The advocates of increased exemptions argue that spending will thereby be increased resulting in stimulating the economy. It has probably been pointed out to you gentlemen that $2.5 billion added to consumer spending would increase it by only 1 percent while the same amount added to net new investment in plant and equipment would be an increase of 44 percent. Tax reduction in the higher brackets would tend to go into this field. Although I personally would favor a flat rate limited by constitutional amendment to a maximum of 25 percent I believe the best immediate procedure is the enactment of the Sadlak-Herlong bill. This bill is bipartisan. It contains safeguards against deficit financing. It makes provision for reducing the base rate which should give it very wide popular appeal and has every appearance of being highly practical both from a fiscal and a political point of view. It should be noted that a Gallup poll published early in 1955 showed 53 percent of the public in favor of a top limit of 35 percent tax on individual incomes so there is every reason to believe that the passage of this bill will meet with general approval. Our organization endorses it and urges your committee to report favorably upon it. I presume that you gentlemen have been thoroughly informed by previous witnesses as to the grievous burdens imposed upon corporations by the income tax, so I shall limit my remarks to the means of relief. Many gadgets are proposed to be added to the tax law. Most of these which I have seen are mainly for the benefit of small business. Being a small-business man I am in favor of a number of them, particularly the proposal to permit deductions for reinvestment. I will omit any detailed discussion of them, but would like to urge that no legislation should favor small business over big business or vice versa. I particularly condemn the idea of a graduated surtax for corporations. say this, knowing that the one I have seen proposed would reduce the tax on my own business. All of these gadgets are, after all, just gadgets, and do not get at the real root of the trouble which, as we all know, is the rate of taxation. And here, again, I recommend to you the Sadlak-Herlong bill. It does not go as far as I would like, but it is a practical, politically feasible, and realistic approach to the problem and goes as far as we can hope for at this time. To the owners of closely held businesses, the estate tax is the most cruel and vicious of all. For one thing, it is furtive. It lurks among the shadows the shadows of death. The income tax is a hardship, but it is out in the open and we know the rules; we can figure where we shall stand under any set of conditions, and we are here to cope with it and to argue with the Revenue Service if we disagree with it. But the owner of a closely held business goes to his grave without knowing whether he has left his heirs an asset or a tax debt. It is possible under section 2031 (b) of the 1954 code for the Internal Revenue Service to set such a high value upon a man's equity in a small business that his widow, in a forced sale, cannot realize enough out of his entire holdings to pay the estate tax upon them. Tax experts tell me this has actually happened. The irony of it is that the greater a man's success, measured by his company's growth at the time of death, the greater the danger to his estate. We are trapped by the fact that we have to die without knowing what value will be set upon our businesses. This tax is a cruel and inhuman punishment meted out to a man for operating a closely held business. And for what? The revenue from it is insignificantlittle more than 1 percent of the budget, even with the gift tax added to it. Yet, for this triflng sum, hundreds of thousands of men operating the 4 million small businesses in this country are forced to face death without knowing whether the provisions they have made for their loved ones are going to be a help or a hindrance. Considering the beating a man takes all his life, both from corporate and individual income taxes, it is an avaricious tax collector indeed who stirs his dead ashes seeking to share in what little residue of his earnings he had when he died. When a criminal's body is carried from the execution chamber, his debt to society is reckoned as paid, but an honest man finds no refuge, even in his tomb, from the rapacious clutches of the tax collector. Any modification of our tax law should begin with the elimination of the estate and gift taxes. They are well known to be the cause of many mergers of smaller businesses into larger ones. This trend is not only unhealthy but outright dangerous. A few large businesses can easily be nationalized, while a multitude of small businesses is a protection against socialism. If it is impossible to repeal these taxes at this session of the Congress, the following suggestions are offered: 1. One of the most perplexing aspects of estate planning hinges upon the estate-tax treatment of certain transfers of property during the life of the decedent. For example, the presumption in section 2035 (b) works a hardship that is difficult to justify, since all estate planning is done in contemplation of death. A man still in his twenties who buys a life-insurance policy does so in contemplation of death. Since both estate and gift taxes are essentially taxes upon the transfer of property, there is no good reason for the differences between them. The existing differences have arisen out of the fact that the two taxes started from different origins and have developed along different lines. Much confusion and hardship could be avoided by consolidating the estate and gift taxes so that both fall under the same schedule of rates; that is, a single tax upon the transfer of property. Then contemplation of death would not be a complicating issue. This would simplify estate planning and would simplify the administration of the laws at the same time. The new rate could be a compromise between the two present ones to maintain the same revenue yield, and the gift exemptions could be increased to avoid increasing the tax on the smaller estates. 2. It is recommended that section 2031 (b) be amended to provide a fixed formula for assessing the value of equities in closely held businesses. This would greatly banish the uncertainty with which the owners of such equities are plagued today. The book value of the stock could be used, or a formula based upon average earnings for, say, a 5-year period preceding the death of the decedent. 3. In order to obviate the hardships resulting from forced sales in order to close an estate within 15 months, it is recommended that section 6161 (a) (2) be eliminated and a section 6151 (b) (3) be added, giving automatically to all estates a period of 10 years in which to pay the tax. Thank you very much, gentlemen, for permitting me to speak to you, and, in conclusion, let me remind you that 3,000 years ago in the 39th Psalm, King David said, "Every man ***heapeth up riches and knoweth not who shall gather them." If King David were here today, he'd know. (The following letter was received by the chairman :) Hon. WILBUR D. MILLS, ASSOCIATED INDUSTRIES OF ALABAMA, Chairman, Committee on Ways and Means, House of Representatives, Washington, D. C. DEAR MR MILLS: I would like your permission to amend the statement made by me before your committee on January 28, 1958. First, let me apologize for taking up your time with a statement which I later decided needs changing. This came about because this statement had to be prepared in a great hurry in order to meet a deadline of January 7, and at the time of its preparation my tax consultant was out of the city. After preparing the statement I was confined to my home by an attack of influenza until just 3 days before I left to come to Washington. My general criticism of the estate and gift taxes as submitted in my written statement and as stated by me orally to your committee stands as stated and as written. I still disagree 100 percent with the basic philosophy behind the estate tax and the gift taxes and feel that they should be abolished. The revisions I wish to make pertain only to the means to be employed in lessening the burden of worry and anxiety imposed upon the taxpayer who holds equities in closely held businesses in the event that these taxes must be retained at this time without reduction of revenue. I believe that the changes proposed below can be made without any appreciable loss of revenue. Larger estates will probably not be affected by the proposed changes nearly so much as the smaller estates. where more of the equities in closely held business will be found. As pointed out previously, the provision of section 2035 (b) throwing all gifts within 3 years preceding death of the decedent into the estate unless the estate can prove that these gifts were not made in contemplation of death and placing he burden of proof upon the estate, puts the estate in a very difficult position because all estate planning is made in contemplation of death. Furthermore, the statute as written puts the estate into the position of having to prove a negative which is, I believe, generally considered among lawyers to be virtually an impossibility. I therefore recommend that the question of contemplation of death be eliminated from the code so that gifts made even upon the deathbed would be taxed as gifts and not thrown into the estate. It is recommended that section 2031 (b) be amended to provide that equities in closely held businesses shall not be assessed at a value greater than the book value of the stock. One of the great difficulties with this section at present is that the Internal Revenue Service has the right to evaluate the goodwill value of the equities. Closely held businesses are usually, although not always, among the smaller businesses and the death of a principal of a small business might destroy the goodwill or profoundly affect it and I do not believe it should be left up to the discretion of an agent of the IRS to establish this value. In order to obviate the hardships resulting from forced sales now necessary to close an estate within 15 months, it is recommended that section 6161 (a) (2) be eliminated and a new section 6151 (b) (3) be added providing that when 25 percent or more of the gross estate consists of equities in closely held businesses, real estate, or other properties not being actively traded at generally accepted prices, that portion of the estate tax which bears the same ratio to the total estate tax that the assessed value of such equities and properties bears to the net taxable estate may be deferred for a period not to exceed 10 years or until said assets are sold or disposed of, at the election of the taxpayer. Thanking you again for your courteous attention to my statement before your committee, I am Very truly yours, R. W. COWARD, Member Tax Committee, Associated Industries of Alabama. The CHAIRMAN. Thank you very much for your appearance and information given the committee. That completes the call of the calendar for today and the committee is adjourned without objection, until 10 o'clock in the morning. (Whereupon, at 5:05 p. m., the committee was adjourned, to reconvene at 10 a. m., Wednesday, January 29, 1958.) 20675-58-pt. 2- -60 |