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cessors-in-interest. Said credit and deductions are also taken into account in determining the “net value" for estate tax purposes of all the items described in section 691 (a) (1).
In recognition of the fact that the right to receive income in respect of a decedent may have caused certain Federal estate taxes with respect thereto, section 691 (c) provides a deduction for Federal income-tax purposes for estate taxes attributable to the items of income in respect of a decedent. It provides in general that a person who includes an amount in gross income under section 691 (a) shall be allowed, for the same taxable year, a deduction of an amount which bears the same ratio to the estate tax attributable to the net value for estate-tax purposes of all the items described in section 691 (a) (1) as the value for estate-tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate-tax purposes of all the items described in section 691 (a) (1).
RECOMMENDATION It is respectfully recommended that section 691 (c) be amended by striking the words "as a deduction" appearing in sections 691 (c) (1) (A) and (B) and substituting the words "as a credit against the tax imposed by this subtitle for the taxable year", and by striking the words “Deduction" and "deduction" appearing in the title to section 691 (c) (2) and in the last sentence of section 691 (c) (2) (B), respectively, and substituting the words "Credit" and "eredit." respectively. Appropriate changes along these same lines should also be made in section 421 (d) (6) (B), as well as any other appropriate sections.
The purpose of this recommendation is to permit an estate or other person who must include in gross income an item of income in respect of a decedent to obtain a credit for the Federal estate taxes attributable to said item in lieu of only a deduction from gross income for such Federal estate taxes. Unless a taxpayer is given credit against income taxes for such Federal estate taxes and not merely a deduction, he will bear the burden of not only the full Federal income taxes attributable to the inclusion of such item in his income when received, but also a proportion of the Federal estate taxes attributable to such item. The extra burden of the Federal estate taxes with respect to the same item is not completely alleviated by permitting a taxpayer to have only a deduction from income for such taxes since the value of a deduction to a taxpayer would depend entirely on his income-tax bracket. A taxpayer in the lower bracket for income-tax purposes would bear a proportionately larger part of the Federal estate taxes. For example, a taxpayer in the 20-percent Federal income-tax bracket receiving a deduction from income for Federal estate taxes attributable to the inclusion of such an item in his income would find that each dollar of deduction for Federal estate taxes reduces his income tax by 20 cents. He would personally bear the full income taxes on such item included in his income and in addition 80 percent of the Federal estate taxes attributable to such item. A taxpayer in the 60-percent bracket for income-tax purposes would still bear the burden of 40 percent of the Federal estate taxes attributable to the inclusion of an item of gross income in his income-tax return, since each dollar of deduction for Federal estate taxes decreases his income tax by only 60 cents. Since it is inequitable to impose the burden of the Federal estate tax upon the right to income, and the Federal income tax upon the receipt of such income, without proper adjustment for the burden of such Federal estate tax, it is respectfully suggested that the deduction for Federal estate taxes provided by section 691 (c) be changed to a credit against income taxes so that each dollar of Federal estate taxes attributable to the inclusion of an item of gross income in respect of a decedent would decrease the income tax liability with respect to the very same item by an equal amount and nothing less. If this recommendation is followed the existing inequity resulting from hte imposition of a Federal estate tax on the right to income, and an income tax on the income itself, would be corrected. It obviously is unfair to subject such item to this double taxation and to impose the resulting penalty against taxpayers receiving income of this character,
PITTSBURGH, PA., September 11, 1957. Re section 44 (d) of the Internal Revenue Code of 1939 and section 453 (a) (3)
and 691 (a) (4) of the Internal Revenue Code of 1954 Hon. JERE COOPER,
House of Representatives, Washington, D.C. DEAR MR. COOPER: Pursuant to your press release of August 9, 1957, I have enclosed a form of a bill to add a new section to Internal Revenue Code of 1954. The purpose of this bill is to remedy an inequity arising from a faulty interpretation by the Bureau of Internal Revenue of section 44 (d) of the Internal Revenue Code of 1939, by not giving effect to the changes made by the provisions of sections 453 (d) (3) and 691 (a) (4) of the Internal Revenue Code of 1954, or the intent of Congress in enacting those latter provisions.
In brief, the factual circumstances which gives rise to this inequitable situation is as follows:
The taxpayer might sell real estate on the installment basis and at his death in 1951 might be possessed of certain installment obligations.
The law applicable at the date of the decedent's death, (Internal Revenue Code of 1939, sec. 44 (d), would provide that:
1. If the taxpayer had received the proceeds of installment obligations during his lifetime, those proceeds would have given rise to income to said taxpayer;
2. Since the taxpayer died, the Internal Revenue Code should not permit the ordinary income already earned to escape an income tax;
3. Therefore, section 44 (a) would provide 1 of 2 alternatives: (a) the income from these installment obligations was to be realized in the last return of the decedent; or (b) the beneficiaries of the estate of the decedent or the estate could post a bond as a guaranty that the income tax in respect of those installment obligations would be paid as the installment obligations
were collected. It is the last circumstance that is particularly onerous today. Under the Internal Revenue Code of 1939, there was no escape from the fact that if one would want to avoid immediate payment of tax on the profits on installment obligations owned by the decedent, one had to post bond. From our experience it was almost impossible to get a bonding company to post bond, and, therefore, the procedure was that the decedent's beneficiaries would have to secure from the Internal Revenue Service a determination of the amount of bond acceptable by that service. Then the beneficiaries would have to put up United States Government bonds in that amount.
It is here to be pointed out that the requirements for the bonds only arose by virtue of the provisions of section 44 (d) which said that on the death of a decedent, the Internal Revenue Code worked what was technically called a disposition of the bonds and that therefore all of the income would be immediately recognized.
Under section 453 (d) (3) of the Internal Revenue Code of 1954, it is specifically provided that the death of a decedent owning installment obligations shall not work a "disposition" of the obligations; in other words, there is no longer the necessity for recognizing all of the ordinary income inherent in the installment obligations in the last return of the decedent.
As a result, the requirement for the posting of a bond is of course altogether eliminated.
Section 691 (a) (4) describes how the proceeds of installment obligations are to be treated by the beneficiaries of the decedent's estate.
This brings us to the nub of this question. You will note that for a decedent dying before the effective date of the Internal Revenue Code of 1954, a bond would have to be placed; but for the decendent dying after the effective date of the Internal Revenue Code of 1954, no bond would have to be replaced.
It is the opinion of this office that Congress did not intend that a bond should henceforth be required under any circumstances after the effective date of that act. That is, we feel that the law now states that no disposition of installment obligations takes place as of the date of the decedent and that the only obligation on the part of a beneficiary of the estate is to pay the income tax on the profit of installment obligations as collections are made. Note that if the executors file a bond under the old section 44 (a) the same obligation accrues to the beneficiary. That is, the only difference between old section 44 (d) and the new sections of the law, in a situation when à bond is filed, is that under the old law there is a guarantee that the taxpayers will pick up the profit on installment obligations as collections are made-that guarantee being in the form of bonds.
It seems to us then that since the bond requirement has been removed from the language of the code, the removal should be effective for all decedents who now have bonds placed regardless of the date of death, and the bonds now placed should be returned. That is, if the intent of Congress was that beneficiaries of decendents who are receiving amounts in repsect of installment obligations have only a duty to report taxable income from collections, then all such beneficiaries should be treated alike. The beneficiary of a decendent dying August 15, 1954, should not be treated differently from a beneficiary of a decedent dying August 17, 1954. The tax situation with respect to both is exactly the same, the Government is not deprived of any revenues, and the intent of Congress is given full effect.
The correction procedure should include the return to the taxpayers of those bonds now posted.
This amendment will reverse Revenue Ruling 55-627, CB 1955–2, page 550, which now provides that bonds posted under section 44 (d) of the Internal Rer. enue ('ode of 1939 are not affected by the new provisions of the Internal Revenue Code of 1954. Very truly yours,
ROBERT H. SABEL,
Attorney at Larc.
A BILL To amend the Internal Revenue Code of 1954 with respect to bonds filed under
the Internal Revenue Code of 1939 on installment obligations Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That there shall be added to the Internal Revenue Code of 1954 section 7104 as follows: "SEC. 7104. BONDS HERETOFORE FILED IN RESPECT OF SECTION 44 (d)
OF THE INTERNAL REVENUE CODE OF 1939 "(a) Bonds heretofore filed with the Commissioner under the provisions of section 44 (d) of the Internal Revenue Code of 1939 shall, under regulations to be prescribed by the Commissioner, forthwith be returned to the successors in interest of decedents affected. “(b) The effective date of this provision shall be January 1, 1956."
PETITION TO THE CHAIRMAN, COMMITTEE ON WAYS AND MEANS,
HOUSE OF REPRESENTATIVES, WASHINGTON, D. C. TO BE CONSIDERED AT THE HEARING BEGINNING JANUARY 7, 1958, AND MADE A PART
OF THE RECORD, FOR THE PURPOSE OF AMENDING SECTION 2039 OF THE 1954
INTERNAL REVENUE CODE
House of Representatives, Washington, D.C.
(Attention: The Clerk, New House Office Building.) SIR: It is understood that the purpose for this hearing is to reexamine the basic policies underlying our tax laws looking toward such possible revisions in order to obtain a revenue system which is fair, equitable, neutral in impact between dollars of income from similar sources, responsive to changes in economic conditions, and capable of compliance and administration with a minimum of taxpayer and governmental effort, and which at the same time produce the needed revenues for the Government.
I, therefore, wish to bring to your attention a section of the 1954 code that as interpreted by the regulations works a severe hardship upon estates and their beneficiaries. This section reads as follows:
"Sec. 2039. ANNUITIES “(a) General.-
"The gross estate shall include the value of an annuity or other payment re ceivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement entered into after March 3, 1931 * * *, if under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or pay. ment, either alone or in conjunction with another for his life or for any period
not ascertainable without reference to his death or for any period which does not in fact end before his death.
"(b) Amount Includible.
Subsection (a) shall apply to only such part of the value of the annuity or other payment receivable under such contract or agreement as is proportionate to that part of the purchase price therefor contributed by the decedent. For purposes of this section, any contribution by the decedent's employer or former employer to the purchase price of such contract or agreement (whether or not to an employee's trust or fund forming part of a pension, annuity, retirement, bonus or profit sharing plan) shall be considered to be contributed by the decedent if made by reason of his employment. (Italic supplied.]
"(c) Exemption of Annuities under Certain Trusts and Plans.
"Notwithstanding the provisions of this section or of any provision of law, there shall be excluded from the gross estate the value of an annuity or other payment receivable by any beneficiary (other than the executor) under
*(1) An employees' trust (or under a contract purchased by an employee's trust) forming part of a pension, stock bonus, or profit-sharing plan which, at the time of the decedent's separation from employment (whether by death or otherwise), or at the time of termination of the plan if earlier, met the require. ments of Section 401 (a); or
“(2) A retirement annuity contract purchased by an employer (and not by an employee's trust) pursuant to a plan which, at the time of decedent's separation from employment (by death or otherwise), or at the time of termination of the plan if earlier, met the requirements of Section 401 (a) (3).
"If such amounts payable after the death of the decedent under a plan described in paragraph (1) or (2) are attributable to any extent to payments or contributions made by the decedent, no exclusion shall be allowed for that part of the value of such amounts in the proportion that the total payments or contributions made by the decedent bears to the total payments or contributions made. For purpose of this subsection, contributions or payments made by the decedent's employer or former employer under a trust or plan described in this subsection shall not be considered to be contributed by the decedent. This subsection shall apply to all decedents dying after December 31, 1953.”
OBJECTIONABLE FEATURE TO WHICH I WISH TO CALL ATTENTION My criticism is directed to paragraph (a) of this section as it is applied to contingent annuities.
It has become a custom with many companies to enter into an agreement with their valuable officials as follows:
“When the official reaches his retirement age if he agrees to hold himself available to advise and consult with the management when called upon, and does not in any way serve or attach himself to a competitor, the company will pay him an annual stated sum during his life, and if he predeceases his wife, the company will pay her a lesser sum during her life.”
The consideration that the company pays for is, that it retains the valuable experience of the retired official. By this agreement the retired official agrees that if he fails to make himself available when needed or called upon, or places himself out of the reach of his company, or serves or attaches himself to a competitor, the agreement becomes null and void and no rights enure to either the official or his wife. The official under the agreement creates a contingent right for the benefit of his wife if he predeceases her. He has no reversionary interest in the value of the wife's rights. If she dies before her husband, her rights die with her, and even after the rights become vested in the wife by outliving her husband she cannot dispose by will of the property as the right to receive such monies die with her. At best the husband when he makes the agreement only acquired for the service that is expected of him a contingent right for his wife to receive a sum annually if he performed his part of the agreement and if she outlived him.
In most cases these agreements are made sometime before the official retires and he cannot assign or change the beneficiary nor does he have any interests whatsoever in the right created for the benefit of his wife. When agreement is made the company obligates itself to make the agreed payments on one side and the official obligates himself not to serve any competitor of his company and to be at all times available for consultation and advice on his part. There is mutual consideration which constitutes a binding contract. There is no transfer of property to the wife when the agreement is made. She simply gets a contingent
right based on the husband fulfilling his part of the agreement, and that she outlives him.
Under paragraph (a) of section 2039 of the code, because the wife's pension is termed an annuity and does not come under any of the qualified types or plans recognized by the regulations, it includes an estimated value for the wife's right based upon her life expectancy in the husband's estate and taxes it accordingly.
RESULT This procedure imposes a very harsh burden upon the husband's estate, as it increases the estate tax and unreasonably limits his marital deduction and forces the estate of the husband to pay tax upon an intangible sum that did not become property or vest in anyone until after he died. The right of the wife never became a realized portion of the husband's estate. He could not change the beneficiary, he has no reversionary interest in what the wife would receive and the benefit or value to the wife is highly contingent. It depended upon her husband fulfilling the agreement and that she would outlive her husband. The wife's life expectancy might be 10 years or more, and a large fictitious sum under the present regulations would be added to the husband's estate and taxed although the wife may only live for a year or two and her receipts from her annuity would be nominal-nothing like the fictitious value included in the husband's estate and upon which tax would have to be paid.
This procedure seems entirely inequitable and I submit should be changed.
Previous to October 7, 1949, the courts held that the value of such a right should not be included in the estate of the decedent. (See Higgs' Estate y. Commissioner, 184 F. 2d 427; 39 A. F.T. R., p. 1070), and (Commissioner v. Twogood's Estate, 194 F. 2d 627; 41 A. F. T. R., p. 852). But section 811 (c) of the 1939 code was amended to include such rights in the estate for tax purposes. This change is continued in paragraph (a) of section 2039 of the 1954 code, and results in the hardship that I am bringing to your attention.
Annuities received under the circumstances herein cited should be taxed in full as ordinary income to the wife when and if she received the proceeds annually. In this way the Government would get the full tax on all income received by the wife no matter how long she lived and the estate would not be taxed upon a fictitious value that it never owned and from which income or capital may never be realized as an asset of the estate.
If the above suggestion is adopted, the Government would lose little, if any, revenue, and the tax would be levied upon the full income realized by the wife, which would be upon a sound and equitable basis.
SUGGESTED CORRECTION In paragraph (c) of section 2039 of the code an exception is made to the rule as prescribed in paragraph (a) of this section. A genuine relief to the estates, executors, or administrators would result in a fair and just method of taxation if annuities similar to the illustration herein given, where the expectancy is so contingent, would be brought within the purview of paragraph (c) instead of (a) of section 2039.
SUMMARY The application of paragraph (a) of section 2039 of the 1954 code is to a situation similar to the one herewith presented, inequitable and unsound.
The decedent has no interest in the right created during his lifetime, and such a right would have no market value during the lifetime of the husband. There is really nothing of value to be included in the decedent's estate, because the decedent owned nothing that could be disposed of during his life and has no market value while he lived. Respectfully submitted.
GEORGE B. FURMAN,