in 1956, 32 recommendations in 1959, 16 recommendations in 1965, and 35 recommendations between 1969 and 1971. In contrast, there were only 7 in 1961 and 4 in 1967 or 1972.

Attached to this statement I have included a "List of Recommendations for Changes in the Internal Revenue Code Adopted by the American Bar Association" as of March 1973. It contains merely brief summaries of each American Bar Association recommendation. These are organizational recommendations. Each has been considered and debated by probably the largest United States organization of lawyers, private, public, and academic interested in taxation. Each has been considered and approved by the representatives of the largest organization of lawyers in the United States. We ask your permission to have this list printed as part of the record of these hearings. For your convenience we have delivered to your staff four copies of the full text of each of these recommendations together with a complete explanation of the reasons for the proposal and statutory language in most cases. This compilation is obviously too voluminous and too detailed for your immediate consideration but, at the same time, it is available for ready reference as to any recommendation.

EXAMPLES OF AMERICAN BAR ASSOCIATION RECOMMENDATIONS

In general these recommendations do not purport to change the direction of major tax policies representing the considered work of your Committee over the years. In major part they reflect the irritants, the grains of sand, creating friction in the smooth and efficient administration of those policies. Often, they suggest the removal of unnecessary complexity, or reduction of disproportionate costs of compliance, or elimination of unequal or unexpected taxation-often arising by oversight-on similarly situated taxpayers.

Our Section is well aware that in the area of tax reform, each time it is undertaken, the pressures on Congress exerted by competing interests often result in compromise. Many of these compromises, it appears, result in a law more complex than its predecessor. Let me mention just two examples of such complexity.

In the Tax Reform Act of 1969 this Committee suggested perpetual throwback rules in trusts that may accumulate income, whatever the underlying reason for the accumulation. We understand this was primarily to solve the multiple trust problem with which your committee had been struggling since 1958. The Senate added an amendment that certain trusts include in the income to be thrown back any realized capital gains. Unwittingly, I assume, the result now is that beneficiaries must have access to the records of a trust for all years of its duration after 1969. Whoever prepares the beneficiaries' tax returns must have access to law books sufficient to find the tax law for each year after 1969. If such a trust, however small, accumulates any ordinary income and capital gain for no more than five years and then makes one single distribution to one beneficiary, to compute his tax properly requires computations equivalent to preparing 15 U.S. individual income tax returns. The American Bar Association in 1970, therefore, recommended that you eliminate the capital gain throwback.

The attribution rules are another example of complexity and confusion. From time to time the Congress, in at least 30 different provisions of the income tax law, has included what is generally known as an attribution rule. This means that property not actually owned by the taxpayer will, for purposes of applying that provision, be treated as owned by the taxpayer if it is owned for example by his wife; his children; or by a corporation, trust or estate in which he has an interest. In any of these provisions these are complex rules of which in most cases the taxpayer is neither aware, nor understands. But the real evil is not the existence of these rules, but the fact that each time such rules were adopted a different list of persons were considered to stand in the critical relationships and different percentage interests were considered to bring the rules into play. For example, the rules are not the same when considering the disallowance of losses from sales to related persons, redemptions which might be treated as dividends, sales between partners, who are the stockholders of a personal holding company, or who are the stockholders of a controlled foreign corporation. The Section began working before 1958 on the basic premise that the tax law would be simplified if

a single uniform set of attribution rules could be adopted with the fewest possible number of exceptions. The American Bar Association first in 1958 and improved in 1968 proposed a uniform set of attribution rules and has worked out all the statutory language for its adoption.

In other areas, we assume by oversight, Congress has permitted similarly situated taxpayers in similar situations to pay unexpectedly different taxes. Here are two examples:

In Ohio an intended beneficiary under a will can disclaim or renounce his bequest and not be subject to gift tax. Since 1952 in Minnesota an intestate heir is subject to gift tax if he renounces or refuses the property. Some states have laws permitting disclaimers, some do not. The application of the gift tax or the estate tax is therefore confused, unequal and uncertain. The American Bar Association in 1958 (and more recently the American Law Institute in 1968) suggested that this irritant be eliminated by amending the Internal Revenue Code to provide that a disclaimer does not give rise to a gift tax, or to a transfer that might give rise to an estate tax.

Similarly, if you own real estate, for example an office building, sell it for cash and a mortgage, the buyer defaults and you repossess the real estate, since 1964 your taxable gain, if any, is limited to cash and payments received on the mortgage. Now assume, the building was incorporated and you sold the stock, under the same terms, reserving a right on default to take the stock back. On default, because the stock is personal property, not real property, you must pay income tax on the full value of the cash received and the value of the stock, even though it is the same stock you had before. This year the American Bar Association has recommended that the rules for taxing gain on repossession of real property and of personal property be made the same.

The Section is well aware that in the practical application of the legislative process and in the ultimate pressure to complete a bill not all of the situations to which the bill may apply can be imagined or carefully considered. This inevitably places a substantial burden on the Treasury Department, the Internal Revenue Service, and ultimately on the taxpayer, his representatives and the Courts in bona fide disputes. We strongly urge that the American Bar Association recommendations be enacted to eliminate disputes, unintended oversights, and unwarranted distinctions of this kind. The ragged and uncertain lines of distinction reached in midnight compromises very understandably need straightening and clarification.

SIMPLIFICATION

The Section and its committees fully appreciate the intense present need for simplification of the Internal Revenue Code (and consequently the tax returns that must be filed yearly). As the first step toward simplification, the Section of Taxation fully supports the "Deadwood Bill".

In fact, the Section has created a Special Committee on Simplification. Among its nine members are both John S. Nolan and Jerome Kurtz, former Tax Legislative Counsel to the Treasury, as well as Edwin L. Kahn and Norman Sugarman who had long experience within the Internal Revenue Service. At its suggestion, the Section currently is studying the possibility of simplifying the retirement income credit, annuity taxation, the quarterly gift tax return, the credits for gift taxes and previously taxed property against estate tax.

The Section as such, without formal action of the House of Delegates of the American Bar Association, cannot support or oppose any proposal of a controversial nature affecting the distribution of a substantial part of the tax burden to a particular class or classes of taxpayers. The Board of Governors of the American Bar Association has, however, authorized the Section to assist the Congress or the Treasury by :

(1) explaining the effect of any such proposal,

(2) commenting on problems of statutory draftsmanship,

(3) pointing out undue complexity in the structure of the tax law, and

(4) suggesting alternative methods of accomplishing the same general objectives.

We would be happy to work with any of you or your staffs in these areas.

LIST OF RECOMMENDATIONS FOR CHANGES IN THE INTERNAL REVENUE CODE ADOPTED BY THE AMERICAN BAR ASSOCIATION

Tax Treatment of other Items Specially Affecting
Individuals, Estates and Trusts.

Tax Treatment of Foundations and Charitable

Contributions.

Tax Simplification.

Miscellaneous Provisions Affecting Both Corporations

and Individuals.

Tax Procedure, Administration and Penalties

State Taxation.

6

6

10

Note. The principal section of the Internal Revenue Code of 1954 which each recommendation would amend is identified in the left hand margin. A parenthetical number under the section number identifies the recommendation as having been included in H.R. 11450, a bill introduced by Chairman Wilbur D. Mills on October 6, 1965 at the request of the American Bar Association. The full text of each recommendation is contained in a notebook prepared by the Section of Taxation of the American Bar Association, copies of which were delivered to the staff of the Committee on Ways and Means in February, 1973.

Estate and Gift Tax Revision

Section 1014 (11450-$55)

Section 1014 (11450-556)

Section 2011 (11450-568)

Section 2012 (11450-569)

Section 2031 (11450-570)

Section 2031

Section 2043 (11450-$71)

Section 2043

The basis of a surviving spouse's share in joint property,
acquired with community property, should be determined
in the same manner as the basis of a surviving spouse's
share in community property.

The basis to the transferee of property acquired prior
to the transferor's death, but included in the transferor's
gross estate for estate tax purposes, should be
determined without reduction for depreciation and
depletion allowed to the transferee prior to the
transferor's death.

The 4-year period in which credit for state death taxes may be claimed for estate tax purposes should be extended to the date on which the final payment of estate tax is made.

In computing the limitation on the estate tax credit
allowed for gift taxes paid in respect of property
included in the decedent's gross estate, the estate tax
attributable to such property should equal the

reduction in estate tax if such property were removed
from the gross estate.

In determining the value of unlisted stock and securities for estate tax purposes, comparisons should be permitted with stocks and securities of other corporations engaged in the same or similar line of business whether or not such stock or securities are listed on an exchange.

Tangible personal property and mutual fund shares should
be valued for estate and gift tax purposes at the sales
price obtainable in the available markets by the executor
or donor. (Recommendation No. 1966-9).

The estate tax provisions should be made to conform
to the gift tax provisions by excluding from the
decedent's gross estate property transferred pur-
suant to a divorce settlement (except as it relates
to the decedent's obligation to support issue after
his death), whether or not such transfer was incor-
porated in a decree of divorce.

The amount included in gross estate with respect to
property transferred by a decedent for less than full
consideration, should be limited to the proportion of
the date of death value equal to the proportion of the
property which was transferred donatively.
(Recommendation No. 1970-5).

New Section 2045 Partial and complete disclaimers and renunciations should (11450-$72) not be treated as taxable transfers for estate or gift tax purposes to the extent they are effective under local law.

Section 2056 (11450-$73)

Section 2503 (11450-$74)

Section 2504

Section 2515

The payment of allowances provided by state law
for the support of a surviving spouse should qualify
for the estate tax marital deduction.

The classes of gifts eligible for the $3,000 annual gift
tax exclusion should be enlarged to include gifts
of a future interest if the property, to the extent
not expended for a single donee during his lifetime,
will be included in the donee's gross estate. The
conditions requiring distribution to a donee at age
21 should be eliminated.

In determining the proper gift tax rate, gifts made in
prior periods, now closed for purposes of assessment,
should not be subject to revaluation (nor should the
present interest exclusion and deductions be subject
to adjustment) if the gift was reported and a gift
tax paid in the closed year or any subsequent
year. (Recommendation No. 1970-4).

The gift tax exemption for the creation by spouses
of a joint tenancy in real property should be extended
to apply to shares in cooperative housing corporations.
(Recommendation No. 1966-15).

Treatment of Capital Recovery for Tax Purposes

Section 165 (11450-56)

Section 167

Section 167

Demolition losses should be deductible, regardless of the
taxpayer's intention at the time the property was acquired,
if, at the time of demolition, the taxpayer has
held the property for more than 3 years.

The rules for allocating depreciation and depletion
deductions between estates and beneficiaries should
be made to conform to the trust rules by requiring
that the allocation be made in accordance with the
provisions of the Will or, in the absence of such
provisions, on the basis of the estate income
allocable to each. (Recommendation No. 1966-12)

Depreciation should be based upon cost recovery periods for classes of depreciable property, which periods should be shorter than normal "useful lives". (Recommendation No. 1969-10).

Taxation of Capital Gains and Losses

Section 267

Taxpayers who are not permitted to recognize a loss upon
the transfer of property to related persons should,
however, be permitted to recognize the loss when
the related person sells the property to an unrelated
person or when the property becomes worthless.
(Recommendation No. 1962-17).