PREFACE The Tax Reform Act of 1969 hearings before the Ways and Means Committee included testimony concerning revision of the estate and gift tax laws and a change in the current income tax basis rule for property transferred at death. Due to a lack of time, the 1969 Act did not deal with these subjects. Representative Wilbur D. Mills, Chairman of the Ways and Means Committee, did, however, announce his intention of having the committee consider these subjects in the future. During the last three years the Trust Division of the American Bankers Association has had the estate and gift tax laws and a change in the basis rule under continuing study. The members of the Trust Division would prefer to avoid substantial changes in these areas where stability, certainty and simplicity are primary objectives. Nevertheless, change appears likely and they desire to participate in the process of shaping it. The Trust Division has developed what it regards as a constructive program for change in the estate and gift tax laws and the basis rule that responds in every major area to the criticisms of current law. This program is set forth in the discussion draft (the "Draft") of statutory provisions and explanatory comments (the 'Commentary") that follow. Preparation of the Draft was found necessary since in some areas for example the taxation of limited trust interests - policy decisions could not finally be made without a proposed statutory provision. On balance, the Draft does not simplify current law. The additional complexity is required in order to respond to the criticisms of this law. The Draft is based upon our belief that the present level of estate and gift taxation (estimated in the Economic Report of the President, January, 1973, at $4.6 billion for fiscal 1973 and $5.0 billion for fiscal 1974) is appropriate, and has the effect of reallocating the amount of tax payable by affected taxpayers but does not significantly increase or decrease the total amount of transfer taxation. The additional revenue derived from some changes would be offset by the decreased revenue that would result from other changes. It is believed that the Draft constitutes a modest tax increase in terms of long range tax revenues. Thus, it is true "reform", within the total ambit of all affected The starting point for our review of the current estate and gift tax laws and the basis rule was the work of the American Law Institute and the Treasury Department under the administration of the late President Johnson. The American Law Institute publication, Federal Estate and Gift Taxation, Recommendations of the American Law Institute and Reporters Studies (1969) (the "ALI Project") contains the resolutions adopted by the Institute with explanations and the studies and proposals of the reporters. The Treasury's work, Tax Reform Studies and Proposals (1969) (the "Studies") proposed changes under three main headings: (1) taxation of appreciation at death, (2) unlimited marital deduction and unification of the estate and gift taxes, and (3) generation skipping transfers. The Draft accepts some of the ideas of these groups, rejects others and modifies still others. In each instance the Commentary sets forth the basis for our actions. SUMMARY OF TRANSFER ACT DRAFT STATUTE I. Sections Containing Major Changes in Current Law 2. This section imposes a single, cumulative transfer tax on an individual's taxable transfers of property in place of the current two separate gift and estate taxes. Taxable transfers are defined separately in Sections 3 and 17 for lifetime transfers and transfers at death respectively. The tax is computed in the same manner as the current gift tax, viz., by calculating a tax on the individual's total transfers to that time, including the transfers to be taxed, and by then subtracting from this amount the tax on the individual's prior transfers, 1.e. those in preceding calendar quarters where a lifetime transfer is involved, or all lifetime transfers if transfers at death are being taxed. The Section 1 rate schedule reduces the current estate tax burden on medium estates by eliminating the rapid and steep progression which is present in the lower brackets. As a result of the inclusion of the Section 2 tax and the single rate structure, it is also possible to lower the Section 1 rates to a maximum of 60% in the top bracket from the current top 77% estate tax rate. Section 2. Additional Tax on Certain Transfers. Section 2 imposes an additional tax (AET) of 14% upon the net appreciation in an individual's transfers at death. Net appreciation in transfers within two years of death is also subjected to the AET in order to prevent avoidance through transfers shortly before death. Current law would be continued as to the income tax basis of assets included in a decedent's gross estate this basis would be the value of the asset on the applicable valuation date. In the case of property transferred more than two years before death, its basis, increased by the Section 1 tax attributable to unrealized appreciation, will be "carried over" to the donee. Net appreciation is determined on an aggregate basis by subtracting the basis of the transferred property from its fair market value. Certain assets are deemed to have a basis for AET purposes equal to their fair market value. These assets are (1) life |