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Section 6165

The requirement of a bond as a condition to any extension may, as a practical matter, make it impossible to obtain such extension. Furthermore, as pointed out above, administrative practice varies widely in this area. Consideration should be given to use of security arrangements such as mortgages, pledges, and escrow agreements in lieu of bonds. The provisions relating to security interests could follow the basic pattern and terminology established by the Uniform Commercial Code, which has now been adopted in a majority of the States. The proposed revision of section 6165 would provide that the decedent's interest in any illiquid asset included in the gross estate would constitute adequate collateral to secure the payment of taxes imposed with respect to that interest. The tax applicable to any asset would be the average rate (determined by dividing the net tax payable by the taxable estate) multiplied by the value finally determined for the decedent's interest in that asset. Such collateral would be ü muate to secure the Government's interest, since the tax with respect to any asset will always be smaller than the value of the asset itself. So exception would be necessary if the asset is leavily encumbered at death, since only the remaining value of the asset is subject to tax. The District Director should be entitled to all notices and rights granted to a creditor or stockholder and failure to give such notices would constitute a default, enabling the District Director to enforce his security interest of his estate tax lien." Section 6601 (6)

consideration should be given to a fair rate of interest on the amount of estate tax extended. Present law provides a rate of interest of t. In some cases this is probably too low and in other cases even this rate of interest might be a hardship. Consideration might be given to basing the amount of "interest" upon the return from the property. For example, if the average estate tax rate in the estate was 40%, in lieu of interest. 10% of all amounts realized by the taxpayer from the property, whether as current income payments or as gain upon the sale of the property, would be payable to the Government. The annount so paid to the Government in lieu of interest, like interest, should be treated as a deduction, so that the taxpayer would pay income tax only on the balance remaining to him. Thus, both the Government and the taxpayer would share in the benefits of retained ownership of the property in proportion to their respective interest in the property: the Government as to its percentage of ownership by reason of the estate tax, and its security interest in that property, and the taxpayer by reason of his equity in the property. Section 2204

Presently, if the time for payment of estate tax has been extended, the executor cannot obtain a release from personal liability, and other fiduciaries cannot obtain a release in any event. One of the stated objectives of the proposed acceleration of payment of tax and more prompt audits is to permit shortening the process of administration and earlier distribution of the assets to beneficiaries. An executor or fiduciary subject to personal liability for estate tax is unlikely to make distribution. Therefore, consideration should be given to the following changes.

The executor would be released if, as to the property in his possession and control, all unextended estate taxes, at the estate's average estate tax rate have been paid and security interests have been created for any extended estate taxes on that property.

Any other fiduciary or person subject to personal liability, except to the extent of his beneficial interest in the property, would be released if, as to the property in his possession and control, all unextended estate taxes, at the estate's average estate tax rate have been paid and security interests have been created for any extended estate taxes on that property.S Section 303

To make funds more readily available to meet the liquidity problems, present section 303 could be amended to extend the period for redemptions at capital gain rates, presently about 412 years, to equal any additional period for which the pay

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ment of estate taxes has been extended, with reduction or elimination of the present percentage requirements. Section 531

To make funds more readily available for early payment of estate taxes, thus minimizing the need for extension of time, section 537(a) (2) of the Code, amended by the Tax Reform Act of 1969 to permit post-death accumulation of earnings for section 303 redemptions, could be further amended to permit predeath accumulations of earnings to fund corporate buy out agreements.o

SHERWIN T. McDOWELL,
Chairman, Section of Taxation,

American Bar Association. Mr. WATTS. With reference to shortening the period from 15 months to 9 months, that is very precipitous shortening. Heirs sometimes are scattered in all directions. Sometimes it is necessary to get documents signed by all of them before you can proceed, and then if an estate is of any size, goodness knows, 9 months is nothing in comparison to winding it up.

I like to see estates wound up as quickly as possible and I don't want to withhold from the Government any money that is legally due them, but do you think if we were to agree to shorten the period and we may or may not do that, a longer period like 12 months would be much better than a 9-month period?

Mr. MCDOWELL. Yes, it would certainly le an improvement because we are dealing as you say in an area where time is important, and I think certainly the extra 3 months would be of assistance to fiduciaries.

At the risk of repeating what I said, I would like to point out, si". that the greatest single factor in speeding up the administration of estates and the ultimate distribution, the final settlement. is shortening the statute of limitations for assessment of taxes because the estate has to be kept open until such time as the ultimate tax liability is known.

Mr. Watts. I agree with you. I don't remember whether the Treasury said they would be willing to shorten the period of limitations, but I know they said they would certainly take the necessary steps to shorten the audit period and to get the final figures into the hands of the executor if this period were changed. Naturally they would have to do this. Under present law you hold the executors and heirs liable. The executor is hesitant to distribute the assets because if the Internal Revenue comes back to him, then he is caught,

So, what you are saying is the period of time in which a fiduciary's records should not only be shortened but the statute of limitations for the assessment of the tax should also be shortened.

Mr. McDOWELL. It is 3 years now from the date of filing the return. Mr. Watts. What do you think it should be shortened to?

Mr. McDowell. One year. I think it is fair to say, although I suppose the administration would have a contrary view, that it does not take 1 year to audit an estate tax return once you get to it.

* Cf. Studies, p. 406. 10 Cf. Studies, p. 407.

The Secretary has said they're going to speed up the audit procedure. Presumably that means they will get to it.

Mr. Watts. Then you think the period of limitations ought to be shortened on top of that.

Mr. VcDOWELL. That really enforces it. There are no real teeth in an administrative practice which can change like a railroad timetable on a moment's notice.

Mr. Watts. I would assume you would not want any provision in there as they have in the income tax laws, that they can have the taxpayer sign a document to waive the statutory period. If he does not sign the waiver they put a heck of a big assessment against him.

Mr. McDOWELL. You cannot extend the time for assessing estate tax under present law. You can extend the time, as you pointed out, for assessing income tax by agreement.

Vír. Watts. In other words, you can't agree to an extension of the statute of limitations on estate taxes.

Mr. McDOWELL. Yes, sir.

Mr. WATTS. I know you don't want to change that part. You don't want a taxpayer to be put to the trouble of signing a paper or getting a huge assessment in the face right away.

You don't want to change that feature.
Mr. McDOWELL. That is right.
Mr. ULLMAN. Are there any other questions?

If not, thank you very much for your very helpful testimony. Our next witness is Vir. William T. Barnes. We are very happy to have you before the committee, Mr. Barnes. Would you identify yourself for the record and also your colleague and we will be very happy to recognize you.

STATEMENT OF WILLIAM T. BARNES, CHAIRMAN, DIVISION OF

FEDERAL TAXATION, AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS; ACCOMPANIED BY GILBERT SIMONETTI,
JR., DIRECTOR, DIVISION OF FEDERAL TAXATION
Mr. BARNES. Thank you, Mr. Chairman.

My name is William T. Barnes. I am chairman of the division of Federal taxation of the American Institute of Certified Public Accountants. I am accompanied by Gilbert Simonetti, Jr., director of the institute's tax staff.

The American Institute of Certified Public Accountants is the sole national organization of professional CPA's. It was establshed in 1887 and currently has more than 75,000 members.

The tax division has been authorized by the institute's governing council to speak for the institute on matters relating to Federal taxation.

We appreciate the opportunity to express our views on proposed legislation to accelerate the payment of estate and gift taxes.

SUMMARY STATEMENT

The administration originally requested legislation requiring:

(1) Payment of estimated estate tax 7 months after the decedent's death, and,

ment of estate taxes has been extended, with reduction or elimination of the present percentage requirements.” Section 531

To make funds more readily available for early payment of estate taxes, thus minimizing the need for extension of time, section 537(a) (2) of the Code, amended by the Tax Reform Act of 1969 to permit post-death accumulation of earnings for section 303 redemptions, could be further amended to permit predeath accumulations of earnings to fund corporate buy out agreements.io

SHERWIN T. MCDOWELL,
Chairman, Section of Taration,

American Bar Association.

Mr. Watts. With reference to shortening the period from 15 months to 9 months, that is very precipitous shortening. Heirs sometimes are scattered in all directions. Sometimes it is necessary to get documents signed by all of them before you can proceed, and then if an estate is of any size, goodness knows, 9 months is nothing in comparison to winding it up.

I like to see estates wound up as quickly as possible and I don't want to withhold from the Government any money that is legally due them, but do you think if we were to agree to shorten the period and we may or may not do that, a longer period like 12 months would be much better than a 9-month period?

Mr. McDowell. Yes, it would certainly lie an improvement because we are dealing as you say in an area where time is important, and I think certainly the extra 3 months would be of assistance to fiduciaries.

At the risk of repeating what I said, I would like to point out, si”; that the greatest single factor in speeding up the administration of estates and the ultimate distribution, the final settlement, is shortening the statute of limitations for assessment of taxes because the estate has to be kept open until such time as the ultimate tax liability is known.

Mr. Watts. I agree with you. I don't remember whether the Treasury said they would be willing to shorten the period of limitations, but I know they said they would certainly take the necessary steps to shorten the audit period and to get the final figures into the hands of the executor if this period were changed. Naturally they would have to do this. Under present law you hold the executors and heirs liable. The executor is hesitant to distribute the assets because if the Internal Revenue comes back to him, then he is caught.

So, what you are saying is the period of time in which a fiduciary's records should not only be shortened but the statute of limitations for the assessment of the tax should also be shortened.

Mr. McDOWELL. It is 3 years now from the date of filing the return. Mr. Watts. What do you think it should be shortened to?

Mr. McDOWELL. One year. I think it is fair to say, although I suppose the administration would have a contrary view, that it does not take 1 year to audit an estate tax return once you get to it.

Cf, Studies, p. 406. 10 Cf. Studies, p. 407.

The Secretary has said they're going to speed up the audit procedure. Presumably that means they will get to it.

Mr. Watts. Then you think the period of limitations ought to be shortened on top of that.

Mr. McDowell. That really enforces it. There are no real teeth in an administrative practice which can change like a railroad timetable on a moment's notice.

Mr. Watts. I would assume you would not want any provision in there as they have in the income tax laws, that they can have the taxpayer sign a document to waive the statutory period. If he does not sign the waiver they put a heck of a big assessment against him.

Mr. McDOWELL. You cannot extend the time for assessing estate tax under present law. You can extend the time, as you pointed out, for assessing income tax by agreement.

Vír. Watts. In other words, you can't agree to an extension of the statute of limitations on estate taxes.

Mr. MCDOWELL. Yes, sir.

Mr. Watts. I know you don't want to change that part. You don't want a taxpayer to be put to the trouble of signing a paper or getting a huge assessment in the face right away.

You don't want to change that feature.
Mr. McDOWELL. That is right.
Mr. ULLMAN. Are there any other questions?

if not, thank you very much for your very helpful testimony. Our next witness is Mr. William T. Barnes. We are very happy to have you before the committee, Mr. Barnes. Would you identify yourself for the record and also your colleague and we will be very happy to recognize you.

STATEMENT OF WILLIAM T. BARNES, CHAIRMAN, DIVISION OF

FEDERAL TAXATION, AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS; ACCOMPANIED BY GILBERT SIMONETTI,
JR., DIRECTOR, DIVISION OF FEDERAL TAXATION
Vr. BARNES. Thank you, Mr. Chairman.

My name is William T. Barnes. I am chairman of the division of Federal taxation of the American Institute of Certified Public Accountants. I am accompanied by Gilbert Simonetti, Jr., director of the institute's tax staff.

The American Institute of Certified Public Accountants is the sole national organization of professional CPA's. It was establshed in 1887 and currently has more than 75,000 members.

The tax division has been authorized by the institute's governing council to speak for the institute on matters relating to Federal taxation.

We appreciate the opportunity to express our views on proposed legislation to accelerate the payment of estate and gift taxes.

SUMMARY STATEMENT

The administration originally requested legislation requiring: : (1) Payment of estimated estate tax 7 months after the decedent's death, and,

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