The CHAIRMAN. Mr. Heller, we thank you very much for coming to the committee and giving us the benefit of your views on these very important matters.

Are there any questions?

Mr. MASON. Yes.

The CHAIRMAN. Mr. Mason will inquire.

Mr. MASON. You have presented a very thought-provoking paper to us, Mr. Heller.

Mr. HELLER. Thank you, Mr. Mason.

Mr. MASON. I just have two questions.

One is, can you account for or explain briefly why Uncle Sam was satisfied 20 years ago with 25 cents out of every tax dollar collected, leaving 75 cents to the States and local communities, and now he is demanding 75 cents out of every tax dollar collected, leaving only 25 cents to the States and local communities for their use?

Mr. HELLER. Mr. Mason, I think the answer is to be found both in economic emergencies and in military emergencies that shifted the balance.

As a matter of fact, the figures that I have used at times were that in the late 1920's it was 20 cents Federal and 80 cents State-local, and by the end of World War II it was 80 cents Federal and 20 cents State-local. But since World War II, the balance is being somewhat redressed. That is, the local and State expenditures are up to about 30 percent, and the Federal down to 70 now, instead of their being 20 and 80.

Mr. MASON. Would you give the reason as the additional military expense?

Mr. HELLER. Very largely. It is the additional military expense, though, needless to say, the addition of many social programs, welfare programs in the thirties, had a great deal to do with it.

Mr. MASON. The additional military expense would only mean that Uncle Sam would take 50 cents now and leave 50, approximately.

Mr. HELLER. Yes. There is no doubt that the great expansion in the thirties had a lot to do with it. However, it is interesting that the social-welfare expenditures of the Federal Government have not expanded proportionately either to the military or to the State-local in the postwar period.

Mr. MASON. My second question concerns your suggestion to give a kickback to the States of 5 percent for personal income tax collected from each State. That, to me, sounds very, very logical, and a kickback means that they could use it for anything they please, with no strings attached to it. If they were hard up for educational funds, they could use it for that. If they were hard up for something else, they could use it for that.

It seems to me that that is a very logical thing, and I am for it a hundred percent. Uncle Sam has, in general, better means of collecting income tax than to just simply say, "I will keep 95 and you may have 5 back.”

That is all, Mr. Chairman.

The CHAIRMAN. Are there any further questions of Mr. Heller?
Mr. MCCARTHY. Mr. Chairman?

The CHAIRMAN. Yes. Mr. McCarthy.

Mr. MCCARTHY. I would like to compliment the chairman for having Mr. Heller come down to testify. Of course, the members of this

committee know his reputation as an expert in the academic field, particularly with respect to taxes and the general economy of the country. I want to express my appreciation to him for accepting this invitation and coming in to testify here today.

You may recall yesterday a witness was complimented because whereas he was an academic man, he was also practical. We could also say that of Mr. Heller, and note that in addition to possessing the ordinary virtue of being practical, he possesses the highest, I would say, of the practical virtues, that of appreciating the politics of his problems.

The CHAIRMAN. Are there any further questions?

If not, we again thank you, Mr. Heller, for coming to the committee and giving us the benefit of your views.

Our next witness is Mr. Charles W. Davis.

Mr. Davis, although we know you well and recall your service to the committee, for the record will you please give your name, address, and the capacity in which you appear?

Mr. DAVIS. Thank you, Mr. Chairman.

STATEMENT OF CHARLES W. DAVIS, CHAIRMAN, COMMITTEE ON FEDERAL TAXATION, CHICAGO BAR ASSOCIATION, CHICAGO, ILL., ACCOMPANIED BY LEONARD M. RIESER, AUSTIN FLEMING, ROBERT W. MANLY, AND MAX MEYER

Mr. DAVIS. Mr. Chairman, I am Charles W. Davis, an attorney, of Chicago. I appear today as chairman of the committee on Federal taxation of the Chicago Bar Association. With me at my far left is the vice chairman of our committee, Mr. Max Meyer, and there are three other members of our committee whom I shall introduce as they speak on the various subjects.

Mr. Chairman, the committee on Federal taxation of the Chicago Bar Association appreciates very much the opportunity to state the views of our committee on certain phases of tax revision now under consideration.

Our committee consists of approximately 40 attorneys in the Chicago area who are particularly interested in the Federal taxing statutes from the standpoint of certainty, ease of administration, and compliance, and the impact of Federal tax laws upon other important areas of the law. We have studied the Internal Revenue Code of 1954, and have followed closely the development of the regulations which have been promulgated under it and the administrative rulings interpreting it. We have also undertaken, through the organization of subcommittees, to review carefully the reports of the advisory groups to the Subcommittee on Internal Revenue Taxation on subchapters C, J, and K, and it is with reference to the recommendations of those advisory groups that our views are submitted.

Mr. Leonard M. Rieser, on my left, will give our preliminary views upon the report of the advisory group on subchapter C, Mr. Austin Fleming, on my immediate right, will present our recommendations regarding the reports of the advisory group on subchapter J, and Mr. Robert W. Manly, on my far right, will cover our views on the reports of the advisory group on subchapter K.

At this time, Mr. Chairman, Mr. Rieser will present our preliminary views on the report of the advisory group on subchapter Ĉ.

Mr. RIESER. Mr. Chairman, we had hoped we would be in a position to present definite and detailed views on the proposed revisions of subchapter C. This is an extremely important and sensitive area of tax law, and the suggestions of the advisory group are numerous and far reaching. Believing that it is our duty to scrutinize them carefully and responsibly, we have had a special subcommittee working steadily to study the recommendations and present its findings to our entire committee. But despite the best of intentions and almost daily meetings, we have been unable to complete more than a fraction of the work which the report demands.

Under these circumstances, we normally would refrain from offering comment. However, we believe that certain general reactions of our group, which crystallized during our discussions, might be of sufficient interest in your review of the work of the advisory group that we should communicate them now, and ask leave to file a full statement of views when our study has been completed. In this vein we wish to call attention to the following:

1. Our experience with reviewing the advisory report suggests that the bar requires considerably more time to think about the proposals. Many of them would affect a wide range of corporate transactions which have numerous and varying tax aspects. It is therefore difficult to trace through the consequences of the proposals and form sound judgments as to their merits.

2. Even after the suggestions have been weighed on their merits, we urge caution in enacting a multitude of changes in the subchapter C area. The bar had to undergo a major reeducational effort as a result of the 1954 code, which enacted some major modifications in the technical law. Unless there is strong need to overhaul particular provisions, it would seem unwise to make necessary another broad reeducational effort so soon.

In saying this, we are aware that some hardships and some loopholes have been uncovered. But we believe that unless the hardships are shown to be seriously oppressive, or the loopholes are shown to be widely exploited or a significant drain on the revenues, it is generally better to live with the existing system rather than to rush to undertake basic alterations.

The proposal to eliminate statutory mergers and consolidations as a separate category of tax-free reorganizations can be used to illustrate this point. For over 30 years statutory mergers and consolidations have been given tax-free treatment. It would require a substantial shift in practices if statutory mergers and consolidations were now to be awarded tax-free treatment only if various code qualifications were satisfied. In other words, in general we urge that change itself carries a cost which should be weighed in the balance so as to provide a brake against continuous revision of our technical tax law.

3. Some of the proposals involve introducing into the corporate area concepts new to it. For example, one proposal calls for changing the long-standing rule that generally on liquidation of a corporation, gain or loss to the shareholder is recognized and the assets received in the liquidation then have a fair-market-value basis in the hands of shareholders. In its place, the revision would substitute a rule under which gain is to be postponed and the corporate basis for the assets is to be carried over to the shareholders. A similar arrangement is embodied in the existing subchapter K, covering partners and

partnerships. Considerable dissatisfaction has developed with its operation, and we are far from sure it will prove workable even in the partnership field, which is logical, since the partner is not a separate entity. The advisory group nevertheless recommends that it be imported into the corporate area, which is both illogical and far more extensive, and embraces complicated liquidation situations.

4. Without intending to imply that subchapter C can feasibly be simplified, we are impressed that some of the proposals surely add substantially to its complexity. By way of illustration, we cite the suggestion that would considerably refine the test for determining when a sale of corporate assets will be tax free at the corporate level if the corporation is liquidated pursuant to plan. These refinements are largely designed to help taxpayers by loosening the rigidity of the present test. We feel, however, that making an exception to an exception is the wrong way to accomplish simplification. If change is needed, more thought should be given to substituting a test which is less a matter of form and which goes to the realities of the situation. Perhaps it would be possible to eliminate hardships and simplify the law here by providing that sales at the corporate level are to be tax free if the corporation is in the process or liquidating and with reasonable dispatch, considering all the circumstances, both disposes of its assets and makes liquidating distributions to shareholders.

In presenting these negative preliminary reactions to the report of the advisory group on subchapter C, we do not wish to be understood as concluding that the proposals are without merit. Some of them are certainly sound, and our later detailed submissions will point out areas of agreement. Others raise interesting questions, which also will be noted. However, we believe that the general attitudes which we have conveyed today go to the heart of the matter. We hope that they will be taken into account in dealing with the advisory group proposals. Above all, we hope that patient and reflective examination and analysis will be the keynote to tax revision in this most technical and complicated of areas.

Thank you.

Mr. DAVIS. Now, Mr. Chairman, Mr. Austin Fleming will present the views of the Committee on Federal Taxation of the Chicago Bar Association on subchapter J in the report of the advisory group.

Mr. FLEMING. Mr. Chairman and members of the House Ways and Means Committee, the 1954 code made substantial changes in the sections dealing with the taxation of estates and trusts. In the monumental job of getting the code assembled and enacted, it was to be expected that rough edges would develop here and there, and this proved to be particularly the case in subchapter J, which deals with the income taxation of estates and trusts. Subchapter J is probably one of the most important parts of the code, and affects thousands of widows and children who are beneficiaries under estate arrangements created by fathers and husbands, and also every other American citizen, even those of us in this room with sufficient assets to require probate at the time of death.

To say that there were rough edges in this particular subpart is probably the understatement of the year. This committee is to be commended for seeking the assistance of an advisory group of such high caliber, in endeavoring to smooth out these provisions. We think that the advisory group on subchapter J has done a sound job, and that

their recommendations are 9944100 percent ready to go in the form of legislation. Their recommendations are extremely important and will materially improve the practical administration of the 1954 code in this area.

As practicing lawyers who represent these beneficiaries and executors, we wish to be recorded in support of the changes recommended by the advisory group on subchapter J. While these changes may appear to be technical on their face, they are extremely important aspects of the tax structure. They are not intended to and will not affect the revenues or budget considerations significantly one way or the other. Their purpose, rather, is to make these statutory provisions, which are now highly unsatisfactory from the point of view of workability and practical application, infinitely more workable and equitable and satisfactory both for the Government and for the taxpayer.

While we strongly concur in the recommendations which Professor Casner and his group have submitted, there are two aspects of the minority reports which are a part of their submission where we think that those minority reports are better than the majority report. Both of these aspects relate to trusts that have more than one beneficiary. The first aspect relates to the way in which beneficiaries, where you have a trust with more than one beneficiary, are grouped together for purpose of telling what part of the aggregate distributions will be taxed to any given year to a given beneficiary. The second aspect relates to the treatment of charitable distributions.

It is the scheme of the code that a trust is simply a conduit through which the earnings of a trust pass to the beneficiaries and are ultimately taxed in their hands. But not all funds that are distributed to the beneficiaries in a given year will necessarily be taxed to them. There may be corpus deductions, depletion and depreciation allowances or nontaxable interest on municipal bonds which will reduce taxable income, or the distributions may represent income accumulated from prior years or even a part of principal itself. In any given year, when more funds are distributed than are subject to tax, rules must be established for determining the amount which is taxable in the hands of each beneficiary in the group.

In this connection, the 1954 Čode draws some very arbitrary distinctions which have given trustees and beneficiaries and their lawyers and accountants no end of difficulty and have caused no end of complaint. I think the best way to illustrate these difficulties is to give an example.

Take, for example, a trust that has $10,000 of earnings in a given year. Under the will, the trustee is directed to pay half of the income from that trust to the widow for her life. The other half of the income is directed to be paid to a child as, for example, a son, but only so much of the income of that half as the trustee considers proper or for his best interests; in other words, a discretionary arrangement as regards that child. Then, in this illustration we are citing, the will also directs that if an aged mother survives, she is to be paid $5,000 a year from principal.

Let us assume that in a given year the trustee pays out $5,000 of the $10,000 of income to the widow and in the exercise of its discretion pays out another $5,000 to the son, and also carries out the direction to pay $5,000 from principal to the aged mother. In determining to