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. ULLMAN. 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. MCDOWELL, CHAIRMAN, SECTION OF TAXATION, AMERICAN BAR ASSOCIATION; ACCOMPANIED BY EARL COLSON, CHAIRMAN, TAX SECTION ON ESTATE AND GIFT TAXES

Mr. McDOWELL. Thank von, Mr 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 revenue-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

cases.

(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

changes in the Internal Revenue Service audit procedures. No reason was given as to why this speed-up could not be assured by a change in the code. We believe that it would be preferable to accomplish this by statutory rather than administrative change. The Tax Section believes that the statute of limitations for assessment of tax should be shortened from 3 years to 1 year. This could be done in stages, say over a 2-year period, if it would create an administrative burden on the Internal Revenue Service to do it all at once.

We think that if there is an acceleration of time for payment of the tax, there should be a correlative acceleration of the period in which the Commissioner must move to settle the tax. This will shorten the time during which an estate must remain in administration and will speed the time for distribution of the estate to the ultimate beneficiaries. If the statute of limitations is not shortened, taxpayers will be asked to assume the burden of acceleration without any correlative benefit.

If the time for payment of the estate tax is shortened to 9 months, we believe that it is imperative that the practice of granting extensions in cases of hardship be subsantially liberalized. The committee reports and the regulations should spell out the ground rules for the guidance of District Directors in granting tax postponements. Factors to be considered should include a shortage of liquid assets charged with the burden of the tax, a post-death shrinkage of asset values, actual or threatened litigation, and potential liabilities.

Now, let me turn briefly to the gift tax proposal. We believe that the effectiveness of the proposal is open to question. Gifts are voluntary acts. Gift tax rates are already high and any further increase in the burden may depress the tax base. Most donors review their gift programs near the end of the calendar year. Donors who might otherwise make gifts in the early part of the calendar year will almost certainly defer them until later in the year in order to obtain an interest-free postponement of the tax payment. For this reason, it seems that the proposed complication of the tax law would not result in sufficient additional revenue to justify the increased burden on taxpayers. Thank you very much.

(Mr. McDowell's prepared statement follows:)

PREPARED STATEMENT OF SHERWIN T. MCDOWELL, ON BEHALF OF THE SECTION OF TAXATION, AMERICAN BAR ASSOCIATION

My name is Sherwin T. McDowell and I am appearing as Chairman of the Section of Taxation, American Bar Association.1

The Administration has proposed to this Committee that legislation be enacted requiring (1) filing of the estate tax return and payment of the tax nine months after the decedent's death and (2) reporting of gifts and payment of gift tax at intervals of three months.

This statement deals only with the estate and gift tax proposal and not with the Administration's proposals concerning excise taxes and the lead additives tax.

The Section of Taxation opposes the proposal to acelerate payment of the estate tax because it will unduly increase the burden upon fiduciaries in effecting an orderly marshaling and liquidation of the decedent's assets.

1 This statement has been prepared by the Section of Taxation and has not been approved by the House of Delegates or the Board of Governors of the American Bar Association, and should not be taken as representing the opinions, views, or action of the American Bar Association, its House of Delegates, or Board of Governors, but only the opinions, views, or action of the Section of Taxation.

If an increase in estate tax revenue in the fiscal year 1971 is an overriding consideration, we support the Administration's proposal only if (1) the statute of limitations for assessment of estate tax is substantially shortened, and (2) the practice of granting extensions in cases of hardship is substantially liberalized.

We oppose the gift tax proposal for the reason that it 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.

BACKGROUND

Initially the Administration proposed to require payment of an estimated estate tax seven months after death. In opposing this proposal, the Section of Taxation took the position that if acceleration of estate tax payments were considered necessary for revenue purposes, it would be preferable to eliminate the requirement for payment of an estimated tax and require the filing of the final return and payment of the tax 9 months after death instead of 15 months as under present law. There were, however, four additional points in the Section's proposal which were an integral part of the proposal: (1) that the statute of limitations for assessment of additional estate tax be shortened to one year, (2) that the practice of granting extensions in cases of hardship be liberalized, (3) that the alternative valuation date be changed from one year to six months, and (4) that the six months holding period required for long-term capital gain treatment be eliminated.2

The Administration's present proposal covers points (3) and (4). Although the Section fully recognizes the improvements made by the Administration in accepting portions of the alternative proposal, we believe that points (1) and (2) are essential, and we would support the proposal only if they are included.

THE CASE AGAINST ACCELERATION

The sole purpose of the proposal to accelerate the payment of estate and gift taxes is to achieve a none-time revenue increase. We are opposed to the acceleration of the payment of tax without correlation with the other anticipated farreaching proposals for change in the estate and gift tax, particularly where acceleration is solely a one-time revenue raising expedient.

It is generally recognized that estate and gift tax rates are too high. The impact of the post-World War II inflation has pushed estates into higher and higher tax rate brackets, which range upward to 77 percent. Although the inflationary growth represents no increase in real value, it has inexorably increased the percentage of the estate taken as estate taxes. The American Law Institute recommended in its recent study, along with structural changes, the adoption of a substantially reduced rate table with a top rate of 60 percent. Proposed 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 payment acceleration proposals are actually estate and gift tax rate increases in disquise. Payment of estate tax six months before the existing due date would, at an assumed annual 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 seven months would amount, at the assumed 8 percent interest rate, to a tax increase of 4% percent.

Determination of estate tax liability is frequently a complex and time-consuming process. The executor, upon his qualification, usually a month or so after the decendent's death, may be faced with an unfamiliar situation. He must ascertain the identity not only of the decedent's property but also of the nonprobate components of the gross estate. This may require a review of trust instruments, life insurance policies and related documents, wills of prior decedents, check books, and various other documents. The includability of jointly-owned property may involve research into the entire financial history of the decedent and the other joint tenant or tenants. Valuation questions may be a quagmire of uncertainty for months, often requiring expert appraisals involving long and careful study.

All too frequently fiduciaries faced with the problems of administration referred to above find the present 15 month period for payment of estate tax too short. A

This proposal originated in discussions between members of the Section of Real Property, Probate and Trust law and members of the Section of Taxation.

reduction of 40 percent in this period of time will unduly increase the burden upon fiduciaries in effecting an orderly marshaling and liquidation of decedents' assets.

DEFICIENCIES IN THE ADMINISTRATION'S PROPOSAL

As noted above, the Section recognizes that the present proposal of the Administration for acceleration of estate tax represents a substantial improvement over its prior proposal. We believe, however, that the present proposal is deficient in two respects.

The proposal does not shorten the statutory period for assessment of additional estate tax. In his testimony before this Committee the Secretary of the Treasury stated:

"An important feature of the proposal is a speed-up in the time of auditing federal estate tax returns. While this cannot be reflected in the draft legislation, we are prepared to make changes in the Internal Revenue Service's audit procedure in order to shorten the time now required to complete audits of estates. These steps will reduce further the time necessary for the administration of estates."

We believe that it would be preferable to accomplish a speed-up in the time of auditing Federal estate tax returns by statutory rather than administrative change. The Section of Taxation believes that the statutory period for assessment of additional tax should be reduced from three years after the due date of the return to one year after the due date of the return. To avoid an undue administrative burden on the Internal Revenue Service it may be desirable to accomplish this shortening in stages over a period of two years.

Fairness, if nothing else, requires that if there is to be acceleration of the time for payment of the tax, there should be a correlative acceleration of the period within which the Commissioner must move to settle the tax. This has the merit of shortening the time during which an estate must remain in administration and speeding the time when the estate may be distributed to the ultimate beneficiaries. If the statute of limitations is not shortened, taxpayers will be asked to assume the burden of acceleration with no correlative benefit.

In addition to shortening the statute of limitations we believe that the practice of granting extensions in cases of hardships should be substantially liberalized. Total or partial tax postponement should be granted liberally without penalty (although interest should be charged in order to prevent estates with liquid assets from bearing a higher tax by being deprived of income-producing assets sooner than non-liquid estates would be). The Committee reports and regulations should spell out the general ground rules for the guidance of district directors in granting tax postponements. Factors to be considered should include a shortage of liquid assets charged with the burden of the tax, a post-death shrinkage of asset values, financial hardship of income beneficiaries, depressed market, litigation, and potential liabilities.

THE GIFT TAX PROPOSAL

The effectiveness of the gift tax proposal is questionable. Gifts are voluntary acts. Gift tax rates are already at a high level, and any increase in burden might well depress the tax base. Most donors review their gift programs annually, generally near the end of the calendar year. Those donors who might otherwise make their gifts in the first quarter of the calendar year (the only quarterly payment which would, under the proposal, fall into an earlier budgetary fiscal year) will, if the proposal is enacted, almost certainly defer them until later in the year in order to obtain an interest-free postponement of tax payment.

Mr. ULLMAN. Thank you, Mr. McDowell.

Mr. Watts?

Mr. WATTS. I find myself in agreement that we should not take up this segment of the estate and gift tax if we are not going to look at the other sections also. Having settled a few estates myself, none of them of tremendous size, I recognize the problem in forcing assets on to the market early. I recognized when Treasury testified, that if they were going to insist on this speedup, then certainly there should be some revision and extension of the privilege, under certain circumstances, to obtain an extension of time.