death will consist of a very much larger amount than was present in the husband's estate, so that there will be a very, very high estate tax at the death of the wife. The example chosen by the Secretary also assumes that the husband is going to ignore completely the income tax effect during the remainder of his wife's life of such a foolish disposition.

I do not think the people in the Treasury could be so ignorant of the way property is generally handled as to believe that this sort of an example represents anything other than the most unusual type of case.

I do think, in discussing the fairness of a bill with all the implications of this bill, that the usual situation should be first discussed, and that later consideration can be given to all the unusual situations which you wish to discuss, if you have time, and if you think those very unusual situations are of importance.

Thank you.

The CHAIRMAN. Any questions?

If not, thank you very much indeed for coming.

Mr. SUTHERLAND. Thank you, gentlemen.

The CHAIRMAN. Our next witness is Mr. Allan Higgins.

Will you give your name, address, and occupation, please?

STATEMENT OF ALLAN H. W. HIGGINS, CHAIRMAN, AMERICAN BAR ASSOCIATION, SECTION OF TAXATION, COMMITTEE ON EQUALIZATION OF TAXES IN COMMUNITY-PROPERTY AND COMMON-LAW STATES, BOSTON, MASS.

Mr. HIGGINS. I am Allan H. W. Higgins, of Boston, Mass. I am chairman of a subcommittee of the tax section of the American Bar Association, known as the committee on equalization of taxes in community-property and common-law States. This committee consists of 17 members, 6 of whom are from community-property States and 11 of whom are from common-law States.

Senator CONNALLY. You equalized the taxes, but you did not equalize the committee-11 to 6.

Mr. HIGGINS. The ratio of the committee was largely based on the ratio of community-property States to total number of States. Senator CONNALLY. All right.

Mr. HIGGINS. I am glad to state that the decisions of the committee were unanimous. So there was no overriding of the views of individual members even though they might be in the minority, Senator. Senator CONNALLY. Fine. Congratulations.

Mr. HIGGINS. I should like to point out to the committee a brief explanation of the provisions of the bill and call your attention to a few changes and omissions with respect to which we would like to make some recommendations.

I might say that my printed statement was prepared and submitted before we had had a conference on Saturday with members of the staff of the joint committee, and a number of the provisions with which we had taken issue and which we thought were not quite in accord with the general purposes of the bill have been gone over with the members of the staff, and also the legislative draftsmen, and substantial accord has been worked out with respect to about all of those changes.

So I will confine my remarks chiefly to those problems that are as yet not solved with respect to the bill as passed by the House.

I think the income tax provisions do not require very much explanation, because they have had such wide publicity in the press.

I do want to point out that the so-called split-income provision does not do violence to the fundamental property laws of the several States. Because of the fact the people in the community-property States had for a long while stressed the importance of separate property ownership of husband and wife, we felt it necessary in working out this equalization bill to hit upon a plan which would not do violence to their fundamental views of property.

That is the reason the so-called split-income provision was put into the joint return section of the law, under which, in the past, it had always been possible for the husband and wife to lump their income and deductions together in a voluntary joint return.

The split-income provision permits exactly the same thing, and there is superimposed upon the existing joint return provision merely a special provision with reference to computing the tax on the aggregate income of the husband and wife as shown in the joint return.

Senator CONNALLY. Let me ask a question right there.

Under the bill and under your plan, the income of the husband and wife, regardless of whether community property or separate property, is all lumped into one income and split through the middle; is that right?

Mr. HIGGINS. The splitting is solely with reference to the computation you are going to make. It is not as though it was split and apportioned to husband and wife. You take the aggregate income and divide it by 2, computing the tax thereon, and then multiplying said tax by 2. So it is really a computing provision.

Senator CONNALLY. The mechanics of it. But my point is in estimating the income you take the wife's income, if she should have separate income, and add it to the husband's income regardless of whether it is her own or community.

Mr. HIGGINS. That is right.

Senator CONNALLY. So you just have one income.

Mr. HIGGINS. That is right.

Senator CONNALLY. That works both ways, though.

Suppose a man in New York State has an income on his own separate property of a million dollars. His wife has nothing. He gets a pretty substantial advantage from that plan; does he not?

Mr. HIGGINS. That is right, although the advantage is not as great as with the people in the middle brackets. The advantage is not as great with the people in the higher brackets as it is with respect to people in the middle brackets. The man with the high income is already up in a very high tax bracket, and even after splitting the income he is still in a high rate bracket.

Senator CONNALLY. It is not as high after splitting as it is before, is it?

Mr. HIGGINS. When you get into the 80-percent rate-that is, beyond $80,000 or $90,000-as in your particular illustration, even after splitting the resulting income is still up in a very high bracket.

Senator BARKLEY. Do you call $80,000 or $90,000 a middle bracket?

Mr. HIGGINS. What I am referring to is that the largest benefits, I think, would come to people between $5,000 and $50,000, and not to people in the brackets above that.

The balance of the income provisions are largely dealing with technical matters such as the medical deduction and other deductions and the figuring of rates, and so on, with reference to the individual returns, and cover some of the matters that were discussed by the Commissioner this morning.

So, I will hasten into the estate and gift taxes, equalization provisions, concerning which there has been very little newspaper publicity, and with respect to which there has been some misunderstanding.

I would like, first, in connection with the estate-tax provisions, to reiterate what Mr. Sutherland said: That our committee and the bar association, at two different conventions, now, have discussed the 1942 amendments so far as they affect the estates of community-property residents, and unanimously recommended the retroactive repeal of the 1942 amendment.

Although we do realize there are some problems in connection with that repeal, we do feel the citizens of the community-property States are entitled to retroactive relief from the hardships and inequities of the 1942 act; and we urge upon the committee they give consideration to granting relief to the citizens of community-property States.

Mr. Jackson is going to cover that subject in considerable detail. Senator CONNALLY. Under the 1942 act, if a man dies, his wife pays an inheritance tax, or estate tax, on the entire estate, regardless of the fact she already owns and possesses one-half of it?

Mr. HIGGINS. That is correct.

Senator CONNALLY. Of course, that is not fair and not just.
Do you favor the retroactive repeal?

Mr. HIGGINS. Yes; we favor retroactive repeal, and there are two suggestions we have made with reference to that, so that the retroactive repeal can be effected without doing any violence to the Constitution. Senator CONNALLY. What is the constitutional point about that? Mr. HIGGINS. If you repeal the 1942 amendment retroactively so that the law then stands as it did prior to the 1942 act, in certain instances there would be a tax assessed on people who since 1942 have not paid a tax with reference to certain estates and gifts.

Senator CONNALLY. How is that? You say the affect would be to assess a tax on people who have not heretofore paid any?

Mr. HIGGINS. Yes, because the impact and burden of the tax was changed by the 1942 amendment.

If you go back to what the situation was before the 1942 law, you will find that there are certain instances in which there would be a tax where there was not a tax before in connection with certain gifts and estate provisions.

Senator CONNALLY. In those few instances, would it not be just as fair to let them suffer as to let the whole mass of community income-tax payers, who pay on estates, suffer the imposition of that sum against them?

Can you not work it out some way that would be just and fair?

Mr. HIGGINS. We feel it could be worked out to make it clear that such retroactive imposition of taxes would not occur, and we have suggested such a form of bill to the committee.

Mr. Jackson will cover that in detail in connection with his statement.

Senator BARKLEY. The fact that it would require some to pay taxes who have not paid since 1942 would be a constitutional question, or would it be a question of administration?

Mr. HIGGINS. It would be a constitutional question, Senator. There are a number of Supreme Court decisions to the effect that you cannot retroactively impose a gift or estate tax.

The CHAIRMAN. But we can retroactively give a refund?
Mr. HIGGINS. That is correct.

The CHAIRMAN. And we can retroactively grant an exemption.
Mr. HIGGINS. That is correct.

The CHAIRMAN. So, assuming it should be done, if the thing is kept in a compass of that kind, I can see no possible constitutional question. Mr. HIGGINS. That is correct.

But just a plain blanket repeal of the 1942 amendment, without putting in the amendments we suggest, might create difficulty.

Senator BARKLEY. You might have to forgive all taxes that might arise under the law retroactively in order to avoid having a constitutional question arise.

You might remit or forgive it, and the Constitution would not prohibit that.

Mr. HIGGINS. Exactly.

The CHAIRMAN. Have you figured how much money that would cost?

Mr. HIGGINS. I am not sure whether any specific estimate has been made if retroactive repeal took place, but I cannot feel it would run into any great amount of money by the way of refunds when you consider the fact it has been in existence only 5 or 6 years, and there must be some estates where people died in the last year and where returns have not yet been filed. Also we are dealing only with decedents in a small number of community-property States.

I do not know whether the. Treasury has made any estimates as to the refunds involved.

Senator CONNALLY. Whatever the amount, it was unjustly collected and ought to be paid back; had it not?

Mr. HIGGINS. That is correct.

The CHAIRMAN. Does it raise the question that in order to achieve equalization you would have to make retroactive the benefits of the split income?

Mr. HIGGINS. I do not think the two provisions are necessarily interrelated.

The CHAIRMAN. Would it pose the question of whether you would have to make retroactive the estate- and gift-tax provisions for the common-law States?

Mr. HIGGINS. I do not think that is involved. As Senator Connally says, if the law was unfair and inequitable, there is no reason why that inequity should be perpetuated even though you do not retroactively permit marital deductions for commcn-law States.

The CHAIRMAN. You see no repercussion on the common-law States as far as that field is concerned?

Mr. HIGGINS. None whatsoever.

Basically, that is what we have done in order to equalize the situation which would exist after repealing the 1942 amendment. The people in the community-property States would then be in this position; one-half of the property which had been earned in the lifetime of the husband would go over to the wife without any estate tax. Senator CONNALLY. How is that now?

Mr. HIGGINS. After the 1942 amendments are repealed, you are then back to the status of the law prior to 1942.

Senator CONNALLY. Yes.

Mr. HIGGINS. When a husband in a community-property State dies, half of the community property which the wife owns as the result of the community-property law comes to her at death without the imposition of any estate taxes.

Senator CONNALLY. Yes.

Mr. HIGGINS. Now, to equalize with the people in the common-law State, we have provided that a spouse in a common-law State may inherit up to one-half of the adjusted gross estate without the imposition of an estate tax, feeling as we do that even though the wife in a community-property State has more definitely a property right in the half of the property

Senator CONNALLY. Not necessarily half in all the property. That is only in the community property.

Mr. HIGGINS. Only in the community property.

Senator CONNALLY. And your provision would give common-law States the right to take half of it, irrespective of whether made through joint efforts or separate property of the husband, would it not?

Mr. HIGGINS. Yes; but you have to have in mind that there in a great many of the common-law States, the wife, by way of a dower, or curtesy, or some statutory share, is entitled at death to a third or a half of the husband's property. So there are some property rights involved in common-law States.

To answer the objection you just made, Senator

Senator CONNALLY. I did not make any objection. I was asking for information.

Mr. HIGGINS. This provision in regard to marital reduction would equally well apply to separate property in community-property States, although the marital deduction provided in this bill will not apply to community property because the wife is going to get that half anyway as the result of the community-property laws.

Nevertheless, as to the separate property of the husband and wife in the community-property State, when one of them dies, this marital deduction will apply to their separate property.

So, when you aggregate the two things together, the citizens of the · two States are substantially equal.

The CHAIRMAN. Let me ask you this: The Federal Government, of course, cannot compel a community-property State to grant any refund on taxes which they had collected on the basis of the 1942 amendment; has that problem been thought of?

Mr. HIGGINS. You mean the problem with reference to the inheritance taxes?

The CHAIRMAN. I am assuming the States have also collected taxes in relation to the 1942 amendment. There would be no way of compelling the States to make refunds if they have collected such taxes, and it would not be desirable to attempt anything of that kind.