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 It cannot be because nothing happened while the 1939 code was in effect, nor can it be because the 1939 code has been repealed by the 1954 code as to taxable events that happened in a taxable year commencing after December 31, 1953.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


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).)

20675-58 pt. 211

As a result of the enactment of section 1014 (b) (9), property acquired by gift in contemplation of death and thereafter subjected to estate tax on the death of the donor, will have a date of death valuation basis for determining gain or loss on sale just as other property upon which an estate tax is paid. The same is true as to property jointly held, property transferred with retained life interest or intended to take effect in possession or enjoyment at death, which is required to be included in the gross estate of the decedent for estate-tax purposes.

Having recognized the equity of this principle, it would have been expected that Congress would have given it complete prospective effect; that is, that it would be applied to all sales or other disposals of property taking place in taxable years commencing after December 21, 1953. This is the familiar test of the applicability of income tax legislation and would have been wholly appropriate in the present case, since it would have involved no retroactive treatment of any prior taxable event. It is settled by judicial determination and it is the position of the Treasury Department that the basis for computation of gain or loss is to be determined under the law in effect when the property is sold or exchanged rather than the law in effect when the property was acquired. (Sehtam Corporation v. Commissioner, 125 F. 2d 655 (2d Cir. 1942) ; Wurlitzer v. Helvering, si F. 2d 928 (6th Cir. 1936); Speer v. Duggan, 5 F. Supp. 722 (S. D. N. Y. 1933).)

However, the applicability of this remedial legislation was limited by its terms to the case of decedents dying after December 31, 1953. This unreasonable and unwarranted limitation has the effect of preventing the normal prospective application of the principle of section 1014 (b) (9), and brings into the 1954 code the inequitable situation that had existed under the 1939 code. Our proposed amendment would remove this limitation.

It will be observed that this proposed amendment is in no way retroactive since its effect will be simply to remove a discrimination in the tax treatment of certain taxable events occurring during the years after the 1954 code became applicable.

The striking unfairness which results from the inclusion of the clause limiting its application to the case of decedents dying after December 31, 1953, may be illustrated by a single example. Two donees received identical gifts from different donors at the same time prior to December 31, 1953. Each gift was made in contemplation of death. Each donor acquired his property at about the same time and at the same cost, $10,000. Each property was required to be included in the gross estate of its donor at a value of $100,000. Each of the properties was sold for $100,000 in 1957; therefore determination of the taxpayers' income and capital gain is governed by the Internal Revenue Code of 1954. The only difference between the two cases is that one donor died in 1953 while the other donor died in 1954. This difference has no readily discernible relevancy to the determination of income tax liability. However, the provision limiting the application of section 1014 (b) (9) to the case of persons dying after December 31, 1953, would cause one donee to pay a capital-gains tax on $90,000 while the other donee would pay no capital-gains tax.

The apparent irrevelancy of the date of death of the donor to the question of the donee's tax liability upon sale or exchange requires a closer examination of this particular problem. Obviously, if there were no reason at all for injecting the date of death as a condition upon the change of basis, the limitation of the subsection would post serious constitutional questions (cf. Heiner v. Donnan, 285 U. S. 312 (1932)).

Quite apart from this consideration, however, the legislative history of the subsection makes it clear that the purpose of Congress was to remove the unjustified discrimination under the old law. The continuation of the old rule in years governed by the Revenue Act of 1954, in the single situation where the decedent happens to have died prior to January 1, 1954, in itself creates a new kind of discrimination which is explained in the committee reports only by the statement “This provision is applicable only with respect to decedents dying after December 31, 1953, in order that basis under existing law may not be disturbed.” (H. Rept. 1337, 83d Cong. 2d sess. A267 (1954).) The report of the Senate Finance Committee drops this statement, while retaining the limiting language without any discussion or stated justification.

In assigning this particular reason, we believe that the committee overlooked the fact that the income tax consequences of a particular action are governed by the law in effect when the taxable event takes place. The Internal Revenue Code of 1954 specifically repealed the Internal Revenue Code of 1939 with respect to taxable years commencing after December 31, 1953 (sec. 7851). Oon

sequently it is not accurate to assert that "old bases" are preserved as a result of the limitation.

Conversely, the Internal Revenue Code of 1954 is not applicable to years commencing before December 31, 1953, so its provisions could not have affected existing basis in relationship to tax events taking place before that date. The only and unfortunate effect of the limiting clause of section 1014 (b) (9) is to discriminate against a small group of taxpayers by denying them the basis otherwise accorded them with respect to later taxable events by the provisions of the section as a whole.

In imposing this unnecessary limitation upon the right to use a stepped-up basis, Congress nullified as to certain taxpayers the general salutary purpose of the subsection which was certainly based upon an appreciation of the fact that the long continued inflationary movement of the economy made it inequitable to require a taxpayer to use his donor's basis for determining the amount of gain on the sale of property for income tax purposes where an estate tax upon the inflated value had already been paid. This inflationary trend made the removal of the inequitable discrimination a matter of real urgency. The extent and nature of the new discrimination created by the limitation of section 1014 (b) (9) can be illustrated by the following example.

A husband and wife purchased their residence during the 1930's for $10,000. As in the usual situation, title to the property was taken by the husband and wife jointly, although the purchase price was paid by the husband. In 1953 the husband died and the residence was required to be included in his gross estate for estate tax purposes at its then inflated value of $20,000. The widow sold the residence in 1954 for $20,000. The determination of her income tax liability is governed by the Internal Revenue Code of 1954 which has adopted the principle that the date of death value should be used as to all property required to be included in the gross estate of a decedent for estate tax purposes, but the application of the equitable principle of the 1954 code is denied to her merely because her husband happened to die in 1953. Consequently, she must pay tax on her gain of $10,000-although exactly that same increased value had been subjected to estate tax in the estate of her husband.

PROPOSED FORM OF AMENDMENT (1) The unnecessary discrimination which we have described may be eliminated by a very simple amendment, viz, by merely striking out the words "In the case of decedents dying after December 31, 1953" from subsection (b) (9) of section 1014 of the Internal Revenue Code of 1954.

(2) An amendment in the foregoing form would give full prospective effect to the general equitable principle of the 1954 code. Like any other substantive amendments, it is possible that such a change might work to the financial disadvantage of a particular individual; this might occur under the proposed amendment in the unusual case where the decedent's basis was higher than the date of death valuation, despite the economic factors referred to above. It seems obvious, however, that legislation must be designed primarily to establish a general equitable principle. If Congress wishes to eliminate any possibility of financial disadvantage to any taxpayer as a result of this change, this could be accomplished by excepting from the prospective application of the rule of the 1954 code only the situation in which the basis of the property in the hands of the decedent was greater than the date of death basis where the decedent died when the 1939 code or previous acts were in effect.

(3) While either form of the amendment would eliminate the principal inequity contained in present subsection (b) (9), we are mindful of the fact that in the case of depreciable property, subsection 1014 (b) (9) contains a patent and much-criticized defect. This is the provision added by the Senate Finance Committee which requires a reduction of the date of death value by the amount of the depreciation which has been allowed to the taxpayer prior to the death of the decedent. Obviously, the date of death valuation takes into account actual depreciation which has occurred between the date of gift and the date of death, which means, in effect, a double reduction for the same item. Since the subsection must be amended for the equitable reasons which we have previously mentioned, we think that Congress might well wish to correct this additional defect.

This could be accomplished by substituting for the second sentence of subsection 1014 (b) (9) a much more appropriate provision which would reduce the date of death basis to the same proportionate extent that the useful life of

the property from the date of acquisition has been exhausted prior to the date of death (or January 1, 1954, whichever is later).

It may be noted that such additional amendment will serve another purpose : It will establish a sound and proper rule for determining the basis of depreciable property which will be completely appropriate to the situation covered by the principal amendment which we have proposed.

(4) In order to make the intended application of the amendment clear, the amending act should state that the amendment is effective as to all taxable years beginning after December 31, 1953.

ADDITIONAL CONSIDERATION There is an additional and compelling reason for amending subsection (b) (9).

We have assumed up to this point that the opening limitation of this subsection would necessarily lead to the conclusion that where a decedent died prior to December 31, 1953, his successor under the circumstances described in the subsection would not be entitled to the date of death basis. A closer examination of the 1954 and 1939 codes, however, casts grave doubt on any such conclusion, because of a major hiatus in the statutory treatment of this problem.

This inherent difficulty is best illustrated by an example. A donor made a gift of securities in 1924 and died in 1925. The gift was held to be made in con templation of death and the securities were included in the gross estate for estate-tax purposes at a value of $10,000, which also was their value at the date of gift. The cost of the securities to the donor was $5,000. The donee continued to hold the securities through the years and ultimately sold the securities in 1957 for $12,000.

What is the proper basis of the securities for computing the capital gain on the sale?

1. It is not the basis which would have been allowed to the donee under the Revenue Act of 1924, which was in effect both at the date of the gift and the date of the death (and which incidentally allowed a date of death basis for property acquired by gift in contemplation of death). As has been previously stated, it is settled law that the statute in effect at the date of the sale rather than the statute in effect at the date of acquisition controls in fixing the basis of property for the purpose of determining gain or loss (Wurlitzer v. Helvering, 81 Fed. 2d 928.)

2. It is not the basis as determined by the provisions of the Internal Revenue Code of 1939. Section 7851 of the Internal Revenue Code of 1954 has repealed the provisions of the Internal Revenue Code of 1939 as to all taxable years beginning after December 31, 1953. Further, of course, there was no change at all in the status or ownership of the property during the time the 1939 code was in effect.

3. It is not the basis as determined under past judicial decisions. These de cisions involved an interpretation of the Internal Revenue Code of 1939 and previous revenue acts. There has been a significant change in the language of the general rule as stated in section 1014 (a) of the Internal Revenue Code of 1954 as compared to section 113 (a) (5) of the Internal Revenue Code of 1939. The general rule under the 1954 code allows a stepped-up basis as to property passed from a decedent, while the 1939 code provided a date of death basis as to property acquired by bequest, devise or inheritance and certain other specified transfers. Accordingly, these decisions would have no relevance to the case we are considering.

4. It is thus apparent that the answer to the question must be found within the four corners of the 1954 code. The difficulty here is that subdivision (b) (9) of section 1014 specifically grants a stepped-up basis where the decedent dies after December 31, 1953, but is silent as to the governing rule when death occurs before that date, and this particular situation is not covered specifically by any other provision of the code.

Faced with this dilemma it is possible that the courts may hold that the express limitation of the applicability of subdivision (b) (9) to cases where the decedent died after December 31, 1953, inferentially adopts the old rule with respect to other cases.

We believe it at least equally possible that the courts would conclude that despite the limiting language of subdivision (b) (9), property acquired by gift in contemplation of death was property acquired from a decedent within the general rule of section 1014 (a) and that the date of death basis should be used. In considering this question the courts would certainly be influenced by the fact

that a general equitable principle had been adopted by the 1954 code to eliminate previous unjustified discrimination, and that the time of death of the decedent is inherently irrelevant to the determination of basis in computing gain or loss.

To summarize, the present language of section 1014 (b) (9) of the Internal Revenue Code creates major problems which can only be resolved by major litigation with the ultimate outcome in doubt. It is submitted that Congress rather than the courts should resolve this question by amending the subsection and that such amendment should insure the full prospective application of its general equitable principle.

The CHAIRMAN. Mr. Mugel, before recognizing Mr. Reed, you understand, I am sure that when the Revenue Act of 1954 was being developed, it was the thought in the Ways and Means Committee, and I assmue in the other body, that its provisions would not be made retroactive in any respect, that it was to be prospective altogether.

What you are suggesting is that one of the provisions of the 1954 code be made retroactive; is that the case ?

Mr. MUGEL. I do not believe so, Mr. Mills. In fact, the principal point that I make is that this is not a retroactive amendment that we are asking.

If this provision had not been put into effect, the statement "decedent's dying after December 31, 1953," had not been so stated, the Internal Revenue Code of 1954 would have applied as to sales or exchanges that occurred after the years covered by the 1954 code.

The CHAIRMAN. You are not thinking in terms then of applying the provision to sale or exchange prior to January 1, 1954?

Mr. Mugel. No, sir. The only point is as to sales or exchanges that occur while the 1954 code is in effect.

The CHAIRMAN. Based upon deaths that occurred before that time?
Mr. MUGEL. Yes, sir.
The CHAIRMAN. Mr. Reed.

Mr. REED. Mr. Mugel, I missed part of your statement because I was on the telephone. But I will read it. I am sorry to hear that Mr. Fleischmann is not feeling well and could not appear. I know you have done a fine job for him.

I also wish you to remember me to him and tell him I remember very pleasantly his father who was a very remarkable lawyer.

If Mr. Fleischmann were here I would go into a little more detail.
Thank you very much.
Mr. MUGEL. Thank you.
The CHAIRMAN. Are there any further questions?

If not, Mr. Mugel, we thank you for your appearance and the information you have given the committee.

The Chair understands that Mr. E. J. Grassman is now present.

Mr. Grassman, will you come forward and identify yourself for the record by giving your name, address, and the capacity in which you appear.

STATEMENT OF EDWARD J. GRASSMAN, ELIZABETH, N. J. Mr. GRASSMAN. Edward J. Grassman, Elizabeth, N. J. Mr. KEAN. Mr. Mills, I want to say that Mr. Grassman is one of the most able citizens of New Jersey and is one of my most valued friends.

The CHAIRMAN. We welcome Mr. Grassman to the committee.
Mr. GRASSMAN. Thank you, sir.

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