(3) Adjustments should be made in light of market conditions, determined by adding 2 percentage points to the Federal Reserve System's recommended rediscount rate. (4) The rate of interest applicable on the date on which a tax becomes payable will remain the same for that tax liability until it is paid. For example, if a tax becomes payable on December 31 of a given year, when the rate of interest under section 6601 is 5 percent, that rate of interest will remain applicable, even though the interest rate is raised a few days later by the Commissioner. VIII-D-2. PAYMENT OF ESTATE TAXES WITH GENERAL EXPLANATION BACKGROUND Under the provisions of existing law, certain designated Treasury securities enjoy special estate tax payment privileges. These securities can be redeemed at par in payment of estate taxes, even though the securities may be selling on the date of redemption for a price which is substantially below par. For example, if an issue of securities which carry such redemption privileges has a coupon rate of 34 percent and is selling for 86 so as to yield 42 percent, the Treasury ordinarily must redeem these securities at their par value of 100 if the securities are offered in payment of estate taxes. The effect is the same as selling the securities for 100 and realizing a 14-point tax-free profit. At the time when estate tax payment privileges were written into the law, during World War I, it was believed that inclusion of these privileges in the terms of issue of Treasury securities would make it possible to market those securities more readily and at lower rates of interest. However, experience has shown that the tax losses sustained when such securities are redeemed at par prior to maturity considerably outweigh any possible benefits realized at the time when such securities are issued. Moreover, the inclusion of tax payment privileges in the terms of issue of Treasury securities tends to obscure the actual cost of carrying the national debt. Finally, the benefits of these securities are conferred in a very haphazard fashion from one year to another and from one taxpayer to another. For example, the benefits conferred by existing law are usually available only to those taxpayers who have the cash or other liquid assets needed to buy such securities and who die during periods when interest rates are high. There does not appear to be any reason for preferring such taxpayers over those whose estates are illiquid, or those who die during periods when interest rates are low. PROPOSAL The statutory provisions which require the Treasury to include estate tax payment privileges in the terms of issue of certain Treasury securities should be repealed prospectively. Adoption of this proposal will gradually reduce the substantial tax losses caused by the provisions of present law. In addition, the cost of carrying the national debt will be made clearer, and there will be greater equity in the treatment of similarly situated taxpayers. This proposal would not alter the redemption features of any outstanding Treasury securities. To the extent that existing issues of Treasury securities carry estate tax payment privileges, those securities will continue to be redeemable at par in payment of estate taxes. VIII-D-2. PAYMENT OF ESTATE TAXES WITH GOVERNMENT SECURITIES TECHNICAL EXPLANATION PRESENT LAW Under the provisions of 31 U.S.C. 765, United States Treasury bonds which bear interest at a rate of more than 4 percent must be made redeemable in payment of estates taxes. If an estate owns securities which carry tax payment privileges, and if such securities were held by an individual at the time of his death (or, in the case of certain securities, for at least 6 months prior to his death), the securities may be redeemed in payment of Federal estate taxes, even though the securities have not yet matured. Upon redemption, such bonds are valued at the higher of par or the mean selling price on the valuation date, and the securities must be included in the estate at the same valuation. PROPOSED AMENDMENT It is proposed that section 14 of the Second Liberty Bond Act, as added by section 6 of the Third Liberty Bond Act, 31 U.S.C. 765, be amended by adding the following sentence at the end of existing section 765: "This section shall not apply to any bond or other security issued after [enactment date]." This proposed revision would repeal, prospectively, the provisions of 31 U.S.C. 765. RELATED MATTER Under a related provision, 31 U.S.C. 752, the Treasury has discretionary authority to establish the terms of issue of Treasury securities, and, in the past, this discretionary authority has sometimes been used to confer estate tax payment privileges on certain issues of securities. No amendment to section 752 has been proposed because, consistent with its proposed section 765 amendment, the Treasury Department will refrain from using its discretionary authority to issue additional bonds or other similar securities (except bona fide tax anticipation certificates) which are subject to a term or condition permitting such bond or security to be received in payment of taxes imposed by the United States. PROPOSALS FOR ESTATE AND GIFT TAX REFORM OF SELECTED PROFESSIONAL ORGANIZATIONS [From Committee on Ways and Means Panel Discussions on Tax Reform, 1973, pt. 10, pp. 1571-1638; submitted by Prof. A. James Casner, Harvard Law School] FEDERAL ESTATE and GIFT TAXATION RECOMMENDATIONS Adopted by THE AMERICAN LAW INSTITUTE At Washington, D.C. AND REPORTERS' STUDIES: STUDY OF DUAL TAX SYSTEM By A. James Casner, Reporter STUDY OF ACCESSIONS TAX SYSTEM By William D. Andrews, Associate Reporter The study upon which this report is based was made possible by funds granted by The Maurice and Laura Falk Foundation of Pittsburgh. However, the Falk Foundation is not the author, publisher, or proprietor of this publication and is not to be understood as approving or disapproving by virtue of its grant any of the statements made or views expressed herein. 1969 by The American Law Institute |