STATEMENT BY GEORGE CRAVEN IN REGARD TO PROPOSED TREATMENT OF CHARITABLE DISTRIBUTIONS

I disagree with the part of this report which deals with the proposed treatment of income of an estate or trust which is paid to or permanently set aside for charitable organizations.

We are not concerned with whether Congress will wish to continue the unlimited deduction for charitable distributions which has been in force since the Revenue Act of 1924 but should assume that the deduction will be continued. We are concerned only with the proper method of treating that deduction for income tax purposes.

The present section 643 (c) allows as a deduction in computing taxable income amounts of gross income without limitation which are paid to or permanently set aside for charitable organizations. The proposed amendment would change that rule by treating a charitable organization as a beneficiary of distributable net income. I agree that such change should result in simplification of the law. However, if the charitable organizations are treated as beneficiaries, it is my view that they should be treated in exactly the same way as individual beneficiaries and that if there are charitable beneficiaries and individual beneficiaries of the same trust, the individual beneficiaries should not be required to pay a greater tax on distributions than they would pay if the other beneficiaries were individuals.

Examples are given in the report of supposed tax avoidance which would be possible under the proposed amendment if a charity were treated in the same way as an individual. Example 1 is a case where the trust instrument requires the trustee to pay all the income to a charity and to pay to the grantor's wife each year an amount equal to that year's income. I fail to see that this provision presents any means of tax avoidance or why the wife should be taxed on an amount of principal if all the income is paid to someone else, whether an individual or a charity. If income is accumulated for a charity or another individual, there may be justification for treating as a distribution of income a distribution of principal to an individual. However, if all the income is paid out currently to an individual or a charity, there is no justification for taxing as a distribution of income a distribution of principal to an individual. The principal of the trust would be reduced each year by the amount of the distribution from principal and the principal distributions plainly would be gifts. Moreover, I doubt that the 16th amendment would justify taxing an individual on such distributions of principal, and I think the statute would be unconstitutional if it attempted to tax such distributions of principal to the individual.

Similarly, if the trustee is given discretion to make distributions to a charity from income and distributions to an individual from income and principal and distributions of income are made to a charity and distributions of income or principal or both are made to the individual, the individual should be taxed on only the amount of distributable net income remaining after reducing such income by the amount of income paid to the charity.

It is probable that few cases would arise where income is paid to a charity and principal is paid from the same trust to an individual. However, the fact that such cases seldom would arise is no justification for distorting the tax law in this fashion. On the other hand, the very fact that few such cases would arise is a strong argument against a statute which would produce such results.

One result of treating charitable beneficiaries differently from individual beneficiaries is that where deductible items are paid from corpus, the individual may be deprived of all or part of the benefit of deductions for items paid from corpus. For example, suppose that a trust instrument provides that one-half of the net income shall be paid to X charity and the other half to Y, an individual. Suppose that in the taxable year the trust has ordinary taxable income of $10,000, of which $5,000 is paid to X and $5,000 to Y, and that the trustee pays $2,000 of commissions from principal, resulting in distributable net income of $8,000. If both beneficiaries were individuals, each would be taxed on one-half of the distributable net income, or $4,000. However, under the proposed statute, because the other beneficiary is a charity, the individual would receive no benefit from the $2,000 deduction, but would be taxed on $5,000.

It is my view that the results produced by the proposed statute would be inequitable and that a charitable organization should be treated in all respects the same as an individual beneficiary. If it is thought that the only alternative to the statute now in force is a statute which would produce the results produced by the proposed statute, it is my view that the present statute should not be changed.

The CHAIRMAN. You are recognized, sir.

TESTIMONY OF THE ADVISORY GROUP ON SUBCHAPTER J: A. JAMES CASNER, CHAIRMAN (HARVARD UNIVERSITY), CAMBRIDGE, MASS.; KENNETH W. BERGEN (BINGHAM, DANA & GOULD), BOSTON, MASS.; CARLYSLE A. BETHEL (WACHOVIA BANK & TRUST CO.), WINSTON-SALEM, N. C.; GEORGE CRAVEN (BARNES, DECHERT, PRICE, MYERS & RHODES), PHILADELPHIA, PA.; RUPERT GRESHAM (BOYLE, WHEELER, GRESHAM, DAVIS & GREGORY), SAN ANTONIO, TEX.; JAMES P. JOHNSON (BELL, BOYD, MARSHALL & LLOYD), CHICAGO, ILL.; CARTER T. LOUTHAN (ANGULO, COONEY, MARSH & OUCHTERLONEY), NEW YORK, N. Y.; AND WESTON VERNON (MILBANK, TWEED, HOPE & HADLEY), NEW YORK, N. Y.

Mr. CASNER. Mr. Chairman and members of the committee, I should like first to introduce to you the members of my advisory group, pointing out a little of the background of each one. In this way, the members of this committee will know them better and will be able to judge better the kind of work that has been done by my group.

I am going to take them alphabetically and I ask each one to stand as his name is called, so that you will be able to see clearly each one and more clearly place him in your mind.

Mr. Kenneth W. Bergen, who is on my right, is a partner in Bingham, Dana & Gould, a Boston law firm, and he is the chairman of the

American Bar Association Committee on Income Taxation of Trusts and Estates.

Mr. Carlysle A. Bethel, on my right, is vice chairman of the board and senior trust officer of the Wachovia Bank & Trust Co. in WinstonSalem, N. C. He has been active in tax work of the American Bankers Association Trust Division for many years, and I am willing to prophesy now, although he will probably wish I had not, that he will be the next president of the American Bankers Association Trust Division.

Mr. George Craven, on my right, is a partner in Barnes, Dechert, Price, Myers & Rhoads of Philadelphia. He has given many lectures at tax institutes for lawyers and is a prominent tax lawyer in Philadelphia.

Mr. Rupert Gresham, on my left, is a partner in Boyle, Wheeler, Gresham, Davis & Gregory of San Antonio, Tex. He is a former chairman of the tax section of the State Bar and a member, Institute Committee, Tax Section, Southwestern Legal Foundation.

Mr. James P. Johnson, on my right, is a partner in Bell, Boyd, Marshall & Lloyd of Chicago, Ill. He was recently in the Treasury Department as special assistant to the head of the legal advisory staff and was responsible to a considerable extent for the regulations on subchapter J, which we are going to consider this morning.

Carter T. Louthan, on my right, is a partner in Angulo, Cooney, Marsh & Ouchterloney of New York City. He is a former member of the New York State Bar Committee on Personal Income Taxation. Weston Vernon, on my left, is a partner in Milbank, Tweed, Hope & Hadley of New York City and is a former chairman of the Section of Taxation of the American Bar Association.

Laurens Williams, who is not here, and who is very sorry he had to be absent today, is a partner in Sutherland, Asbill & Brennan of Washington, D. C., and a former assistant to the Secretary of the Treasury and head of the legal advisory staff of the Treasury Department.

These gentlemen have worked very hard over the course of the last year, and most of the credit for what we have produced must go to them.

The CHAIRMAN. Mr. Casner, you have introduced everyone except yourself. I think it would be appropriate for the Chair to mention to the other members of the committee, if they do not know already, that you are a member of the faculty at Harvard Law School, and that in addition to being one of the outstanding professors of law in the country, you are also engaged in the practice of law yourself, and have written a number of books on the subject of estates and trusts as well as a number of articles. We are very pleased to have such a distinguished advisory group; all of you with such outstanding backgrounds in the field. I know that anything you say to this committee will be given very careful consideration by the committee. Mr. CASNER. Thank you very much, sir.

I should also like to acknowledge, before we go to the report itself, the great help and assistance that we have had from representatives of the Treasury Department, of the chief counsel's office, and of the Internal Revenue Service. They have attended each of our meetings, and I want to make it clear that they are not estopped at all to object to what we propose, but they have been very, very helpful to us,

and we could not have done what we have done without their help and assistance.

With the Chair's permission, I should like to present this report from three standpoints this morning. I should like to make an analysis of the charter we had; secondly, what we have accomplished to date in carrying out that charter; and thirdly, what it is that we have left to do to complete our original assignment.

Subchapter J, on the income taxation of trusts and estates, is a complex body of law. I am not so sure that, from the nature of the subject matter, it can be anything but complex. We all, of course, would like simplification in any area. Simplification, however, many times may be misleading. If you are to have a detailed body of law that will guide people through this area, the law cannot be simple. One of the things we were assigned to do was to simplify the subchapter to the extent that simplification could be produced without losing something else of more value.

The second thing we were asked to do was to go through the subchapter and determine where there were loopholes which permitted significant tax avoidance, and whether such loopholes could be closed without losing something else that should be preserved.

Thirdly, there are certain ambiguities, certain gaps in statutory language, that have come to light since the enactment of the 1954 code, and we were asked to examine them and to suggest statutory changes that would fill up these gaps and eliminate these ambiguities. Fourthly, there are some unintended hardships that were caused by the terms of the 1954 code, and we were asked to look at them and suggest possible ways of curing them.

Finally, there are some unintended benefits that were produced by the language of the 1954 code, and we requested to examine them and suggest what should be done with respect to them.

We did not consider it within our charter to suggest a completely new approach to the handling of the taxation of trust estates. That had been done as recently as 1954, and our job, we thought, was to operate within the accepted framework of the 1954 code and do what we could within that framework.

What has been accomplished in carrying out our assignment?

This advisory group has met on an average of once every 2 weeks for the last year, except for the period during the summer. We have produced, as a result of these efforts, this document which is entitled, "Revised First Report" of the advisory group on subchapter J. It is a revised first report because we put out the first report last May and then, as a result of our own further deliberations in connection with that report, plus comments that we recived from others, plus our own continuing research in the matter, we made a number of changes. Thus, we published this revised first report as of November 22, 1957, incorporating the changes that we had made as a result of our further deliberations.

In setting up this revised first report, however, we thought we had some obligation to the people who had studied the initial report, and thus we labeled any changes in the first report by putting the changes in bold-face type, so that one who had read our report of last May could go through the revised one rather quickly and pick out the changes that had been made.

I should like to examine with you parts of this report. I do not intend to take up in minute detail the statutory language which we are

proposing. I shall be glad, of course, to answer any questions of the committee on any phase of the language which is presented in the report, but I should like at this time to give you a rather broad picture of what it is that we have tried to accomplish in some of the statutory recommendations which are found in this report.

The first matter that you encounter in reading this report is a brandnew section in this subchapter which deals with multiple trust. I am certain most of you are aware of the fact that in recent years, it has become increasingly common for a grantor to set up a number of different trusts for primarily the same beneficiaries, so that if the income is not distributed and is accumulated by the various trusts, it can be taxed to these separate trusts as separate tax entities, thereby producing an overall tax which will be lower than would be the case if these trusts had been one.

It is not an easy job to draft a statute on multiple trust. It would have been very easy to draft a statute to cover the obvious cases, but to do that and no more would have meant drawing a rigid line, and it would have been easy then for grantors just to move over on the other side of the line we had established and set up multiple trusts that would have the same tax-avoidance possibilities.

Thus, in drafting a multiple-trust statute, it seemed to us that the dividing line should not be precisely defined; that you had to have an area where, if a client came to you, you would have to say, “Well, if you get into that area, I don't know what the answer is, but you better stay out of it, because if you get into that area, you are going to have trouble."

For this reason, you will find that in the language of this statute the line is not drawn as precisely as some people would like to have it. Some people have complained to us about this very thing, saying, “We cannot tell clients on which side of the line certain arrangements fall."

To them, I have said that that was exactly the situation we were intending to create, so that the only advice which can be given is, "Stay out of that area entirely, or go into it with your eyes open to the possibility that you may be in trouble."

Any statute on multiple trust that is going to be comprehensive is going to be complex. If you read our statute, when you get through you will wonder where you have been. It is a complex statute. It is not easy to read and to understand. But I submit that that is the nature of the animal with which we are dealing.

I think complexity is justified in this type of statute, because you are trying to induce people to stay away from the area entirely Thus you can say "You better stay out of the area entirely. If you move into it, you are not going to know for certain where you are. You are going to create very complex situations with respect to the people managing the several trusts involved."

In preparing this legislation, we were well aware of the fact that there are a number of family arrangements which it is desirable, from the family standpoint, to take care of by separate trusts. For example, where the primary purpose is to provide for different branches of the family, so that their respective shares will be kept equal, a separate trust for each branch of the family may be the most desirable solution.

Thus, we did not want to go to the point of suggesting a statute with respect to multiple trusts that would penalize normal family arrangements, where there was not behind them the primary objective of tax avoidance that prompted other multiple trust arrangements.