qualified (and deductible) type of trust may be done without resort to judicial proceedings if the instrument permits it. In the case of trusts created under wills, instruments which do not permit amendments, the ordinary course to pursue would be to have the executors or trustees file a court action, with the consent of the beneficiaries, and seek the necessary conforming amendment through a judicial proceeding. In order to conserve the assets held in an unqualified charitable remainder trust, and foreclose any question on the legal rules which govern amendments to testamentary and other unamendable trust instruments, proposed D.C. Code Title 21-1801 (d) of H.R. 11489 permits the trustee and all parties in interest to the unqualified trust to amend its instrument to contain all the rules and limitations of Sec. 664 of the Internal Revenue Code without resort to judicial proceedings; this facilitates obtaining the charitable deduction for the grantor or testator, subject, of course, to the effective date rules of applicable Internal Revenue Code and regulations. By permitting all parties in interest to amend the instruments for this purpose, District of Columbia court dockets will be kept clear of amendatory litigation and the trusts (and the public charitable beneficiaries) will avoid costly legal fees which would have been incurred were a judicial proceeding required. An example of the operation of the new provision would be as follows: Suppose a District of Columbia resident executed a will on June 14, 1971 and died July 4, 1971. In his will he created a charitable remainder trust which provides that all the income from the trust shall be paid to his wife until her death, and upon her death the corpus (i.e., remainder) is paid over to Shriners Hospitals. Because the testator failed to create a qualified trust described in Sec. 664 of the Internal Revenue Code, he is not entitled to an estate tax deduction for the present value of the charitable remainder. To be eligible for a deduction under present Treasury Department regulations, the trustee, the decedent's wife, and Shriners Hospitals would have to obtain counsel who would file an action in D.C. Superior Court asking that the court amend the instrument to conform the testamentary trust to the requirements of Sec. 664 of the Internal Revenue Code and applicable regulations. Enactment of proposed Title 21-1801 (d) of H.R. 11489 would avoid the litigation since it authorizes the trustee and the beneficiaries to amend the testamentary trust without resort to court action and thereby obtain the federal estate tax deduction (subject to the effective date rules). Although we are not a party to litigation in the District of Columbia at the present time, there are "amendment" suits pending in Maryland and Montana of which Shriners Hospitals are a party. If the Congress enacts proposed Sec. 21-1801 (d), it can act as a model for all fifty states and foreclose this type of litigation. Of course, if a beneficiary did not want to join in an amendment, the authorization contained in Sec. 21-1801 (d) would not permit amendments for purposes of his objections. If an income beneficiary died prior to considering the possibility of amendments for federal tax purposes, the trust could still be amended for the benefit of the remaining income beneficiaries. In the case of unborn or unascertainable income beneficiaries, a guardian could be appointed by a court of competent jurisdiction which could then ratify the agreement reached between the parties in interest. I suggest, in addition to the explanation contained in the House report (Report No. 92-610), an explanation of the provision consistent with this letter and/ or the attached statement. Very truly yours, Enclosure. WILLIAM J. LEHRFELD. TECHNICAL EXPLANATION TO AMENDMENT TO LAST LINE OF SEC. 21-1801 (D) Prior to its amendment by the Tax Reform Act of 1969, the Internal Revenue Code permitted an individual to make an indirect charitable contribution to public charities by transferring property to a trust and providing that the trust income was to be paid to private persons (e.g., a wife, a wife and children) for a period of time (e.g.. their lifetime) with the remainder of the property to go to a public charity. In the ordinary case, a charitable contribution deduction was allowed for the value of the remainder interest given to charity. The amount of the deduction was based upon the present value of the remainder interest determined by using the actuarial life expectancy tables and an assumed interest rate of 32% as the projected rate of return of the property in trust. The revenue problem was that a taxpayer was entitled to receive a charitable contribution deduction for a gift to charity of remainder interest in trust substantially in excess of the amount the charity would ultimately receive. This was the case because the assumptions used in calculating the value of the remainder interest bore little relation to the actual investment policies of the trust. For example, the trust assets could be invested in high income, high risk assets. This enhanced the value of the income interest benefiting the private party but decreased the value of the charity's remainder interest. This factor, however, was not taken into account in computing the amount of the charitable contribution deduction. Under Sec. 2055 (e) and Sec. 664 of the Code, as amended by the Tax Reform Act of 1969, there are limitations on the allowance of a charitable contribution deduction for a charitable gift of a remainder interest. In general, a deduction is allowed for a charitable gift of a remainder interest in trust where there is a non-charitable income beneficiary if the trust is either a charitable remainder annuity trust or a charitable remainder unitrust described in Sec. 664 of the Code. These general limitations are provided so that the amount received by the charity will be consistent with the charitable deduction allowed to the donor upon the creation of the trust, either during his lifetime or by will. This result occurs under these two limitations because they remove the flexibility of prior law whereby it was possible to favor the private income beneficiary over the charitable remainder beneficiary by means of manipulating the trust's investments. Under the new law, the amounts received each year by the income beneficiary, generally, will have to be either a stated dollar amount ("annuity trust") or a fixed percentage of the annual value of the trust property (“unitrust”). Lifetime transfers after July 31, 1969 had to be in the proper form for the deduction to be allowed. These provisions regarding the charitable contribution deduction for estates took effect with respect to decedents dying after December 31, 1969. There were certain transitional rules for wills in effect on October 9, 1969, which related to or are for the benefit of these decedents dying before December 31, 1972. Unfortunately, the limited scope of the transitional rules has caused a number of instances where an individual or an estate may be deprived of the deduction for the charitable remainder in trust because the trust instrument or the decedent's will did not contain the proper form. The mistake of the decedent, either because of his own draftsmanship or that of his uninformed lawyer, causes both the income beneficiary and the remainder beneficiary to suffer due to the taxes which will have to be paid unless the trust is reformed. In many jurisdictions, a court of equity may, but not necessarily would, permit the trusttee, the income beneficiaries and the remainder beneficiary to join together to amend the terms of the trust to conform to the requirements of the Internal Revenue Code. Whether or not any instrument could be conformed to the requirements of the Internal Revenue Code, thereby assuring the charitable deduction, may depend, in part, on the intention of the testator in drafting the various terms contained within the governing instrument. This amendment would authorize all of the interested parties to amend the trust's governing instrument solely for charitable deduction purposes without resort to a court and the ensuing litigation and inherent problems of construction of the instrument. In general, every income beneficiary and every charitable remainder beneficiary with the trustees, would have to unanimously agree to these conforming changes to effect a change under this provision. The creator of the trust, if living, need not join in the amendment to the trust to conform it to the federal tax requirements. If a private beneficiary is deceased at the time of the proposed amendment, then the other beneficiaries would not be precluded from amending so long as the remaining living beneficiaries joined in the agreement. In the case of any private beneficiary who is not capable of giving consent, for whatever reason (including a child in esse), the trustee would have to apply to a court of competent jurisdiction for the appointment of a guardian ad litem. The guardian would then be entitled to examine the proposed amendment, and its ramifications, and be able to join in the agreement if he believes it is in the best interests of his beneficiary, subject, of course, to ratification of the guardian's action by the court. Agreement by the guardian would be treated as the agreement by the named beneficiary. If the beneficiaries cannot agree among themselves as to the proper rate of return ("unitrust") or stated dollar sum ("annuity trust") which would be equitable in light of the increase due to the federal estate savings, or one of the beneficiaries does not wish to forego the opportunity to invade corpus (contrary to the provisions of Sec. 664), the remaining beneficiaries would not be precluded under this provision from filing an action in a court of competent jurisdiction to place the trust under the equity jurisdiction of the court for a determination of the arguable issues and the application, if required, of the cy pres doctrine. The amendment is solely for the purpose of authorizing all interested parties to join together and conform their charitable remainder trust to the requirements of the Internal Revenue Code and possibly increase the corpus of such trust due to the allowance of a contribution deduction without recourse to the courts. If a trust is already subject to the jurisdiction of a court, through probate proceedings or otherwise, then the court may permit the parties to conform the governing instrument under its supervision for this purpose under this amendment. DISTRICT OF COLUMBIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, Hon. THOMAS F. EAGLETON, Chairman, Senate District Committee, Washington, D.C., November 4, 1971. DEAR SENATOR EAGLETON: The District of Columbia Institute of Certified Public Accountants supports the the position encouraged by the Internal Revenue Service for the enactment of state laws which comply with U.S. Internal Revenue Code Sections 508 (d) and (e). The aforementioned Sections 508 (d) and (e) added by the Tax Reform Act of 1969 (P.L. 91-172) provide that certain charitable trusts and coporations which are treated as "private foundations" will lose their exemption from federal income tax as well as their right to full dedication for charitable contributions unless their governing instruments (i.e. corporate charter or trust indenture) include, by December 31, 1971 certain limitation on their activities. On May 9, 1970, the Internal Revenue Service issued Temporary Regulation 13.8 (35 Fed. Reg. 7300) which states that a statute which deems the requisite provisions to be contained in the foundations' governing instruments will satisfy the governing instrument rule of 508 (d) and (e). Provision which facilitate compliance under Regulation 13.8 are included in H.R. 10790. We encourage the passage of H.R. 10790 (which is essentially H.R. 9172, an earlier Bill, with an amendment to cover Internal Revenue Code Section 664 Charitable Remainder Trusts) in order to avoid burdensome litigation and to ensure that assets donted to tax exempt entities will be used for charitable purposes. I would further urge that your Committee and Congress act expeditiously because Section 508(e) requires compliance with the governing instrument rule by December 31, 1971. As of August 24, 1971, the following states have enacted legislation to conform governing instruments of charitable trusts and corporations to requirements of Tax Reform Act of 1969: Senator STEVENSON. Our next witness is Mr. Revan Tranter, Deputy Director of the Metropolitan Council of Governments. STATEMENT OF REVAN A. F. TRANTER, DEPUTY EXECUTIVE DIRECTOR, METROPOLITAN WASHINGTON COUNCIL OF GOVERNMENTS, ON S. 2204 Mr. TRANTER. Mr. Chairman, I appreciate your courtesy in scheduling me as a witness at this late stage. As you know, the Metropolitan Council of Governments is the regional planning coordinating and developing agency of the major local governments of the major Capital region. For some time our purchasing office of this Council which consisted of the chief procurement officer of each government has been attempting to limit joint efforts in the purchasing of services and supplies. Encouragement has recently come from a very successful endeavor conducted on a subregional basis by the regions of northern Virginia. The committee believes if the purchasing power of the whole metropolitan area were harnessed very substantial savings would result. Title IV of S. 2204 now before you would aid matters somewhat by permitting the District of Columbia to purchase on behalf of other local governments when properly requested. After due reflection the Corporation Counsel's Office, the Office of Planning and Management, the Department of General Services and the Council of Governments have agreed the positions of all of the local governments concerned and of their taxpayers would be strengthened if the District were, in so many words, not only able to permit other governments to join its contracts and bids but also when advantageous to join in theirs. The Council of Governments is therefore submitting a proposed amendment to S. 2204, which would have that effect. It would then enable all of the local governments of the metropolitan area and District and suburban areas to share the responsibility of acting as principal bidding or contracting agents without losing the purchasing power represented by the city. S. 2204, as presently written, concerning any responsibility would have to rest on the District government while conversely the District could not take advantage of prices obtained by suburban governments. The Board of Directors of the Council of Governments has strongly endorsed the concept of cooperative purchasing, and I am sure it is the hope of all of our local governments that your subcommittee will find it possible to support this proposed modification of the administrative improvements bill. Senator STEVENSON. Mr. Tranter, I can certainly sympathize with your desire to see more joint contracts for the purchase of services and supplies as a means of economizing but I am not sure I understand the modification which you are suggesting. Does the Congress have the authority to enable other local governments in this whole metropolitan area to enter into these joint arrangements or to make one or another of the participating governments the agency for all? What is our authority-in this case of Virginia and Maryland? Mr. TRANTER. The other local governments have such ability. If today the District of Columbia were legally able, which it is not, to join in a favorable bidding or contracting arrangement of say Fairfax County, Va., Fairfax can permit that to happen legally today. The District could not legally do so. The proposed amendment enables that to happen. Senator STEVENSON. The proposed amendment permits the District to act as an agency; is that correct? Mr. TRANTER. No, sir; the proposed amendment permits any other jurisdiction to be an agent for the District government. As written, it permits only the other way around. That is to say, for the District to be the contracting agency and this would give more flexibility. Senator STEVENSON. Mr. Robinson, you are still here. What is the position of the District on this proposed modification? Can you tell us? Mr. ROBINSON. The District government has carefully considered the proposed amendment by the Council of Governments. We believe it would be a worthwhile addition to the law. It would provide more flexibility in the joint procurement program and accordingly the District government would support such a change. Senator STEVENSON. Thank you. I thank you, Mr. Tranter. We will try to move ahead rapidly and favorably consider S. 2204. At this point I order a copy of the proposed amendment printed in the record. (The proposed amendment follows:) PROPOSED AMENDMENT TO S. 2204 "DISTRICT OF COLUMBIA ADMINISTRATIVE IMPROVEMENT ACT" Title IV would be amended to read as follows: TITLE IV-JOINT BID REQUESTS AND CONTRACTS SEC. 401. "The Commissioner of the District of Columbia is authorized and empowered either to include in bid requests or contracts for the procurement of supplies and services for the government of the District of Columbia the requirements for like supplies and services of any political subdivision in the National Capital Region, or to have included, from time to time, all or any part of the procurement needs of the government of the District of Columbia for supplies and services in the bid requests or contracts of any political subdivision within the National Capital Region. In either case, the Commissioner shall determine that the political subdivision requesting or agreeing to participation in the bid request or procurement contract has agreed to obligate itself to perform all liabilities or obligations relating to its portion of the procurement and possesses the legal authority to procure or have procured such supplies and services in such manner; and further, that any such political subdivision in whose contract the District of Columbia joins has obligated itself in such contract to comply with all applicable elements of law pertaining to fair employment practices and other similar provisions of Federal or District of Columbia law. The District of Columbia shall be authorized to participate in such joint procurement bid requests or contracts only upon the agreement by all the parties involved in the bid request or procurement contract that they will pay or agree to pay their fair share of the procurement costs which are attributable to the operation of the joint procurement program.” (SEC. 402 would remain unchanged.) The next witness is Vincent A. DeForest of the Afro-American Bicentennial Corp. |