STATEMENT BEFORE THE WAY AND MEANS COMMITTEE ON STATUS OF WIDOW'S ALLOWANCE AS A MARITAL DEDUCTION

The statutes of most of the States provide an allowance out of a decedent's estate for the maintenance and support of the surviving spouse or children of the decedent, pending administration of the estate. Such an allowance is commonly called a widow's allowance.

Prior to the enactment of the Revenue Act of 1950, a widow's allowance was specifically deductible from the gross estate under section 812 (b) (5) of the Internal Revenue Code of 1939, which provided for the deduction of amounts "reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent." This deduction as such was eliminated by section 502 of the Revenue Act of 1950, effective with respect to estates of decedents dying after September 23, 1950.

So long as a widow's allowance was specifically deductible under section 812 (b) (5) of the Internal Revenue Code of 1939, a deduction could not also be taken for such an allowance under the marital deduction section of the 1939 code (sec. 812 (e)). See Regulations 105, section 81.47b (c). However, when section 812 (b) (5) was eliminated from the code by section 502 of the Revenue Act of 1950, the Senate Finance Committee and the House Ways and Means Committee carefully indicated that thereafter a widow's allowance would normally qualify for deduction under the marital deduction section of the code. Both the Senate Finance Committee and the House Ways and Means Committee reports accompanying the bill which became the Revenue Act of 1950 state as follows with respect to section 502:

"Under existing law amounts expended in accordance with the local law for support of the surviving spouse of the decedent are, by reason of their deductibility under section 812 (b), not allowable as a marital deduction under section 812 (e) of the code. However, as a result of the amendment made by this section, such amounts heretofore deductible under section 812 (b) will be allowable as a marital deduction subject to the conditions and limitations of section 812 (e)."

The obvious congressional intention was that, with respect to estates of decedents dying after September 23, 1950, a widow's allowance would normally be deductible under section 812 (e). Of course, to be deductible as a marital deduction, it would have to fall within the 50-percent limitation contained in section 812 (e) (1) (H). But we do not believe that Congress intended that a deduction for the widow's allowance should be barred because of a failure of such allowance to meet the "passing interest" and "terminable interest" tests of section 812 (e).

THE "PASSING INTEREST" PROVISION

Only the value of an interest in property "which passes or has passed from the decedent to his surviving spouse" qualifies for the marital deduction under the 1939 code, and passing interests are specifically defined in section 812 (e) (3) of the code. To conclude that the statutory right to a widow's allowance does not fall within the definition of section 812 (e) (3) would mean that no widow's allowance could qualify for the marital deduction and would result in a complete destruction of the congressional intention. Accordingly, to give the congressional purpose any effect whatever, a widow's allowance must be regarded as an inherited interest or as a dower or curtesy interest. The Internal Revenue Service has apparently recognized the necessity of such a construction as it has at least inferentially ruled that the widow's allowance is a passing interest. Rev. Ruling 83, 1953-1 C. B. 395. However, in Estate of Proctor D. Rensenhouse (27 T. C. 107 (1956)), the Service took a different position, contending therein that the widow's allowance was not a passing interest and the Tax Court upheld that position, concluding that the widow's allowance was neither an interest in property bequeathed or devised to the widow, an interest inheriated by her, nor a dower interest or statutory interest in lieu thereof. Three judges dissented, stating that in their opinion the widow's allowances was "inherited" property.

THE "TERMINABLE INTEREST" PROVISION

Under section 812 (e) (1) of the 1939 code, terminable interests do not qualify for the marital deduction. In some States, the statutes provide for an allowance of a specific dollar amount to the surviving spouse for her support and maintenance during the settlement period, and this amount is payable to the surviving

spouse (or her estate) whether or not the surveying spouse dies or remarries and regardless of the length of the settlement period. In most States, however, the amount of the widow's allowance is keyed to the need for support and maintenance on the part of the surviving spouse, so that if the surviving spouse dies while the estate is in process of administration, the amounts paid out by the estate under the widow's allowance would cease. Allowances in such States are made on a monthly basis and continue only so long as the estate remains unsettled. The Service has ruled, in Rev. Rul. 83, supra, that widow's allowances under the laws of these latter States are terminable interests because such laws "do not confer upon the surviving spouse of a decedent any vested indefeasible right of property" and the allowances "amount to no more than annuities payable out of the assets of the estates during the periods of settlement or until prior death or remarriage of the surviving spouses." We believe this position of the Service to be untenable, not only because it violates the congressional purpose as evidenced by the legislative history of section 502 of the Revenue Act of 1950, since it would mean that the widow's allowance of only a few of the States could qualify for the marital deduction, but also because it is based on an incorrect construction of the terminable-interest provision.

For the terminable-interest rule to apply, (i) the interest in property passing to the surviving spouse must be of a sort that may terminate or fail upon the lapse of time, or upon the occurrence or nonoccurrence of an event or contingency. and (ii) an interest in the same property must pass from the decedent to a person other than the surviving spouse under such circumstances that if the interest in property passing to the surviving spouse fails or terminates, then such other person may possess or enjoy any part of the same property. A widow's allowance keyed to maintenance and support, to the extent it has been paid, does not terminate or fail when the surviving spouse dies during the administration of the estate. The only interest the surviving spouse gets is the right to support and maintenance, and that interest must be fully paid. If the surviving spouse dies during the administration of the estate, the amount of the widow's allowance may be less than would otherwise be the case. But that does not mean that the widow's allowance, in any sense, has terminated or failed. On the contrary, the widow's allowance has been completely satified. Moreover, the widow's allowance becomes completely the property of the surviving spouse, and no other person can get, or in any sense possess or enjoy, an interest in the property composing the widow's allowance. On none of the required counts, therefore, does the widow's allowance come within the statutory definition of a terminable interest.

Rev. Rul. 83 was ignored by the United States District Court for the Western District of Oklahoma in King v. Wiseman, 147 F. Supp. 156 (1956), in holding that amounts paid to the surviving spouse as a widow's allowance under Oklahoma law were allowable as part of the marital deduction, although such amounts had been paid to her on a month-to-month basis and under a statute which authorized the continuance of the payments throughout the period of settlement of the estate. The Government had argued by brief therein that, in accordance with the principles of Rev. Rul. 83, the widow's allowance under the Oklahoma statutes was a terminable interest and therefore did not qualify for the marital deduction. The provisions of the 1939 code hereinabove referred to were reenacted in the Internal Revenue Code of 1954 without any modification here pertinent. H. R. 8300 (which became the 1954 code), however, as it passed the House, contained a provision (sec. 2056 (b) (7)) which expressly allowed the window's allowance to qualify for the marital deduction to the extent paid within 1 year of the decedent's death. This provision was rejected by the Senate, with the following comment appearing in the report of the Senate Finance Committee:

"Your committee rejected a special provision added by the House that allowed widow's allowances to qualify for the marital deduction to the extent paid within 1 year of the decedent's death. Under present law many widows' allowances qualify for the marital deduction without regard to the time of payment. It is believed that the House bill might raise some question as to the treatment under the marital deduction of these widow's allowances to the extent not received within 1 year of the decedent's death."

The conference committee report, in accepting the Senate amendment, stated: "This amendment strikes out subsection (b) (7) of section 2056 which would have specifically excepted from the terminable interest rule generally applicable to the estate tax marital deduction payments for the support of the surviving spouse within 1 year of the decedent's death. In repealing the deduction for support of dependents formerly allowed by section 812 (b) and providing that

such amounts will be allowable as a marital deduction, the report of the Committee on Ways and Means on the Revenue Act of 1950 (Rept. No. 2319, 81st Cong.) stated:

"Under existing law amounts expended in accordance with the local law for support of the surviving spouse of the decedent are not allowable as a marital deduction under section 812 (e) of the code. However, as a result of the amendment made by this section, such amounts heretofore deductible under section 812 (b) will be allowable as a marital deduction subject to the conditions and limitations of section 812 (e).'

"Many of these 'widows' allowances' should qualify for the marital deduction under present law without regard to the time of payment. Therefore, the added complications of this section are largely unnecessary."

Added complications have nevertheless arisen since the enactment of the 1954 code in the form of the Tax Court decision in the Rensenhouse case, the decision of the district court in the King case, and the uncertainty as to the precise position of the Service in the matter. It appears at present that, in the opinion of the Tax Court, no widow's allowance could qualify for the marital deduction since none would be a passing interest. Under the philosophy of Revised Rule 83, the widow's allowance in some States would qualify; in others it would not. And, under the rationale of the King case, presumably the widow's allowance in all States would qualify. We believe that some amendment of the marital-deduction provisions at this time is justified by this state of confusion. It is not a question now of added complications but of removing complications which have already arisen, complications which would at best permit the deduction of the widow's allowance only by resort to the filing of a refund claim and the prosecution of a suit for refund. It is respectfully requested that Congress therefore enact, in clear and unabiguous terms, legislation which would achieve the results which were intended by Congress when it enacted section 502 of the Revenue Act of 1950.

Ths can be accomplished by amending section 812 (c) of the Internal Revenue Code of 1939 by the addition of a new subparagraph (H) to paragraph (3), reading as follows:

"(H) such interest consists of amounts paid for the support of the surviving spouse during the settlement of the estate, under the laws of the jurisdiction under which the estate is being administered; and such amounts for the purposes of subparagraph B of paragraph (1) to the extent in fact paid to the surviving spouse, or vested in the surviving spouse under local law, shall not be considered as an interest which will terminate or fail. The provisions of this subparagraph shall be effective with respect to the estates of decedents dying after September 23, 1950."

and by amending section 2056 of the Internal Revenue Code of 1954 by the addition of a new paragraph (7) to subsection (b) reading as follows:

"(7) Allowance for support of spouse.-In the case of an allowance under the laws of the jurisdiction under which the estate is being administered for the support of the spouse during the settlement of the estate, any amounts paid to such spouse—

"(A) shall, for purposes of subsection (a), be considered as passing to the surviving spouse; and

"(B) shall not, for purposes of paragraph (1), be considered as passing to any person other than the surviving spouse."

STATEMENT OF RICHARD D. DANIELS, ATTORNEY, BEFORE THE COMMITTEE ON WAYS AND MEANS, HOUSE OF REPRESENTATIVES, WASHINGTON, D. C.

My name is Richard D. Daniels and I am an attorney in active practice with offices in the Washington Building, Washington 5, D. C. I respectfully invite the committee's attention to the need of passing a retroactive amendment to section 2054 of the Internal Revenue Code of 1954. The section reads as follows: "SEC. 2054. Losses.

"For the purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate losses incurred during the settlement of estates arising from fires, storms, shipwrecks, or other casualties, or from theft, when such losses are not compensated for by insurance or otherwise."

It covers losses in the administration of the estates of decedents and, as presently written, places a premium on what might be entitled maladministration of these estates, but leaves no relief for an estate which has been administered in

accordance with law by orderly processes such as those exercised by a reasonably prudent and diligent man.

The Bureau of Internal Revenue consistency refuses to recognize as a deduction from the estate of a decedent any loss incurred by the executor on the sale of securities, even though such sale has been authorized and sanctioned by the probate branch of a court of record.

As shown by the language of the section itself, the losses are fire, shipwreck, etc., or theft, and in many instances losses which might well be prevented by an executor in handling an estate. Yet, on the contrary, even when a sale of securities has to be made by an executor for the payment of the Government's own taxes, and a loss occurs in connection therewith, such loss is not deductible from the gross estate.

I suggest the following language:

Insert between the words "from" and "fires" "sales of security by a fiduciary in the administration of an estate, when approved by an order of court." The amendment, if passed, should be retroactive to the date of the enactment of the 1954 code.

Respectfully submitted.

RICHARD D. DANIELS.

(Thereupon, at 11:50 a. m., the committee recessed, to reconvene at 10 a. m., Thursday, January 23, 1958.)

GENERAL REVENUE REVISION

(Tax Exempt Organizations)

THURSDAY, JANUARY 23, 1958

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D. C.

The committee met at 10 a. m., pursuant to recess, in the hearing room of the committee, House Office Building, Hon. Wilbur P. Mills, chairman of the committee, presiding.

The CHAIRMAN. The committee will please come to order.

Our first witness this morning is Mr. A. L. Reed. Mr. Reed, will you please come forward and, for the purposes of the record, identify yourself by giving us your name, address, and the capacity in which you appear.

STATEMENT OF A. L. REED, PUBLIC INFORMATION COMMITTEE OF THE COTTON INDUSTRIES, DALLAS, TEX.

Mr. A. L. REED. Yes, sir.

Mr. Chairman and gentlemen of the committee, my name is A. L. Reed. I reside in Dallas, Tex. I am appearing as a member of the Public Information Committee of the Cotton Industry. For short, I will call it the Public Information Committee.

We have 1,673 individuals, firms, and corporations supporting our efforts to obtain some character of tax equality between cooperatives and other tax-paying members of the cotton industry.

The cotton industries are small business. They consist primarily of cotton gins, cottonseed oil mills, cotton compresses in warehouses, and cotton warehouses. They do not include the spinning mills, so far as we were able to determine, the cooperatives are not operating any cotton spinning mills.

The two documents which we have delivered to the committee, consisting of volumes 1 and 2, were compiled from 6,500 pages of financial documents, charters, by-laws, published statements, and articles of various characters. They deal with the cooperative corporations and their competitive relationship to the tax-paying corporations engaged in the cotton industry business.

In the prior hearings, an effort was made to compare the little cooperative marketing agency of the cotton co-ops with the cotton merchandising business. In the first place, the comparison was out of order because the cotton merchandising business is not an industry in the sense that it requires a substantial investments of capital in plant and equipment. The cotton merchandising business is more nearly a profession.