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remaining partners. This would obviously result in unjust and unexpected benefit to the estate of the deceased partner or the retired partner and unjust and unexpected detriment to the remaining partners.

Therefore, it is respectfully requested that in order to avoid this injustice the Senate Finance Committee change the 5-year limitation to a 10-year limitation.

If for any reason which is not apparent it is deemed unwise by this committee to make the above suggested change, then as an alternative, it is respectfully requested that a provision be inserted in the above-quoted subsections (A) and (B) to exempt from the 5-year limitation provision all bona fide partnership agreements in force on the date when the new tax law becomes effective. Such existing agreements, of course, the remaining partners are now powerless to change or modify to compensate for the shift in the tax burden.

The United States Treasury should receive about the same tax revenue under a 10-year limitation as under a 5-year limitation and about the same revenue under the other change suggested above. This appears from the testimony given by Mark H. Johnson, Esq., of New York City, on behalf of the American Bar Association before the Committee on Ways and Means of the House of Representatives, found on page 1370 of the transcript of the hearings before that committee. Mr. Johnson's testimony was in part as follows:

"* * * Let me emphasize this point that very few of the problems involve overall revenue consideration. By and large, one set of solutions will, in the long run, produce about the same total taxes as another set of solutions. The problems in the partnership field usually involve the question of which partner is to be taxed and when. * * *

This is a serious matter for many insurance partnerships throughout the United States. Unless the proposed amendment is changed, they will be in a difficult position with no corresponding benefit to the United States Treasury. Respectfully submitted.

JOHN W. Downs,

Attorney at Law.

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The CHAIRMAN. Senator Saltonstall, we are glad to have you present. Do you wish to introduce your constituent and make a statement?

Senator SALTONSTALL. I would appreciate the opportunity, sir.



Senator SALTONSTALL. I would like to present to the Finance Committee Mr. Kenneth W. Bergen, a partner in Warner Stackpole, Stetson & Bradlee in Boston, which is a highly reputable firm of lawyers in Boston. He is chairman of the Tax Forum of Boston. I believe you have already met him, as he has appeared before this committee at various times.

Now, the Tax Forum is composed of many of the leading tax lawyers and accountants, and some of the professors of law in the Greater Boston metropolitan area. He is here to speak to you in due course on charitable trusts and the problem of accumulations.

I don't know whether we are different in our section from other sections of the country. I do know that we have a number of charitable organizations which are interested in this problem, out side of the charitable trusts which Mr. Bergen may represent this morning. They are the United Community Services in the metropolitan area, The Massachusetts General Hospital, the Massachusetts Memorial Hospital, and a number of other hospitals and charities.


Now, I was chairman of the Greater Boston Community Fund 1 year and was responsible for raising something over $4 million. We worked very hard on it. The beneficiaries of the fund are reputable institutions for which one united campaign is conducted. The question before you, as I understand it, is one that would affect accumulations and would affect our systems of charities in the Greater Boston area, because in Massachusetts accumulations for charitable purposes are permitted.

I personally happen to be a trustee of one small trust that has been in existence now almost 100 years, under which we accumulate a small amount each year. So that the issue in which Mr. Bergen is interested does become a problem, as I had not realized, even in the case of the trust under which I am an active trustee.

This is a question that involves the welfare, the good health, and the hospitalization of many of our citizens, and I know that it will receive your sympathetic consideration.

The CHAIRMAN. I am sure it will.
Senator SALTONSTALL. I appreciate your permitting me to introduce
Mr. Bergen, whom I can vouch for as a responsible tax authority.

The CHAIRMAN. Thank you..
(Off the record.)
The CHAIRMAN. Mr. Bergen.

Mr. BERGEN. Mr. Chairman, my name is Kenneth W. Bergen. I am an attorney in Boston, Mass. "I appreciate very much the opportunity you have given me to appear before you. .

First of all, I have been asked by the Tax Forum of Boston, a group of tax practitioners from many of the large law and accounting firms in Boston, to make a few general remarks about H. R. 8300. This group, I believe, is representative of the Tax Bar of Boston and possibly New England.

The Tax Forum believes that a remarkable and herculean job has been done in putting together this tax bill. Too much credit cannot be given to the many who have labored over it. However, the Tax Forum feels that some parts of the bill need drastic revision, if it is to become workable and something we can live with comfortably. Although the Tax Forum is not making specific suggestions, it would like to endorse the suggestions made by the American Bar Association, the American Law Institute, and the American Institute of Accountants. It is understood that groups from these organizations are working and cooperating with the staffs of the joint committee and the Treasury Department, and the Tax Forum would like to urge that this cooperation be continued just as long as possible in the working out of this bill, so that we can have as good a bill as possible.

So much for my statement on behalf of the Tax Forum. I would like now to get to the question involving charities, which Senator Saltonstall spoke to you about a few minutes ago.

As he said, I represent a number of charitable trusts in Boston. Rather than read the formal statement which I have here, I would respectfully ask that it be included in the record, and then that I be permitted to summarize it briefly.

The CHAIRMAN. That is exactly what we want you to do. Put it in the record, please.

(The statement referred to follows:)

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HARDSHIP ON CHARITABLE TRUSTS REQUIRED TO ACCUMULATE INCOME One of the most ambiguous and uncertain provisions of H. R. 8300 is to be found in paragraph (1) of sections 504 (a) and 681 (c). It is respectfully submitted that this provision should be eliminated prior to the final enactment of H. R. 8300.

As a result of the enactment of a similar provision by Congress in 1950 (secs. 162 (g) (4) (A) and 3814 (1) of the Internal Revenue Code), many genuine charitable trusts now find themselves in danger of losing their tax exemptions and deductions even though the trust income must be used for the benefit of charity and even though no personal benefits can inure to the benefit of the creators of the trusts.

The 1950 legislation took the form of an amendment to the Internal Revenue Code denying charitable exemptions and deductions of trusts in which there are income accumulations "unreasonable in amount or duration in order to carry out such purposes of the trust.” No guide to interpreting this language is avail. able, and it is impossible to administer with any degree of certainty.

This provision was a small part of the 1950 overall revision of the tax law relating to charities. This overall revision was enacted largely because certain charitable trusts and foundations were taking advantage of their tax exemption either through tax-avoidance schemes or through private benefits to the creators of the trusts. The House Ways and Means Committee held extended hearings and Congress enacted numerous provisions designed to prevent these abuses without harming worthy charities. The great majority of these provisions were commendable and should be continued in the Internal Revenue Code. However, there is nothing in the history of this legislation indicating that the provision taxing accumulation trusts was intended to prevent the abuses which Congress sought to prevent.

A brief history of the 1950 charitable amendments as applied to accumulations of income by charitable trusts is set forth below.


In section 321 of H. R. 8920, the House Ways and Means Committee proposed that certain income accumulations by charitable trusts be subjected to Federal income tax. However, the bill exempted from such tax the following:

(1) All irrevocable trusts created prior to June 1, 1950, where accumulation of income was mandatory;

(2) All income actually distributed to charity;

(3) All income of testamentary trusts received within 25 years after date of death of the decedent.


Because the Senate Finance Committee thought that the proposals made by the House were too inflexible and would be injurious to many worthwhile charitable organizations, section 341 of H. R. 8920 eliminated entirely the tax on accumulations as proposed by the House and substituted merely the requirement that charitable trusts claiming deductions for accumulations for charitable purposes file information returns with the Commissioner of Internal Revenue,


The joint conference committee retained the Senate amendment requiring the filing of information returns but otherwise rejected both the House and Senate proposals, enacting what is now sections 162 (g) (4) and 3814. Thus, the joint conference committee and the law as finally enacted subject to income tax all charitable trusts accumulating income as provided in the law even ough (1) the trusts were created prior to the date of the enactment of the law, (2) the income is accumulated by testamentary trusts, and (3) most of the income is actually distributed to charity. The only limitation on the tax is that the accumulation be “unreasonable in amount or duration,” a phrase which is extremely indefinite in meaning.

As the above legislative history indicates, the law now imposes a more harsh rule on charitable trusts that either the House or the Senate versions of the 1950 revenue bill.

The number of trusts endangered by present section 162 (g) (4) (A) of the Internal Revenue Code is great. In one city alone, the number of trusts in this

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category might well run into the hundreds. As a result, millions of dollars intended for charity are in danger of being diverted through taxes at a time when charities are desperately in need of funds to meet ever-increasing costs. Typical examples of trusts affected by this law are

(i) The will of a person dying subsequent to 1950 provides that property is to be held in trust to pay specified amounts to named elderly annuitants and that the balance of the income is to be accumulated. On the death of the last surviving annuitant, the trust principal and all accumulated income is to be paid to named hospitals and colleges. Because the amount of income paid to the annuitants each year will constitute a relatively small fraction of the income received each year, there is serious danger that the income accumulated each year will be regarded as unreasonable in amount and, therefore, will be subject to Federal income tax.

(2) A man died in 1948 leaving a will which provided that the residue of his property was to be held in trust to pay 90 percent of the income to specified charities and to accumulate 10 percent for 50 years. Because of the accumulation provision, there is serious danger that the 10-percent accumulation will be regarded as unreasonable in duration in which event the trust would be taxed in the same manner as an individual with the deduction for its charitable distributions being limited to 20 percent of its income, although 90 percent is required to be distributed to charity.

It is difficult to understand why there should be any social or other policy against such accumulations per se so long as they are used for bona fide charitable purposes. Since other provisions (secs. 162 (g) (4) (B) and (C) and 3814 (2) and (3); H. R. 8300, secs. 504 (a) (2) and (3) and 681 (a) (2) and (3)) are designed to prevent charitable trusts from being used to the private advantage of the creators of charitable trusts, the provision preventing unreasonable accumulations is unnecessary. In fact, tends to discourage gifts for the benefit of charity.

It is respectfully submitted that sections 504 (a) (1) and 681 (c) (1) of H. R. 83000 should be eliminated altogether from H. R. 8300.

Mr. BERGEN. H. R. 8300 contains a provision which subjects to tax trusts which accumulate income. The test for determining the taxability of the trust is whether the accumulation is unreasonable in point of time, or in amount. If either test is met, then the trust loses its exemption, and is subject to a Federal income tax, to the full extent of its income, regardless of whether the income is distributed, and its deduction for charitable contributions is limited to 20 percent, just as in the case of an individual.

Perhaps I can illustrate this to make it a little clearer: Suppose a man dies, leaving a will which provides for a trust to pay an annuity

a of $10,000 a year to his wife for the rest of her life and to accumulate the balance of the income until the wife dies, at which time the accumulation of income and principal is to be paid over to the American Red Cross. Let's say the income of the trust is $20,000, so that 50 percent is accumulated and 50 percent is paid out to the wife. Under the provision, about which we are concerned, there is a serious danger that that trust will lose its exemption, and that the 50 percent accumulation will be subject to income tax, even though eventually it is going to be paid to the American Red Cross.

This provision was first enacted in 1950 as a part of overall legislation designed to prevent charities from competing in business or engaging in activities for the benefit of private individuals. The legislation was commendable, and certainly should be continued in the law. But the provision about which I am concerned was not designed to prevent any of these abuses. The other provisions of the law adequately take care of them.

I think you will be interested to know some of the harsh results of this provision. The law applies even though a trust was created before the enactment of the law in 1950 and even though the trust is required to accumulate income. I suppose the classic examples of this type of trust are the ones created by Benjamin Franklin many years ago. While I don't know the exact details of that trust, it is public knowledge that there are 2 trusts, 1 in Philadelphia and 1 in Boston. I understand that the income was to be accumulated for 100 years. At the end of that time one-half of the trust property and accumulated income was to be paid out to charity. The balance was to be accumulated for the second hundred years, at the end of which time the trust was to terminate.

Now, I can't say for certain that the Franklin trusts are affected by the present tax law, but it is the kind of trust we are worried about. A 200-year accumulation might very well be regarded as unreasonable in point of time by a court.

The saw also applies even though most of the income has to be distributed by a trust. We have a case where a trust is to pay out 90 percent of its income to charity each year, and to accumulate 10 percent for 50 years. Thereafter all the income is to be paid out to charity. It is quite likely that a 50-year accumulation would be unreasonable in point of time. And if it is, the trust loses its exemption. 100 percent of the income less a 20 percent charitable deduction, is subjected to tax, although 90 percent is actually paid out to charity.

We have some investigation of the number of trusts involved in this situation in Boston, and it could run into the hundreds.

The CHAIRMAN. Has the staff studied that situation?

Mr. STAM. Yes. Of course what he is talking about, Senator, is the provision of existing law.

Mr. BERGEN. That is right.

Mr. STAM. Which was merely carried into the code. It was put in, I think, in 1950.

Mr. BERGEN. In 1950, that is correct.

Mr. STAM. And it was designed—the purpose of it was to prevent unreasonable accumulations in certain types of trusts, which would jeopardize the interests of the beneficiary.

For instance, we had a situation where the trust was investing in stock of the grantor, and the thing was very speculative and it appeared from facts that there was a possibility that beneficiaries might not get anything out of the trust at all. So, certain of these restrictions were written into the law to take care of that situaion. And we have had his called to our attention. We haven't been able to find a solution for it at the moment.

Mr. BERGEN. Now, take the case that you have just mentioned
The CHAIRMAN. Give us a solution.

Mr. BERGEN. I don't think the solution should prohibit accumuations. We can't see any social policy against accumulations per se. But, if those accumulations are going to jeopardize the interests of charity, we agree the trust ought to lose its exemption, and there is a specific provision in the law which would deny a trust an exemption in that case. I refer to paragraphs (2) and (3) of section 504 of H. R. 8300.

We also agree if they participate in certain prohibited transactions, they ought to lose their exemption. But we do say that mere accumu

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