preferred to have the beneficiaries treated alike taxwise rather than differently.

The one area where I stumble on my recommendation of a single tier system is in the area where a person is entitled to trust corpus only. Suppose a trust provides that the trustee can pay corpus to the wife if she needs it but she is not entitled to any income but that income is to be paid to others. If the trustee pays corpus to the wife, to have her taxed as though she receives income may be a hardship. So I suggest an alternative of a two-tier system. In those cases where corpus only can be paid to a beneficiary, place that beneficiary in the second tier but have all other distributees in the first tier. Now I suggest that fairly readily because I do not think there are many trusts where corpus only can be paid to a beneficiary.

The CHAIRMAN. Would you put a charity in the second tier or the first tier?

Mr. BERGEN. I would be inclined to treat a charity like any other distributee.

The CHAIRMAN. Do you differ with the advisory committee on that recommendation?

Mr. BERGEN. I did not differ so strongly that I felt I should write a minority report in this respect.

The CHAIRMAN. You conceive of a need for a second tier. Do you not also conceive of a possibility of some different treatment for charitable trusts?

Mr. BERGEN. Yes.

I now want to mention my view with regard to the income taxation of estates, which is I think the most important problem of all. The CHAIRMAN. Distributions?

Mr. BERGEN. Distributions by estates is the most important part of this report as Professor Casner has already indicated. I have suggested having estates taxed like individuals. Then it would make no difference whether distributions are from corpus or from income. The CHAIRMAN. Because you would not allow them exclusions?

Mr. BERGEN. Would not allow any distribution deductions and would not tax the beneficiaries on any distributions. The income would be taxed to the estate.

The CHAIRMAN. Would that not create hardship if the matter is under litigation?

Mr. BERGEN. It would. It would also create a hardship where you have a large estate with a large number of ultimate beneficiaries of the estate.

It might be desirable to have this problem separated in some way so that estates with incomes of say, under $5,000 would be taxed like individuals. With regard to estates having income above that figure another rule, such as that suggested in the report. Here again I have been motivated by the problems of the ordinary executor with a normal estate, which is a small estate with income of $2,000 or $3,000. Should he have to grapple with the complicated rules of the present law or of the proposal? Many executors do not keep track of what is distributed as corpus and as income. An executor makes a distribution and the revenue agent comes along under the proposal and says, "You made a distribution of income." The executor says, "No, I have made a distribution of corpus." The revenue agent then says, "You have the

burden of proof." The executor then has the problem of proving that the distribution was of corpus.

The CHAIRMAN. Mr. Bergen, as I understand your suggestion, you would treat estates as individual for purposes of distribution. We have always tried to tax estates and trusts alike and with few exceptions in the case of trusts we do treat them alike for tax purposes.

If we take your suggestion with respect to estates, does it follow that we would have to extend the same treatment to trusts? Is that what you are recommending?

Mr. BERGEN. Not at all. This suggestion would only apply to estates. Estates would be treated differently from trusts.

The CHAIRMAN. The only point you make, then, is that estates and individuals should be treated the same respecting distributions. Mr. BERGEN. That is right.

The CHAIRMAN. And you do not think like treatment would have to be extended to trusts?

Mr. BERGEN. Not at all.

The CHAIRMAN. Why not? I am not arguing that it should be. I am merely interested in your thinking as to why it does not follow. Mr. BERGEN. When a person dies his estate is to be administered for only a temporary period. During that temporary period my thought would be: Let's not have the executor worry about how distributions he makes are going to be taxed. Let's have him prepare an income-tax return for the estate similar to that of an individual.

In the case of a trust, a long period of time is generally involved. The estate lasts for only a temporary period during which the property of the decedent is transferred to the heirs of the decedent.

The CHAIRMAN. It may be a 10-year trust, and the estate itself may be open for 10 years.

Mr. BERGEN. I would say that you ought not to permit an estate to continue beyond an unreasonable time. Have some limit, the way there is a limit in the present law. If an estate should have been wound up and the executor has been keeping it open for tax avoidance reasons, then, as under the present law, I think that the estate could be closed and the heirs of the estate regarded as the owners of the property.

The CHAIRMAN. It could be in litigation for the 10-year period. I am concerned with that type of case primarily because I do not conceive an estate remaining open for 10 years as a general rule although there might be some other circumstances that require estates to remain

open.

Mr. BERGEN. What you are saying is, suppose you have a large estate in litigation. If this estate is taxed as an entity, won't it impose a severe hardship to the beneficiaries of the estate because the estate would be taxed in high brackets, when the income belongs to the beneficiaries who are in low brackets? That does create a problem.

I hope it is important in considering revision to the tax law in the trust and estate area to see how the revisions will show up on the tax return itself. We ought to constantly keep that in mind.

Thank you very much.

The CHAIRMAN. Without objection, the committee is adjourned until 2 o'clock.

(Whereupon, at 12:30 p. m., a recess was taken until 2 p. m.)

AFTERNOON SESSION

The CHAIRMAN. The committee will please come to order. 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.-Resumed

Mr. CASNER. Mr. Chairman, going on with our alphabetical presentation, Mr. Bethel would like to have a couple of minutes to make a few remarks.

Mr. BETHEL. Mr. Chairman, it has not been my intention to take the time of your committee, but I have been so concerned with the discussion of Mr. Bergen on the estate as an entity that I would not like to see that go unchallenged by a member of our group.

In the first place it has not been considered by our group as pointed out by Mr. Williams and in the second place, we are not informed of any hardship either on the part of the Treasury Department or on the part of taxpayers, particularly in trust institutions, with the present law.

I suppose if you ask me what my chief concern is, I would say probably fear of the unknown. Subchapter J, as you know was rewritten in 1954 and has caused a great deal of complexity in the preparation of income-tax returns by thousands of trust institutions all over the United States.

I would look with great concern on such a major change in the method of taxation of estates as proposed by that suggestion and to oppose it for the reasons I have mentioned. I hope that no real consideration would be given to that proposal without more notice as to what is probably going to be done than we have had here today.

The CHAIRMAN. Certainly, if the committee should undertake to give consideration to Mr. Bergen's minority views, it would be necessary for the committee to have rather exhaustive hearings because I am certain that there would be a number of people who would desire to be heard, including Mr. Bergen.

Mr. BETHEL. Thank you, sir.

Mr. CASNER. Mr. Craven of Philadelphia.

The CHAIRMAN. Mr. Craven, you are recognized.

Mr. CRAVEN. Mr. Chairman, there are three points on which I would like to comment briefly. First the proposed treatment of multiple trusts: As Mr. Casner said this morning we are in unanimous agreement on the proposed treatment of trusts. I disagree on one point and that is the proposed effective date.

Under the proposal of the advisory group, in the case of the trusts of the more flagrant type, the proposed statute would be applied to all trusts regardless of when created. I do not object strongly to that provision, although even in that case I think it might be more equitable to apply the rule only to trust agreements in the future.

However, in the other area, where the same grantor creates more than one trust with an accumulation of income for substantially the same beneficiaries, where there may be reasons other than tax consideration of the trust, the advisory group in its report proposes that the amendment be made applicable to trusts created on or after December 1, 1956.

That is because some public announcement was made shortly prior to that date of proposed legislation to deal with multiple trusts. However, the reports of that sort are not widely circulated or read except among tax specialists. I feel that since this represents a complete departure, a completely new method in the treatment of multiple trusts, the proposed statute certainly in the case of trusts which are not of the more flagrant type, should be made applicable only to trusts created after the passage of the proposed statute, or in any event, trusts created after the report of the Ways and Means Committee proposing specific legislation.

The CHAIRMAN. You would not apply the rule to income of trusts which are already in existence and which is derived after the enactment of the bill or the announcement.

Mr. CRAVEN. Not in the case of trusts which are not of the more flagrant type.

The CHAIRMAN. How would you define the kind of a trust to which you would apply the rule?

Mr. CRAVEN. That is already defined in the statute. There is an exception under the proposal of the advisory group. The proposed statute would be made applicable to all trusts regardless of when created when more than five trusts are created by the same grantor with substantially the same provisions, with the same trustee, and in the same taxable year.

I do not object, particularly, to that effective date. But in the case of all other trusts, that is, where the same grantor merely creates more than one trust for substantially the same beneficiary, regardless of why he happened to create those trusts, those trusts were created under statute which taxed them separately, and where the rules are changed drastically as the group proposes to do in the case of multiple trusts, I think the change should be made applicable to only trusts created after the taxpayers generally are made aware of what the proposed legislation would be.

The CHAIRMAN. I wonder if you do not attribute to trusts a lot more sanctity than accorded to the individual. Do we not increase taxes with respect to individuals who begin to work after the enactment of the law? We increase taxes with respect to the income of all individuals derived after the enactment of a new premium or new rate.

I wonder if it is not fair to apply the rule with respect to future income of a trust that may have been created in the past. I am talking about income derived after the enactment of legislation.

Mr. CRAVEN. I do not think so. Congress has always been careful to prevent a statute from operating retroactively where it is too late

to change what the taxpayer has already done. That is particularly true in the estate and gift-tax field. It is true that in some areas statutes in the income-tax field, a change was made in the rules applicable to something transferred irrevocably prior to the passage of the statute. This represents a drastic change.

In many cases trustees have accepted trusts with the understanding that the trust would be taxed in a certain way. Under the proposed statute if the same grantor creates a trust with a New York trustee, a California trustee, and a Kansas trustee, each trustee will have to find out what income each of the other trusts has. He is charged with the duty of furnishing sufficient information to enable the trust ble only to trusts created in the future.

I think in a good many of those cases the trustees would not have accepted the trusts if they understood they would be taxed in this fashion. It will increase the expenses of the trustees. I feel it would be more equitable if the rule in this particular area is made applicable only to trusts created in the future.

The CHAIRMAN. Is there the thought that Congress would be taking on the role of a despot if it taxed future income from trusts existing in a way different from that which was in effect at the time the trusts were established? You would not attribute to us that despot's role, I know. You will recall Justice Cardozo's statement in the case of Irenee du Pont in the Supreme Court to the effect that one who retains for himself so many of the attributes of ownership is not the victim of despotic power when for the purpose of taxation he is treated as owner altogether, so also one who takes advantage of benefits which he was not entitled to runs the risk of losing those benefits. I do not believe any constitutional question is presented here.

Mr. CRAVEN. I do not think there is any constitutional consideration involved. It is purely a question of what is most equitable under all the circumstances.

The CHAIRMAN, In other words, if they are enjoying tax avoidance, we should let it continue.

Mr. CRAVEN. It is very difficult to distinguish between something that is or is not a tax-avoidance device. I think the more flagrant cases would probably represent tax avoidance taxes. The others do not necessarily do so.

The CHAIRMAN. Thank you very much.

Mr. MASON. I have a question right there. Here is a flagrant case. We have taken care of it. Here is a case that is absolutely to the other extreme. You are pleading for that. But what about all these cases in between in the twilight zone? Who is going to decide whether it is flagrant or just a little flagrant?

Mr. CRAVEN. That has to be done in a more or less arbitrary fashion. I think we can all agree where the same grantor grants five trusts with the same trustee every year in the same year with substantially identical provisions that represents flagrant abuse. We can find cases on the other side that would not represent any abuse at all. We cannot say in the case of trusts that fall in between. I think those will just have to take their place in the statute.

Mr. MASON. If the statute does not distinguish a dividing line, then the department of revenue will have to in their rules try to place a dividing line in between the two extremes. They would have just