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transfer made shortly before, and in contemplation of, death because the gift tax both reduces the gross estate and is a credit against the estate tax. A 1975 General Accounting Office Report (GGD-76-1) to the Joint Committee on Internal Revenue Taxation on "Proposed Changes in Estate Taxation" recommended changes in the law to eliminate the tax savings and to improve the operation of the gift tax credit. Section 28 of the Draft Statute also eliminates the tax savings by requiring the gift tax paid to be included as an asset of the decedent's estate for estate tax purposes. The ABA also supports the recommendations regarding the computation of the gift tax credit.

The ABA believes that the GAO Report does not go far enough in the contemplation of death area. We urge this Committee to eliminate the rebuttable presumption that transfers made within three years of death are "in contemplation of death" and substitute a rule requiring that the gift tax on all transfers made within two years of death be included as an asset of the decedent's estate, as does Section 28 of the Draft Statute. This change would eliminate a source of controversy that exists today regarding the decedent's intent in making transfers within three years of death.

3. Alternate Valuation Date

Current law properly permits a decedent's estate having a date

of death value of $60,000 or more to be valued as of that date or, generally as of six months after death. The income tax basis for an asset included in a de

cedent's estate is the same as its estate tax value. The alternate valuation

method may be used whether or not it results in a lower estate tax.

In some

cases, particularly with smaller estates, use of this method produces overall tax savings when the estate tax is increased because the higher values for assets which are sold reduce income taxes by more than the estate tax increase.

The GAO Report referred to above recommends that use of the alternate

valuation method be restricted to cases in which it produces a lower estate tax. The amount of the additional revenue that would result from this change would be small and, as noted in the preceding paragraph, would come largely from the smaller estates.

Current law has the advantages of reducing valuation controversies and providing certainty as to the valuation date. Once the estate tax return is filed the choice of valuation date cannot be changed. If the alternate valuation method is available only when it results in a lower estate tax, audits of estates with assets difficult to value may necessitate making both valuations to determine which method does in fact produce the lower tax. The ABA regards this dual audit possibility as undesirable and recommends that current law be continued, as does Section 18 of the Draft Statute.

4. Expenses of Sale

Current law regarding the deductibility of expenses of sale

under section 2053 is unclear. Circuit courts have reached contrary results. Compare Estate of Park v. Comm'r, 475 F.2d 673 (6th Cir. 1973), with Estate of David Smith v. Comm'r, 510 F.2d 473 (2nd Cir. 1975). The law should be clarified so that all expenses of sale which are allowable under applicable state law are deductible for purposes of section 2053, as is done under Section 29 of the Draft Statute.

5. Life Insurance

Circuit

Current law regarding the tax consequences of the retention of non-beneficial incidents of ownership by a decedent-insured is unclear. courts have reached contrary results.

Compare Rose v. United States, 511 F.2d

259 (5th Cir. 1975) and Terriberry v. United States, 517 F.2d 259 (5th Cir. 1975) with Estate of Skifter v. Comm'r, 468 F.2d 699 (2nd Cir. 1972), and Estate of Fruehauf v. Comm'r, 426 F.2d 80 (6th Cir. 1970). The law should be

clarified, as is done under Section 26 of the Draft Statute, to provide that non-beneficial incidents of ownership retained by a decedent-insured do not cause taxation under section 2042.

6. Charitable Remainder Trusts

The changes made by the Tax Reform Act of 1969 regarding charitable remainder trusts were undesirable in some respects. The new law has resulted in very complicated regulations and serious problems in drafting trusts that satisfy their requirements. Current law should be changed to return in part to pre-1969 law. Specific recommendations are contained in the Comments (pages 161-66) to Sections 14 and 31 of the Draft Statute.

7. The Gift Tax Annual Exclusion

Current law is uncertain in several respects regarding the

availability of the exclusion for a trust income interest. Compare Rosen v. Comm'r, 397 F.2d 245 (4th Cir. 1968), with Fred A. Berzon, 63 T.C. 601 (1974), and see Estate of David H. Levine, 63 T.C. 136 (1974), rev'd, 526 F.2d 717 (2d Cir. 1975). The law should be changed to provide that an annual exclusion will be available for a transfer in trust when the donee is the only beneficiary and the trust property would be includible in his gross estate if he died immediately after the transfer, as is done in Section 11 of the Draft Statute.

AMERICAN BANKERS ASSOCIATION DISCUSSION DRAFT

OF TRANSFER TAX STATUTE

AND

EXPLANATORY COMMENTS

Appendix A

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