CONTENTS GENERAL TAX REFORM-PANELS TUESDAY, FEBRUARY 27, 1973 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Al Ullman presiding. Mr. ULLMAN. The committee will be in order. Our panel this morning is on the subject of estate and gift tax revision. The members of our panel are Mr. Marvin K. Collie, Mr. James Lewis, Mr. Bart A. Brown, Prof. David West fall, Mr. Richard Covey, and Dr. Gerard M. Brannon. We welcome this distinguished panel and look forward to hearing from you. Before we do, I would like to call the committee's attention to the fact that our distinguished colleague John Byrnes is in the audience. We miss you up here, John, but we will be calling on you for expertise from time to time. If there is no objection, we will proceed in the order that I have designated and begin with Mr. Marvin Collie. Mr. Collie, we will be pleased to hear you. STATEMENT OF MARVIN K. COLLIE Mr. COLLIE. Mr. Chairman and members of the committee, I would like to approach the subject of discussion this morning as a private practitioner in this area for over 30 years and from a man that has practiced in a community property State. Perhaps it would be best to preface my brief remarks by saying that generally I am opposed to most of the changes that have been suggested from time to time by other people in this area. I had the privilege of participating as a consultant to the American Law Institute project for some 3 to 5 years and found myself generally in disagreement with what the American Law Institute came out with. However, the Law Institute did not review one subject which seems to be of great importance and which is a subject, as I understand it, of the committee's consideration and that is the income tax on the supposed appreciation of property in an estate over its adjusted basis to the decedent. Basically, I cannot understand the reason why there should be two taxes at the death of a person, an income tax and an estate tax. The burden of taxation is there. There is an appropriate criterion for pay being paid. Whether one calls that an estate tax or an income tax, it seems to me, is relatively immaterial. Some proponents of this estate tax plus an income tax say that the reason for it is that you are discriminating otherwise against the person who sells before date of death. So far as I have been able to find in the literature, and there is a great deal of it on estate and related income taxation, no one has really gone into why does one sell before date of death. In some cases, of course, it is of necessity, but in the great majority of cases, I respectfully submit, it is because of the motives of the owner of the property. He wishes diversification. He wishes to insure his gain. He wishes to have liquidity, and he is willing to pay the capital levy that is imposed by the capital gains tax in order to achieve those objectives. On the other hand, the person who owns and continues to own his property through the date of death is willing to take the other kind of risk. He is willing to give up income and liquidity, and he is willing to give up an insurance of gain in order to not pay the capital gains tax. So, I basically cannot see this argument at all. Some people say it discriminates against those who pay taxes upon their earnings, but look at this situation: Suppose a person earns $40,000 a year. To be sure, he pays an income tax on that. But suppose he lives it up and has no taxable estate and no tax to pay through his executor. On the other hand, the same person saves part of his income of $40,000 after taxes and invests it and puts it in a home and something to insure that, let us say, that a daughter who is afflicted has something to live by, that person should not have the burden of an additional tax simply because he is willing to save during his lifetime. There are many other arguments that other gentlemen will express this morning. I am simply suggesting to you gentlemen what is based upon my practical experience. There is one other aspect of which I have not seen any discussion in this area and that is how do you handle life insurance? In the proposals that have been made for the taxation of a so-called capital gain, keeping in mind of course there is no real capital gain because there has been no realization of a gain, I have not seen a discussion of what is a capital gain from life insurance, especially when you contrast it with someone who has invested, fortunately, in a piece of land that has gone up substantially in value. A man buys life insurance at, say, age 30 and he holds it for 20 years. His death proceeds in the ordinary life situation are going to be more than double the amount of premiums paid. Yet, under the proposals I have seen, there is no proposal for a capital gains tax on that appreciation. I am not suggesting there be any change in the taxation of life insurance. I am simply pointing out that life insurance, the unrealized appreciation, if you will, and really it has been realized much more than any real estate that is unsold at date of death, is apparently being treated in a different manner than he who invests in real estate. I now would like to turn briefly to the so-called dual or unified tax situation. I am sure the members of the committee have heard a great deal about the encouragement of gifts that comes from our present dual system. I simply wish to add to that in practical experience it works. I know some of the statistics show there is an amazingly small amount of gifts apparently even with the encouragement. If the gift is so small, maybe we don't have any real problem. But in my experience, the encouragement of transferring property to a younger generation has been very beneficial. The major problem that bothers me, that nags at me with respect to this unified tax may be briefly illustrated. Let us suppose a man had $400,000 as he reaches his maturity. He has a son who is in a business that is in, let us say, a failing situation. He gives $100,000 to his son to save the business. He has $300,000 left. By the time of his death that market value of $300,000 has declined to $50,000 which he leaves entirely to his daughter in the interest of equity among his children. Now, if you have the unified tax and throw back in the gift to the son, obviously the daughter cannot get anything, not even a contribution from the son because in my hypothetical illustration, the son's business failed. Turning to the proper manner of handling the so-called generation skipping problem, may I respect fully suggest to the committee that I have not been able to find in any literature what is the basic rationale for a tax every generation. I can find a lot more logic in saying we will have a tax every 10 years or every 30 years, but I cannot see the logic of saying why we should have a tax every generation whether that be 10 years or every 30 years. As to the so-called abuse of the 100 years trust as we have as a repeated litany by everybody who wants to do something about the so-called generation trust, I just simply say to you gentlemen that in practical experience I have not seen it work that way. If the committee does feel that this is a very substantial problem, I would think the easiest way to handle it is to remove some of the very flexible and easy to control problems that would keep out the 100year trust, such as reducing the area of the power of appointment that gives the beneficiary of the trust usually a great deal of control over the corpus of the trust and even being trustee and in effect controlling that trust during that beneficiary's lifetime. Then very briefly as to an area that really was not mentioned before the committee, but also nags me, and that is if we are going to do extensive changing in this area, if we are going to go to more complexity to perhaps avoid some problems, then I respectfully suggest the accessions tax should be carefully looked at by this committee. The accession tax has a very complex solution to the problem, but no one that I have ever talked to has ever denied that it is not a much more fair solution to the problems than the estate tax that is levied under the present system. Why we should not tax it according to whom the heirs are. With respect to the expansion of the marital deduction, I cannot understand the way it was done in the ALI project. To me it is an unwarranted benefit to a gift between spouses. The marital deduction was conceived as an equation to the community property system. Now what is proposed completely leaves the rationale given for the vague thought that the property earned is "theirs" or "ours" between spouses without regard to the source or the ownership. In my prepared statement, I have simply tried to show that that does not really occur. The most dramatic illustration is when there is a divorce. It leads to gimmicks and discrimination especially when there are children by a first marriage and then there is a remarriage. Lastly, with respect to the estate tax deduction for gifts to charity, I respectfully urge the committee as strongly as I can that the law should be left as it is. There is no resemblance, I submit, between the estate tax deduction which is now unlimited for gifts to charity and the income tax deduction which is, generally speaking, limited to 50 percent of taxable income. The thing that the people who propound a limitation in this area, I believe, fail to understand that when there is a gift in the income tax area there is effective saving of income taxes and effective additional wealth to the donor. That does not apply to the decedent or his heirs. That property is removed from the decedent and his family. While it does not go into the Federal Treasury, it means that our hospitals, educational institutions, our charities have benefited to immeasurable good of mankind. Thank you. Mr. ULLMAN. Thank you, Mr. Collie. (Mr. Collie's prepared statement follows:) PREPARED STATEMENT OF MARVIN K. COLLIE, HOUSTON, TEX. SUMMARY The so-called "loophole" whereby unrealized appreciation is not subject to an income tax at death is nonexistent, since such appreciation is subject to taxthe estate tax-at death. If there is any need for revision, it is with respect to that portion of the decedent's estate which escapes estate taxation as a marital or charitable deduction. The proposal for a unified transfer tax would destroy any incentive for lifetime giving and introduce complexities unwarranted by any alleged inequities of the present system, all for the purpose of theoretical symmetry in the transfer tax laws. If generation-skipping is an abuse, the solution lies in a tightening of the present liberal power of appointment rules whereby a beneficiary can enjoy virtual ownership of a trust estate without subjecting that trust estate to estate tax on his death. If the purpose of the estate tax is to limit the passing of inherited wealth, a far more equitable approach would be that of an accessions tax. The expansion of the marital deduction to 100% tax-free interspousal transfers ignores the rationale of the present marital deduction-the equating of community property and separate property states-and would introduce family and property distortions as well as result in considerable revenue loss. The unlimited charitable deduction serves the same purpose as the estate tax itself the redistribution of inherited wealth. Any limitation on this deduction would severely affect the charitable capability of the private sector. Mr. Chairman, Members of the Committee: May I approach the subject of drastic changes in estate and gift taxation, and related matters, from the standpoint of a lawyer who has spent his professional time for over thirty years in the private practice of federal tax law, primarily as it relates to trusts and estates, and in a community property state.1 While the 1 This is aside, of course, from the privilege of such part time assignments as being a member of an Advisory Group to this Committee fifteen years ago and having served on an Advisory Group to Professors Surrey and Warren on the earlier American Law Institute Federal Income, Estate and Gift Tax Project and as a consultant to Professor Casner for three years in his capacity as Reporter for the American Law Institute Federal Estate and Gift Tax Project. |