ction 105(a) 501(b)(3) 501(d) 501(e) 511 6654 242 The amount of credit or refund which will require a report to the Joint Committee should be increased to $200,000. 243 The statute of limitations should run for a fixed number of years if no return was filed by a taxpayer because there was reason to believe, in good faith, that the taxpayer was an exempt organization. 244 Where a prompt assessment is requested, the limitation period in the case of omission of 25% of gross income should also be cut in half. 245 The period of limitation on filing a claim for refund should not run against the taxpayer prior to the time that the period on assessment runs against the government. To accomplish this: (1) Section 6511(a) should include the time for which an extension was granted. (2) Sections 6513(a) and (b) should take into account an extension of time for filing. It is most important that this change be retroactive to the effective date of the 1954 Code. 246 The addition to the tax should not apply to a taxable year if the taxpayer dies during such taxable year or during the first 15 days of the succeeding taxable year, even though a joint return is filed for the deceased taxpayer and his surviving spouse. Section 6654(b) 6654(d) 6655(d) 247 Since the penalty is always computed by reference to the 70% of the actual tax shown on the return of the curren year, $1 underpayment in an estimate that is based on last year's tax, or last year's income, can bring about a substantial penalty. This should be corrected. The penalty should be based on the deficiency calculated with reference to the most favorable safety zone. 248 It should be made clear that where a taxpayer's return for the prior year showed no liability, the penalty for underpayment should not be applicable for the current year. 249 6654(d)(2) 7206(1) 7502(a) A taxpayer who has fluctuating or irregular income, and who has to amend his declaration of estimated tax, may become subject to the penalties of section 6654 even though he complies literally with the amending and paying requirements of section 6153(c). This should be clarified. An illustration is where a taxpayer using the 90% method estimates his tax for the first declaration on his actual taxable income to date of $1,000, and, at the time for the second installment, based on his actual taxable income to that time of $4,000. 250 Any criminal penalty should be affirmatively eliminated where a declaration of estimated tax is based on last year's tax or income, even though the taxpayer knows the current year will show a higher income. 251 The date of mailing of a return should be treated as the date of filing. Mr. JENSEN. I think that part of my team may have to leave for a plane, so I will proceed. The CHAIRMAN. All right, sir. You are recognized. Mr. JENSEN. In the CPA's services to the business community, objectivity and the exercise of independent judgment are essential. In our work as a committee we strive to maintain the same objectivity and the same exercise of independent judgment. In preparation for these hearings, our 50-member committee held. a series of meetings late last year. We adopted 251 recommendations for amendments to the Internal Revenue Code. Our recommendations are intended to deal with some of the imperfections, uncertainties, hardships, and unintended consequences which have come to our attention and which we believe merit the consideration of Congress. Some of our suggestions favor the Government, some the taxpayer, and some cut both ways. We intend to submit a copy of these recommendations as an extension of this statement. In the course four work as a committee, we review such materials as tax legislation introduced by Members of Congress, and the reports of the Advisory Groups to the Subcommittee on Internal Revenue Taxation of the Committee on Ways and Means. Last fall, we submitted written comments on the May 1957 reports on subchapter J (estates, trusts, beneficiaries, and decedents) and subchapter K (partners and partnerships) to Mr. Colin F. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation. The reports of the advisory groups on subchapter C (corporate distributions and adjustments), dated December 24, 1957, and subchapter K, dated December 31, 1957, were released later than anticipated by us in scheduling meetings in preparation for these hearings. We have not had sufficient time to review these two reports and to evaluate the many suggestions contained therein. Our subcommittees responsible for subchapters C and K will be meeting next month, after which we will be able to furnish you with comments on these reports. We have already discussed the revised report on subchapter J, dated November 22, 1957, with Mr. Stam, members of his staff, and the chairman of the advisory group, Prof. A. J. Casner. At a later date, we will file for the record a supplemental statement furnishing our comments on that report. The CHAIRMAN. How long will it be before you could have your comments available? Mr. JENSEN. We think we can get it in within the next 2 or 3 weeks. The CHAIRMAN. Let us give you consent to put it in the record providing you can get it to the committee in time for inclusion. Is there objection? The Chair hears none. Mr. JENSEN. Thank you, sir. (The information is as follows:) AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, Representative WILBUR D. MILLS, New York, N. Y., February 20, 1958 Chairman, Committee on Ways and Means, House Office Building, Washington, D. C. DEAR MR. MILLS: In accordance with our committee's oral statement before the Ways and Means Committee, we are enclosing five (5) copies of a memo randum on the revised report of the advisory group on subchapter J. The memorandum discusses multiple trusts, final returns of a beneficiary, and income for the benefit of the grantor, plus the allocation of depreciation and depletion deductions (a subject not covered in the advisory group report). Although we are not in complete agreement with the proposed 4-tier system, or the ineffective changes suggested for treating sprinkling trusts, we are not prepared to offer any substantial criticism of the problems involved; we do not wish at this time to comment on the throwback rule. Accordingly, these portions of the report are not discussed in the memorandum. Except where we have otherwise commented, our committee is generally in agreement with the advisory group and we commend the group for its effort to improve the law. More particularly, our thinking is in harmony with those portions of the report dealing with the dividend exclusion, section 642 (a) (3); charitable beneficiaries, section 642 (c); separate shares rule, section 642 (h): capital gains, section 643 (a) (3) (B); corpus deductions, section 643 (a) (3) (C); separate shares of estates, section 663 (c); amounts set aside for charitable beneficiaries, section 663 (d); persons other than grantors as owners, section 664; corporate grantors, section 671; limitations on contributions, section 681. This opportunity to supplement our earlier testimony is appreciated. We shall continue to study the report of the advisory group and will furnish you with any additional comments. As in the past, we will be happy to meet with your advisers to whatever extent we may be of assistance. Sincerely, WALLACE M. JENSEN, General Chairman, Committee on Federal Taxation. Chairman, Subcommittee on Estates and Trusts. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS COMMITTEE ON FEDERAL TAXATION Memorandum on Advisory Group Report on Subchapter J, Submitted to Committee on Ways and Means of the House of Representatives Effective date SECTION 641 (c)-MULTIPLE TRUSTS Except for certain cases cited on page 9 of the revised report, the advisory group has suggested that the proposed amendment for taxing multiple trusts should be effective as to trusts created after December 1, 1956. We are not in favor of any retroactive application of the proposed amendment. The list of unintended benefits and hardships, dated November 7, 1956, merely stated that the problem of multiple trusts was under study. In our opinion, it would be unwise and unfair to make tax legislation effective as of the date a problem is first announced as being under study. For the purpose of selecting an effective date, the announcement date of a study is inadequate. It has been traditional to use an effective date no earlier than the announcement of a decision of a Congressional committee. Then some statement is available as to what treatment taxpayers may expect. Even if legislation on multiple trusts were enacted this session, we have a minimum of a 15- to 18-month period during which time no one knows what rules will be applied. Taxpayers should not be expected to suspend all actvity because of an announcement that a problem is under study. This is particularly true in the trusts area where, in most instances, instruments cannot be changed. We would be in favor of making the legislation effective as to trusts created after approval of the advisory group proposal by the Ways and Means Committee. Definitions The proposed amendment takes effect where a grantor establishes a series of trusts for the same primary beneficiary. No statutory definition of these terms is provided, although the advisory group offers extensive explanatory comment. We recommend that as a minimum some language be added to the statute, defining primary beneficiary as the one first entitled to the accumulated income allocated to corpus where there is an order of succession with respect to such income. (See advisory group report, p. 4.) Equally necessary is a statutory definition of grantor. On pages 8 and 9 of the revised report, the advisory group suggests the possibility of multiple grantors. Thus, to the extent of a particular grantor's contribution, only portions of various trusts may be taxed as one trust. This can lead to extreme complications in computation and verification of tax. For example, it would be possible for a grantor to make a 10 percent contribution to one trust, 40 percent to another, 60 percent to another, and so forth. It is believed that a test of substantiality should be adopted. If a grantor substantially contributes to a trust, the entire trust should be joined. Contributions would be valued for this purpose as of the date of contribution since fluctuation in value should not require combining, or possibly, later separation. We suggest the use of a percentage, say 50 percent, as the test for a substantial contribution. Admittedly, such a test sets a boundary for permissive activity which the amendment seeks to control. However, the complications of a proportion test seem less desirable. If necessary, the percentage could be made low enough to limit avoidance substantially. Attribution rule for grantors Further rules are required for identifying the grantor. Statutory rules of attribution would be desirable. The advisory group comments on page 5 of the revised report that an individual may be the grantor of a number of trusts if it can be shown that he gave property to others (members of his family) with the understanding that each would establish a trust with the property. This is proper, but suppose an individual establishes three trusts at the minimum 60month intervals, and his wife establishes 3 more during this period for the same beneficiary. Other members of the family may also create such trusts. It may be difficult to prove the existence of any understanding if there have been earlier gifts of property, or the trusts may be established by each grantor from his own resources. In the case of a husband and wife in a community property State, this is not even necessary as the wife could use her interest in community property to establish the trust. A rule of attribution, similar to that of section 318 (a), is needed. Portion of year to be taxed The proposed amendment indicates that the trusts may be taxed as one for only a portion of the year. This could present burdensome administrative problems in ascertaining the income for that portion of the year. It would seem simpler to tax the trusts as one for the entire year if statutory conditions are met at any time during the year. Calculation of the tax-a one-way street The proposed amendment provides an unfair exception. The trusts are not taxed as one where such a computation results in a lower tax than the aggregate of the separate taxes of each trust on its accumulated income. This is a one-way street in the Government's favor. If the trusts are to be taxed as one, this should be so regardless of whether a higher or lower tax results. Effect of a foreign trust While it may appear to be a limited problem, consideration should be given to the effect of a foreign trust. For example, assume there are three existing trusts created at the proper interval. Suppose the grantor creates a fourth trust in a foreign jurisdiction. If the fourth trust were a domestic trust, all four trusts would be taxed as one under the proposed section 641 (c). However, neither the statute nor the comments indicate what should be done if the fourth trust were a foreign trust. It is suggested that if either the grantor or primary beneficiary is a United States resident, the domestic trusts should be taxed as one, even though the income or deductions of the foreign trust would not be included since it is not subject to United States taxation. Accounting periods and methods The proposed amendment would give the Secretary or his delegate power to require the trusts to report on the basis of the same taxable year and to use the same method of accounting. Unquestionably, differences in taxable years should be eliminated. Rather than leave the details to regulations, it would be simpler for the statute to permit the trustees to select the taxable year of any of the trusts as the taxable year of the group. If the trustees are unable to agree, then the Secretary or his delegate could prescribe a calendar year. |