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Under this rule, tax would not be imposed merely because the original recipient can transfer his forfeitable interest to another person in a donative transaction if such other person will also be subject to the forfeitability condition. Such a donative transfer will not, however, change the tax consequences to the original recipient at the time his transferee's rights become non forfeitable; he will realize income at that time just as if there had been no donative transfer. Transfers Under Qualified Annuity Plans

2.

Under proposed new Code section 85(d)(2), transfers by an employer to an employees' trust which satisfy the qualification requirements of section 401(a) are not subject to the restricted property rules of section 85. Similar treatment should be provided with respect to premiums paid by an employer under non trusteed annuity plans for an employee which meets these requirements.

Under proposed new Code section 85(f), the restricted property rules of section 85 do not apply to property transferred before July 1, 1969, or to certain property transferred on or after that date if certain conditions are satisfied. This section should be amended to provide that

where corporate securities to which section 85 does not apply because of these effective date provisions are exchanged for other securities in a tax-free transaction and the new securities are subject to restrictions identical to those applicable to the old securities, section 85 will not apply to the new securities.

4.

Nonexempt Trusts and Nonqualified Annuities

Section 321(b) of the bill amends sections 402 (b) and 403(c) of the Internal Revenue Code to provide essentially the same tax treatment for pension, profit-sharing, stock bonus, and annuity plans which do not satisfy the qualification requirements of section 401(a) as would be provided under the bill for restricted stock plans. This section should be amended to make it clear that the amount subject

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to tax when the employee's interest becomes non forfeitable is the value of his interest in the trust at that time or the value of the annuity contract at that time. The value of amounts subsequently contributed to the trust, or premiums subsequently paid, by the employer on behalf of the employee should be includible in the income of the employee in the subsequent years in which contributed or paid to the trust

or insurer.

In addition, section 403(c) should be amended to make it clear that the restricted property rules of section 85 do not apply to any amount excluded from gross income under

section 403(b) dealing with annuities purchased for an employee by a section 501(c)(3) organization.

58.

Sec. 341--Accumulation Trusts

1.

Transitional Problem

Under present law, if a trust makes an "accumulation distribution"--that is, a distribution in excess of distributable net income for the current year--there is a five-year "throwback." This results in a recomputation of the beneficiary's income tax for each of such years to determine the increase in tax which would have resulted had the trust income been distributed to him currently rather than accumu– lated. This amount is then added to his tax liability in the year of distribution. Under existing law, however, the only accumulated income which is subjected to this additional tax is that which was accumulated in the five years preceding the year of the distribution. All earlier accumulations are distributed tax free. Moreover, there are several exceptions under the existing throwback rule so that even part of the accumulation during the preceding five years may be distributed free of additional tax.

The House bill removes the five-year limitation on the throwback rule as well as all of the exceptions. All accumulation distributions by trusts would be thrown back and the amount of tax at the time of distribution would be calculated as though they had been distributed to the beneficiary in the year earned by the trust. The bill provides, however, that this unlimited throwback rule will not operate to tax accumulations made in a taxable year of the trust ending before April 23, 1964. This limitation would prevent a throwback to years prior to the five years which are subject to the rule under existing law.

As indicated, however, the exceptions to the throwback rule contained in existing law are removed by the bill. Thus, even though a distribution would have qualified under one of these exceptions in present law, the distribution of such income accumulated by a trust prior to the effective date of this provision would be subject to additional tax when distributed.