the itemized deductions (as defined in section 63(f)) other than Since section 63(f) excludes the deductions for personal exemptions provided by section 151 from the term "itemized deductions," the personal exemption under section 642(b) should not be subtracted from adjusted gross income.

The second point, we feel that the distribution deduction provided for by section 651(a) and 661(a) should not be deducted from adjusted gross income.

The distribution deduction is not a deduction in the true sense of the word. Instead, it represents the amount of income which is taxable to a beneficiary and as such serves the purpose of avoiding double taxation of the same income. To subtract the distribution deduction from adjusted gross income would work an inequity in regard to trusts whose income is currently distributable or distributed as opposed to those which accumulate income. Because of the now required subtraction of the distribution deduction from adjusted gross income, trusts whose income is currently distributable would almost automatically have adjusted itemized deductions even though on an overall basis its itemized deductions, other than the distribution deduction, are only a small percentage of its gross income. The below examples should illustrate this point.

Example 1: Trust A, whose income is currently distributable, and trust B, whose income is accumulated, each generate $10,000 of taxable income and incur an interest expense charged to the corpus of the trust of $3,000.

The beneficiary of trust A, in addition to taxable income of $7,000, would also have to report adjusted itemized deductions of $1,380 while trust B would only have taxable income of $7,000, as calculated below:

Accordingly, we end up with $1,380 that would be an adjusted itemized deduction that would be reportable by the beneficiary when in fact only 30 percent of gross income represents deductions. The second example is basically the same with $100,000 of income and $3,000 of interest deductions. We see in this case that our deductions represent only 3 percent of gross income, however, we still have adjusted itemized deductions being taxable to the beneficiary.

The third point involves section 57(b)(a)(A)(vi) and the amount here should not be subtracted from AGI since in effect this amount is equivalent to the distribution deduction, that is it is taxable income included in the section 642(c) deduction which is taxable to the income beneficiary.

Should I continue, sir?

Senator BYRD. Your total statement will be put in the record. Senator BYRD. Does Treasury have a comment?

Mr. FERGUSON. Mr. Chairman, on page 37 of the attachment to my statement there is a proposal that the allocation of tax preference items between a trust and the beneficiaries or an estate and the beneficiaries be apportioned in accordance with Treasury regulations. We recognize that there are some problems in current law, and we think they should be dealt with through regulations if regulations can handle the problem. If they cannot, perhaps we should consider an additional technical amendment.

Senator BYRD. Does your page 37 take care of Mr. Doumar's problem?

Mr. FERGUSON. I believe it would take care of at least part of it. What the amendment would do is override the current provision and provide that the allocation of tax preference items between a trust and beneficiaries or an estate and beneficiaries would be determined in accordance with Treasury regulations rather than in accordance with income as the statute now provides.

I think that amendment would take care of a portion of their problems. Again, this proposal could be discussed on the staff level to see for sure what the witnesses have in mind.

Senator BYRD. I think that is a good idea.

Mr. Doumar, why don't you consult with Treasury and staff and see what can be worked out to try to solve your problem.

Mr. DOUMAR. Thank you.

[The prepared statement of Mr. Doumar follows:]

PREPARED STATEMENT OF ALBERT G. DOUMAR, COMMITTEE OF BANKING
INSTITUTIONS ON TAXATION

My name is Albert G. Doumar and I appear before the Committee in my capacity as Chairman of the Fiduciary Committee of the Committee of Banking Institutions on Taxation an organization of tax officers of the major metropolitan New York banks and with representation from the major banks throughout the United States. I am a Second Vice President in the Tax Services group of The Chase Manhattan Bank, N.A. I thank the Committee for the opportunity of testifying today.

These comments and recommendations relate to "Adjusted Itemized Deductions," as they relate to estate and trust accounts, i.e., IRC Section 57(b)(2).

Under current law (Section 57(b)(2)(A)(i)), deductions allowable in arriving at adjusted gross income would be deducted twice in order to arrive at a modified adjusted gross income for the purposes of calculating "adjusted itemized deductions."

Section 104(a)(4)(F) of the Technical Corrections Bill of 1979 (H.R. 2797) would correct this defect in the current law. However, we feel that there are other technical defects in the current law which also should be taken into consideration in the Technical Corrections Bill of 1979.

1. Under current law, the deduction for personal exemption provided by Section 642(b) is to be subtracted from adjusted gross income.

This is inconsistent with the treatment accorded an individual taxpayer. Section 57(b)(1) in defining adjusted itemized deductions states, in part, that it is ". the amount by which the sum of the itemized deductions (as defined in Section 63(f)) other than.. ." Since Section 63(f) excludes the deductions for personal exemptions provided by Section 151 from the term "itemized deductions," the personal exemption under Section 642(b) should not be subtracted from adjusted gross income. 2. We feel that the distribution deduction provided for by Section 651(a) and 661(a) should not be deducted from adjusted gross income.

The distribution deduction is not a deduction in the true sense of the word. Instead, it represents the amount of income which is taxable to a beneficiary and as such, serves the purpose of avoiding double taxation of the same income. To subtract the distribution deduction from adjusted gross income would work an inequity in regard to trusts whose income is currently distributable or distributed as opposed

to those which accumulate income. Because of the now required substraction of the distribution deduction from adjusted gross income, trusts whose income is currently distributable would almost automatically have "adjusted itemized deductions" even though on an overall basis its itemized deductions, other than the distribution deduction, are only a small percentage of its gross income. The below examples should illustrate this point.

Example 1: Trust A, whose income is currently distributable, and Trust B, whose income is accumulated, each generate $10,000 of taxable income and incur an interest expense charged to the corpus of the trust of $3,000.

The beneficiary of Trust A, in addition to taxable income of $7,000, would also have to report adjusted itemized deductions of $1,380 while Trust B would only have taxable income of $7,000, as calculated below.

NOTE.-On an overall basis, the $3,000 interest deduction represents only 30 percent of Trust A's gross income but because of the subtraction of the distribution deduction from AGI the beneficiary is inequitably subjected to report an item of tax preference that does not apply to our accumulation trust, Trust B, nor would it apply if the above were reportable in his own

return.

Example 2: Trust A, whose income is currently distributable, and Trust B, whose income is accumulated, each generate $100,000 of taxable income and incur an interest expense charged to the corpus of the trust of $3,000.

The beneficiary of Trust A, in addition to taxable income of $97,000, would also have to report adjusted itemized deductions of $1,380 while Trust B would only have taxable income of $97,000 as calculated below.

Calculation of Adjusted Itemized Deductions-Trust A:
Gross taxable income.

100,000

NOTE.-In the above example our itemized deductions are only 3 percent of the gross income and once again because of the subtraction of the distribution deduction the beneficiary of Trust A has an item of tax preference. Further, please note that the beneficiary of Trust A in Example 1, who received $7,000 of taxable income as opposed to $97,000 in Example 2, has the same amount of adjusted itemized deduction ($1,380) to report. Once again, this distortion is caused by the current law requiring that the distribution deduction be subtracted from AGI. 3. The amount provided for in Section 57(b)(2)(A)(vi) should not be subtracted from AGI since in effect this amount is equivalent to the distribution deduction, i.e., it is taxable income included in the Section 642(c) deduction which is taxable to the income beneficiary.

In accordance with Section 57(b)(2)(C) certain charitable contributions deductible under Section 642(c) are to be treated as deductions allowable in arriving at AGI. However, the charitable deduction should be reduced by the amount provided in Section 57(b)(2)(A)(vi).

If the current law is amended so that the distribution deduction would no longer be subtracted from AGI, the amount provided for in Section 57(b)(2)(A)(vi) should, as stated above, be used to reduce the charitable deduction that is applied against AGI. However, if the distribution deduction remains as an offset against AGI, Section 57(b)(2)(A)(vi) should be repealed since under current law the amount provided for would be deducted twice.

4. We suggest that in the final year of an estate or trust account wherein "excess deductions" as provided under Section 642(h) are involved, no calculation of adjusted itemized deductions on the entity level should be required. This we feel would avoid an inequity wherein the recipient's adjusted itemized deductions could be greater than the amount of the itemized deductions, as illustrated below.

Here, assume that the recipient remainderman has $10,000 of taxable income and no itemized deductions other than the "excess deductions" of $10,000. Calculation of Adjusted Itemized Deductions on Remainderman's Level:

NOTE. As a result of calculating adjusted itemized deductions on the entity level when excess

deductions are involved, the recipient remainderman has adjusted itemized deductions of $14,400 whereas the itemized deductions only total $11,000.

Senator BYRD. Mr. Newman.

STATEMENT OF MATTHEW E. NEWMAN, TECHNICAL DIRECTOR, INSTITUTIONAL PENSION CONSULTANTS

Mr. NEWMAN. Senator Byrd, my name is Matthew E. Newman. I am appearing on behalf of IPCO, Inc. a New York based consulting company of which I am the technical director, and the National Retirement Plans Training Conference, Inc.-NRPTC-a_nationwide nonprofit trade association consisting of commercial banks, savings and loan institutions, mutual savings banks, and credit unions.

Also present today is John Allen, director of Washington operations for the two institutions who has an office in Alexandria, Va. In these two capacities I am here representing over 1,000 institutions ranging in size from $2.5 million in assets to over $30 billion in assets.

I would like to point out that any statements we make today are not statements of any individual financial institution which is a member of the NRPTC or any client of IPCO, Inc., but rather they are based solely upon our experience providing services to financial institutions throughout the country.

The written testimony has been provided to the committee and I request that it be entered into the record. The point of our written comments and today's oral testimony is the simplified employee pension plan, SEP.

Financial institutions throughout the country are going through a period of rapid disintermediation of funds, a crisis of confidence and general problems for which legislative solutions are being sought. Just last week the Senate passed the Depository Institutions Deregulation Act-H.R. 4986-which among other things would grant new trust powers to federally chartered savings and loan associations, permit greater consumer loans and generally make more funds available at higher interest rates for all depositors. While these are necessary steps for the economy as a means of encouraging capital formation and dealing with the inflationary spiral, they do not address the issue of pension fund deposits as a key to institutional stability, savings growth, et cetera.

During the first 6 months of 1979, New York State mutual savings banks had a net deposit outflow of $1.84 billion. In sharp contrast to this, during the same period, they had a net deposit inflow in pension funds of $329 million, primarily in IRA and Keogh funds. When the Revenue Act of 1978 was passed, the SEP was envisioned as a means of increasing private pension plan coverage, increasing savings and creating a simple pension plan for employers to adopt. Unfortunately, this has not occurred even though the IRS has just issued new model forms in this area. The Technical Corrections Act addresses many of the SEP problems which make it unworkable now. Such issues as social security taxes, contributions for persons over the age of 70%, required coverage of certain individuals, et cetera, are dealt with. Unfortunately, additional key areas must be addressed now if these ac