feror under 21 years of age, whether or not he resides in the transferor's household, provided that such expenditure does not result in such person or child acquiring property which will retain significant value after the passage of one year from the date of such expenditure; or

(b) current educational, medical or dental costs of any person; or

(c) current costs of food, clothing and maintenance of living accommodations of any person in fact dependent on the transferor, in whole or in part, for support, provided such expenditure is reasonable in amount.

F. The Charitable Gift Problem

Internal Revenue Code Secs. 2055 and 2522

A 100% deduction is now available under the gift and estate tax laws for dispositions to charity. There has been some discussion of the desirability of cutting down the available charitable deduction for gift and estate tax purposes to correspond to the 20% and 30% charitable deductions available for income tax purposes. No significant sentiment developed for such a change.

The present rules applicable to the charitable deduction, however, make it an all-or-nothing proposition. That is, if the charitable interest created is not capable of being valued on the date of the gift, or on the date of death in the case of a deathtime transfer, no charitable deduction is available even if the charity later succeeds to substantial property. Extensive litigation has arisen over the issue whether a charitable gift can be valued at the designated time, when the transfer to the charity is subject to a condition precedent or condition subsequent or to a power which may be exercised in favor of individuals. Instead of trying to solve these cases on an all-or-nothing basis, it is here recommended that they be solved on a waitand-see basis.

Under a wait-and-see approach, a charitable deduction will be initially disallowed to the extent any condition or power

could prevent the charity ultimately from obtaining any of the transferred property, no matter how remote that contingency may be. If the condition or power applies only to a portion of the property, then the deduction is initially disallowed only as to such portion. Later, when the facts are finally known, a refund without interest would be allowed in the amount that the original tax would have been reduced had the facts as they turned out been known from the beginning and the charitable gift valued accordingly. The refund will go to charity unless the dispositive instrument directs otherwise. This approach will put more money in the hands of private charity than under the present law, and this objective is worth attaining in an age when the tendency is so much in the direction of governmentsupported charitable goals.

In cases where the valuation of the charitable interest is uncertain due to a power to divert the property to an individual, and that power is subject to a definable standard, an election could be provided under which a value may be placed on the charitable interest by the donor or his representative and the tax paid accordingly. Then later, when the facts are known, the original tax bill would be recomputed on a wait-and-see basis. If the original tax was too little, a deficiency would be assessed with interest from the date the tax should have been paid; if the original tax bill was too much, a refund without interest would be payable.

The wait-and-see rules would be subject in all cases to an agreement between the taxpayer and the Government as to the value of the charitable gift. Such an agreement would stand regardless of what turned out to be the facts on a wait-and-see basis.

Under the wait-and-see proposals, there is no room for litigation except to determine whether there is any condition or power and except to determine whether there is a definable standard if the donor or his representative decide to elect to determine the value of the charitable gift.

The value of a charitable remainder is not uncertain merely because it follows a life interest in some person. A charitable income interest, however, measured as to its duration by the life of an individual, should be treated as uncertain and subject to the wait-and-see rules.

Under the wait-and-see approach, in connection with lifetime transfers, the requirement that the original tax be computed without the charitable deduction means that subsequent lifetime transfers may be taxed at higher rates than if the deduction had been allowed. If a refund is later obtained, the refund should be in the amount necessary to reduce the total transfer taxes paid to the amount that would have been paid if the charitable deduction had initially been allowed, and the rate for future transfers should be adjusted accordingly.

The difference between a dual tax system and a unified tax does not suggest any difference in the operation of the wait-and-see proposal in regard to charitable gifts.

With respect to the charitable gift problem the Institute adopted resolutions recommending that:

8. The 100% charitable deduction in the field of transfer taxation should be retained, under either a dual tax system or a unified tax.

9. A charitable deduction should be allowed on a waitand-see basis, with respect to charitable gifts of uncertain value, under either a dual tax system or a unified tax.

G. The Property-Previously-Taxed Problem10

Internal Revenue Code Sec. 2013

When property is subjected to transfer taxation, it is only fair that it not be pushed through the transfer tax mill again for some reasonable period of time by the death of the recipient, an event over which the recipient has no control. If the recipient makes a lifetime transfer, there is less need to be concerned that the transfer tax will be applied again, because this result could be avoided by not making the gift. A lifetime gift followed shortly thereafter by the death of the recipient and a deathtime transfer followed shortly thereafter by the death of the recipient are the situations that may need relief.

The present law gives relief by providing a credit for the original tax in computing the recipient's estate tax. The computation of the credit is somewhat complicated in various situations. The credit is allowed only in the case of successive death

time transfers, not in the case of a lifetime transfer followed by the death of the recipient. The credit diminishes by 20% every two years, so that it is totally gone at the end of ten years.

The credit approach does not free the previously-taxed property from a second tax in most instances, because the previously-taxed property in effect will be taxed at the top bracket of the recipient, whereas the available credit will be based on the original transferor's average estate tax rate, which frequently is lower.

Prior to the development of the present credit approach, previously-taxed property was simply excluded, if it could be identified in the assets of the recipient at the time of his death. This required a segregation of these assets if the tracing job was to be done with accuracy. The exclusion was available for a period of five years. The main objection to this approach was the tracing requirement.

It is here proposed that a decedent's estate be allowed a deduction in the dollar amount of any previously-taxed property, such dollar amount to be determined as of the time of the transfer to the decedent. This deduction would be for 100% of such dollar amount if the decedent dies within six years after the transfer to him. If he dies after six years, the dollar amount would decrease by 20% each year and be entirely gone after ten years. The availability of the dollar amount deduction would not be dependent on tracing and would be available on death during the ten-year period regardless of what dispositions had been made of the previously taxed property itself in the mean

time.

The dollar amount of the deduction for property previously taxed would be determined as of the time of the prior transfer and the specific exemption available to the transferor would be taken into account and allocated proportionately among the recipients of taxable property as of that time. For example, if there were two transferees of a decedent and one transferee received from the decedent $100,000 and the other transferee received $200,000 and the specific exemption was $60,000, the $60,000 would be allocated one-third to the $100,000 beneficiary and two-thirds to the $200,000 beneficiary, leaving the former (if he died within six years) with an $80,000 deduction for property previously taxed, and the latter with $160,000. If the

first decedent had been allowed a deduction for property previously taxed in the amount of $90,000, that deduction would have to be allocated proportionately to the two transferees in the same way the $60,000 exemption was allocated so that the deductions would be $50,000 and $100,000 respectively.

In cases where successive interests are created, the amount of the deduction available for property previously taxed would be first determined with respect to the whole property. Then if one of the successive beneficiaries dies, the portion of the amount of the deduction for property previously taxed that is allocable to him would be ascertained on the basis of what would have been his share of such amount as of the time such amount was ascertained if the time of his death had then been known.

Under a unified tax the deduction for previously-taxed property should be allowed whether the prior transfer was during life or at the death of the original transferor, since in either event the transfer will ultimately be taken into account in computing the original transferor's death taxes. Under a dual tax system, however, the deduction should only be allowed for property acquired on the death of the original transferor, because otherwise property acquired by a lifetime transfer would not be taken into account at estate tax rates for either the original or subsequent transferor.

If property was previously taxed in a lifetime transfer, the annual exclusion might be involved and have to be taken into account in determining the value of what was previously taxed. The property previously taxed deduction is available only with respect to the property of a decedent that was previously taxed.

This proposal is more favorable to the taxpayer than the present credit rules, because the dollar amount deduction will take property out of the top tax bracket. It does not have the tracing objection that was present in the former deduction for property previously taxed.

With respect to the property-previously-taxed problem the Institute adopted resolutions recommending that:

10. The fixed dollar amount deduction approach for the benefit of a recipient of previously-taxed property should be adopted, under either a dual tax system or a unified tax.