an event occurs (such as the exercise or release of a power of appointment) that would have been subject to a further tax under the old law.

44. In the case of property transferred prior to enactment of the new law, but which would have been included in the transferor's estate on his death under the old law, the property should be taxed as a transfer at death under the new law whether or not it would be so treated under the terms of the new law, but there should be a credit for any gift tax previously paid as provided in the present law.

45. Inasmuch as the primary justification for changing to a unified tax system is to keep the rates on deathtime transfers by those who do not or cannot make lifetime transfers at a lower rate than would be possible under a dual tax system, it should be understood by those charged with determining the rate structure, if a unified tax is adopted, that the purpose of the shift to a unified tax would be undermined if the rate structure evolved under it were designed to produce more revenue than would be produced under a dual tax system.

II. Comments on Resolutions

A. The Joint Ownership Problem'

Internal Revenue Code Sec. 20402

It is very common for two people, particularly husband and wife, to own property jointly with the right of survivorship. The present transfer tax rules applicable to such jointly owned assets are complex, inconsistent and hard to work with. They require tracing of the source of the consideration that went into the acquisition of the jointly owned property. They treat property as passing by gift and then treat the same interest as passing again to the donee at the donor's death if the donor dies first. They frequently require resort to complicated actuarial tables to determine values. The opportunity for simplification here is patent.

'For fuller discussion, see Reporter's Study, at pp. 106-114 infra.

'The text of this, and other sections of the present law to which changes are recommended, is set forth in Appendix A to the Reporter's Study beginning at

There are two aspects of the problem of jointly owned property. One is the valuation of the lifetime gift made on the creation of the joint ownership, and the other is the amount of the deathtime transfer when the right of survivorship with respect to the joint ownership matures by the death of one of the joint owners.

1. The Amount of the Lifetime Transfer

When a joint ownership with right of survivorship is established, there may be no completed gift, as when a joint bank account is set up, because the one who furnishes the consideration for the resultant joint ownership arrangement can unilaterally draw back to himself the entire joint interest. We are not concerned here with that situation but rather with situations where the creator of the joint ownership cannot do this, as when he establishes a joint tenancy or tenancy by the entirety in real estate or in stock or some other property, so that he has made a completed gift of some interest in the jointly held property to the other joint owner.

Under present law, the value of the gift will be one half the value of the jointly held property if the donor-joint-owner has furnished all the consideration and there are two joint owners and if the right of survivorship is destructible by either joint owner at any time, so that he can draw down the one half he owns. If the right of survivorship is not destructible except by mutual consent, then the value of the interest of the younger, who has the greater chance of surviving and taking all, is greater than that of the older joint owner. The determination of value then involves resort to actuarial tables and techniques. It would simplify the taxation of these joint ownership arrangements if each joint owner was regarded as owning one half of the jointly held property regardless of their respective ages. The loss of revenue from this simplification would be very small.

2. The Amount of the Transfer on the Death of One of the Joint Owners

Under present law the gross estate of a decedent includes the full value of property held jointly by the decedent and any

other person, except such part as is shown to have been originally contributed by such other person (or received as a gift from some third party). Thus, even though a donor-joint-owner has made a completed gift in his lifetime and paid a gift tax thereon, when he dies, the entire value of the property is subject to estate taxation.

There is a credit against the estate tax for the gift tax previously paid, but it is often inadequate to prevent some degree of double taxation.

The present rule determining the amount includible in the decedent's gross estate is referred to as the considerationcontributed test. Tracing the consideration for jointly owned property is often difficult, confusing and uncertain. It is therefore proposed to abandon the consideration-contributed test, and to treat a joint owner, on his death, as transfering his proportionate share of the jointly owned property without regard to the original source of the consideration. When the joint owner who paid for an item of jointly owned property dies first, these proposals would mean that one half the value of the property would be treated as transferred at the date of creation of the joint ownership, and one half (of its later value) would be treated as transferred at death. On the other hand, when the joint owner who contributed nothing dies first, the proposed rule may impose a tax at death, which present law does not do, but the benefit of the rule applicable to previously taxed property may be available. If, however, the unlimited marital deduction rule is adopted, no tax will be payable in such a situation if the joint owners are husband and wife.

Under a unified tax, it would clearly be unfair to impose a tax on the completed lifetime transfer and thereby build up the rate that would be applicable to the deathtime transfer, and then also tax the deathtime transfer at the full value of the property simply because the decedent furnished all the consideration. Some complicated adjustment procedure would have to be introduced. The general goal of a unified tax is to make the transfer tax costs approximately the same whether a transfer occurs during life or at death. Thus, picking up the tax in two bites, one on a lifetime transfer of one half and the other on a deathtime transfer of the other half, seems called for under

Under a dual tax system, if the donor can pay the tax in two bites, the proposal opens the door to some tax avoidance, because half the value of the property will escape the estate tax. The consideration-contributed test was devised to protect against this. This tax avoidance is very slight if the 100% marital deduction is available because often the donor and donee will be husband and wife. Even if the 50% marital deduction is retained, the tax avoidance possibilities are not substantial, and the overall simplification produced by eliminating to this extent the tracing problems inherent in the consideration-contributed test outweighs the advantages of its retention even under the dual tax system.

If the 50% marital deduction is retained, and the present provision which eliminates the gift tax on the creation of a joint tenancy or tenancy by the entirety in real property when the donor and donee are husband and wife is also retained, then some modification of this proposal would be required. Otherwise no transfer tax would be imposed on the creation of the joint ownership, and only one half of the jointly owned property would ever be subject to taxation.

The consideration-contributed test will continue to be significant in determining tax consequences on the death of one of the joint owners in cases where the establishment of the joint arrangement with right of survivorship does not result in any completed gift, because the donor-joint-owner retained power to withdraw the entire property, as in the cases of a joint bank account or a jointly owned government bond. This is what is meant by the qualification "where the donor makes a gift at the time the joint interest was created" in the Institute's resolution. With respect to the joint ownership problem the Institute adopted resolutions recommending that:

1. The value of what is received by a donee-joint-owner with the right of survivorship, where the donor makes a gift at the time the joint ownership was created, should be the value of his fractional interest, whether or not the right of survivorship is destructible by the unilateral act of the donee-joint-owner, under either a dual tax svetem or a unified tax.

2. The amount of what is transferred on the death of a joint owner should be his fractional interest, except where no gift was made at the time the joint ownership was created, under either a dual tax system or a unified tax. B. The Employee Death Benefit Problem

3

Internal Revenue Code Secs. 2039(c) and 2517

Under qualified employee benefit plans, the deferred compensation element represented by the employer contributions to the plan is free from income tax until paid out; the build-up due to the investment of this deferred compensation is free of income tax until paid out; when paid out in the employee's lifetime, if paid out in a lump sum in one taxable year, the untaxed build-up of what would normally be ordinary income is treated as a long-term capital gain with the capital gains tax rate ceiling on the income tax imposed; and if the payout of the employer contributions is on the death of the employee, the amount is excluded from the employee's gross estate for estate tax purposes whether paid out in a lump sum or not, unless the amount is paid to his estate, and if paid out on the death of the employee in a lump sum in one taxable year, $5,000 of the amount paid out is excluded from the gross income of the recipient and the balance is treated as a long-term capital gain.

The accumulation of wealth under qualified plans is widespread. The estate tax exemption of employee death benefits has not been extended to self-employed qualified plans, nor is it available with respect to the various sorts of deferred compensation not under qualified plans. If this deferred compensation is brought back into the realm of estate taxation, a broader and fairer base will exist for the transfer tax.

The estate tax collected on the employee death benefits would not result in double taxation of the total amount collected, because the estate tax attributable to this item would be deductible in determining the income tax payable on the receipt of benefits. The combined estate tax and income tax, however, would produce more revenue than the income tax alone produces now. Furthermore, the entire estate tax is payable fifteen months after the death of the employee (unless the time of payment is extended) and when the payout is in installments