Treasury recommends that present law be continued for

all income accumulated in taxable years of trusts beginning on or before April 22, 1969, and that the unlimited throwback provided by the bill be made applicable only to accumulations made in taxable years beginning after that date. Any amounts accumulated in taxable years of a trust beginning before April 22, 1969, should, when paid out in an accumulation distribution in a taxable year beginning after that date, be subject to the law in existence on the date when the income was accumulated. Consistent with present law and the House bill, an accumulation distribution should be deemed to have been made from the most recently accumulated income of the trust. Thus, distributions made during taxable years beginning after April 22, 1969, would be subject to the new unlimited throwback rules to the extent the trust had undistributed net income accumulated during a taxable year beginning after such date.

For example, if a trust using the calendar year as its taxable year had undistributed net income of $500 accumulated in each of the years 1968 through 1972 and on December 31, 1973, made a distribution of $2,500 in excess of the trust's 1973 distributable net income, $1,500 would be taxed pursuant to the new unlimited throwback rules and $1,000 would be subjected to additional tax only if it did not fall within one of the exceptions to the definition of an accumulation distribution presently contained in section 665(b) of the Code. Thus, for example, if any portion of the $1,000 accumulated in 1968 and 1969 were distributed to meet the "emergency needs" of the beneficiary, or had been accumulated prior to the beneficiary's 21st birthday, such sum would be distributed tax free. There should, however, be no $2,000 de minimis exception for distributions made in taxable years beginning after April 22, 1969.

The five-year limitation of present law should continue to apply to income accumulated during taxable years beginning before April 23, 1969. Accordingly, if income accumulated in 1968 were distributed in 1975, it would be subject to no additional tax.

The House bill provides that one method of limiting the

beneficiary's tax attributable to an accumulation distribution is to compute the average increase in the beneficiary's tax caused by adding the average annual income of the trust for the period over which the amount distributed was earned to the beneficiary's income for the current year and each of the two preceding years. This averaging device would be more accurate if it utilized the three preceding years and excluded

the current year.

The current year's income will necessarily include the trust income for that year even though it is not part of the accumulation distribution and therefore should not enter into the computation. Treasury recommends that this so-called "short-cut" limitation be altered to eliminate a recomputation of the beneficiary's tax for the current year and include in its place a recomputation of the tax for the third year preceding the year in which the accumulation distribution

occurs.

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Treasury also recommends that the short-cut method should

not be available to the taxpayer if prior accumulation distributions made to him by two or more other trusts overlap the accumulation distribution in question. This is necessary to prevent the creation of multiple trusts with staggered accumulation distributions to take advantage of the short-cut rule. Thus, the short-cut method would not be available to limit the tax attributable to an accumulation distribution made to a beneficiary if during any preceding taxable year in which such accumulation distribution was deemed to have been distributed to such beneficiary under section 666(a) of the Code, prior accumulation distributions made by two or more other trusts were deemed, under section 666(a), to have been distributed to such beneficiary.

The House bill provides for an eight-year transition period beginning on January 1, 1969, during which the amount of each additional $25,000 surtax exemption, $100,000 accumulated earnings credit, and $25,000 limitation on the small business deduction of life insurance companies, otherwise allowable to the controlled group, would be phased-out. At the end of this period, the group would be limited to only one of each of these tax benefits.

Treasury does not oppose the eight-year phase-out period. However, the transition period originally recommended by Treasury on April 22, 1969, would also be equitable and would reduce the administrative complexity of the longer eight-year period. Under the earlier proposal, the maximum number of $25,000 surtax exemptions and other benefits listed above of a controlled group for taxable years including a December 31 after 1968 and before 1974 would be reduced over a five-year transition period in accordance with the following schedule: