transfer tax brackets of both spouses. Even though all the property is owned by one spouse, the donor spouse can move one half over to the donee spouse without any tax, and the donee spouse can give half of that half away in her lifetime and the other half on her death, and the donor spouse can do likewise. This results in only two bottom rate schedules being utilized under a unified transfer tax. Under a dual tax system, however, four bottom rate schedules are available-the donor spouse's gift tax rate, the donee spouse's gift tax rate, the donor spouse's estate tax rate, and the donee spouse's estate tax rate. The utilization of these various bottom rates without placing the control of the property in the donee spouse is possible under an adoption of the current-beneficial-enjoyment test. This would be the case if the donor spouse placed one fourth of the property in a trust under which the wife's interest would terminate in the wife's lifetime and one fourth in a trust under which her interest would terminate on her death. It is thought by some that this opens the door too far when a dual tax system is involved. Nevertheless, it is recommended that the 100% marital deduction be adopted under either a dual tax system or a unified tax.

Adoption of the 100% marital deduction would cause some revenue loss under either a dual tax system or a unified tax. An analysis of the revenue loss is made in Appendix C to the Reporter's Study at page 410, indicating that in the long run the revenue would be about 7% less than with a 50% marital deduction.

The Tax Advisory Group at a meeting in May 1967 voted in favor of the 100% marital deduction by a vote of 30 to 11, and almost unanimously favored the abolition of the terminable-interest rule and the substitution of the current-beneficialenjoyment test. The Council of the Institute approved the 100% marital deduction by a vote of 13 to 7.

With respect to the interspousal transfer problem the Institute adopted resolutions recommending that:

16. The 100% marital deduction should be adopted in place of the 50% marital deduction, under either a dual tax system or a unified tax.

17. The terminable-interest rule in relation to marital deduction transfers should be abolished and a current-bene

ficial-enjoyment test adopted, under either a dual tax system or a unified tax.

18. Under either a dual tax system or a unified tax, an election should be available to have qualified marital deduction transfers taxed in whole or in part as though they did not qualify for the marital deduction, and to the extent such an election is made, no transfer tax should be imposed on identifiable previously-taxed property when beneficial enjoyment passes from the donee spouse to others.

J. The Spousal-Transfers-to-Others Problem19

Internal Revenue Code Sec. 2513

Under present law, when a gift is made by a married person to a person other than his spouse, one half of the gift can be treated as if made by the non-donor spouse for federal gift tax purposes. This is referred to as gift splitting by husband and wife. Gift splitting has been allowed since 1948 and came into the picture as a part of the tax legislation that was designed to equalize to some extent the tax situation in community and non-community property states.

If the subject matter of a gift is community property and the donee is not the spouse of the donor, the gift is one half from each spouse without any election since each owns one half of the donated property. Gift splitting in common law states produces the same gift tax result.

1. Gift Splitting at Death

Gift splitting is not now allowed with respect to transfers made on death. That is, a surviving spouse cannot have one half of the deathtime transfers made by the deceased spouse to others attributed to her. The deceased spouse could make a marital deduction deathtime transfer to the surviving spouse and she could in turn give it to a beneficiary of the deceased spouse and in effect produce an ultimate result comparable to the gift-splitting result available for lifetime transfers. If a deceased spouse makes a deathtime transfer of community property to another and the surviving spouse acquiesces, the result is a lifetime gift by the surviving spouse of one half the

community property and a deathtime transfer by the deceased spouse of the other one half. In a sense, it could be said that gift splitting is available for deathtime transfers of community property while as to non-community property a more cumbersome procedure to accomplish the same end must be employed. To reduce the complications in relation to other than community property, and to achieve greater equality of treatment between community and non-community property, it is proposed that gift splitting be extended to deathtime transfers.

2. Splitting in Ratios Other Than 50-50

The present law requires that one half of the gift made by the donor spouse be attributed to the consenting non-donor spouse. The one-half rule is tied to the fact that a transfer of community property by the spouses is inherently one half and one half. It is proposed, if the 100% marital deduction is adopted, that the gift splitting be allowed on any basis agreeable to the consenting non-donor spouse. If the 100% marital deduction is adopted, the donor spouse could give any portion of an intended gift to his spouse and she could become the donor of that portion. The same result should be allowed to be accomplished directly by her consenting to be treated as the donor of any particular portion. The opening up of gift splitting in this way would also apply to community property, so that on a gift of community property to another, either spouse could consent to be treated as the donor of any portion of the total community property.

The extension of gift-splitting to deathtime transfers makes it easier to utilize the non-donor spouse's bottom rate schedule. This is not particularly significant under a unified transfer tax because such utilization will move up the beginning rate bracket that will be applicable to future transfers, lifetime and deathtime, by the consenting non-donor spouse. Extending gift splitting to deathtime transfers under a dual tax system, however, makes it possible to utilize the non-donor spouse's bottom gift tax bracket at the time of the donor spouse's death, when otherwise it would never be used in many cases. Nevertheless, it is suggested that the same position in regard to gift

splitting be taken under either a dual tax system or a unified

tax.

With respect to the spousal-transfers-to-others problem, the Institute adopted resolutions recommending that:

19. Gift splitting by husband and wife should be allowed on a transfer by either one to others in connection with deathtime transfers as well as lifetime transfers, under either a dual tax system or a unified tax.

20. If the 100% marital deduction is adopted, gift splitting should be allowed on any ratio consented to by the nondonor spouse, under either a dual tax system or a unified tax.

K. The Disclaimer Problem20

Internal Revenue Code Secs. 2041(a)(2), 2055(a), 2056(d)(2), 2514(b)

The premium on skillful advance planning with respect to property dispositions would be lessened if post-transfer-date changes could be treated for transfer tax purposes as though they were incorporated in the original transfer. This can be accomplished to some extent by judicially recognized disclaimers, but the limits of the utilization of disclaimers is somewhat uncertain except for the following instances that have been incorporated in the Internal Revenue Code.

Under present law, an interest that falls to a charity as a result of an irrevocable disclaimer of a bequest, legacy, devise, transfer or power, if made before the date for filing the federal estate tax return, will be available for the charitable deduction (I.R.C. Sec. 2055). This provision makes it possible, after the decedent's death, to obtain a charitable deduction as a result of a disclaimer where otherwise no charitable deduction would be available.

If a person is given a general power of appointment and disclaims it, he will not for transfer tax purposes be treated as though he had the power and released it (I.R.C. Sec. 2041). In other words, a disclaimer of the power is not a taxable gift and will remove from the disclaiming party's gross estate for federal

estate tax purposes the value of appointive assets that would otherwise be in his gross estate, just as would have been the case if the general power had not been created.

Recently the marital deduction provisions were amended to allow a marital deduction for an interest that falls to the decedent's spouse as a result of a disclaimer by another of an interest given to him by the decedent (I.R.C. Sec. 2056(d)(2)).

The present Internal Revenue Code does not undertake to define what will amount to a disclaimer that will cause the original transfer to be judged for transfer tax purposes as though it had been in the form that is produced by the disclaimer. The Code should define what constitutes a disclaimer so that the transfer tax consequences would be clearly determinable.

If a timely disclaimer has been made, the tax consequences should depend on circumstances. If a power is disclaimed, the transfer should be construed for transfer tax purposes as though the disclaimed power never existed. If a beneficial interest in property is disclaimed, the disclaimed beneficial interest would have to go to someone else as a result of the disclaimer and transfer tax consequences may be affected by the identity of the recipient. In the absence of a provision in the dispositive document that specifically designates where a disclaimed interest will go, resort to local law should determine its destination.

Under present law a transferee is not treated as disclaiming if he controls and directs the redistribution of the transferred property. It is proposed, in order to give the maximum freedom in post-transfer rearrangement, to recognize as a disclaimer, if timely action is taken, what may be regarded locally as accepting the interest and transferring it, provided no tangible beneficial enjoyment results from the acceptance. This, in effect, would allow the disclaiming party to direct where the disclaimed interest will go by acting promptly, without being treated as a transferor for transfer tax purposes.

With respect to the disclaimer problem the Institute adopted resolutions recommending that:

21. The Internal Revenue Code, under either a dual tax system or a unified tax, should define what constitutes a disclaimer.