in the ensuing year of working out a plan for the equalization of estate and gift taxes. That committee was composed of 17 men-11 of them from common-law States and 6 from communityproperty States. The members of that committee were outstanding lawyers in their communities and nationally outstanding lawyers in the tax field. They set to work first, I may say, with great animosity toward each other and with the attempt by both groups represented to get what the other thought was an unfair advantage. But, as frequently happens when lawyers are brought together and finally made to realize that all the other side wants is fairness and that, in view of their wide experience and background and knowledge of the problems, they are perhaps in a better position than anybody else to work them out, the members of this equalization committee finally, after numerous sessions in which nothing was accomplished, said down and said, "Well, now, wait a minute. We are not getting anywhere. We have got to work this thing out because it is a real problem and we all want to create equality. We should be able to work out a plan to get it." After this, numerous meetings where held, some of them lasting for several days, at which various examples were brought before the committee by people from both common-law and community-property States. Conferences were held with the staff of the joint committee and with representatives of the Treasury. Finally, at the Cleveland meeting of the bar association in September of last year, the committee presented first to the tax section, and then to the house of delegates of the association, the plan which was finally submitted, and which, in substance, is contained in this bill, H. R. 4790. It seems to me that, when anyone attacks the equality effected by the bill, a great burden rests upon him. If you look at the names of the people on that committee, and consider that they have sat down together and have thought this thing out and have arrived a what they feel is as substantial equality as can reasonably be worked, I think anyone would realize that, unless we could hit upon some happy solution such as we did with reference to the income tax-and I do not believe that is possible-it is not possible because of the different property situations in different States to have absolute equality in the estate- and gift-tax field. But we do feel that this bill now works as great equality as Congress should be particularly concerned with at this time, and if later small revisions are necessary, why, that will be only what is true of all the other new provisions that go into the revenue acts. Senator CONNALLY. May I ask a question there? Senator CONNALLY. Did these committees consider at any time the repeal, or rather, the retroactive repeal of the 1942 act? Mr. SUTHERLAND. Senator, you have anticipated exactly what I was going to say next. I was going to say there are only two features of the bar-association plan-other than minor things which we have thrashed out and are thrashing out with the staff of the joint committee, and with which we do not think it is necessary to trouble this committee here—which are not yet taken care of in H. R. 4790. The one is retroactive repeal of the 1942 amendment. I think one reason that retroactive repeal was not included in H. R. 4790 was because some constitutional difficulties were raised which had not been foreseen in the working out of the bill that we prepared. Senator LUCAS. Do you mean State constitutions? Mr. SUTHERLAND. No, sir; the United States Constitution. The retroactive repeal, if it were carried out, would mean that the 1942 amendments would be treated as having had no effect in the past, and this might adversely affect taxes on transactions already past. I am not fully qualified to go into the constitutional question. That problem has been handled by another member of the committee testifying today, and he will be delighted to discuss it in detail, or anything else you wish, in connection with retroactivity. The CHAIRMAN. I assume there will be someone among the witnesses to do that? Mr. SUTHERLAND. Mr. Jackson will be able to discuss that fully. Senator CONNALLY. Just one observation, not a question. If the act ought to be repealed on the assumption it was unjust from the beginning and people have paid taxes under that unjust provision, would it not be fair for the Government to refund those taxes? Mr. SUTHERLAND. I think the retroactive repeal is absolutely fair, and I think it can be worked out. But it does involve some complications we had not anticipated, and therefore it is not in H. R. 4790. But I was going to urge, just as Your Honor spoke, that consideration should be given to retroactive repeal now in this committee, and if complete retroactive repeal cannot be accomplished on account of constitutional limitations, that Congress should at least go as far as it can to see that those amendments are repealed retroactively. There is one other feature of the bill H. R. 4790 which unduly favors taxpayers in common-law States at the present time, and the reason that this unequal feature exists in the bill as it passed the House is, I think, because of difficulties in drafting the plan we had recommended. We had recommended that the basis of property passing untaxed from the husband to wife under our plan should be the same basis as the property had in the hands of the decedent. That is, the property would not take a new basis at death, as is true and would remain true with property which is subject to tax. The bill as it passed the House provides that this untaxed property also will have as its basis the value at death. I think that this provision creates an unfair advantage in favor of common-law States unless in a community-property State the community property that the wife has at the husband's death, and which she does not get from him, also acquires a new basis. I hope that this committee will give this problem of equal basis treatment the most careful consideration. I cannot sit down without taking one moment to discuss the statement which was submitted to this committee on March 1, 1948, on behalf of the Secretary of the Treasury. I cannot possibly hope to discuss this statement in detail, and I do not think any useful purpose would be served by that. I think the general remarks which I have made about the screening process through which the American Bar Association proposal passed should do more to demonstrate the fairness of our plan and to refute the Secretary's position than any short analysis of the Secretary's remarks could do. But it does seem rather bad to me that a department of the Government would submit to a committee of Congress a statement that a bill is unfair and should give as its first example the example which you find at the bottom of page 10 of the statement of the Secretary of the Treasury. I think much of the same criticism could be made about most of the other examples cited. Let me just read the two sentences that are necessary: An analysis of these sections of the bill reveals they not only fail to bring about equality of treatment, but in fact produce inequalities not present under existing law. Thus, where in a common-law State the estates of husband and wife are substantially equal and one dies leaving his property to the survivor, an estate tax would, by reason of the marital deduction, be payable on only onequarter of the family wealth; that is, on one-half of the decedent's half. And the Secretary goes on: However, in the corresponding situation in which the family wealth consists of community property earned by both spouses, an estate tax would be payable on the death of the first spouse to die with respect to one-half of the family wealth. Now, in the first place, the Secretary takes an example in a commonlaw State and then another example in a community-property State, each of which, while not perhaps very rare, is certainly far from the usual situation. Moreover, where the equality of property does exist in a common-law State, it is generally largely by virtue of gifts from husband to wife on which gift taxes have been paid. All of which the Secretary ignores. But more important than that, the Secretary goes on to assume that each of these two husbands, when he dies, instead of paying any attention to the over-all tax effect of the disposition of his property, is going to want to do what is probably the most foolish thing he could possibly do, which is to leave the rest of the property outright to his wife. If this is done, the estate of the wife at the time of her |