Page images
PDF
EPUB

shortly after the close of the taxable year. In both cases the revisions were intended to tax the beneficiary on the income actually received.* In 1943, however, it was found necessary to grant relief in certain situations in which it was thought there would be double taxation under the 1942 provisions and accordingly the law was again amended to exclude from the income of a beneficiary the amount included in distributions which was in excess of the income of the year of distribution.5

Additional provisions have also been added to the law concerning the treatment of charitable trusts and employee pension and profitsharing trusts, but these really involve different fields and, except to mention them as areas of growing complexity, I do not intend to dwell upon them.

However, in connection with the principal stautory provisions affecting estates and trusts, by the time immediately preceding the Internal Revenue Code of 1954, the statute had grown from a paragraph of 161 words in 1916 to a group of six statutory sections (secs. 161, 162, 163, 164, 166, and 167) of varying length and complexity— which were still not the last words.

In the Revenue Act of 1954, there was again a further expansion and an attempt at "clarification." The Internal Revenue Code of 1954 reserved a whole subchapter for the treatment of estates and trusts. The 1954 revision consisted primarily of (a) a collection of the various provisions relating to estates, trusts, beneficiaries, and income in respect of decedent into one subchapter, (b) the addition of extensive provisions on the treatment of grantors or other persons as the owners of property in trust where certain powers were retained, and (c) substantial revisions of the tax treatment of estates and trusts with regard to the determination of distributable income to be taxed to beneficiaries and also with regard to the taxation of accumulated income to beneficiaries under the so-called throwback rules. Despite the intended purposes of the 1954 code revisions, that is clarification and codification of rules, the fact remains that the statutory structure which reached its high point in the 1954 code has not brought either greater certainty in the treatment of estates and trusts or greater understandability either within or ouside the Treasury Department, nor brought an end to the problems and the apparent need for further clarification in this area.

Not as a criticism but as a simple statement of fact, it can be said that for all the revisions and consideration which has been given to the treatment of estates and trusts, the law today is hardly more advanced than it was when the tax treatment was in one paragraph, if we are to judge by the ability of taxpayers and tax administrators to be able to determine with certainty the tax consequences of the terms and operations of an estate or trust.

It took the Treasury Department somewhat more than 2 years to issue regulations under subchapter J of the Internal Revenue Code of 1954, which was good time considering the nature of the task facing

Revenue Act of 1942, sec. 111 amending sec. 162.

5 Revenue Act of 1943, sec. 133 adding sec. 162(d) (4)..

the Department under the new code. More recently an advisory group of very able people has made a report to the Ways and Means Committee suggesting further clarification and revision of the provisions of subchapter J. The report of this group contains 71 pages of both amended statutory language and explanations and has an additional 26 pages of comments and recommendations as to additional specific proposals.

This is all by way of indication of a simple principle which can be exemplified in many other areas of our tax laws, namely, that the writing of additional statutory language does not necessarily mean that there is any real progress being made in bringing understanding of the law and in facilitating its administration.

I think the matter of increasing complexity is very serious from the viewpoint of tax administration. Just as it is difficult for taxpayers and their advisers to know and understand the rules and principles involved in the treatment of estates and trusts, so it is equally difficult for the Revenue Service. I believe the problem is particularly acute for the Revenue Service today because it does not have a large or adequately trained force of personnel who understand the legal principles involved in estates and trusts and are masters of the technical and complex provisions of the tax laws. It should be a matter of concern to all that in enacting more complex provisions, the Congress may be far ahead of the ability of the Revenue Service to train and to keep able people who can administer and enforce the law.

I do not mean to suggest that we can or should retreat to the oneparagraph provision of the Revenue Act of 1916, and I do want to make myself perfectly clear on the point that I think the effort in the Internal Revenue Code of 1954 to collect the existing rules relating to estates and trusts in one subchapter of the code formed a proper foundation for the treatment of this subject. However, I also feel that more care and consideration is needed in the field of estates and trussts, as well as in other areas, to make sure that the legislative revisions under consideration are really necessary and will really contribute to a better tax law and administration.

A SUGGESTION FOR EVALUATION OF FUTURE LEGISLATION

I would like to suggest, for the consideration of the committee, a procedure which I think would go a long way toward meeting some of the problems in evaluating the need for and effect of legislation and which would be particularly appropriate and may even be necessary-in the field of estates and trusts. Except where time is of the essence, I believe it would make good sense if this committee would, before reporting out proposed legislation, refer the bill to the Treasury Department for a determination of (a) whether regulations can be written under it which will be understandable and administratively feasible, and (b) whether the provisions of the legislation can be translated into a practical tax return form.

I think the estate and trust area lends itself to just this type of preenactment evaluation of legislation. There is no great crisis impelling legislation in this field. There is a need for clear and helpful regulations for the guidance of fiduciaries and revenue agents. Above

all, there is need for workable and efficient tax forms, which after all are the primary means of tax determination-and represent the tax laws to most taxpayers. Congress should be satisfied that legislation in this field which will affect a great many individuals satisfies these criteria.

Two examples may help to make the point clearer.

On the one hand, there are a number of provisions of the Internal Revenue Code of 1954 on which the Treasury Department has not yet issued regulations or on which it has issued regulations which are merely a paraphrase of the law. It is apparent that the Department is not willing to commit itself-even 5 years after the law was enacted as to an interpretation of certain statutory provisions. In these areas neither taxpayers nor revenue agents have the benefit of real guidance as to the tax consequences of transactions. Uncertainties, variance in treatment, and litigation are all bound to resultnone of which contribute to good administration and respect for our tax system.

6

An example of a quite different situation is that exemplified by the so-called Clifford Trust provisions. In 1946, the Treasury issued regulations establishing rules for taxing the grantor of a trust because of its short term and/or certain powers over income or principal. This was an attempt to bring chaos out of the litigation surrounding the Supreme Court's decision in Helvering v. Clifford. Although there naturally were some differences of opinions as to the provisions of the regulations, nevertheless they were recognized as, in effect, providing a blueprint of what could and could not be done in this trust area. The regulations served the purpose of an administrative guide which could be tested by practical experience. Then in 1954, Congress reviewed the policy and efficacy of the rules and with some modifications enacted the present rules for such trusts into law. The effectiveness of this entire procedure is attested by the fact that litigation in this area has practically disappeared.

Perhaps not all problems in the estates and trust area can be handled in the same manner as the Clifford problem, but this experience should demonstrate how much better it is if, before legislation is enacted, there has been the attempt to determine whether administratively feasible rules and guides can be provided.

While the principles I have been discussing obviously have wider application than just the estates and trust field, nevertheless I believe they are particularly appropriate to the subject at hand because the committee presently has before it new legislative recommendations, many of which are highly technical and are likely to involve difficult problems of interpretation. I therefore respectfully suggest that the procedure I have discussed of finding out before enactment what the administrative effects will be rather than after enactment-may be particularly appropriate.

I would like to relate the principles I have discussed to two specific legislative proposals before the committee. The first of these involves the subject of multiple trusts.

• Treas. Dec. 5488, C.B. 1946–1, 19; Treas. Dec. 5567, C.B. 1947–2, 9.

7 I.R.C., sec. 671-675.

47060-59-pt. 3- -15

MULTIPLE TRUSTS

The committee has before it certain recommendations of the Advisory Group on Subchapter J concerning the subject of multiple trusts. This apparently is the outgrowth of talk about abuses through the use of multiple trusts. This usually involves the possibility that an individual may establish many trusts for a child with the income to be accumulated for his ultimate benefit, thereby avoiding some tax, by reason of the income being split and taxed only in the lower bracket of each of the trusts so created.

In brief, the Advisory Group has recommended that where the same grantor establishes intervivos or testamentary trusts under which the primary beneficiary or beneficiaries of the currently accumulated income or income allocated to corpus are substantially the same, the trusts would be consolidated and taxed as one trust. This recommendation would add additional complexities and problems to the tax laws and I think there is serious question as to whether such action is warranted.

There are many things that can be said in opposition to the proposed legislation which others have already said, such as: The problem is not a serious one and does not warrant such broad and complex legislation. (Incidentally in my experience and from questions to many others, including trust officers, I have not yet seen a case where a large number of trusts were created for the same beneficiary to avoid tax.) The proposed legislation is not fair or workable because it would require trusts with different trustees (who may not know of the existence of the other trusts) to consolidate for tax purposes.

However, I would like to suggest that the legislation is objectionable in its present form for other basic reasons.

A basic objection I believe is that the proposal does not reflect a proper analysis of the problem and the proper role of trusts.

Trusts are generally used for the holding and management of family property. They are however only one means of ownership. Family income may be divided up among members of a family through ownership of property directly by various members, by income earned by individual members, by various forms of ownership such as through corporations, and by family trusts. Not the least of the factors in dividing family income is the number of members in the family.

The real question involved is the treatment of family income. Are we to move to a system of taxing family income as a unit? Apparently such a proposal is not seriously before the Congress. Then why single out trusts for severe treatment?

As indicated, there are many ways of dividing family income. Is there a difference in principle between a situation where a father creates three trusts, one for each of his three sons, and the case where a father creates three trusts for his only son?

While there is a difference between these cases in the number of sons involved, I find it difficult to say dogmatically that it is wrong under our present concept that these families may pay the same tax.

The treatment of family income requires much more analysis than just the matter of consolidating family or multiple trusts. The proposed legislation treats however only this one phase of the matter. If we are not ready to consolidate other sources of family income,

then doesn't the proposed legislation encompass too much in singling out trusts for this purpose?

It seems to me that the proposed legislation is a step in the direction of taxing family income when presumably that is not the problem which we are ready to tackle as a matter of policy. The "evil" is presumably the attempt to split income where there is no reason for the split except tax purposes. Thus if we are not to meet head on the matter of taxing family income, then the proposal in this area should be confined to those cases of intended tax avoidance.

The danger of a proposal which goes beyond the specific evil is that it is bound to produce arbitrary results. This may cause hardships in some cases and may result in missing the mark in other cases. History indicates that when this happens we keep tinkering with statutes year after year, adding new rules and exceptions, and with each change the statute grows more complex and more difficult to administer.

The proposed legislation apparently is designed to prevent tax avoidance by using terms that are so vague that they will "scare off" those who would use multiple trusts. Thus such terms as "primary beneficiaries" and "substantially the same" are used-terms that are difficult to define."

It seems to me therefore that the proposed legislation is in a form that is not conducive either to clear understanding by taxpayers or to the issuance of administrative guidance by the Treasury Department. For the reasons I have previously stated, I feel that in a field as important as that of trusts, there should be every effort made to have legislation enacted that will lend itself to the development of administrative rules and procedures so that the application of the law may be made clear.

To sum up, the principles that should guide us in legislation in this field as well as others are that the legislation should be no broader than the problem to which it is addresssed and it should be capable of being reduced to an administrative practice that will result in clarity and certainty as to its application. Using the proposed legislation on multiple trusts as an example I believe it violates these principles.

If the Congress believes that legislation in this area is necessary, then I suggest that it can adopt legislation of the type that would aggregate the income of multiple trusts under proper circumstances but it should apply only where the principal purpose of such trusts is tax avoidance. This type of problem can be met by having a procedure such as that under section 367 whereby the Commissioner is in effect required, upon request, to give an advance ruling as to whether the transfer violates the proscribed intent. If this procedure is followed, taxpayers with proper purposes in setting up trusts may obtain advance rulings and not be subject to the vagaries of later events and unexpected interpretations. The whole subject is one that could be approached like the "Clifford" regulations, with the development of

See summary of the Subchapter J Advisory Group recommendations, prepared by the staff of the Joint Committee on Internal Revenue Taxation, Feb. 25, 1959, at p. 1: "The proposed amendment does not provide any precise definition for determining who are the 'primary beneficiary or beneficiaries' or when they are 'substantially the same' on the theory that to do so would reduce the effectiveness of the statute."

Until experience has been gained or there is evidence that testamentary trusts present a real area of abuse, I believe any legislation on multiple trusts should not involve testamentary trusts.

« PreviousContinue »