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Mr. MILLIKEN. We will do that.

Senator MARTIN. In addition to the handicap of depreciation, you also have the handicap and complication that for foreign countries they have low wage rates.

Mr. MILLIKEN. Absolutely, yes, sir.
Thank you, sir.
The CHAIRMAN. Thank you.

(The charts accompanying Mr. Milliken's statement follow (see also p. 1430) :)

A $10 billion increase in capital expenditures, stimulated by incentive depreciation, affects taxable corporate income as follows: 1. Increases income by a 25-percent return on expenditures before taxes

$2,500,000,000 2. Decreases income by the difference between present and proposed depreciation : Proposed depreciation 20 percent-

2,000,000,000 Present depreciation 6 percent--

600,000,000 1, 400, 000, 000


Net increase in corporate income--

1,100,000,000 1 After 6-percent depreciation.

The increased Federal revenue (assuming 50-percent rate) amounts to $550 million.

The CHAIRMAN. Mr. Cohen. Sit down and make yourself comfortable and identify yourself to the reporter.



Mr. COHEN. My name is Barry S. Cohen. I am an attorney practicing in New York City, specializing in tax matters. I come here as one interested in the alleviation of tax inequity.

Last July I had the privilege of appearing before the Ways and Means Committee of the House of Representatives, in order to point up what I considered to be an inequity existing in the income tax laws and caused by section 113 (a) (5) of the Internal Revenue Code of 1939, now rewritten, supplemented, amended and appearing as section 1014 of H. R. 8300.

Briefly put, this inequity resulted from the fact that under the earlier law property transferred by a decedent received for subsequent income-tax purposes a change in basis under section 113 (a) (5), if it had been transferred in certain ways, but did not receive this change in basis if, fortuitously in many cases, the property had been transferred in other ways. Therefore, some types of transfers received a change in basis for subsequent depreciation and capital-gains purposes, while other types of transfers did not.

While providing for the change in basis, for example, for an outright transfer, such as the one exemplified when a man leaves property by will to his son, the section failed to accord the change in basis to property transferred in contemplation of death, and has been construed to deny the change in basis to property transferred via certain trusts, even though such other transfers or such trusts were of a nature such that the property had to be included in the gross estate of the transferor. In short, by covering one situation and failing to cover another, section 113 (a) (5) worked injustice and hardship.

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(Assuming Dept. of Commerce Average Straight Line Depreciation of 6%)

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In those cases where no change in basis was received even though the property was included or includible in the gross estate for Federal estate tax purposes, there was room under the 1939 code for a brand of double taxation to flourish. This double taxation, unnoticed by many, but flourishing nevertheless, stemmed from the fact that both an estate tax and an income tax would be levied on the same appreciation in value, since an estate tax was levied on the fair market value of the property as of the date of its owner's death but since when a subsequent income tax fell due (let's say, upon a sale) the decedent's heir would not get the benefit of a change in basis and would have to use the earlier and lower basis of the property, the transferor's basis.

I am happy to say that H. R. 8300, passed by the House of Representatives, showed an awareness of this problem. In fact, to a very great and helpful extent, section 1014 of H. R. 8300 has solved the problem by giving equal treatment to all transfers which are, in the words of the statute, "acquired from” or which are “passed from” a decedent. Because of this section, the income tax law will be more appropriately correlated with the estate-tax law, and the existing double taxation on appreciated property will be eliminated.

Section 1014 of the revenue bill passed by the House, however, does not do quite enough. If section 1014 is left the way it now has been drafted, all will be well for the future, but all will not be well with the past. Why? Mainly because of the ancient rule of statutory construction which says that if A is explicitly covered by a statute, then B, C, D, and E must be excluded, because if B, C, D, and E were to be covered they too would have been explicitly spelled out. I think that is referred to as "Inclusio unius est exclusio alterius,” in the old legal Latin.

Allow me to point out that section 113 (a) (5), which is to be changed, originated in the internal revenue laws of 1926. Bit by bit it has been expanded through the years, by the Revenue Acts of 1928, 1942, 1948, 1951 and, most recently, by the stop-gap measure, the Technical Changes Act of 1953. The Technical Changes Act of 1953, as a matter of fact, touched upon one of the most acute problems lurking in the old section 113 (a) (5). This committee, in reporting the Technical Changes Act to the Senate last summer, stated as follows in connection with this matter:

Section 113 (a) (5) of existing law contains a provision to the effect that where the grantor retains the income from property in trust for his life, with power to revoke the trust, the basis of the property in the hands of the persons entitled to take the property under the terms of the trust insrument after the grantor's death shall, after such death, be the same as if the property had passed under a will executed on the day of the grantor's death. This results in the basis of the property in the hands of the recipients being its fair market value at the date of the grantor's death or, at the election of the executor, the value 1 year from the date of death. Your committee believes that this same rule should apply to situations where the grantor with a reserve life estate has the power to make any change in the enjoyment of the corpus of the trust through the power to alter, amend or terminate the trust. In both cases, the trust property is required to be included in the gross estate of the grantor for estate-tax purposes.

That was certainly true. The same rule should apply to the type of trust referred to by the committee. But that was, in effect, not enough. By grafting another amendatory clause into section 113 (a) (5) the Congress did little more than reraise the question of what the statute was intended to cover. It was piecemeal kind of legislation, breeding uncertainty because, again, the Congress seemed to want to include in all similar trusts, though the language used by the statute did not appear to be that broad.

Now, as I say, the section contained in H. R. 8300 is to blanket the field, and it would seem to me it does explicitly blanket the field. However, it applies only prospectively. Making everything clear for the future, unfortunately, does not similarly make everything clear for the past.

To pursue the reference to trusts further, there have been cases in the past in which section 113 (a), (5) has been found to be replete with question marks. For example, in connection with trusts of the sort referred to in the committee report, the question has arisen, “Aren't the 'twin brothers' of these trusts covered? If X type of trust be subject to estate tax and get a change in basis under 113 (a) (5), isn't Y type of trust, which is also subject to estate tax and is essentially similar to X to get the same change in basis for income tax purposes?” The answer has been unclear.

" I therefore recommend to the committee at this time that trusts be singled out specifically and it be made clear, perhaps merely by committee report, that the new law is clarifying; that the new law does not, in respect to the treatment of trusts at least, make substantive changes in the conditions under which 113 (a) (5) has applied in the past; and that last summer's amendment was also merely clarifying and worked no substantive change.

In the alternative, I recommend that if it be found, as I believe it will be, that very little revenue is involved in this sort of technical provision, that the committee see fit to clarify for all times the past law by reworking and broadening the language of subdivision (a) (3) of section 1014. This subdivision parallels the language put into section 113 (a) (5) last year. It should cover not only the many types of trusts it does specifically refer to, but all trusts where the retention of a power by either the decedent or one lacking a substantial adverse interest to the decedent causes the trust property to be included in the decedent's gross estate. Moreover, it should have applicability not merely in the case of decedents dying after December 31, 1951 (the date set forth for some reason unknown to me in (a) (3)) but in earlier cases as well. I recommend that such effective date might fairly be geared to one of the years in which Congress had earlier imperfectly attempted to broaden section 113 (a) (5)--to October 21, 1942, when the section was reviewed and it was geared for the first time with section 811 (j) of the estate tax law and thus explicitly and statutorily related to the estate tax law.

The CHAIRMAN. How about cases that have been closed ?

Mr. Cohen. Well, what is involved here is not so much the estate tax as it is the subsequent sale of assets received by an heir or devisee or a trust beneficiary from trusts or from estates. Therefore, I doubt that there have been many cases which have been closed under the section. I doubt that it has been used much in the manner to which I refer at all.

However, I think that a closed case might well be left standing as closed. What we look for now is clarification of the law, and, as the

Senator knows, if you go up to court in March you have the benefit of the cases that have been decided in January and February, whereas had you gone to court in the previous December you wouldn't have had the benefits of the January and February decisions. The same should be true of legislative clarification. That sort of clarification of past law is what is suggested. I do not believe I come here today to recommend retroactive substantive changes. This is not quite that. This is a clarification of an uncertainty, one that has existed in the statute heretofore and which now could be solved either by an express declaration in the new section 1014, clarifying existing law in connection with such trusts or, by an explanation in the committee report

Thank you very much.
The CHAIRMAN. Thank you.

Mr. Goldstein, make yourself comfortable and identify yourself for the reporter.



Mr. GOLDSTEIN. My name is Meyer Goldstein, of the Pension Planning Co. of New York. We are consultants and actuaries to many companies in the field of pension and profit-sharing plans.

I have a digest on the first three pages, and I would ask your permission to put the whole statement into the record.

The CHAIRMAN. It will be put in the record. (The statement of Mr. Goldstein follows:)


My name is Meyer M. Goldstein. I am executive director of the Pension Planning Co., located at No. 260 Madison Avenue, New York, N. Y.

I. GENERAL STATEMENT When I had the privilege of appearing before the Senate Finance Committee to testify on the pension and profit-sharing provisions which were proposed as parts of the then pending Revenue Act of 1942 there were but a relative handful of private pension systems in this country as compared to the large number now in existence. This evidences a tremendous growth which has progressively continued during the intervening years. There is no doubt that the encouragement given by the Congress through the tax treatment of employees and employees is, to a considerable extent, responsible for such growth, and I venture the prediction that the improvements that have been included in H. R. 3800 will even further accelerate this movement which is so important to the free enterprise system and the American way of life.

The draftsmen of the revenue revision bill performed a herculean task in selecting, deleting, compiling, and rearranging numerous sections in a limited period of time, and it is readily understandable that the resultant revenue bill submitted should contain certain inequities. My purpose is to point out some of these and to suggest possible remedies.

I shall attempt to relate my testimony primarily to those areas which I feel have not been fully clarified and to other areas which apparently favor one type of plan as against another. I trust that some of the features will be elaborated upon by others who will here testify. The matters which I shall endeavor to cover, and which are set forth in a written memorandum which I deem a privilege to submit to this committee, are indicated in the digest of contents which precedes this memorandum.

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