tracts with my father when the business was in such terrible condition, which provided that all the tax had been paid.

My father died within 3 weeks before the statute of limitations had run, and I was assessed this high tax.

I simply could not afford to fight it. The interest on the tax was mounting. So I paid this tax out over a 5-year period, but that meant this:

I did not know from day to day, year to year, whether I could meet these payments. It meant that I lived in a state of anxiety 24 hours a day for 5 years. It was like meeting a $50,000 fine and 5-year prison sentence of anxiety.

Now, not many people are going to put up with that in order to remain independent. That is why I don't think this 10-year installment provision is adequate. I do not think very many people will take that nervous strain. They don't have to.

Mr. BAKER. The Treasury can extend up to 10 years the payment of estate taxes in hardship cases, but there is a lot of controversy over what is and what is not a hardship case.

Mr. ROBERTS. You cannot borrow from a bank beyond 5 years, so 10 years does not help you too much.

Mr. BAKER. Mr. Mason, do you care to comment on this?

It seems to me this is a most essential part of this so-called smallbusiness program. Will extending it to 10 years solve the problem and prevent mergers?

Mr. MASON. I believe that is very true. I am a practicing lawyer in Lincoln with a general practice, and I do a considerable amount of estate planning as do many lawyers around the country who have a practice similar to ours.

We find that the clients who have businesses that are sizable enough that estate taxes are a real problem to them, are trying very, very assiduously to make plans that will allow their families to have security.

These gentlemen who have businesses of this type are trying to plan as intelligently as they can for their family. They realize full well that if their business has to be sold at their death it may be sold at a sacrifice and it may be a problem for their family to handle.

If it is apparent the businesses can or must be sold because the owners cannot make adequate provision for estate taxes, they seriously consider merging with some corporation in the manner indicated in Mr. Roberts' paper.

The provisions of H. R. 7600 are designed specifically to meet that type of problem in this manner.

If the man is allowed to set up some kind of reserve for payment of estate taxes during his lifetime, then he is assured that his business could continue.

In many cases insurance is used for this purpose, but insurance is not available to all men and this would be an alternate type of provision for such a reserve.

The method followed by H. R. 7600 would be to allow the businessman or his business to purchase these estate tax anticipation certificates which would be non-interest-bearing certificates of indebtedness of the United States.

The purchaser can deduct from his income tax, or from his business tax, up to 10 percent per year for amounts expended in the pur

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 appearance 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 give full prospective effect to a significant change in the income tax law 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 conditionthe 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.

This creates a serious inequity. The date of death of the decedent is 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 contempla

tion 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 con-. siderable 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.