Section 302 what it was unable or unwilling to accomplish under Section 201 (c) and (d), by partially disallowing the charitable deductions in question in all cases where such unrealized appreciation (plus other forms of exempt income and preferences described in Section 302) exceeds $10,000. Certainly one result that could be fairly anticipated from the enactment of Section 302 into law would be for the many individuals whose substantial charitable donations in the past have invariably taken the form of gifts in kind of appreciated property to simply stop making large charitable gifts. I believe a previous witness at these hearings has testified to the effect that 55% of the dollar value of all gifts to a group of Massachusetts colleges are so made in kind rather than in cash. Undoubtedly cash gifts by foundations and charitable trusts made from the proceeds of sale of gifts in kind made to them by their own donors comprise a very substantial portion of the other 44%.

As applied to charitable gifts of appreciated property Section 302 provides in effect for a double penalty. Thus not only is the unrealized appreciation itself treated as one of the tax preference items requiring Section 302 allocation; but in addition such appreciation also represents part of a charitable gift which constitutes one of the personal deduction items subject to such Section 302 allocation. I would assume that it is for the above reasons that the administration has recommended narrowing the scope of Section 302 by removing unrealized appreciation from charitable gifts in kind from the list of tax preferences subject thereto.

6.

THE ALLOCATION OF DEDUCTIONS CALLED FOR BY SECTION 302 WOULD
UNNECESSARILY COMPLICATE THE TAX LAW AND THE TAX RETURN FORMS.

The adjustments called for by Section 302 would apply in every year to hundreds of thousands of taxpayers who would have to bear the time-consuming burden of making the many calculations called for by that Section, nearly all of which apart from Section 302 would never even have to be computed by the taxpayer (except as to some such items in the extremely rare instances covered by Section 301).

The necessary additional computations and recordkeeping required under Section 302 with respect to intangible drilling expenses, straight line depreciation, cost depletion and the keeping of a separate set of farm books using the inventory method of accounting (including the taking of a beginning inventory each year) would be most complex. As an example, in order to calculate for a given year the amount of his accelerated depreciation in excess of straight line depreciation (or, in the case of oil and gas wells and farm losses, the amount of depreciation which would have been allowed if the taxpayer had capitalized intangible drilling expenses and certain farm expenses), the taxpayer will have to make a separate determination of the salvage value of each item (a determination which is not necessary under the 200% declining balance method of depreciation) and if there has at any time been a change in useful life, he will have to recalculate straight line depreciation on a year-by-year basis from the time of his original acquisition of

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the property in question. Similarly with respect to determining percentage depreciation in excess of cost depletion, he will have to make a determination,from information not generally available, of the amount (in barrels of oil and cubic feet of gas) of oil and gas extracted and sold during the year and also of his oil and gas reserves in place at the beginning of the tax year. In order to determine reserves in place for cost depletion purposes, he must obtain a reasonably up-to-date engineering report, which will not normally be available unless he goes to the expense of having one made for this specific purpose.

In short, then, Section 302 would be an administrative headache, require a number of exceedingly complex computations and tax return entries (never heretofore required) to be made by a large number of taxpayers, entail additional work by the IRS in auditing, checking and reviewing such additional computations and the evidence necessary to verify the figures used in such computations, and be a step in the opposite direction of the objective of tax and reporting simplification which so much of the rest of the House Bill (particularly its proposed increase in the standard deduction) was so wisely designed to accomplish and which the taxpayers themselves are so vociferously demanding.

Serious questions exist as to the validity under the Federal Constitution of certain provisions of The Tax Reform Bill of 1969 (H.R. 13270), specifically:

(a) the "Limit on Tax Preference" (LTP) provisions in section 301 imposing a direct Federal income tax on municipal bond interest,

(b) the "allocation of deductions" provisions in section 302 imposing an indirect Federal income tax on such income by the reduction of other deductions merely because of the receipt of such income by a taxpayer, and

(၁)

the Federal subsidy and waiver of tax exemption provisions in sections 601 and 602 in their application to the political subdivisions of any state in the absence of its authorization of action pertaining thereto by its political subdivisions at least by state act or possibly by state constitutional amendment.

Senate Finance Committee
September 19, 1969

Page Two

GENERAL COMMENT

I am appearing before this Committee in order to present the views of members of several law firms which are nationally recognized as municipal bond counsel with regard to the tax reform proposals presently before this Committee as they relate to treatment of the interest on obligations of states and their political subdivisions (herein "municipal bonds" and collectively "Local Governments," respectively). My statement is directed primarily at setting forth our views on the constitutionality of any attempt to impose a Federal tax directly or indirectly on income on municipal bonds under the "Limit on Tax Preference" (LTP) provision in section 301 of The Tax Reform Bill of 1969, i.e., H.R. 13270 (herein the "Bill"), constituting a direct tax on such income, and the "allocation of deductions" provision in section 302 of the Bill, constituting an indirect tax on such income. While others have expressed their opinion that any attempt to tax such interest would raise a serious constitutional question, this view has apparently not been accorded much weight by some members of Congress. We wish to dispel here any notion that passage of the proposed legislation would meet with no resistance by those who issue and those who invest in municipal bonds. It is the view of our group of bond counsel that a very serious constitutional question is raised by the proposals, both with regard to the right to tax either directly or indirectly the interest on municipal bonds and with regard to the right of a political subdivision within any state to waive the constitutional tax immunity under the waiver and Federal subsidy provisions in sections 601 and 602 of the Bill, in the absence of the state's authorization of action pertaining thereto by the political subdivision at least by state act or possibly by state constitutional amendment.

Under the Federal Constitution neither the Federal Government nor the Local Governments can materially impair the other's power to raise money by borrowing (or by taxation, a point here irrelevant), i.e., materially impair the so-called "sovereign power of the purse.

We understand that Secretary Kennedy recently conceded that the LTP provisions in the Bill posed a grave constitutional question, but that he indicated that the allocation of deductions provision did not pose such a question, even though it related in part to municipal bond interest, in view of United States v. Atlas Life Insurance