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clause in the will, (ii) doubt as to the inclusion of non-probate property in the gross estate, (iii) uncertainty as to liability on the facts of an individual case. For example, revocable trusts are being used with increasing frequency as substitutes for wills. A fairly common provision inserted in such trusts is that the trustee will make available to the executor sufficient funds with which to satisfy all liabilities of the estate (including estate taxes) if the decedent's residuary estate is insufficient. In such cases the extent of the trustee's obligation for estate taxes is uncertain until the estate assets (whether liquid or nonliquid) have been sold and the estate liabilities have become fixed.
Further, as noted above, even when the liability for the payment of the estate tax is clear there is still the problem of the time of payment by a person holding non-probate property. To the extent payment may be delayed, such a person may use the funds to produce income. Thus, there is a conflict between the executor and a recipient of non-probate property as to the time the funds are made available by such recipient unless the recipient is also the sole beneficiary of the decedent's residuary estate or unless under applicable state law the recipient would be charged interest at the rate of 6 percent from the date the payment is due on any “underpayment” by him.
In conclusion, the net liquid asset concept is deficient and unworkable in many cases. While it could be changed in some respects to make it more workable, the changes would require further complexity and could not solve the myriad of problems that may arise in connection with a decedent's estate. Several technical problems relating to the concept, as it is set forth in proposed section 6158, are discussed later in this Appendix.
II. TECHNICAL COMMENTS ON ORIGINAL ADMINISTRATION PROPOSAL FOR ACCELERATION
OF THE PAYMENT OF ESTATE TAX SET FORTH IN DRAFT BILL
Subsection (a)-the word "a" should be substituted for the word "every".
Subsection (b)--the word "pa yable" should be substituted for the word "imposel". The word “imposed" is used in section 2001 with reference to the gross federal estate tax. Thus there is an implication that the estimated estate tax refers to the gross tax rather than the net tax after credits. The change suggested makes it clear that the net tax is what is being accelerated.
This subsection should also be amended to provide that in computing the estimated estate tax the estate is entitled to subtract the amount of estimated estate tax the date for payment of which would be postponed under the provisions of sections 6163 or 6166. Proposed section 6660(e) does have the effect of providing that for the purpose of determining whether there has been an underpayment of estimatell estate tax the estate may treat as paid the amount of estate tax as to which a postponement of payment is available under these two sections or section 6161. That proposed section does not, however, solve the problem of an underpayment in cases where the estate uses the alternate valuation method and neither section 6163 nor 6166 is available but would have been available if date of death values were used. The estate should not be asked to "assume the risk" of the availability of postponements under these sections where they are available if date of death values are used. In this connection it should be noted that the net liquid asset concept does not necessarily avoid unfairness in this area. To illustrate, a postponement of tax may be available under section 6166 for a “liquid asset" where the asset consists of 20% of the voting stock of a company. To summarize, section 6022(b) should be revised to read :
For purposes of this title the term "estimated estate tax" means the amount which the executor estimates as the estate tax which, if section 2032 (relating to alternate valuation) had not been enacted, would be payable under chapter 11 on the transfer of the taxable estate of a decedent reduced hy the estate tax as to which the date for payment would be postponed under
the provisions of section 6163 or 6166. Section 6077
This section requires that a declaration of estimated estate tax be filed within 7 months after the decedent's death "if the estate tax return required under section 6018 has not been filed prior to such date.” Section 6158(a) requires the estate tax payment to be made with the declaration. If no declaration is filed because the estate tax return has already been filed, it may be argued that no payment must be made under section 6158(a). An estate tax return may, of course, be filed before it is due without being accompanied by payment of the tax shown as due on the return and the payment may be made at a later time. See section 6151 (a). Thus there is the possibility of avoiding acceleration by filing the estate tax return but not paying the tax. This possibility may be avoided by revising section 6077 to read :
Declarations of estimated estate tax required by section 6022 shall be filed within 7 months after the date of the decedent's death unless the estate tax return required under section 6018 has been filed within such period and the
tax shown as due on such return has been paid within such period. Section 6158
Subsection (a)--the heading is inaccurate and should be changed from "General Rule" to "Amount of Payment.”
Subsection (b)-the word “made” should be substituted for the word "paid" and the words "executor as defined in section 2203•' should be substituted for the words "person required to file the declaration of estimated estate tax" to conform to proposed section 6022 (a).
Subsection (c) (1) (A)—the words "the date" should be omitted.
Subsection (c)(1)(B)—this subsection reaches an inappropriate result where a liquid asset is sold but all or a part of the sale proceeds are not received within the six month neriod. It has the effect of assuming that the entire sale proceeds have been received since it treats as a liquid asset the full value of the property sold which is no longer a part of the estate.
Subscction (c)(1)(C)-the use of the word “received” permits the application of the subsection to be avoided by having payment for the sale of a nonliquid asset made 6 months and 1 day after date of death.
Subsection (c)(2)(A)-the use of the words "as required by their terms" with reference to estate obligations should be deleted. A decedent may have a promissory note outstanding which has more than 15 months to run at the time of his death. The executor should have the right to repay the note if he deems such action in the best interest of the estate without having to consider the amount paid as a liquid asset.
Subsection (c) (2) (B)--the amounts permitted to be set aside for the shouse or a dependent child of the decedent may be hopelessly inadequate to cover the needs of these persons based upon their standard of living prior to the decenient's death.
Subsection (d)—this subsection is defective in defining the term “liquid assets” to include assets that as a practical matter are not available for the payment of an estimated estate tax. For example, property classified as a “liquid asset” may be held as security for the payment of a debt that is not due or paid within six months of the decedent's death or may be located in a foreign juris. diction and subject to administration there. Also, subsection (d) (2) has the effect of being inconsistent with present section 6166. To illustrate, if 200% or more of the voting stock of a corporation is included in a decedent's gross estate par. ment of the estate tax on this stock may be deferred under section 6166 but the stock mar still in some cases he treated as a “liquid asset." Section 6603
Heading--the heading should be changed to omit the prorils "os nonpayment". The word "nonpayment” is not used in the proposed sertion and nonpayment is an underpayment.
Subsection (a)-the words "and (f)” should he eliminated. Section 6660(f) has nothing to do with the amount of an underpayment. Section 6660
Subscrtion (p) (1) (A)-the words "section 61.38" should be changed to "sition 6158(a)" to conform with other provisions.
Subsection (e)(1)(B)-the words "required under section 6022" should be omitted as unnecessary.
Subsections (e) (2) (A) and (M)-there is no need to have two separate provisions since the amount referred to in (C) is exactly the same as the amount referred to in (A) errept for the reduction provided for hr (ii). Also, the words “estate tax determined by the executor as the tas imposed under chapter 11" should be eliminated and replaced by the words "estate tax shown as due on the estate tax return” to conform to language used in section 6426. (C) should be eliminated and (A) should be revised to read :
If the amount of estimated estate tax paid on or before the date prescribed under section 6077 for filing the declaration of estimated estate tax equals or exceeds S0 percent of
(i) the estate tax shown as due on the estate tax return reduced by
(ii) the estate tax, the date for payment of which is postponed under
the provisions of section 6161, 6163, or 6166. Section 6426
Subsection (a)-the word "actually" should be omitted from the first sentence.
Subsection (b)-the words “make, to the extent he deems practicable in such period, a limited examination of the applications, declarations, and returns to discover omissions and errors of computation therein and shall” should be omitted as unnecessary. The Code does not read to give instructions as to how the Secretary or his delegate is to make the required determination. Also the words "he finds" should be omitted. If the Secretary or his delegate "finds" incorrectly he should not be able to avoid the payment of interest.
Vr. ULLMAN. We thank you for a very thoughtful and helpful statement, Mr. MacKethan.
Would you say, Mr. MacKethan, that I have interpreted your feelings on this matter correctly in saying that unless we get into some basic reforms in this whole area that we should not adopt a speedup at this time?
Mr. MACKETHAX. We feel that this legislation would be better adopted as a part of an overall package that we understand you intend to take up later this year or more probably next year.
Mr. ULLMAX. I could not agree with you more strongly.
This is an area of taxation that we have had on our agenda, as you know, for some time, an area of most needed reform. You have brought out some of the problems, and I am sure at such time as we go into the matter thoroughly you would probably be able to expand each even further on this matter.
It has been my personal feeling that to adopt a speed up now without going into some of these basic matters would be a very grave mistake and very well might endanger the whole concept of reform in the area of estate taxes.
Are there questions?
If not, we thank you very much, gentlemen, for appearing before the committee.
(The following letter was received for the record :)
THE AMERICAN BANKERS ASSOCIATION,
New York, N.Y., September 21, 1970. Hon. WILBUR D. MILLS, Chairman, Committee on Ways and Means, U.S. House of Representatives,
Washington, D.C. DEAR MR. CHAIRMAN: I am writing this letter to you to be certain there is no misunderstanding about the position of The American Bankers Association with respect to pending proposals for the acceleration of payment of estate and gift taxes.
We prefer that there be no change in existing law and believe that consideration of the matter of the time of payment of these taxes should be taken up as a part of the general review of estate and gift taxes.
However, if your Committee decides that fiscal considerations require you to act on acceleration this year two elements should be added to the alternate pro posal supported by the Treasury. They are :
1. To change the one-year rule for discharge of an executor from personal liability for payment of estate taxes in section 2204 to nine months and expand the discharge (a) to cover the decedent's income and gift taxes, and · (b) to provide that the discharge of the executor will also discharge other fiduciaries who on the date of the decedent's death hold property included in the decedent's gross estate from personal liability for these same taxes ; and
2. To clarify the rules with regard to securing extensions of time to pay the estate tax clearly to indicate that an extension will be granted when the funds available to the executor are not sufficient to pay the entire tax or for
other good cause. Under these circumstances, i.e., your Committee's determination that fiscal considerations require action this year, and the addition of these two elements, we believe the alternate proposal supported by the Treasury is a reasonable and workable approach. Sincerely,
EDWIN R. MACKETHAN. Mr. ULLMAX. The next witness is Mr. McDowell, and we welcome you before the committee. If you will identify yourself and your colleague for the record, we will be very happy to recognize you.
STATEMENT OF SHERWIN T. MCDOWTLL, CHAIRMAN, SECTION OF
TAXATION, AMERICAN BAR ASSOCIATION; ACCOMPANIED BY EARL COLSON, CHAIRMAN, TAX SECTION ON ESTATE AND GIFT TAXES
Mr. VCDOWELL. Thank you. V Chairman and members of the committee. My name is Sherwin T. McDowell, and I am anrearing as chairman of the section of taxation, American Bar Association.
With me is Earl Colson, chairman of the tax section's committee on estate and gift taxes.
Mr. ULLMAN. We are always happy to have the American Bar Association testify before us and your testimony is always most helpful.
Mr. McDoWELL. Thank you, Mr. Ullman.
We appreciate this opportunity to appear before you. We wish to address ourselves only to the estate and gift tax proposals which you are considering. The position of the Tax Section may be summarized as follows:
Basically, we are opposed to acceleration of the time for payment of the estate tax. However, if revenue needs make estate tax acceleration necessary at the present time, we support the Administration's proposal only if the statute of limitations for assessment of estate tax is shortened and the practice of granting extensions in cases of hardship is liberalized.
We believe that the gift tax proposal is unlikely to produce any substantial acceleration in revenue since it will simply lead donors to defer their gifts until the final quarter of the calendar year. It is an undesirable complication of the tax laws.
Let me state, briefly, the reasons why we oppose acceleration of payment of the estate tax.
First, we believe that such an acceleration should be correlated with the other anticipated substantive changes in the estate and gift tax provisions, particularly where acceleration is solely a one-time rerenue-raising expedient:
Second, it is generally recognized that estate and gift tax rates are too high. In its recent study, the American Law Institute recommended adoption of a rate table with a top estate tax rate of 60 percent. Rate reduction was also a major feature of the estate and gift tax reform studies formulated by the Treasury Department during 1968, at the request of Congress. The present payment acceleration proposals are, in effect, estate and gift tax rate increases. Payment of estate tax 6 months earlier than the present due date would, at an assumed interest rate of 8 percent, amount to a 4 percent increase in the tax. Acceleration of gift tax payment dates by the proposed average period of 7 months would, at the assumed interest rate of 8 percent, amount to a tax increase of 4% percent.
Finally, as the committee is of course aware, the administration of a decedent's estate and the determination of the estate tax liability is often a complex and time-consuming process. All too frequently, fiduciaries find the present 15 months' period for payment of tax too short. Reducing this period by 40 percent will increase the burden on fiduciaries in effecting an orderly administration of decedents' estates.
Let me turn now to the specifics of the administration's estate tax proposal. Initially, the administration proposed to require payment of an estimated tax 7 months after death. We opposed this, and said that if acceleration were necessary for revenue purposes, it would be preferable to eliminate the requirement for payment of estimated tax and move up the filing and payment date from the present 15 months after death to 9 months. There were four additional points in the section's proposal :
(1) Shorten the statute of limitations for assessment of estate tax deficiencies.
(2) Liberalize the practice of granting extensions in hardship
(3) Change the alternative valuation date from 1 year to 6 months.
(4) Eliminate the 6 months holding period for long-term capital gains. The administration has changed its proposal to eliminate the requirement for estimated tax payments and now proposes to advance the filing and payment dates to 9 months after death. Also, it proposes to shorten the alternative valuation date to 6 months and eliminate the 6 months holding period for long-term capital gainst treatment.
The administration has thus covered two of the points that were an integral part of the tax section's alternative to the administration's original proposal. We recognize that the present proposal is a substantial improvement over the administration's prior proposal. However, we believe that the present proposal is deficient because it fails to cover two of the four points mentioned; that is, it fails to shorten the statute of limitations for assessment of estate tax deficiencies, and it does not provide for liberalization of the practice of granting extensions in hardship cases.
The Secretary of the Treasury said, in his statement to you, that an important feature of the administration's proposal was a speed-up in audit, but that this would be accomplished by administrative