turns and have not had the matter brought to their attention until hey have consulted an attorney about drawing a will or some other matter. To deprive such taxpayers of the benefit of section 374, merely because the return was not filed on time, would be a gross injustice. We know of no instance where such an exceedingly restrictive and punitive provision has been inserted in the revenue laws. No such provision exists in connection with the right of taxpayers to file a joint return or to claim the benefit of deductions, losses, credits, etc.

It is perfectly all right, as in the case of joint returns, to provide that after an election has been made that such election cannot be changed or revoked, but it would be most unusual to provide that, where no action had been taken whatsoever, that the right to file such a consent had been lost.

This is all the more true in a situation such as with gift taxes which most taxpayers do not have to file annually and about which there is very little general knowledge among our citizens.

It is submitted that it would be sufficient to state under section 1000 (f) (2) that a consent under this subsection shall be signified at the time that each of said spouses files his or her gift-tax return and in such manner as is provided under regulations provided by the Commissioner with the approval of the Secretary.

Adjustment of cost basis

In connection with equalizing the income, estate, and gift taxes between the common-law and community-property States, it is necessary to place the citizens of the respective States on a similar footing with respect to the basis for property acquired from the spouse first to die. This would involve an amendment of section 113 (a) (5) of the IRC. Where a surviving spouse in a community-property State acquires property from a decedent spouse by operation of the communityproperty law, it has been ruled that such spouse did not acquire the property by devise, bequest, or inheritance under section 113 (a) (5) and accordingly is not entitled to take the value as of the date of death for the purpose of determining gain or loss on future sale. If the property were a farm or an oil well, and the surviving spouse acquired a one-half interest therein by operation of the community-property law and the other one-half interest therein by specific devise under the will of the spouse first to die, the property then has two cost bases. One-half of it takes, as its cost basis, one-half the cost or purchase price to the community and the other one-half takes as its cost basis one-half of the value at date of death.

The bar association originally proposed that where the marital deduction was claimed for the purposes of estate and gift taxes, then the interest of the surviving spouse which was not subject to tax in the estate of the spouse first to die should have, as its cost, the cost to the decedent.

In connection with the drafting of the bill by the draftsmen of the House, it appeared that such a provision would get exceedingly complicated and might become unworkable. Accordingly, it was left out of the House draft of the bill. It is submitted that the inequity could be corrected in another way by simply providing in section 113 (a) (5) that value at date of death could be claimed as the cost basis not only of property acquired by bequest, devise, or inheritance but also of property acquired by operation of the community-property law upon the death of a spouse first to die.

Such a provision would put surviving spouses in both the community-property and common-law States on exactly the same cost basis and would eliminate a long-outstanding inequity.

CONCLUSION

The members of my committee from both the community-property and common-law States have shown a remarkable spirit of cooperation in attempting to bring about equalization. A similar spirit of cooperation has been shown by the Members of Congress and of the congressional committees, the representatives of the staff of the Joint Committee on Internal Revenue Taxation, and the legislative draftsmen.

The equalization provisions of H. R. 4790 represent substantial progress toward the goal of equality; and we believe that with certain changes and corrections

which we have suggested, the equalization provisions should have the complete bipartisan or nonpartisan support of your committee and the Congress. Respectfully submitted.

ALLAN H. W. HIGGINS,

Chairman, Committee on Equalization of Taxes in Community Property and Common-Law States.1

MARCH 8, 1948.

The CHAIRMAN. Mr. J. Paul Jackson is the next witness.

Mr. Jackson, will you be seated and give the reporter your name, address, and occupation?

STATEMENT OF J. P. JACKSON, ATTORNEY, DALLAS, TEX.

Mr. JACKSON. My name is J. P. Jackson. I am an attorney from Dallas, Tex.

I am a member of this special committee of the American Bar Association and also spokesman for the State Rights Association of Houston, Tex.

The CHAIRMAN. Mr. Jackson, what is the State Rights Association? Is that an association of lawyers?

Mr. JACKSON. No. It is a State association of taxpayers formed particularly for the purpose of considering equalization of taxes between the common-law and community-property States and particularly to seek the repeal of the 1942 amendments.

In this capacity we advocate the adoption of the estate and gift tax provisions of H. R. 4790.

Senator LUCAS. What was the theory of that 1942 amendment, if I may inquire? How did it happen to get through this august body?

Mr. JACKSON. It got through as a part of the War Revenue Act of 1942. It was passed in the last stages in the House without the benefit of committee hearings. Members of the community-property States were never accorded an opportunity to be heard. That bill was passed in the closing days of the session in 1942 and has been with us since that time.

This 1942 act, Senator-I will depart from my statement to give it to you briefly-the 1942 act adopted for the then eight community property States a new concept of taxation. Traditionally, as we all know, Federal estate taxation is based upon the concept of taxing the transmission of property at death. Property owned and transmitted at death was subject to the estate tax.

Now, the 1942 amendments for the community property States, and for those States alone, adopted a new concept. This concept was the concept of economic attribution. A man was intended to be taxed in the community property States and in the community property States alone, if, theoretically, he was the originator of wealth. was responsible, years ago, for the creation of that wealth, then the theory of this bill was that he should be taxed on that wealth without regard to the question of whether he owned it and whether he could transmit it at death.

If he

1 Committee: Allan H. W. Higgins, chariman, Boston, Mass.; William C. Allee, Detroit, Mich.; David B. Buerger, Pittsburgh, Pa.; George E. Cleary, New York, N. Y.; Frank M. Cobourn, Toledo, Ohio.; Charles E. Dunbar, New Orleans, La.; Paul E. Farrier, Chicago 90, Ill.; Lawrence E. Green, Boston, Mass.; James B. Howe, Seattle, Wash.; Erwin N. Griswold, Cambridge, Mass.: James C. Ingebretsen, Los Angeles 13, Calif.; James S. Y. Ivins, Washington 5, D. C.; Paul Jackson, Dallas 1, Tex.; H. C. Kilpatrick, Washington 5, D. C.; Harry J. Rudick. New York, N. Y.; Weston Vernor, Jr., New York, N. Y.; and Robert C. Vincent, New York, N. Y.

This bill provides that-that is the 1942 act-all community property in the community property States shall be taxed to the first spouse to die, except in two respects: First, except that property which is attributable to the earnings of the surviving spouse; and second, except such community property as was attributable to the separate property of the surviving spouse. All other community property, except those two categories, were to be taxed altogether to the first decedent, whether it be man or wife, with a proviso that in any event, whether the decedent originated it or not, property over which he had the testamentary power of disposition should be taxed. The simple case that the draftsmen had in mind was the case of the lawyer, for example, who through his own efforts accumulated some wealth. The wife was a housewife and contributed nothing in the economic sense. The theory of this act was that should the husband die first in those circumstances he, being economically responsible, should be taxed on the whole of the wealth, whether or not he owned it or whether or not he could transmit it.

However, if the wife, perchance, should be the first to die, under those same circumstances in the community property States she was to be taxed on that which she could dispose of at death, namely, onehalf. So we have the concept of all of it being taxed to the husband if he should die first but half being taxed to the wife if she should die first.

This bill produced a series of inequities as far as we are concerned. Senator LUCAS. It did violence to your community property laws. Mr. JACKSON. It did. I do not need to labor the point too much, but to illustrate a point or two: We have in Texas, we will assume, a man and wife who married 40 years ago. The wife brought into the community separate property of her own. The husband brought into the community separate property of his own. Now, under our law in Texas, the income from that separate property is community. The income from her separate property and the income from his separate property are both jointly owned under our State law.

And in recognition of that State law the common practice of such a man and wife would be to deposit their joint earnings that is, the incomes from their respective properties-into a common bank account. From that common bank account investments would be made. Those investments were community property under our law. Those investments, in turn, produced income, and other properties were sold, and they were mingled in this common bank account with the earnings of either spouse. And in the course of 40 years they accumulate in that way an estate. Then one of the spouses dies.

Now, this law says that the whole of that community-every item of that community property on hand at death shall be taxed to the first spouse to die, whether it be man or wife, except that which is traceable by the executor into the separate property of one or the other of the spouses.

Now, our executor whom we represent takes the list of community property on hand at death and undertakes to make this tracing. And he finds that here is an item of community property that was acquired in 1940. And he finds that that property acquired in 1940 was purchased with a check drawn on this common bank account. He goes into that common bank account and he tries, with the aid of account

ants, to see what went into that common bank account; that is, the community fund that was used to purchase this property. And he finds that years before, through many changes, mutations, withdrawals, and additions and subtractions, she put in some and he put in some, but they do not know how much is ascribable to each.

It is impossible in those circumstances to trace this item of community property acquired in 1940 back to its original sources, yet this statute places upon us the burden of taking each item of community property on hand at death, whether the death be of the husband or wife, and tracing its origin back through 40 or 50 years of married life, an impossible burden of proof.

Senator LUCAS. If you do not do it, then the Treasury officials come along and attempt to do it.

Mr. JACKSON. Yes. And we have an arbitrary method of taxation which, too frequently, leaves the amount of the tax to the liberality of the revenue agent.

The CHAIRMAN. I think it should be said that while this new concept of the 1942 act did violence to the system of property in the community property States, it was a concept, though, that prevailed in the common law States so far as joint tenancies and tenancies in entirety were concerned.

Mr. JACKSON. That is true.

The CHAIRMAN. And it was an attempt, even though misguided, to bring equalization between the two systems in that limited field. Mr. JACKSON. That is true.

The CHAIRMAN. When it was attempted to do the same thing as far as splitting incomes were concerned, we ran into difficulties in Congress which never could be overcome.

Mr. JACKSON. It is true. I think the principle is the same, Senator Millikin; yes. But it is one thing to tax at death in accordance with economic origin a joint tenancy or tenancy by entirety, which is created by a single voluntary act, and which is generally a matter of record, its origin easily traceable; and it is something else again to apply that rule indiscriminately to every item of property that man and wife accumulate over a long married life.

The CHAIRMAN. I believe that is very correct, and I quite agree that it certainly was not consistent with your theories of property in community-property States.

Mr. JACKSON. Here is one difficulty of applying their concept of economic attribution. It is a difficulty of definition. In seeking to achieve this result of taxing the creator or originator of wealth, this statute taxed community property to the first to die, except community property attributable to the earnings of the surviving spousethat is, compensation for personal services actually rendered-or attributable to the separate property of the surviving spouse. That definition has created some very curious results.

A man, for example, in Texas, incurs what we call a community debt. It is a debt of the husband and the wife. With that debt they purchase an item of property. That property enhances in value, and the income therefrom, which is community, pays off the community debt, and then one of the spouses dies. Who in that case under this statute is economically responsible for the property? Under our definition that property is not derived originally from the separate

property of either spouse; it is not derived originally from compensation for personal services rendered by either spouse, and thus we have an item of property which is taxed, under the statute, altogether to the first spouse that might die.

Or take our rancher or farmer; a man and wife come into the marriage 40 years ago with no property. They bought a farm on credit. They worked hard and diligently together and they accumulated a little estate. One of the spouses dies. Under this statute that man and that wife have community property, yet it cannot be said that their community property is derived originally from the separate property of either spouse, because they hand none.

It is not derived originally from compensation for personal services rendered by either spouse, because they did not work for anybody; they worked for themselves.

So you have a category of community property which would be taxed under this statute altogether to the first spouse to die.

The CHAIRMAN. As an administrative matter, it must have been very confusing.

Mr. JACKSON. Very confusing. The confusion resulted from trying to interpret this phrase: "compensation for personal services as actually rendered." We could give you innumerable instances, some rather amusing, of how this thing has operated.

It has placed upon us burdens of proof and of tracing, impossible to bear. And it has caused people to be taxed on property in Texas, not owned by them, over which they have no power of disposition at depth, and property with respect to which they are not even economically responsible.

Senator LUCAS. Do you have the figures to show what this act of 1942 produced in the way of revenue for the Government?

Mr. JACKSON. I do not know. It said that the retroactive repeal of this statute would cause a loss in revenue of from $70,000,000, and I heard another figure of $90,000,000. I do not know how those figures were arrived at.

Senator LUCAS. Per annum?

Mr. JACKSON. No. For the whole 5-year period.

Senator GEORGE. You mean to make it retroactive to 1942?

Mr. JACKSON. Yes, sir.

Senator BREWSTER. In the report. on this bill in the House, I am not clear to what it applies. It says:

Moreover, the Secretary of the Treasury advised the committee that if all married couples took full advantage of this provision the combination of such estate and gift tax changes would involve an annual loss in revenue amounting to $245,000,000.

Are you familiar with that?

Mr. JACKSON. Yes, sir. That figure, Senator, refers to the total annual loss in revenues all over the United States. That figure, I think, refers to the equalization provisions in the bill which would accord to the common-law States the same right to split their property at death, the provision that would enable a man through the use of the marriage exemption to give half of his property to his wife.

Senator BREWSTER. The report is not clear. It speaks of H. R. 4790 in its present form, repealing the 1942 amendments referring to community property. Then it speaks of certain amendments. Were