chase of these certificates. They then, in fact, become a sinking fund or a reserve against payment of his death taxes.

At the time of his death they may be redeemed at face value in payment of his estate taxes.

There are other provisions in the bill, more technical in nature, designed to prevent the abuse of this system or use of the certificates for investment purposes or for income-tax dodges or anything like

that.

Basically, that is the principle involved. The effect of it to the Government would be that by purchase of these certificates, the man will be paying in cash to the Federal Government in the year of purchase an amount which would exceed his income tax savings. So, in effect, the Government would get more cash at the time he buys his certificates, which would be now, when the Government is in need of money.

Later on when the certificates are redeemed in payment of estate taxes, of course, the redemption would not constitute any payment of cash to the Government, but would be a wiping out, in effect, of the estate-tax payment to that extent.

So these would be a reduction in income to the Government in some future years in the amount of these redemptions.

Mr. BAKER. As far as the impact on present revenue, instead of a loss at the moment and for the next few years, with certificates, the Government would get more money?

Mr. JOHN MASON. That is correct, sir; it would get more money. And, in addition, the use of the money would be interest free, which would in effect perhaps replace some of the national debt.

Mr. BAKER. One witness testified last Friday, first, that the revenue loss under the 10-year statute was $34 million. He did not mean loss. He meant lag, gradually decreasing. Thirty-four million dollars is not much compared to $74 billion.

But by adding the second part of this proposed legislation, there could be no lag conceivably, could there, but substantially an increase of income?

Mr. JOHN MASON. That is correct, sir.

Mr. BAKER. That is the important thing, the best thing we hope, for the next 3 or 4 years. We hope after that time we will have a longer range view and not have to look at this year's cash income. Mr. JOHN MASON. I agree with that.

I would like to add one more additional point. I realize that this committee would like to have facts and figures and precise predictions of what the tax effect would be of any measure which they consider. Unfortunately there is one aspect of this bill which we cannot pin down. We cannot tell you what the effect of it will be in dollars, but I think I can tell you from our own community, and I am sure people from all over the country would also tell you, that there is a tremendous force driving small-business men to sell their businesses because they cannot meet all of the demands of the business and capital requirements, plus anticipation of death taxes.

I think that the effect of all these mergers and taking productive. men out of productive businesses and having them live on investment income instead must have an effect on the internal revenue of the United States; it must have an effect on reducing the total income in this country, the production of goods, and, therefore, reducing the

amount of income taxes which the Federal Government is able to collect.

Now, I cannot measure that for you; I can't predict it, but I know it is an important factor.

The CHAIRMAN. Are there any further questions?

If not, we thank you, Mr. Roberts and Mr. Mason, for your appear ance and the information given to the committee.

Mr. ROBERTS. Thank you, Mr. Chairman.

The CHAIRMAN. Is Mr. E. J. Grassman present?

The Chair understands he may have been delayed in his flight to Washington.

Is Mr. Manly Fleischmann present?

STATEMENT OF ALBERT R. MUGEL, ATTORNEY, BUFFALO, N. Y.

Mr. MUGEL. Mr. Chairman, Mr. Manly Fleischmann is unable to be here because of illness.

My name is Albert Mugel. I am a partner of Mr. Fleischmann, an attorney, practicing law in Buffalo, N. Y.

The CHAIRMAN. I did not get your name.

Mr. MUGEL. Mugel, M-u-g-e-l.

The CHAIRMAN. Mr. Fleischmann was to be heard for 10 minutes, and you desire to make a statement in his stead?

Mr. MUGEL. Mr. Chairman and members of the committee, I am present here today speaking as counsel to Ann O. Kennedy, and others, as trustees of a living trust created by Helena W. Shire, dated October 27, 1952.

We appreciate the great privilege of appearing before this committee and testifying on what we believe is an important aspect of tax revision.

We wish to propose that the income tax law be amended so as to five give full prospective effect to a significant change in the income tax that was made by the Congress in the Internal Revenue Code of 1954.

Specifically, I am speaking of section 1014 (b) (9) of the Internal Revenue Code of 1954, which grants a date-of-death basis for determining gain or loss on the sale or exchange of property which was acquired from a decedent and required to be included in his gross estate for estate tax purposes.

Prior to the Internal Revenue Code of 1954, and for many years under the Internal Revenue Code of 1939, and prior acts, the general principle had been established that a date-of-death value would be used as the basis for property which was received by reason of the death of a decedent.

However, the 1939 code and prior acts had permitted this date-ofdeath basis only in those cases in which the property was technically a part of the decedent's probate estate and in certain other limited but described situations.

The result was that most property which was included in the decedent's gross estate for estate tax purposes was given a date-ofdeath basis in the hands of the taxpayer when he came to sell or exchange his property.

However, not all property was covered under the 1939 code. For example, property that had been received by gift in contemplation of

death or property that had been held jointly even though that property was required to be included in the gross estate for estate tax

purposes.

In 1954 Congress recognized this inequity and cured it by inserting section 1014 (b) (9), which stated specifically that property which was required to be included within the gross estate of the decedent for estate tax purposes would be considered as acquired from the decedent and thereafter entitled to the date-of-death basis.

This committee and the Finance Committee of the Senate stated that

There appears to be no justification for denying some property included in the decedent's gross estate for estate tax purposes a new basis at date of death while giving this new basis in most cases.

The result of the amendment in 1954 by the enactment of section 1014 (b) (9) was to allow a date-of-death basis in the case of property acquired in contemplation of death and in the large number of cases of property held jointly, particularly held by the entirety between husband and wife.

This section, I believe, is notable in that it first cured an unwarranted discrimination.

Second, it moved toward correlation of our income tax law with our estate tax law; and

Third, it moved or tended toward simplification of our law in that the date-of-death basis was granted on a single pertinent condition-— the inclusion in the gross estate for estate purposes-rather than, as previously, based upon a described set of varying conditions which would allow such a basis.

You would expect that Congress, having recognized this previous unwarranted discrimination, would have made the amendment of section 1014 (b) (9) fully prospective and applicable to all taxable events which would be covered by the new Internal Revenue Code of

1954.

However, Congress did not do so, but inserted as a preface to section 1014 (b) (9) the statement:

In the case of decedents dying after December 31, 1953.

They thereby limited the prospective application of section 1014 (b) (9) and continued the inequitable rule of 1939 code into the Internal Revenue Code of 1954.

is

This creates a serious inequity. The date of death of the decedent essentially irrelevant to the question of the determination of the amount of gain or loss on the sale or exchange of property.

An example of the unfairness that results from this may be illustrated as follows:

Suppose we have two donees who receive identical gifts from donors at about the same time prior to December 31, 1953. Each gift was made and ultimately held to be in contemplation of death. Each donor had acquired the property for the same cost of $10,000 and the property in each case was required to be included in the donor's estate for estate tax purposes at a value which has now increased to $100,000. Each donee continues to hold the property until, we will say, 1957, or 1958, and then disposes of the property. The only difference is that in one case the donor happened to have died shortly before the

beginning of 1954, while the other donor survived the year 1953 by a few days.

The tax result, however, is entirely different. The donee who re ceived the property from the donor who died prior to January 1, 1954. will have to pay a capital gains tax on $90,000, while the donee who received it from the donor who died after January 1, 1954, will pay no capital gains tax on it, assuming that it is sold for the same value that it had in the estate.

The effect of what Congress has done by inserting the statement, “In the case of decedents dying before December 31, 1953," is to continue the discrimination that it has recognized in preexisting law into years which are in fact covered by the Revenue Act of 1954.

No reason is stated for this prefacing clause, except in this committee's report the statement is made that Congress did not wish to disturb existing bases.

However, I believe this ignores the fact that the income-tax consequences of a sale or exchange are controlled by the law that is then in effect.

The basis of the property is determined under the law that is in effect at the time of the taxable event and not at the time of the acquisition of the property.

I might illustrate this in this way:

Beween the years 1921 and 1928 the Revenue Act permitted a dateof-death basis on property which was acquired by gift in contemplation of death.

In 1928 the law was amended and the date-of-death basis was removed in cases of property acquired by gift in contemplation of death. A donee had received property in 1924 at a time when the law permitted a date-of-death basis, but he sold the property in 1929 when the date-of-death basis was not permitted.

The Treasury Department and the courts have consistently taken the position, and the law is settled, that the date-of-death basis is not available to that taxpayer because the law in effect at the time of the sale is controlling.

In talking about this I have assumed that the effect of this prefacing clause to section 1014 (b) (9) is to prevent a date-of-death basis in the case of decedents who died prior to December 31, 1953.

But this is not completely so. There is a real area of doubt as to what the law is as to a sale or exchange of property after December 31, 1953, where the property has been acquired from a decedent who died prior to January 1, 1954.

Let me use an illustration to point out why I believe there is considerable doubt.

Assume that a person acquired property by a gift which was ultimately held to be in contemplation of death and acquired the property back in 1923 at a time when the law provided that a date-of-death basis was to be used in determining gain or loss on the sale or exchange of property.

But he held the property over the period of years. The date of death, we will say, occurred shortly after the date of gift. He held the property beyond 1928, when the law was changed. He held it through the period when the 1939 code went into effect and into the period of the Internal Revenue Code of 1954.

What is his basis in the property? Is it based under the 1924 act, the act that was in effect when he acquired the property, which, incidentally, allowed the stepped-up basis?

It is clear that it is not, under judicial determination and under the Treasury's consistent position.

Can it be the law that is in effect under the 1939 code? It cannot be because nothing happened while the 1939 code was in effect, nor can it be because the 1939 code has been repealed by the 1954 code as to taxable events that happened in a taxable year commencing after December 31, 1953.

The CHAIRMAN. You have consumed more than the 10 minutes. Could you conclude your remarks in a few seconds?

Mr. MUGEL. Yes, Mr. Mills.

The CHAIRMAN. If you will, and you do want the entire statement of Mr. Fleischmann to be included in the record?

Mr. MUGEL. Yes.

The CHAIRMAN. Without objection it will be included.

Mr. MUGEL. We believe that there is a considerable area of doubt, a considerable hiatus in the law as it now exists, and a void which, from the point of equity, should be cured to prevent a serious discrimination; we believe that the Congress rather than the courts should resolve this area of doubt.

I would like to thank this committee for the opportunity of appearing before you, and I would like to urge this committee to give serious consideration to an amendment of section 1014 (b) (9) as I have indicated.

(The prepared statement of Mr. Fleischmann is as follows:)

STATEMENT OF MANLY FLEISCHMANN, OF BUFFALO, N. Y., REPRESENTING ANN O. KENNEDY, ET AL., AS TRUSTEES UNDER TRUST AGREEMENT WITH HELENA W. SHIRE DATED OCTOBER 27, 1952, WITH REFERENCE TO PROPOSED AMENDMENT OF SECTION 1014 (B) (9) OF THE INTERNAL REVENUE CODE OF 1954

AMENDMENT PROPOSED

To amend subsection (b) (9) of section 1014 of the Internal Revenue Code of 1954 by deleting therefrom the following words of the first sentence: "In the case of decedents dying after December 31, 1953,"

PURPOSE OF THE AMENDMENT

It has long been established as a general principle of our income tax law that property transferred as a result of the death of an individual receives a new basis at the date of death equal to its then market value (or value 1 year later if the estate tax optional valuation date is used). Under the Internal Revenue Code of 1939 and prior revenue acts this equitable rule applied to property that was technically part of the probate estate of the decedent and to property transferred by certain other specifically described transfers which required inclusion in the gross estate for estate tax purposes. While this covered most property which was required to be included in the gross estate for estate-tax purposes, it did not cover all such property-for example, property received by gift in contemplation of death.

Subsection (b) (9) of section 1014 of the Internal Revenue Code of 1954 was intended to correct this patent inequity and makes the basic rule generally applicable to all property acquired from the decedent which is required to be included in his gross estate for estate tax purposes. In proposing this subsection the reports of the committee of each House state: "There appears to be no justification for denying some property included in the decedent's gross estate for estate-tax purposes a new basis at date of death while giving this new basis in most cases." (H. R. Rep. No. 1337, 83d Cong., 2d sess. 78 (1954); Sen. Rep. No. 1622. 83d Cong., 2d sess. 107 (1954).)

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