The Washington times., 1937-01-27
CHARITY
SUFFERS BY
u. 5. TAX

1.-THE acute problems facing
priDGte charitable institutions
because of the exhaustion of
sources OF philanthropy and the
tendency totUGrd system OF
"St1te medicine" is continued in
the second of q series OF articles
dealing tDith the situation. To-
days article deals specifically
tDtth the effect of the present
revenue act on reSidudry legGcieS
left charitable Institutions
The Fastening effect of the pres
ent Federal revenue act to drain
the sources of private endowment
to charitable organizations and
provide for the ultimate applica-
tion in the United States of a sys-
tenn of "state medicine is fore
cast by outstanding business men,
heads of organizations and veteran
social workers.
An example Of the way in which
the revenue provisions operate to
throttle future bequests can be
seen from the following example:
Mr.. Jones dies leaving an estate
of one million dollars. He be-
queaths $250,0O0 outright to each
of his two children Sally and Will
liam. He then provides in his will
that the residue of the estate shall
he held in trust, the income going
to Sally and William as long as
they live, and at their deaths the
entire body of the residue shall go
to x Hospital.
what Happens
Mr.. Jones' administrators be-
gin settling the estate Immediately
upon his death. The direct estate
tax on the $500,00O that goes to
Sally and William is paid out Of
the remaining $500,000, cutting
that residue to approximately
$450,0OO.
The Government then says that,
although this remaining $450,0O0
ultimately is to go to K Hospital,
and although Sally and William
will, of course, pay regular income
taxes on the annual income from
it as long as they live and receive
that income, the Government is
entitled to an additional slice of it..
The argument is that Sally and
William will receive 4 per cent in
terest on the $450,000 (or $4,000
as long as they live. Sally is the
youngest and the insurance eX-
pectancy tables say she ought to
live 20 years.
Another Slice
Now the Government says Zig
noring the fact that income tax
will be paid on this $4,000 q year
and that Sally and William will
never have control of the body of
it,, that this income-for-life ar
rangement constitutes a paid-up
endowment to Sally and William.
Tables determine what lump sum
would have to be paid down by the
estate now, in order to bring in
the $4,000 a year for 20 years.
This amounts to approximately
100000.
Next the Government considers
that Sally and William not only
are receiving $500,000 between
them in outright bequests, but that
also they are receiving a lump
sum endowment of 100000 from
the estate, and that this, too, is
an outright bequest. AS such, it is
taxable directly as part of their
personal share of the estate.
Anticipate Revenue
The tax on this 100000 is about
$4,000. The Government says
this must be paid at once, in spite
of the fact that it is on anticipated
income, some of which isn't to be
received for 20 years. If Sally and
William are killed tomorrow in an
automobile accident, none of it
ever will be received. The $780,
900 forthwith is taken out of the
existing residue of $3.50, 900. leav-
ing $4,000.
In short. x Hospital was left
really $45O,000, but because it was
not payable Immediately, the Gov
ernment has taxed this $450,O0O
by $130,O00, the hospital finally
getting $320,000. This does not
take into consideration State taxes.
In larger estates than $1,000,000
the percentage of tax is 35 to As
per cent.
Arbitrary Figure
Also a manifest inequity appears
from the point of view of the heirs.
The endowment tax is paid on the
assumption that the residue will
earn 4 per cent annually. How
ever, this is an arbitrary figure
set by the Government and in
many cases does not work out.
Obviously the only alternative
is for the donor to make a direct
grant to the organization he
wishes to bequeath. On this type
Of endowment the Government
takes only Is per cent as taxes.
However, the lessons of the depres-
sion have been such as to make this
type of bequest a rarity. The
reason being that family security
comes foremost and the charity
second. Owners of any sizable
estate no longer trust to, future
outlooks. and as a result the usual
charitable bequest is left if at all
In the form of a residuary legacy.
Wealthy people say, as in the
case OF Jesse Straus, that the
Government is taking large parts
of their estates and devoting these
to social service purposes. That's
all they care to give to charity.
L