Union Calendar No.

3'
7wiz Cowoxnsel HOUSE OF REPRESENTATIVES, R(IoulT No. 2. let Seaton I

THE REVENUE BILL OF 1928

Dwma,7, 1927.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed

Mr. GifmN of Iowa, from the Committee on Ways and Means, submitted the following

REPORT
[To accompany H. R. 11

The Committee on Ways and Means, to which was referred the bill (H. R. 1) to reduce and equalize taxation, provide revenue, and for other purposes, having. had the sanae under consideration, reports it back to the House without amendment and recommendsthat the bill do pass. GENERAL DISCUSSION .We are again in the happy position of having a surplus of revenue in the Treasury which is 'being applied on the national debt, but which enables us to reduce taxation. In anticipation of this situation an undkstafnding was reached between the representatives of tow, two great parties during the 69th Congress that the Committee on Ways and Means would meet! in- advance of the session now pending and prepare a tax reduction measure to be presented to the House when Congress convened. While this understanding failed to be; enacted into lawI it was. carried' out by the members-elect of thle Comimittee. Pursuanttito notice given ixr thh press, hearing were had in the same manner as on the preceding revenue bill, and an opporttiiilty given to all persons desiring to be heard to present their views to the Committee. Requests were made for reductions aggregating more than $500,000,000, and a large number of amendments were proposed to administrative provision of the present law.

THE

REVENUE

BILL

OF

1928

The present law contained a provision for the creation of a Joint Committee of -the House and Senate on Internal Revenue Taxation. One of the duties of this Committee was to consider measures for the simplification of the Revenue Act. This committee was duly organized and for more than a year its staff, assisted by the Legislative Council of House and Senate, Treasury experts, and by a voluntary committee of distinguished lawyers, experts, and economists, who served without compensation, have been at work devising methods simplifying the income tax. While the work of the Joint Committee is far from complete, an elaborate report, with certain recommendations, was submitted to the Committee on Ways and Means and to the ]Finance Committee of the Senate. These recommendations, together with those made during the hearings were carefully considered by your Committee. Not all the recommendations of the Joint Committee were approved-in fact, your Committee did not have time to properly consider all of them. But the greater part of the recommendations of the Joint Committee were adopted and are part of the bill, among which is the rearrangement of the law. It was obviously impossible to make all of the reductions proposed. The plan adopted in the bill and approved by the majority ot your committee is believed to distribute the reduction as widely as possible, apportioning it among the taxpayers where the need seemed greatest, and at the same time endeavoring to make it reasonably certain that when the law went into full force and effect it would not cause a deficit in the Treasury. In this connection it should be borne in mind that the full effects of the law as proposed to be modified will not be felt until the fiscal year 1930. This fiscal year, ending June 30, 1928, will show a large surplus, as less than half the reductions proposed will apply to it, and the Treasury is likely to receive some large payments from railroads. Our concern is for the future. The majority of the committee are opposed to any plan that would produce a dehbit. In this connection it should be noted that the estimates of surpluses for future years, on the basis of the present lav, takes no account of expenditures which may be made in the future, but which are above the sums appropriated in recent years, such as those for flood control, agricultural relief, additions to the Navy, public buildings, Boulder Dam, etc. A margin must be left for these items, some of which are reasonably certain to be adopted.
REDUCTIONS PROPOSED

existing taxes to determine where reductions should be made and in

The committee gave extensive and detailed consideration to the what amounts. As a result of the action of the committee, the total loss in revenue carried under the bill is %$232,735,000. The details are as follows:

Table: Estimated Los in Revenue

THE REVENUE BILL OF 1928 Estimated Loss in Revenue

(Changes proposed by the Revenue Act of 1928)

Eteductions: CorporationsReduction in rate of taxEstimated revenue under present law: 13% per cent on ail corporations except insurance; 12% per cent on these corporations -------------. $1, 120,000,000 Estimated revenue as proposed: Inlsurance - $18, 400, 000 Other _ 937, 000, 000 955,400,000 Loss. $164, 600, 000 Increased credit (from $2,000 to $3,000 on corporations with net income of $25,000 . 12,000,000 or less) Total loss, corporations. -________________ $176, 600,000 8, 000,060 Admissions tax (increased exemption to $1.00 admission) 5, 000,000 Dues tax (reduced from 10 to 5 per cent)_----------------Automobile tax (reduced from 3 to 11/2 per cent) .______.____ 33,000,000 185, 000 Cereal beverage tax (repealed) _______.___________________ W ine taxes (reduced rates)_-------------------------------930,000 Stamp taxesSale or transfer of capital stock (reduced from 2 to 1W)------------------------- $8,800,000 Sales of produce on exchanges (repealed)__ 3,000,000 11. WM0. 000 Total ----------------------------------------------235, 515, 000
---

Increases: Wlthholding of tax at source on tax free covenant bonds (nonresident- aliens and foreign corporations) Prize lights (tax of 25 per cent on admissborus of $5.00 and over)_------------------Foreign-built boats (increased annual tax on boats contracted for after December 1, 1927)_
-------------------------------

2,000,000 750,000 30,000

2,780,000

Total-_________________--______--______--_______--______ Net loss In revenue--------------

232,735,000

As before stated less than half of this loss will be felt in the fiscal year of 1928, ending June 30 of that year. Consequently there will be a large surplus for that fiscal year which under the law will be applied on the public debt,
CORPORATION TAXES

The corporation tax has not been reduced since the War, while nearly all other taxes have been. The corporation tax was established before the income tax went into effect under the 16th Aiten'dment to the Constitution under the theory that 'corporations enjoyed special privileges and might properly be taxed therefor. At present,

THEB REVENUE BILL OF 1928

however, it is generally conceded that the tax on corporations is disproportionate and that they are especially entitled to some reduction. Whether the reduction of the rate to 11/2 per cent affords adequate relief the Committee did not decide, but it found that this was all that could be given at this time with the surplus available for tax reduction and at the same time afford a measure of relief to the other taxpayers. this tai The small corporations are especially burdened b-y Many have dissolved and are doing business as partnerships by reason of which as individuals they pay a tax very much lower. The Committee proposes to give the sinall corporations with incomes not in excess of $25,000 additional relief by raising the exemption from $2,000 to $3,000. This exemption should not be compared with the individual exemptions as it is based on altogether different reasons; and besides this, the stockholders still have their individual exemptions. The majority of the Committee considered that this reduction of rates given to corporations should apply in 1928 to the income of 1927. This rule was observed in the reductions on individual incomes by the present law and there are the same reasons for applying it in the proposed bill. It is claimed by some that the taxes on corporations on incomes of 1927 have already been passed on to the consumer in the prices fixed, but the returns show that a very considerable proportion of sales of corporations were made at small or no profit or even at a loss, which would not occur if the corporations were able to fix the prices on their products. Economists generally agree that the tax can not be passed on except by a monopoly, and -that other than in exceptional cases corporations sell for the highest price consistent with the broadest market that can be obtained. This view has been concurred in by an English commission which recently investigated the subject aid also by a special board making a similar investigation in this country. These adjustments, as stated above, will cause a loss to the Treasury of $174,600,000.
MISCLNEOUS TAX

The Committee reduced the taxes on admissions and dues, automobiles and motorcycles, and wines used for certain purposes. The stamp tax on sales of produce on exchange, which has always operated as a tax on agricultural products, has been repealed, and the tax on sales or transfers of capital stock has been cut in half. The tax of one-tenth of a cent per gallon on cereal beverages has also been repealed. It was felt that the reductions made were as large as the remainder of available surplus revenue would justify, and will cost the Treasury the further sum of $60,915,000. In connection with the reduction of the tax on wines and the repeal of the tax on cereal beverages, it was stated by the Commissioner of Prohibition that the former would not affect, and the latter had been of no useful purpose in, the enforcement of the Prohibition Act. An amendment to existing law, providing for the retention at the source of the tax on certain kinds of bonds which contain tax iree covenants in the case of non-resident aliens and foreign corporations,

Table: Income for the fiscal years 1926 and 1927 compared with estimated income for 1928 and 1929

Table: [No Caption]

iJUE BEVZ~itMJ

IML OF i1

.-

iV

makes certain the receipt of taxes due and is estimated to save the Treasury $2,000,000. Te tax on admissions to prize fights is to be increased to yield $760,000; also, that on foreign built yachts to yield $30,000. 'Deducting the sum of these amounts from the proposed reductions of $235,516,000, the net loss to the Treasury is estimated to be $282,7a5,000.
RCEITS

FOR 1926 ANiD 1927 COMPARE!D WITH EMSIMATES FOR 1928 1029.

AfD

For the information of the House, there is given below a table showing the sources of; the revenue the receipts for 1926 and 1927, and the estimates of the Treasury ior 1928 and 1929, if the present law were to remain in force. The action of the Committee in making re-uctions was based upon the receipts and estimates given in the table.
Ioome

Wor

the

lio.l vear. 1926 and 1927 compared with estimated

1928 and 1929
1920

income for

Sores of in

I17

1928

19CD'

Co.

.. Rotates a.... 116,041,000 Alooptrlt0 ......... 4mdn s aud d -_ -- .. 34, 066,0

.

OIL Ind Mviualss 87 124 000 0o0o .............,, WI00,000 . I--tab---i---------. ,, O

.

------.--- .1, 09,960,

.
.-.

Tobikeos-.370, 0,000' utomoll --.... t 118,18,000

.......

Sta8p ss~ playh^g43rda~..,, TotaL.,..

--------

................... ................

M, 014, 000 8,071,00 it 144,479,82 S 2,835,999, 892,

$1, 308,013,000 $1, 120,000 000 7 5,000, 911,940,000 1 331, 000000 280,000, 000 80,-o0o,000 10,3%4,000 2119500 1,00,00 0 278, 0 87,170,000 400, 000, 000 O000 6438, 00,0, 346,000 8, xN O 37,8445,_6000 8,104,000 3,200,000

00 120, $1, 765,000,000

MD

42' 0000 05,00000

180M00,000 85000, 17,000, 28,000,000

so000 3,0,0

Q so0,0 000
2,705, 45, 009

12,701,000

2,8,68 3, 000

10,000,.000 2,803,5, 000

I Baick taxs for 10 and 1927 were not ated as separate Items, but included In the corporation and ItdSdual bms. But back t"Weare squregated In the estimates for 1928 and 1929. This amount of $144, 479,892 Includes among other items the following: Gtt tax.. .-__,,. ... ..-.._.$.t3,175,000 , Capital stoCkt ..............---.7,388,000................,.,.,,,....... 9,3"'000 Bvors_ ... ..... .--4,324,000 'Other esola tx ..1,938...............................................,. 000 II. W w- wlrwom elthet disoontinued or ineludedin other items In subsequent years,
. ..

...........

SUIRLUS AVAILABLE FOR TAX REDUCTION

The Treasury submitted to the committee, orally and in writing, estimates of receipts und expenditures. It -analyzed the surplus remaining in the Freasury at the end of the fiscal years of 1926 and 1927-,ad the estimated surpluses for the fiscal year$n 1928 and 1929. Based on the experience of the past and the best forecast it could make for the years 1928 and 1929, it stated that reductions could not safely be made in ex of $225,000,000. Surpluses are made up of two classes of items: recurrent items, which appear each year, producing volumes Uf income of compara*ively stable amounts; and non-recurrent items, producing variable and irregular amounts, which tend gradually to disappear as the sw'ces 0f such income become exausted. These non-recurrent it

Table: [No Caption]

.8

THA REVENUE BLL

OF 192

have been an important factor in recent surpluses, 'as the following table indicates:
Fiscal yew
.........................
...

Surplus

Recurrent income $162, 000,000 221,000,000 137,000,000 199,000,000 177,000,000

lYTegular nonrecurrent income

or

1920 $377, 000,000 1927 .-3 000, .......0...o 000........ 00j 12 (estimated....).. 455,000, 000 19 (esti---ate)---------------------.--274,000,000 12 estimate hased on Bureau of the Budget's flgures.-252,000,000

$215,000,000 414, O,000 318,- 000,000 75,000,000 75,000,000

These irregular and nonrecurring items are estimated to decline $96,000,000 in 1928 over the 1927 receipts, and $243,000,000 in 1929 over estimated receipts for 1928, leaving total receipts from these sources in that year (1929) of only $75,00Q,000. The Treasury estimates the total surplus for 1929, at $274,000,000. The Bureau of the Budget, in a more recent estimate, increases the expenditure estimate and indicates that the surplus will be $252,000,000, or $22,000,000 less than the Treasury estimate, and that the surplus exclusive of nonrecurrent items, will be $177,000,000. The Treasury has been receiving large sums from payments of Farm Loan Bonds, from loans advanced to the War Finance Cor. portion and the railroads, and also from the sale of surplus pro erty. Collections on back taxes have been large, by reason of the fact that some large cases have remained unsettled under the: old excess-profits tax law. These payments will either cease entirely or be largely decreased after the fiscal year of 1929. The Government holds no more farm loan bonds. The War Finance Corporation has been practically liquidated and not more than $6,000,000 can be realized from this source in the future. There will remain after 1929, only $49,000,000 of railroad securities, the value of which is problematical. Surplus property still undisposed of is estimated at $4,000,000. Back tax collections, after 1929, because virtually all the cases under the excess-profits tax years will be closed, will yield only about $50,000,000 per year net, after deducting refunds, but since there will always be collected in anv year taxes due in previous years but not then paid, this amount of $50,000,000 may be considered as regular income, since it is based upon continuing sources. If wisely administered, governments live from regular sources of revenue. The bill proposes a total net reduction of $232,785'000. The estimated surplus for 1929 is $274,000,000, including" the irregular items, or $199,000,000 excluding such items. It is apparent, then, that the committee has gone fully as far in tax reduction as ordinary prudence will justify. Since 1920, surpluses have generally resulted because, the reductions in expenditures have exceeded the reductions in receipts tinder the several revenue acts, and because assets acquired during the war have been gradually disposed of and the moneys received therefrom covered into the Treasury, In 1925, the expenditures increased!aiid receipts declined, with the result that the surplus in that yearvwas less than half that of the preceding year. In 1927i when the largest surplus occurred, receipts increased and expenditures diminished.

Table: Principal change in ordinary receipts and expenditures chargeable against ordinary receipts in the fiscal year 1927 over 1926.

THE

R15VENV

BLJ

There were unusual and non-recurring items in both receipts and expenditures. The disposal of capital assets, the excess of back tax collections over refunds, and other items now rapidly disappearing or of a non-recurrent character account for $414,000,000 of the surplus of $635,000,000. $103,000,000 of this surplus came from sources which are now entirely exhausted. The principal items of the change. in 1927 are as followsPrinolpal change in ordinary receipts and expenditures chargeable against ordinary receipts in the fiscal year 1927 over 1926.
[On basis of daily Treasury statements (unrslsed)J

Expenditures

Receipts-Increase.I
Decreases Customs ....-... Internal revenue (largely income taxes) Foreign repayments._ Railroads (primarily securities sold) Federal farm loan bonds, etc .. Miscellaneous (net)
.

Increases

2,000,000 32,000,000 11,000,000 53b, 5000,000 29,000,000 16,000,000

General expend. tures$ 31, 000,000 ternal revenue Government life in. funds .. ,,.,,.72,000,000 suranco fund 9,000,000 Postal deficiency_. 12, 000, 000 Debt retirements Civil service retirechargeable against ment fund .-. 11. 11,000,000 ordinary receipts.. 32,000,000 Other items15,000,000
-

Interestpayments.- $45,000,000 Customs and in-

The existence of a surplus does not prove thatthe Government has a continuing revenue in excess of its normal requirements. Estimates for coming years must take into account temporary and non-recurring revenues, the business conditions of the country, the increase of expenditures incident- to the growth of the country, and that unexcected demands may be made such as those arising out of the recent foods. The surplus arising from the excess of earnings from recurrent sources over the yearly expenditures forms the real basis of safe and sane tax-reduction. In this connection the following table i. illuminatig :' '

Table: Principal receipt items of a nonrecur ing or temporary type increasing the surplus in the fiscal years 1923, 1924, 1925, 1926, 1927, and 1928.

Principal roeeip item. of a ec wm ng or temporary type increasing th surplus in the fiscal e

1X
. .

9,
1927

1925, 1926, 1927, and 928.1

I

194

1925

1926

19281

19Z

Back Income and profits tax collectionsI --$000000 $300,000,000 $300000,000 $276,000,000 $2,000,000 $331,000,000 MOM,000,000 Les inter-al revenue refunds1, 000 17,000,000 147,000,000 125,000,000----------------117,000,000 151,000,000 Not 175, 000, 000 173,000,000 129,000,000 113,000,000 214, 000,0000 120, 0, 4,M100 58,000,00 Rairoad securities, less railroad payments --314,000,000 Is, Oo,ODD 136,000,000 36,00,00O 89,000,000 u4,000,O9 5 Federal farm loan bonds and other minor securities 46,000,000 00 9,000,000 19,000,000 SC 000,000 63,000,000 1,0a0o0 War Finance Corporation assets _. 53,000,000 109,000,000 43,000,000 19, 000,0O 27,000,000 . e of surplus war supplies_--------------------44,00, 000 83,000,000 16,000,000 13,000,000 8, O0,000 5,500,000 4, Navy oil Judgmpent __ _.____ _ _ __ _ _ ___..___..OKW '5,000,000 13,000,000 ._____:___ Tot-_ -----*---398,000,000 336,000,000 343,000,000 215,000,000 414,000,000 318,000,000 75, 000, m MS,000,000 250,000,000 635,000,000 Surplus-309,000,000 377,000,000 455.000,000 274,000,000 Surplus exclusive of above net receipts_ _ __-189,000,000 -162,000,000 221,000,000 137,000,000 199,080,000 Deficit exclusive of above net receipts- --------------- ----------------_8--000,000- ----------------. 98 000,000 ---------

-_-.-

I*

a Excess

ABack income tax collections for fisal years 192 and l924 are best available estimates. Figure of aal ollec o payments. ot amount pain ier bonds aggregting $5 0000 pib* l aia=

Estimated.

sw

no t

pt

tor thou

*Ximulve

Table: Comparison of estimates with col ections for the fiscal year 1927

THE REVENUE BILL OF 198

From the above table it appears that in the year 1923, the reduc-' tion in taxes was $89,000,000 in excess of regular receipts, and in 195 such excess was $93,000,000. The irregular revenues preventedl Ad deficit. Business expansion provided a growing taxable inkc'otne. These unusual sources of revenue are close to the vanishing point. Business expansion is assured only to the extent of the normal growth of the country. The following table compares the estimates of receipts for the fiscal year 1927 with the actual collections:
Oompari8o* of estimates with oozleotion8 for the fisl year 1927 [Estimats made October, 1921
Item
Estimates
$1,
.

Collections
$1, 125,

Overetimate jUnderestimate
-

Corporation tax Miscellaneous revenue Individual Income -.-.. Back tax collections Total_ .
-

............

820,000,000 2 000, 000 ' 2,800,000 000

12,00,000 619,000,000

$5,000,000 64, 000, Q 000,000. 27, 000,000 73,000, 000 000 $57, 000, ......_ 331,000,000 .-.-81,000, 000 285, 000, 000 57,000,000 I, 000; 000'

Making the net overestimate $50,000,000 in internal revenue oollections

This table shows that the corporation tax was underestimated only $5,000,0o,0 while the collections from individual income taxes were overestimated $57,000,000. The miscellaneous revenue was, under,

estimated by $27,000,000. This was largely caused by the greatly increased consumption of cigarettes and es not likely to be repeated There was also about $9,000,000 collected- on late returns from. the, capital stock tax, which has been repealed. The back tax collections were underestimated $81,000,000. This was caused by a special drive made by the Treasury.. It has hertofore been shown in the report that the receipts from back taxes from now on will greatly decrease. The whole matter may be summed up by paying that the sources of revenue have now reached a normal condition and that estimates can be made with approximiate accuracy, and reductions can be properly made only in accordance, with these estimates. PERSONNEL OF THE BUREAU OF INTERNAL REVENUE. Your Committee is convinced that there remains a realtopportunity for substantial simplification in the administration of the internalrevenue laws. In fact, effective changes must be accomplished if the present situation is to be met. An impartial and exhaustive surveys of the administration of the income and excesp-profits taxes was made by a committee consisting of three officials of the Treasury Department, unqualifiedly approved by the Secretary of the Treasury, and submitted by him to the Joint Committee. on Internal Revenue Taxation. Each of the' individuals is well known to your Committee and your Committee has implicit confidence!.in their integrity and judgment. This survey shows tho present situations in deetal. Inasmuch as it is printed; as a part of the Report f the Joint Committee, it is unnecessary at this time to restate the' facts+. beyond saying. that the present situation is critical. It; is. of utmoW

10

THEB REVE NUE BILL OF 1928

importance that a much larger number of cases be closed finally by administrative action of the Department, rather than by litigation. The burden now imposed upon the Board of Tax Appeals and upon the Office of the General Counsel of the Bireau of lEnternal Revenue must be relieved if the true functions of these agencies are to be performed properly. At root, the major problem is one of personnel. The necessary and even vital administrative changes (in the attitude toward the settlement of tax cases, for example, and the handling of the collection of revenues as an administrative and not a judicial problem) cannot be effected-in fact, should not even be attempted -unless an adequate personnel is available. Tax cases cannot be closed upon the basis of absolute accuracy. Prompt and final settlement is often more important than meticulous accuracy, both from the point of view of the Government and that of the taxpayer. But again the responsibility cannot be vested in any but the most experienced, trained, and competent men. The Treasury has found it impossible to build up and retain an adequate personnel. Your Committee is convinced that the public, as well as the Government, have a right to demand that the personnel charged with the collection of taxes possess extensive experience, ability, unquestioned integrity, and sound judgment. Persons capable of holding important positions have been developed by the Treasury, but the Treasury loses regularly a large proportion of its ablest employees. The present turnover is excessive and devitalizing. The Treasury should not remain indefinitely a training school in which young men and women can educate themselves and then resign to find a permanent career outside. It -is only by the retention of persons capable of holding positions of importance that an adequate personnel will be obtained, and that the necessary reformation in the administration of the law can be carried on. If this cannot be done it will be the body of the taxpayers and the Government-not the employees themselves-who will suffer most. Among the administrative changes undertaken by the Treasury in order to cope with the present situation, is the creation of the Special Advisory Committee. It is expected that this committee will prove of substantial assistance in relieving the present congestion of more than 19,000 undecided cases before the Board of Tax Appeals (involving aggregate amounts of more than $550,000,000), and in preventing a future accumulation. The work of the committee is already producing a most desirable result, although it has been in operation for only three months. Prior to October of this year, cases were accumulating before the Board at the rate of more than 200 a month-that is, more than 200 petitions were being filed in excess of the number disposed of. In October, however, the number of petitions dropped to 522, while the number disposed of amounted to 521. In November, for the first time since the creation of the Board, the number of petitions disposed of exceeded the number of petitions docketed, there being 515 of the former and 496 of the latter. Undoubtedly, the work of the Special Advisory Committee has been a substantial factor. Although the number of petitions filed with the Board constitute but a fraction of a per cent of the cases disposed of by the Treasury, the actual number of petitions filed in the past far exceeds the num-

stopped. Many of the attorneys in the General Counsel's Office are handling cases in which the aggregate amounts involved run into the millions. There are only eleven attorneys in the office who have served in. the office more than six years. There have been in the Income Tax Unit 4,727 resignations of professional and technical officials during the last seven years. A training of several years is necessary to develop the kind of men needed. The Treasury must be given an opportunity to retain trained, experienced, and competent officials. The Government can well afford to retain a substantial portion of the personnel it has developed. Your Committee has unanimously reached this conclusion In order to make this possible, your Committee has included a section in the Bill under which the Secretary of the Treasury is authorized to fix the compensation, without regard to the provisions of the Classification Act of 1923, of a limited but necessary number of officers and employees of the Office of the General Counsel and of the Bureau of Internal Revenue. Your Committee firmly believes that this is a substantial and essential step toward the simplification of the administration of our tax laws. The estimated cost (based upon the difference in the present salaries and the Salaries which will be possible under the provisions of the Bill) is $140,300. Without considering the loss to the taxpayers and their dissatisfaction as a result of delay, this amount is but a negligible fraction of the tremendous sums undoubtedly lost to the Government through its inability to retain its best employees, after they have become really valuable, and through the consequent confiding of its tax cases to untrained employees who must meet the very best legal and accounting talent in the country. STRUCTURE OF NEW BILL AS COMPARED WITH PRIOR REVENUE ACTS. The bill in one respect differs materially from the Revenue Acts of 1918, 1921, 1924, and 1926. Each of those Acts reenacted all the provisions of the preceding Act, with such changes-and omissions as the policy of Congress dictated, and then repealed the preceding Act, with certain exceptions. The Committee feels that this method has resulted in great complication, particularly in the income and estate tax, and especially in the procedural provisions. The effort in each new Act to put in the same place all the'law relating to the assessment and collection of taxes for earlier, rears, as well as the law relating to the method of assessment and collection of the taxes imposed by such new Act, has resulted in many complications. Striking examples of the difficulties encountered may be found in sections 277 and 278 of the 1924 and 1926 Acts, dealing with the statute of limitations section 284 of the 1926 Act dealing with refunds and credits, atid section 283 of the 1926 Act, dealing with appeals to the Board of Tax Appeals in cases arising under the 1924 and preceding Acts. If this process is continued, it will produce more and more complexities. The Committee is impressed with the importance of making a fresh
H R-70-1-vol 1-5

lo ber which can be effectively and efficiently handled by the Board. Consequently, even a larger number must be disposed of by administrative action within the Treasury, and resort to litigation must be
THE REVENUE BILL OF 1928

12

THE REVENUZ BILL OF 1920

stait. Under the plan of the bill the taxpayer for 1927 and succeeding years will not be obliged to wade through many complexities of interest only to txpl)ayers under prior Acts, which only serve to confuse and irritate him. Therefore, the provisions of the income tax title of the present bill ripply only to the taxable year 1927 and succeeding years, and have no effect whatsoever on taxes imposed for prior taxable years. For this reason the income tax title of the 1926 Act is not repealed by the bill and remains in force for the collection of taxes for 1925 and 1926, as well as taxes under prior Acts, except as modified by Title III of the present bill, containing express amendments to such title, and by Title IV containing various administrative provisions, and by Title YV, containing a few retroactive provisions intended to relieve certain cases of hardship under prior Acts. The estate tax title of the 1926 Act is neither repeated nor repealed in the present bill, which, in Title II (Sec. 401-403) contains three amendments to that title. Similarly the reductions recommended by the bill in the automobile, admissions, club dues, and stamp taxes, are accomplished by express amendments to the 1926 Act, instead of the old method of repetition and repeal. The adoption of the new method in the bill, will it is believed, materially save time in the House inasmuch as the till is 50 pages shorter than the bill in 1926, even though the new style of printing, on account of the headings and indentions, increases the number of lines necessary to embody any given number of words. REARRANGEMENT OF INCOME TAX TITLE. The bill embodies a proljosed new arrangement for the income tax title. The basis for the arrangement is the distribution of the provisions by two classifications: General Provisions and Supplemental Provisions. There are a few Introductory Provisions. The General Provisions are those which apply to the ordinary transactions of the ordinary classes of taxpayers. It is believed that approximately 80 per centum of the taxpayers who file returns under the new Act will find in the General Provisions practically all the income tax statute law of interest to them. The General .Provisions are divided into Parts. TThe Supplemental Provisions comprise all provisions of the income tax title other than the General Provisions and the Introductory Provisions. In the main, the Supplemental Provisions are those Which apply only to extraordinary classes of taxpayers or which apply only to the extraordinary transactions of ordinary classes of taxpayers. The Supplemental Provisions are divided into Supplements. An improved form of cross reference, illustrated in section 12(b) (c) and (d), on page 12 of the bill is employed in the bill. Section 2 provides that cross references of this kind (i. e. where the word " see " is used) shall be given no legal effect. The normal tax, surtax, and ordinary corporation tax are imposed respectively by sections 11, 12, and 13, which correspond with sections 210, 211, and 230 of the 1926 Act. No changes are made with respect to the individuals and corporations subject to tax, except as hereinafter noted, or wit 1i respect to the manner of imposing the tax. The in lieu provisions are collected in section 63 of the bill.

THE REVENUE BILL OF 13 13

TOPOGRAPHY AND STYLE OF PRINTING. The Joint Committee on Internal Revenue Taxation in it's report recently submitted to the Committee on Ways and Means and to the Finance Committee of the Senate, endorsed a recommendation that one of the most helpful steps in the simplification of the income tax would be the use of a new typographical setup making use of bold face headings and subheadings and also making use of indentions, so that the reader may more easily find the matter he is in search of. The style approved by the Joint Committee for use in the publication o the law, when enacted, is set forth in Volume II, appended to its report. The present bill makes use of the system recommended for the printing of the law, as nearly as the styles of type in bill size available at the Government Printing- Office will permit. TECHNICAL AND ADMINISTRATIVE PROVISIONS. SEC. 22. GRoss INCOME. No changes are made in the general definition of gross income in section 22(a) except to omit as surplusage the following clause which appears in section 213(a) of the 1926 Act: "including in the case of the President of the United States the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received-;as--such-)-"---______ In so far as any such compensation may be taxed under the Constitution, it is already included within the, general definition in the bill. The exclusions from gross income in the bill are identical with the provisions of the 1926 Act, except that the compensation of teachers in Alaska and Hawaii is within certain limitations exempted from tax by section 116(bb) of the bill, and a new provision is inserted in section 22 (b)(9) with respect to cooperative apartments. The effect of the latter provision is stated below in the discussion of deductions from gross income. SEo. 28. DEDUCTIONS NROM Gitoss INCOME. The deductions provided for in sections 214 and 234 of the Revenue Act of 1926 relating respectively to individuals and corporations have been consolidated, to avoid repetition, in section 23 so far as they relate to the ordinary groups of individuals and corporate taxpayers. Those deductions which are not, as a rule, involved in the case of the ordinary taxpayer have been transferred to appropriate places in subsequent parts of the bill. SFo. 28 (o). SAME--ETATE, INHERITANCE, LEAoY, AND SUOMSION TAxH . It is provided in section 23 (c) that estate, inheritance, legacy, and, succession taxes shall be allowed as deductions only to the estate and not to the beneficiary. This provision is a change in existing

THE REVENUE BILL OF 12 14 law and is a substantial simplification. Furthermore, there is no sound policy which requires the allowance of the deduction to the beneficiary. The amount which he receives is not. treated as income and the tax which he is required to pay is in effect merely a decrease in the corpus transmitted to him. Szc. 23(Q). COOPERATIVE APARTMENT OWNERS. The bill provides for a newly deduction in section 23(q) of taxes and interest paid by the owner (or long-term lessee or other occupant as specified in the bill) of a cooperative apartment, when such payinents are made through the medium of a corporation holding the title to or a long term lease on the entire building. Under section 22(b) (9) the corporation is not required to include in its gross income the sunms thus paid to it and section 24(d) provides that the corporation shall not be entitled to any deduction for ssuch taxes and interest. The general purpose of these provisions is to place the owner or long-term lessee of a cooperative apartment in the same position as the owner of a dwelling house so far as deductions for interest

and taxes are concerned. SEC. 31. EARNED INCOME CREDIT.

The earned income credit provided in section 31 corresponds without change to the earned income credit in section 209(a) and 209(b) of the 1926 Act.
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING.

Certain provisions in the 1926 Act relating to accounting methods and perio &s of accounting are assembled in sections 41-47, inclusive. SEC. 44. INSTALLMENT SAIES. Tn 1925 the installment basis as a method for accounting for income, was held invalid by the Board of Tax Appeals on the ground that it did not clearly reflect income. The case was one in which. (luring the years following a change from the accrual to the installment basis, amounts actually received during such transition period from sales made during the prior years when the taxpayer was on the accrual basis, were excllded in the return of income. In order to permit the use of the installment method of reporting income, the 1926 Act authorized and validated such method both for future and past taxable--years.Future [Taaable Years.-As to future taxable years the committee retains the provisions of the 1926 Act with a liberalizing amendment which increases from 215% to 40%Tothe amount of the initial payment permissible in the case of casual sales of personality or of sales of realty. It is believed that the 25% limitation in the 1926 Act forced the reporting on the accrual basis of sales in which the initial payment, though larger than 25%, was insufficient to create a substantial assurance of the actual payment of the full amount of the deferred purchase price.

Table: [No Caption]

THE REVENTM BILL OF 19

15

The8 committee at the same time definitely provides that in order clearly to reflect income during the transition period upon the change by the taxpayer from the accrual to the installment basis, amounts actually received during such period-from sales made prior to such period shall be included in the return of income. This principle of course is inapplicable to casual sales of personalty. If the amounts so received were excluded, the law would permit the taxpayer to exercise the advantageous option of going on to the installment basis in such fashion as to allow the return during the transition period of a seriously subnormal amount of income, The extent of the subnormality is well illustrated by the following table which represents an actual and typical case of the effect upon income during the transition period, of a change from accrual to installment basis by a dealer in personal property. Considerable benefit is secured by this change, even if the cash received in the current year on account of sales made in prior years is included in the computation of income. This basis was the method ised in this case, the figures for which are shown below:
Net Income

Yew
Accrual basis

Installment

Decrease It taxable Income by change

1918 ......,,. $263,340.11 . 1919 . . ....-.-.-.. * 497,854.20 1920 ----2---------- 706 87 272,
. .

$253,471.Q $0 865 21
135,336.70 161, 211. 10

82, 517. 60 121,4987

NoTa-The above adjustments In net Income were by far the principal changes made in these returns and are therefore the controlling factor in the allowance of a refund of $96,497.47 plus interest of $34,606.5. This large refund Is allowable even under the " double taxation " method; It the method of excluding In the computation of Income current cash. receipts on account of sales made in prior years, as outlined In the Treasury Decision of October 20, 1920, had been used, the refund would have been still larger.

The committee regards as properly interpretative of existing law the departmental ruling that the sale of an item of the taxpayer's inventory should under no circumstance be regarded as a casual sale. The committee therefore incorporates this provision in the bill. Under the 1926 Act the term " purchase price" was used to designate the amount to which the 25% limitation is applied. Since the taxpayer is the seller it seems less confusing to use the term "selling price." Past Taxable Year8,-As to past taxable years the Board of Tax Appeals has recently construed the 1926 Act and tho regulations issued thereunder as requiring the application of the rule that there shall be included in the computation of income during the transition period, in the case of a change from the accrual to the installment basis, amounts actually received during such period from sales made prior to such period. The committee does not deem it desirable retroa lively to validate or invalidate such construction, but leaves the matter to judicial determination. Fair market valn.-It has been suggested, particularly in connection with such installment sales transactions, that in lieu of the increse of the 25 per centum limitation, gain or loss should not be

16

THE REVENUE BILL OF 1928

recognlized on receipt of installment obligations or other property if no fair market value is determinable therefor with reasonable certainty by the application of standards customarily accepted in busiIeSs l)iactice. This suggestion involves altering the consistent practice of the Treasury Departnient of finding a fair market value of property in all cases where there is an ascertainable value. The connimittee has recommended no change in the existing law as to these matters, believtnt-atthe-change suggested would be administratively impracticable and would result in great loss of revenue to the Governuent, and that the permitting of the installment basis to apply to ti'ansactions with an initial payment up to 40 per centuni cares for the greater part of any difficulty in connection with the existing law. (r aih or Loo8 upon DRposit-io of Instailn nt Obliyatono.-Subsection (d) contains new provisions of law to prevent evasion of taxes in connection with the transmission of installment obligations upon death, their distribution by way of liquidating or other dividends, or their disposition by way of gift, or in connection with similar transactions. Trle situations above specified ordinarily do not give rise to gain anld yet at the same time it is urged that they permit the recipient to obtain a gi'eatly increased basis in his hands for the property received, except in the case of gifts. It therefore seems desirable to clarify the matter. The installment basis accords the taxpayer the privilege of deferring the reporting at the time of sale of the gain realized, until such time as the deferred cash payments are miade. To pi-event the evasion the subsection terminates the privilege of longer deferring the profit if the seller at any time trainsmits, distributes or disposes of the installment obligations and Conllpels thle seller at that time to report the deferred profits. The subsection also modifies the general rule provided in subsection (a) for the ascertainment of the percent age of profit in the deferred payments, in those cases in which the obligations are satisfied at other than their face value or are sold or exchanged. The modification permits a compensating reduction in the percentage of profit in case the obligations are satisfied at less than their face value, or are sold or exchanged at less than face value. Whether or not the gain or loss realized under the section is recognized for tax purposes, depends Up)o0 general principles of law embodied in the income tax provisions, the exchange of installment obligations in connection with tax-free exchanges, tjr instance, being carved for by section 112.
SEC. 45. ALLOCATION
OF

INCOME AND DmzuCCTIoNs.

Section 45 is based upon section 240(f) of the 1926 Act broadened considerably in order to afford adequate protection to the Government made necessary by the elimination of the consolidated return provisions of the 1926 Act. The section of the now bill provides that the Commissioner may, in the case of two or more trades or businesses owned or controlled by the same interests, apportion, allocate, or distribute the income or deductions between or among them, as may be necessary in order to prevent evasion (by the sifting of profits, the making of fictitious sales, and other methods frequently

THE REVENUE BILL OF 1928

17

adopted for the purpose of "milking"), and in order clearly to reflect their true tax liability. It Ilas been contended that section 240(f) of the 1926 Act permits what is in effect the filing of a consolidated return by two or more trades or businesses, even though they are not affiliated within the meaning of the section. Section 45 of the bill prevents this erroneous interpretation by eliminating the phrase "consolidate the accounts." SEC. 103. ExlEMpTIoNS PROM TAX ON CORPORATIONS. Section 231(7) of the 1926 Act does not in terms exempt real estate boards, which appear to be within the purpose of the section. It is provided in section 103(7) of the bill that real estate boards not organized for profit and no part of the net earnings of which inure to the benefit of any private shareholder or individual, shall be exempt. Voluntary employees' beneficiary associations providing for the payment of life, sick, accident or other benefits to members and their dependents are common to-day and it appears desirable to provide specifically for their exemption from the ordinary corporation tax. it is provided in section 103(15) that such associations shall be exempt if they provide for the payment of life, sick, accident, or other benefits to menil)ers of the association or their dependents, and if no part of their net earnings inuire to the benefit of any prix'ate shareholder or individual and if 85 per centum or more of the net income is collected from the members for the purpose of paying expenses and meeting losses. SEC. 104-105. AoCUMULATION OF SuRpI.Us TO AVOID_ StRTAXI8

Zronsei-equently,

of the undistributed profits. Section 104(c) is substantially the same as section 220 of the 1926 act in its application to corporations which are not within the definition of a personal holding company," and provides that if any

The bill provides in section 105 for the continuation, in substance, of section.I 220 of the Revenue Act of 1926 for the taxable year 1927 except section 220((c) which is covered by section 148(c) of the bill. For the taxable year 1928 and succeeding taxable years, a distinction is made in section 104 between personal holding companies, as defined in that section, and other corporations. A personal holding company is defined to mean any corporation (except a banking or insurance corporation) if 80 per centumn or more of its gross income is derived from rents, royalties, dividends, interest, annuities, and gains from the sale of and if either 80 per centum or more of its voting stock, as defined, is owned or controlled directly or indirectly by not more than ten individuals, or the right to receive 80 per centunm of its dividends is vested in such individuals directly or indirectly. It is believed that corporations falling within the class thus described are more likely to accumulate their surplus to evade surtaxes than other corporations. Provision is made in section 104 that if such a company permi(s it undistributed profits, as defined in the section, to exceed 30 per centumn of the sum of its net income plus dividends and tax-free interest received an additional tax shall imposed on such net income so increased, equal to 26 per centum

'securities,

18
or

THE REVENUE BILL OF 1928

corporatioti, other than a l)ersonal holding company, is formed availed of to permit its profits to remain accumulated, in order to evade surtaxes, a tax of 215 per centunm of the net income, increased by dividends andn tax-free interest received, shall be imposed. The tax tinder section 220 of the Revenue Act of 1926 was 50 per centum. It is believed tbat this reduction will eliminate unnecessarily harsh features of the former provision and will contribute to its practical effectiveness. Section 104(c) further provides, in accordance with existing law, that if a corporation is a mere holding or investment company or if the gains or profits are permitted to accumulate beyond the reasonable needs of the l)llsiness, either fact shall be prima facie evidence of the purpose to evade the surtax. Section 1.04(d) contains a new, p)rovision that if any corporation, in the taxable year 1928 or in any succeeding taxable year, permits more than 60 per centum of its net income, increased by dividends and tax free interest received, to accullmulate, it must file as part of its return a statement giving in detail the reasons for the accumulation and the purposes to which the amounts accumulated are to be devoted, It must file subsequent reports under oath, giving the disposition of the amounts so accumulated until all such amounts have been accounted for. SEC. 113. BASIS FOR D)ET1}MININa GAIN OiR Loss.--EXECUTOR's SALE. In view of the decision of the (Court of Claims in McKinney v. United States, it is desirable specifically to l)rovide what basis shall be used in determining gain or loss onl the sale of property by an estate. It is believedthat the basis should be the value of the property on the date of the decedent's cleath, and this rule is incorporated in section 113 (a) (5). It is also provided, in the same paragraph, that the basis in case of a sale by a beneficiary slhall be the value of the property on the 0 date of the decedent's death. Under existing law, the basis in su1ch a case is the value at the date of " acquisition , which is indefinite and hlas given rise to controversy. Thl'e value on the date of death affords an equitable and more readily determinable basis. SSo. 113(A) (7) AN! 113(A) (8)-BAsIS FOR DETERMINING GAIN OR Loss--P.RoirRY ACQUIRED BY A CORPORATION. The 1926 Act in section 203(b) (4) (corresponding to section 112(1)) (5) of the bill) provides that no gain or loss shall b) recognize(l if p)rop)erty is transferred to a corporation solely in exchange for it's stock and immediately after the transferors are in control of the corporation. Section 204(a) (8) of the 1926 Act provides that in such cases the basis of the property in the hands of the corporation, for the purpose of determining gain or loss on sale or for depreciation or (ope1tion, shall be the same as it was in (he hands of the transferor. '1lwe p)aragraph, however, does not apply by its terms to a casle, where the property acquired by the corporation Consists of stock or securities in a corporation a party to the reorgiaization. The committ-e can see no reason for such an exception. Sulppose. that indlivi(iuals buy all tlhe stock (1,000 shares) of

THE REVENUE

BILL

OF 12

19

corg ration A Do $100 a share ata time when the assets of A are worth i $10i,o000. Suppose the assets of A appreciate in value and become worth $1,000,000. Suppose further that the shareholders of corporation A organize a new Corporation B and exchange their stock in corporat ion for the stock of corporation B. This transaction under the 1926 Act and under the proposed bill is a tax-free transaction. Corporation B then sells the stock owned by it in Corporation A for $1,000,000, which is the fair market value of the assets of A. Obviously the gain of corporation A should be $900,000, the amount by which the $1,000,000 realized from the sale exceeds $100,000, the cost to A's stockholders of their stock, since the transfer of their stock to B in exchange for the stock B was tax-free. It is claimed that Section 204(a) (8) of the 1926 Act does not apply to such a case because it excludes from the rule therein laid down, stock or securities in at corporation a lparty to the reorganization. While it is quite possible that the courts, in view of the general 1u) poses of section 204 of the 1924 and 1926 A.ct, would hot adopt such a, construction, nevertheless, to remove any doubt, the new bill in the corresponding paragraph (section 113(a) (8) omits these words of limitation, thus making it clear beyond doubt that in the example above, corporation B would have a basis of only $100,000 for the purpose of compulLting the gain derived from the sale of its stock in corporation A. A similar change is made in the bill in section 113(a) (7) (corresponcling to section 204(a)(7) of the 1926 Act). The existing law provides that if property is acquire(l by a corporation in connection with a reorganization anld imrnedliately after the transfer an interest or control in tihe property of 80 per centum or more remains in the same persons, then the basis shall be the same as it would be in the hands of the transferor. Ihere again it is claimed that the rule does not apply in c the property acquired consists of stock or securities of a corporation a party to the reorganization. Here again, also, it is quite possible that the courts would lnot sustain such a claim, but seems to the committee that it should be made clear that this exception does not apply in the case where the stock: or securities so acquired were acquii'ed by the corporate taxpayer by the issuance of its own stock or securities. The bill therefore makes this clarifying change. SEC. 113 (a) (12). BASIS O' IPROPERTY ACXQUIRED DUnING AFFILTATION. There is no provisionl in existing Saw prescribing rules for the determination of the basis after the period of affiliation of property acquired by a corporation from another corporation with which it is affiliatedl (itring the period of affiliation. As a general rule, gain or loss has not been recognized on such inter-company transactions. It is highly important that in such cases the basis in the hands of the corporation after the affiliation should be the same as it would be if still in the hands of the corporation by which the property was brought into the affiliated group, in accordance with the present interpretation of the Treasury, except in those cases where a proper adjustment of the basis should be made. The transactions, however, are so varied fand complex that it is impossible by statute to prescribe a definite rule of general apj)lication and consequently it is necessary

20

THE REVENUE BILL OF 1928

to delegate to the Commissioner power to prescribe regulations legislative in character under which the basis will be determined for the computation of gain or loss, and depletion and depreciation, laying down in the section the general standard to guide the Commissioner that inter-company transactions should be disregarded if gain or loss was not recognized. The basis thus determined will be applicable in determining the basis in the case of inventories. The term " period of affiliation " is (lefne(l to include the period during which the filing of consolidated returns was mandatory, as well as the period during which under the 1921 and subsequent Acts the corporations were affiliated and filed consolidated returns.

SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

Under p)reviolls reveiiiie acts corporate distributions from surplus accumulated prior to March 1, 1913, were exempt from tax. There appeals to be no reason for continuing this exemption indefinitely. Over fourteen years have elapsed since March 1, 1913, and most corhave the p)orations 1913. distributedan surplus accumulated by them-prior to March 1, It seems appropriate time (particularly m view of the resulting simplification) to eliminate this exemption.
SEC. 118. AFFILIATED CORPCoIrTIONS.

Under section 240 of the Revenue Act of 1926, two or more affiliated corporations were authorized to make a consolidated return of net income. -This provision originated as a necessity in the computation and administration of the profits taxes during the war. It has great many important and difficult problems in given rise to aand application of the law. These problems, mostthe lnterl)rettltion of which have not been answered authoritatively to date, appear to be such th at a very substantial modification of the consolidated return provisions is desirable. The consolidated return is abolished in the gill for the taxable year 1929 and following taxable years, and thereafter affiliated corporations are required to file separate returns. Under section 118 any member of an affiliated group sustaining an ordinary net loss," as defined, may by written agreement with another memI)er or members of the sane affiliated group offset the loss of the one against the gain of the other or others. The losses which imay be offset under section 118 do not include capital net losses. It is lellcevd that this method of treatment preserves in a substantial mleasulre, the benefits of affiliation and at the same time obviates many of thle difficulties and undesirable features of the consolidated retmlm. Section 141 permits consolidated returns for the taxable years 1927 and 1928 so that affiliated corporations may adjust their accounts and bookkeeping methods to the change. Section 141(f) is a new provision designed to take care of a situation, which arises in case of affiliated corporations, with respect to the statute of limitations. Under existing law the sending of a 60day letter to one member of--the, affiliated group suspends the running of the statute of limitations as to that member but not as to the others. As a consequence, the statute may bar the assessment or collection of the amount properly due from the affiliated group.

THE REVENUE BILL OF 1928

21

It is highly desirable to provide that if a notice of deficiency in tax is sent to one member of an affiliated group, the statutes should be suspended as to the other corporations which joined with it in filing a consolidated return for the year in question.

SEo. 120. INCOME

FROM

SOURCES WITHIN THE UNITED STATEL.

Section 120 of the new bill is the same as section 217 of the Revenue Act of 1926 except for the provision (120(a) (1) (C)) excluding the income derived by a foreign central bank of issue from bankers' acceptances, the effect of which is that such income will be treated as income from sources without the United States Inasmuch as a foreign central bank of issue is a foreign corporation, the effect of the provision is (under Section 231(a) of the billwhich is taken from section 233(b.) of the 1926 act to exempt such income from taxation. Generally speaking, the chief ways in which a foreign bank of issue employs its surplus funds in the United States are (1) on deposit with banks; 2) invested in short-time Government securities; and (3) in bankers' acceptances. At the present. time the law exempts from taxation income derived from the first two sources (sections 233, 217, and 236 of the 1926 act), but taxes income derived from bankers' acceptances, Foreign banks of issue with surplus funds to invest must seek the most liquid short-time investments available. The present law tends to keep foreign funds out of our market and to force American merchants to finance their transactions abroad rather than through the dollar acceptance. The Committee believes that this handicap on the free development of our dollar acceptance market should be removed. It should be pointed out, however, that the provision is applicable only to a central bank of issue and is not applicable to investments by foreign corporations or nonresident individuals. SEC. 143. TAX-FREE COVENANT BONDS.

The present law provides for the withholding at the source, in the case of bonds, of a tax of 5 per centum of the- interest when paid to nonresident aliens or individuals or partnerships, and a tax equal to the income tax rate in the case of interest paid to foreign corporations. This rule is subject to the exception that if the bond contains the so-called " tax-free covenant " clause by which the obligor agrees to pay the interest-without deduction for any tax which he may be required or permitted to retain therefrom, then the rate of withholding shall be at the rate of 2 per centum. This provision of the present law is based upon the conviction that it would be unfair to domestic corporations to make them pay the entire tax at rates substantially higher than were contemplated when the bonds were issued. It is brought to the attention of the committee that a large number of the tax-free covenant bonds issued since the beginning of the war contain a clause by which the liability of the obligor is limited to 2 per centum of the interest. The committee therefore inserted a provision in the bill in section 143(a) (1) under which, in cases where the liability assumed by the obligor does not exceed .2 per centum of the interest, the withholding shall be at the rate of 5 per centum in

22

THE

REVENJE BLL OF 19

the case of nonresident aliens and and 11 /, per centaim in the case of foreign corporations,partnerships, while remaining at 2 per centum, as under the present law, in the case of citizens residents, and domestic partnerships. This provision places no additional hardship upon domestic corporations, for, their liability under their contract being lintited to 2 per centum, they cannot be called upon to pay any greater amount to the bondholder. On the other hand, under the proposed scheme the Government will get the full tax to which it Is entitled. SEC. 165. EMPLOYEES' TRUSTS. Section 219 (f) of the 1926 Act provides that where a trust is created by an employer as a part of a stock bonus or profit-sharing plan for the benefit of the employees, and contributions are made to the trust by the empinoyer and the employees, the amount actually distributed to the employees by the trust, in excess of their contributions, is taxable when distributed. Upon the termination of the plan there is distributed to the employee his proportionate share of the stock or securities purchased under the plan. Under section 219 of the 1926 Act, in such a case, the appreciation in the value of the stock, from the date of purchase by the trustee to the time of the distribution, is treated as income. As a result-the employee is taxed not only upon the amount contributed to the trust by the employer, and the dividends or interest distributed to the employee but also upon the appreciation in the value of the stock, which has not been realized. The amendment provides that upon such a distribution to an employee there should be taxed to him as compensation the amount contributed by the employer toward the purchase of the stock, all cash dividends on the stock, any interest paid to the employee, and any other income received by him, but that any appreciation in the value of the stock over the cost to the trustee should not be taxed unless and until the grain is realized. SE3C. 272 (J). EXTENSIONS OF TIME FOR PAYMENT OF DEFICIENCIES.

Under existing law and tinder this section of the bill the Comnmissioner is authorized to extend the time for payment of a deficiency for a period not to exceed 18 months where undue hardship would result if immediate payment were enforced. Thlis period is not adequate to take care of cases of exceptional hardship, for example, in areas suffering from business del)ression where property cannot be liquidated quickly. Accordingly, it is provided that in exceptional cases the Commissioner may grant it further extension not in excess of 12 months and may if necessary require a bond to secure the payment of the deficiency.
SEC. 272(K). ADDRESS FOR NOTICE
OF IEFICIENCY.

It is obviously impossible for the Commissioner to keep an up-toLfate record of taxpayers' addresses. Where a taxpayer has changed his address witl~iout notifying the Commissioner, it is not possible to be sure that the deficiency letter is bein g sent to his last address. It is provided in the above section that in ttie absence of notice to the Commissioner under section 312(a), of the existeijce of a fkluciary

TEE REVENUE BMLL OF 19W8

relationship, the deficiency letter may be mailed to the taxpayer at his last known address and if so mailed will be sufficient for the purposes of the title. There is it similar provision with respect to transferees in section 311 (e). These two provisions are combined in the existing law and appear as section 281(d).
SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLETON.

Section 277(a) (4) of the 1926 Act provides that in the case of income received during the lifetime of a decedent, the executor may file a request for prompt determination of the tax and in such case the assessment shall be made or proceedings in court without assessment shall be begun within a year after the filing of such request but in no case after the expiration of the period which would otherwise be applicable. There seems to be no reason for denying this privilege in the case of income received by the-estate during the process of administration and accordingly it is provided in section 275(b) that a similar request may be filed in such cases. In the case of a corporation about to dissolve, the prompt determination of tax liability becomes particularly desirable. Moreover, the collection of such taxes, if delayed, may become uncertain. Accordingly a provision is incorporated under which a corporation about to dissolve may notify the Commissioner that it contemplates dissolution within a year and the assessment or proceeding in court for collection without assessment of any deficiency shall be begun within the year, provided that dissolution is in good faith begun before such time and that the dissolution is completed whether or not within the year.
SEC. 277. SUSPENSION OF RUNNING OF STA'TuT.

Under existing law and under the provisions of the bill, the runnin of the limitation period on assessments is suspended while an is pending before the Board. Subsequently the Board may dismiss the appeal on the ground that the petition was not filed within the 60-day period or, for example, because the paper filed within the period was not sufficient to constitute a petition. The decision dismissing the appeal may not be made until months after the proceeding was begun and there is some question whether in such cases the statute of limitations on assessment is actually suspended during the pendency of the proceeding. It is specifically provided in section 077 that the limitation period shall be suspended, if any proceeding is placed on the docket of the Board, until the decision of the Board in respect thereof becomes final and for 60 days

appeal

thereafter. This provision also takes care of any uncertainty as to the suispension of the statute where, after the decision of the Board, a petition for review is filed without the required bond. It also provides for the situation where a taxpayer files a waiver of the restrictions on the Commissioner as to assessment or collection where the legal sufficiency of the waiver may not be determined for a consideable priod ox time after it is filed.

24

THE REVENUE3 BILL OF 1928

It seems obvious that the enforcement of a decision of the Board which has become final should not be thwarted, and that the decision of thle above matters should not be forced into injunction proceedings. Accordingly, in all the foregoing cases the limitation on assessinent is d(leinitely suspended by section 227 until the decision of the Board has become final and for 60 (lays thereafter. There is a similar Iarovision in section 311(d) with respect to the period of limitation upon assessment of the liability of a transferee or fiduciary. It wtas suggested to the committee that language be inserted to show that thle running of thle stiitulte should be suspended not only ( When thle CUnliiIS5JOIlmI iS under the prohibitions of section 272(a) btit also Mx'IIe hle is restricted by ord er of court froin making assessment or collection. 'Tie committee feels the language of the present statute is lperfectly (lefinlite onl this point and no clarification is necessary. 'T'ie statement of the; conferees in connection with amendnient No. 83 to the Revenuie Act of 1926 Wl5s s5)ecific on the point an(l clearly indlicate(l that the intention was to suspend the running of the statute for the perio(l (luring which, for any reason at all, the C(ommnissioner's hands were tied.
I SEC. 311(B). TiINS F1:I5s ANI) FI)UC1ARIE5-*PERIOD OF LIMITATIONS.

Section 28() of the Revenuie Act of 1.926 (loes not specifically provide any limitation period in the case of a transferee of a transferee of thle r1operty of tlhe taxpayer. Section 311(b)(2) of the bill pirovidles, with specific e;ceeltions, that the period for assessment in suhel case shall be one year after the expiration of the period of limitatioll for assessment against the preceding transferee. Under existing law the liability of a fiduciary may not arise until after the period for assessment against such fiduciary has expired. It is provided in section 311(b) (3) of thle bill that thle liability of the fiduciary miay, be assessed not latter than one year after the liability arises or not lnter thain the expiration of the perio(l for collection of the tax in respect of which scllh liability rises, whichever is the later. Under existiingr law the Government has six years in which to collect income. taxes assesse(l against the estate of a decedent and accruing during tile lifetime of the deedent orI during the administration of his estate. If during, the later part of the six-year period the executor disposes of the assets of tihe estate in such manner as to create t p)e'rsonal liability in him under section 3467 R. S., proceedings against, the exe;'11tor would be batrlr(e unIlerl statute of limitations provided by section 280 of the 1926 Act. '1'lie committee has met this difficulty in section 311(b) (3) by providing thlat the personal liability of the fiduciary aily be, assessed not later than one year after stuech liability arises or not later than the expiration of the period for the collection of the tax upon the decedent's estate, whichever is the

later.

SEC. t322(D). OVEMPAYMENT FOUND BY BOARD.

,Subsection (d).. is identical with section 284(e) of the present law except the last sentence. Under the present law, the Board of Tax Appeals has jurisdiction to determine an overpayment in a cas properly before it, but a refiund or credit of an overpayment found

THE RAVBXTU ByL OF 12

.25

paid after the petition is filed. SEc. 401. DEDOIONS PRoM GROSS ESTATE
RESIDENT

by the Board may not be made unless claim was filed within the proper period of limitations, or the petition was filed within foui' years afer the tax was paid, or in case of a tax imposed by the 1926 Act, within three years after the tax was paid, but it does not provide for the case of a waiver under section 284(g). Inasmuch as the section of the new bill applies only in case of overpayments of taxes imposed by the new bill, the language can be considerably simplified. The committee recommends that no regard be paid to the time of filing claim or petition as determinative of the right to have the amount of the overpayment determined by the Board. It does, however, believe that the principleof-tlwlimitation---section-284-(b)-(2%-of--thie present law should be retained. Under that provision the amount of the overpayment found by the Board which may be refunded or credited cannot exceed the portion of the tax paid during the three years preceding the filing of the claim, or if no claim is filed, then during the three years immediately preceding the allowance of the credit or refund. Sonme doubt has arisen as to whether the date of the " allowance of the credit or refund " is the date of the decision of the Board or the date the Commissioner acts in the matter. Subsection (d), as proposed by the committee, remedies this ambiguity, and provides that no credit or ref und shall be made of any portion of the tax paid more than three years before the filing of the claim or the filing of the petition, whichever is the earlier. It will be noted that there -is no --limitation imposed in -the- case-- of--- amounts
IN THE

CASE OF NON-

DECEDENTS.

Section 303(b) (1) provides for the purposes of the estate tax, that the value of the net estate o a nonresident shall be determined by deducting from the value of his gross estate situated in the United States, among other times, that proportion of the allowable deductions for expenses, debts, etc., which the value of his gross estate in the United States bears to the value of his entire estate, wherever situated, with the limitation that the amount so deducted shall not exceed 10 per centum of the value of his gross estate in the United States. This limitation imposes substantial hardship. For example, the attention of the committee was brought to a case of a nonresident whose gross estate situated in the United States was valued at $600 000, but his outstanding debts amounted to $400,000. Because of this limitation he was permitted a deduction of only $60,000, whereas in fact the deduction, in all fairness, should have been $400,000. Accordingly the committee recommends that this limitation be removed.
Swc. 4029403. .SUSPuiNwION
OF

RUNNING

OF

STATUTYE OF LIMITATIONS.

Thes sections extend the principles of section 277 togases where an appeal is taken to the Board. by an estate or by a fiduciary. or ' transferee of property of the estate.

26

THE REVENUE BILL OF 1M

ADMISSIONS TAX.

In case of admissions to prize fights and boxing etc. matches for which the amount paid for admission is $5 or more, the tax is increased to 25 per centunm of the amount paid for admission. Inasnmuch as-this is done by amendment to existing law and not as an imposition of a new tax, it is not necessary to provide for the collection of the tax or for penalties for evasion, etc., such matters being adequately taken pare of by the 1926 Act.
CLUB DUES TAX.

It has been found that the tax on dues is being evaded by the device of lowering the amount of dues and collecting the money by assessments and that the tax on initiations is being evaded by requiring the purchase of a share of stock or a bond. It is provided in section 412 that the term " dues "'includes any assessment irrespective of the purpose for wvhieh it is made. For similar reasons it is provided that the term "initiation fees" includes any payment, contribution, or loan required as a condition precedent to membership, whether or not evidenced by a certificate or share and regardless of the person or organization to whom it is paid, contributed or loaned. The amount of tax payable by a life member, based on the dues tax of an active member, is not changed. SEC. 413. RETURNS OF An)mISSIONS ANDI DuIES TAX.

The Department has difficulty in collecting the admissions tax from irresponsible promoters. Un(ler existing law, returns are required to be mnade monthly. A prize fight may be held and if a return can not be required immediately, the collection of the tax may be impossible. Section 502 (a) and 502 (b) of the Revenue Act of 1926 are amended so thlat the Commissioner may require returns at such times as he mnay prescribe. Except in order to prevent evasion, however, it is expected that the Commnissioner continue the system of monthly returns. EXCISE TAXES.-AUTOMOBITLES.
REFUND OF AUTOMOBTILE SALES TAXES.

- Section 422 of the riewv Bill adopts the provision of the Revenue Act of 1926 to the effect that a. tax paid upon a sale prior to the enactment of the new Act may be refunded if the automobile is on such date held by a dealer and intended for sale. This provision covers the cases in which title to the automobile has passed to the dealer if he has not sold the automobile or delivered possession thereof to the consumer. For example, a refund will be authorized even if the dealer has contracted to sell a particular car, and even though the car has been set aside, if title to it has not been passed and the car has not been delivered

THE REVENUE BILL OF 1928

REFUND OF AUTOMOBIL

27

ACCESSORIES TAX. A provision was inserted in the First Deficiency Act of 1927 (which became law on February 28, 1927), prohibiting the refund of amounts paid as taxes upon the sale of automobile accessories except upon conditions which, in many instances admittedly could not be complied with. The provision was purposely made all embracing, in order that improper refunds would not be made until your -Comnittee was given an opportunity to make a study of the situation. Generally speaking, it is believed that the amounts paid upon the sale of automobile accessories was collected from the purchaser and passed on directly to the consumer. Despite the fact that the tax is, in legal effect, a tax upon the manufacturer, it turned out that the manufacturer, in almost all cases, was but a collecting agency. The Committee does not believe that, as a general principle, the taxes paid upon such articles subsequently held to be not taxable should be refunded and thus unjustly enrich the manufacturers who merely collected the tax from the persons to whom they sold the articles. However, there are some cases where refunds should properly be made. Accordingly, section 424 of the new Bill provides that judgments of the court should be paid if the action was begun prior to the effective date of the Deficiency Act. It also provides that refunds may be made whenever the taxpayer can establish to the satisfaction of the Commissioner that the amount he paid was excessive (not by reason of the fact that the article was wrongly taxed but by reason of the fact that the tax was improperly computed); or that he did not pass the taxon (for example, where at the time of sale he did not wascalled upon to pay wre-he know the article was--ta-e- -- an additional tax after the sale, had been made); or that the tax was returned to the purchaser or a lessee (for example, where there was an adjustment in the selling price, in accordance with a prior agreenent such as cash discounts, quantity rebates, and wholesale bonuses, or where a sale was rescinded). In all other cases he must comply with conditions similar to those imposed by the proviso in the Deficiency Act and give a bond conditioned upon the refund of the tax to the ultimate consumer. SPECIAL TAXES. SEC. 431. TAX ON USE OF FOREIGN BuiLnT BoATs. The tax on use of foreign built boats is increased to $10 per foot for boats between 32 and 50 feet long; $20 per foot for boats between 50 and 100 feet and $40 per foot or boats over 100 feet. The increase does not apply to boats built, or for the building of which a contract was entered into, before December 1, 1927. Inasmuch as this increase is made by way of -amendment to existing law, it is not necessary to provide for the collection of the tax or for penalties for evasiontc, such matters being adequately taken care of by existing
HI R-70-1-vol 1-6

28

THE REVENUE BILL OF 128

AMENDMENTS TO 1926 INCOME TAX. SEO. 501. AFFILIATED CORPORATIONS-STATUTi. OF LImIrATIONS.

In determining the tax liability of affiliated corporations under existing law, it is sometimes discovered that on the basis of the facts available, a deficiency is owing from one of tie corporations. Accordingly, a deficiency letter is mailed to that corporation, and the running of the statute of limitations is suspended as to that corporation. However, it hap pens not infrequtently that in subsequent proceedings before the Board of Tax Appeals or the courts additional facts are ascertained, showing that the deficiency is actually due from one of the other' corporations of the affiliated group and not from the corporation to which the deficiency letter was mailed. Under recent decisions under the existing law, the deficiency properly owing from the group cannot be collected if the statute has runI-and in practically all cases the final decision is not made until the statute has run. Under section 141(f) of the new bill, previously explained, it is provided that the running of the statute of limitations will be susended as to all corporations of the affiliated group if a deficiency letter of the taxable year' 1927 or 1928 is mailed any one of them. Section 501 amends the Revenue Act of 1926 so that this same policy will be applicable for taxable years prior to 1927. Accordingly, the running of the statute of limitations will be suspended, if a deficiency letter is mailed to one corporation, as to all other corporations for which a consolidated return has been made under the optional provisions of section 240 of the Revenue Act of 1921, 1924, or 1926, or for which a consolidated return should have been made under section 240 of the Revenue Act of 1918, or section 240(e) of the 1921 Act, under which affiliated corporations were compelled to file a consolidated return. These provisions, of course, do not apply where the statute of limitations on any such corporation had expired prior to the enactment of this Act. SEC. 502. EXTENSION oF TIME FOR PAYMENT OF DEFICIENCY. This provision amends the Revenue Act of 1926 and is similar to a provision in section 272(j) above discussed. The purpose is to authori'ie the granting of a further extension of time for payment of any deficiency for any year preceding the taxable year 1927. SEC. 503. REQUEST FOR PROMPr ASSESSMENT. This section -which amends section 277(b) of the Revenue Act of 1926, and is similar to the provision in section 275(b) of the new bill, heretofore discussed. It applies the policy, there explained, to taxes under the 1926 and prior acts. SECs. 604-505. SUSPENSION OF RU`NN1NG OF STATUTE OF LIMrITATIoWS. These, Sections arhend sections 277(b) and 280(d) of -the .1926 Act. They are similar to section 277 of this bill and are applicable to takes imposed by the 1926 and preceding acts. Sections- 504 and 505 do not apply where the applicable statute of limitations had expired prior to the enactment of this act.

THB REVENUE BLL OF 12 29n

EXPIRATION OP STATU8 OF LITAmTOSx. Section 276 (b) of the new bill incorporates a provision makin it clear that the Commissioner and the taxpayer may consent, after the statute of limitations has run, to an assessment or collection of the tax within the period specified. Many instances arise where it is highly desirable to remove the bar of the statute of limitations. Section 506 of the new bill amends section 278(c) and (d) of the 1926 Act, in.order to apply this policy to taxes under the 1926 and prior acts. Waivers filed prior to the 1926 Act are undoubtedly valid and have been so held by the Board of Tax Appeals. However, on account of section 1106(a) of the 1926 Act, some question has arisen as to the validity of a waiver filed after the expiration of the period of limitations and after the enactment of the 1926 Act. The proposed amendment removes this doubt, at least as to waivers filed after the amendment takes effect, by specifically making them valid.
SZx. 506. WAVERS
AFTER

SEC. 507. OVERPAYMENTs FOUND BY BOARD oF TAX APPEALs.

Under the provisions of section 284(e) of the Revenue Act of 1926, if the Board of Tax Appeals finds there is no deficiency and further finds that the taxpayer overpaid his tax for the year in qquestion, the amount of the overpayment is credited or refunded to the taxpayer; but a limitation is imposed that the refund shall not be made unless claim was filed within the applicable period of limitations or -the petition was filed within four years after the tax Was paid or, in the case of a tax imposed by the 1926 Act, within three ears after the tax was paid. Inasmuch as in certain cases under Action 284(g) a longer time than four years from the payment of the tax was allowed for the filing of claims in cases where waivers of the statute of limitations on assessments had been filed bv the taxpayer, it results 'that under the 1996 Act it may be that the petition before the Board was filed beforeithe time for filing of claims had expired; but, unless the.claim had been filed, the overpayment found by the Board cannot be recovered. It is, therefore, recom. mended that this section be amended so as to remedy this defect. Under section 284(b) and (e) of the present law the amount of overpayment found by the Board which may be refunded or credited cannot exceed the portion of the tax paid during the three or four years, respectively immediately preceding the fling of the claim, or, if no claim is filed, then during the three or four years, respectively, immediately preceding the allowance of the credit or refund. Some doubt has arisen as to whether the date of the ":allowance of the credit or refund" is the date of the decision of the Board or the date the Commissioner acts in the matter. It seems to the Committeea that the proper policy to be applied in the case of all credits or refunds (made after the passage of the new Act as a result of an overpayment found' by the Board whether before or after the passatge of the newsAt) is that the credit or refund should be made without regard to the time of filing of the claim or, the filing of the petition but that no credit or refund should be made of any portion of the tat paid more than four years (or, in the case of a tax imposed by the 1926 Act; niore than' three years) before the filing of the

30

THE REVENUE BILL OF IM8

claim or the filing of the petition, whichever is earlier. In order however-, to give the taxpayer the full benefits of the provisions oi section 284(g) it is provided that this limitation on the amount of the credit or refund shall not be applicable where either the claim or the petition was filed within the time prescribed in section 284(g) for filing a claim. It will be rioted that there is no limitation applicable to amounts paid after the petition was filed. ADMINISTRATIVE PROVISIONS. SECs. 601-603. BOARD Op TAX APPEAS. Sections 601 and 602 make a number of amendments with respect to the procedure of the B~oard of Tax Appeals. Opt'ionad Findivg& of Fact.--Under existing law the Board of Tax Appeals is required to make findings of fact in each case before it. The committee has provided that the making of the findings should be left to the discretion of the board, and the board if it so desi dles, may in its discretion make a finding of fact or render an opinion or memorandum opinion, or both make a findings of fact and render an opinion or memorandum opinion. Under the 1924 Act, no appeal was had from the decision of the Board of Tax Appeals. The Government could sue for the amount of any deficiency allowed by the board and the taxpayer could sue for the amount of any refund by the board. In such suits the findings of fact of the board constituted prima facie evidence. TJnder the 1926 Act the decision of the board is not the basis for court suit. If either party is dissatisfied with the decision, an appeal may be taken but a final decision in the case is binding on both the Government and the taxpayer. In accordance with the new procedure, the findings of the board are no longer prima facie evidence in court suits. Neither are such findings necessary as evidence in subsequent proceedings, for on appeal the circuit courts of appeal have available the narrative record of the evidence presented to the board. The committee is of the opinion that in view of the above considerations, findings of fact are no longer necessary. The record in case of appeals can be prepared properly without a detailing finding of facts, and the board may be relied upon to include in its opinion enough facts to support the legal conclusions reached. It may he, however, that in certain exceptionally complicated cases it would be deemed desirable for the board to make formal findings of fact. Consequently the committee provides that the power to make such findingts be not entirely eliminated but left to the board's discretion. The omission of findings of facts would not permit the circuit courts of appeals to substitute their judgment on the facts for that of the board, for under existing law the courts are able to reverse orl modify decisions of the board (so far as questions of fact are concerned) only if there is no evidence to support the decision of the board and such decision is therefor arbitrary. Force cndd Effect of Rueg8.-A recent decision by the circuit court of appeals for the seventh circuit indicates that there is some disposition to regard the Board of Tax Appeals as an investigative rather than a judicial body, and to require it to reach its decisions not wnerely

THE REVENUE BILL OlF 192

01 6

on the basis of the evidence presented in the record, but on the basis of such additional evidence outside the record as may be necessary fully to develop the taxpayer's case. The committee is of the opinion that the board's function is purely judicial, and in order to clarify the situation has provided that no decision of the board (whether rendered before or after the bill becomes law) should hereafter be modified or reversed because the board or any of its divisions has failed to consider evidence not adduced before the board or division. At the same time the committee has provided that the rules of practice and procedure of the board shall, just as the Federal equity rules, have the force and effect of law. Report of Dis'ioins.-The procedure of the Board has been modified so as clearly to deny a division the right to make a decision in proceedings assigned to it. The modified procedure more clearly defines the relation of the Board to its divisions. Under the modified provisions a division merely reports to the Board its findings of fact and/or opinion or memorandum opinion. Such report may be reviewed by the Board if the chairman so directs. If so reviewed, the Board will make its own report; if not so reviewed, the report of the division will become the report of the Board after 30 days. A decision shall be entered by a member of the Board in accordance with the report of the Board and when so entered shall be the Board's decision. Transferee Proceedii*-Burden of Proof.-In transferee cases before the Board of Tax Appeals, the burden of proof irs showing that the petitioner is not a transferee and is not liable at law or in equity for the taxes of the taxpayer, is upon the petitioner. The committee' has provided that the burden of proof in such matters should be upon the Government but that the petitioner still retains the burden of prong, as in other tax proceedings, that the taxpayer was not liable for the tax claimed by the Government. Transferee Proceedings-Access to Book8 of Transferor.-In many instances, in order for a transferee to perfect his defense against liability for tax of a taxpayer, it is necessary that the transferee should have access to the- books of the transferor. The committee has provided that such right of access will be had by the transferee through subpoena issued by the board or any of its divisions whenever in the opinion of:tlhe board or division such right of access is necessary to enable the transferee to ascertain the liability of the transferor for the tax and will not result in undue hardship to the taxpayer. A corresponding privilege is afforded subsequent transferees in respect of the bools of a prior transferee. Szo. 604. SuITs
To

TRANSFUR

RESTRAIN ENFORCEMENT
OR

or

FIDUOIABY.

LIABIiTr or

Under section 280 of the 1926 Act and section 311 of the new bill, the liability, at law or in equity, of a transferee of property of a taxpayer or the liability of a fiduciary under section 8467 of the Revised StatuIes,may be enforced in the same manner as the liability of a taxpayer. Section 280 of the 1926 Act has proved a very elective and necessary method of stopping tax evasion through the various, T favorite methods recognized by everyone prior to the 1926 Act.Whe enforcement of the liability through court process had been ineffc-

court.

THE REVENUE BILL OF 1M 32 tive, and the amount of revenue lost through mala fide transfers or ti'rotigh corporate distributions of assets was admittedly large. In fact, but slightly more than $120,000 was collected through court procedure during the entire period prior to the 1926 Act. Since the )rocedure under section 280.has been in effect, more than $1,000,000 hias been collected in uncontested cases, and many times this amount is involved in cases not yet disposed of. There is no doubt that to the effectiveness of section 280 can properly be attributed the increasing demands for prompt assessment received from corporations contcnplating dissolution. And many other evidences of its effect are available. Because of a recent decision of a Federal district court holding section 3224 of the Revised Statutes inapplicable to proceedings under section 280, the committee deems it advisable to provide specifically that the administrative proceeding should not be interfered with by collateral court proceedings. It should be pointed out that the adtmiinistrative determination of the liability is not final. In fact, the transferee or fiduciary is not required to make any payment, on account of the determination by the Commissioner, if he desires to avail himself of the opportunity given him by the statute, until his liability is finally determined by the Board of Tax Appeals and a Circuig Court of Appeals and, if certiorari is granted, by the Supreme Court. of the UJnited States. Even if the taxpayer does not prefer to file a petition with the Board of Tax Appeals, he may pay the anio-un t Xete`ernuied by the Commissioner and obtain a full and unrestricted judicial review in a suit for refund. SmC. 605. ALTERNA'r1vE, RPErmiEs IN ENFORCING LIABILITY or I'RNSFEREEB OR FIDUCIARIES. Section 605 provides that the Commissioner's right to proceed against it transfree or fiduciary under the provisions of sections 280 or 316 of the 1926 or section 311 of this Act shall be in addition to and not in substitution for proceedings in court, at law or in equity, for the enforcement of such liability. The purpose is to leave it to the judgment of the Commissioner whether it is advisable to proceed before the courts in enforcing the liability of a transferee or fiduciary or to proceed administratively in the same manner as in assessing and collecting a tax liability, for in some cases it is probable that the interests of the Government can be protected better by suit in

Sw. 606.

CIL4sINo AGnEBm'Nr

The closing of tax cases for the earlier years is a difficult problem. Statistics recently gathered show that an abnormally large percentage of closed cases are reopened by the taxpayer or the Government. Among the causes contributing thereto are claims by taxpayers, the effect of subsequent court decisions and changes in the regulations and the law. The constant reopening of closed cases must be discouraged and one of the most effective means of preventing the reopening of cases is the execution of closing agreements. Such agreements are authorized by section 1106(b) of the Revenue Act of 1926. There are, however, a number of restrictions in that section, the

THEB REVNWU, BILL OF 1928

33

practical effect of which is to delay and often to render it impossible to secure the agreement. These restrictions have been removed in section (06 of the bill. It is believed that under this section it will be possible to execute many more closing agreements than in the
past,.

SEC. 607. EFECT Of EXPIRATION OF PEMiIOn OF LIMITATION AGAINST UNTmD STATES.

Section 1106 (a) of the 1926 Act failed to resolve many doubtful questions as to the legal effect which follows the expiration of the period of limitations prescribed for the assessment or collection of a tax or for the making of a refund or credit or the bringing of a suit for refund. Section 1106(a) of the 1926 Act is repealed as of itg effective date and is replaced by sections 007, 608, 609, and 610 of this bill. Section 607 of the bill prescribes the effect to be given to the expiratioii of a period of limitations against the United States and section 608 relates-to the effect of the expiration of limitations periods against the taxpayer. Section 607 rovides that regardless of the correct tax liability any payment shall be an overpayment if made after the period of limitation on assessment (no assessment having been ma de within such period) or after the expiration of the period of limitation on collection by distraint or court proceedin rs (no distraint or court proceeding having been begun within such period). An overpayment under section 607 is to be credited or refunded the same as any other overpayment. . Section 607 is applicable to payments made before or after the enactment of this Act. Any such overpayment shall be credited or refunded, however, only if claim therefor is, filed within the lloper period of limitation. either section 607 nor section 608 applies to payments pursuant to a final decision of the Board of Tax Appeals or of a court, whether or not the question as to the statute 'of limnitattions was rnisedl in the proceeding. The decision is final and under no circumstances could a payment pursuant to it be considered erroneous. Obviously, also, neither section applies to cases which have been closed by a final agreement under section 1106(b) of the 1926 Act or section 606 of the new Bill. SEiE. 608. EFc'r OF EXPIRATION OF PERIOD OF LIMITATIONS AGAINST THE TAXPAYER. If a refund is made after the expiration of the period for filing claim (claim not having been filed within the period) or after the rejection after the date of the enactment of this Act, of a claim filed within the proper period and if the period for filing suit haa expired (no suit having been filed within the period), the~,reff nd thus made shall be considered as erroneous and is recoverable by the United States as provided in section 610.

'34

THE REVENUE Bi7IL OF 1928

SEm. 609. ERRONEOUS CREDrrs.

Section 609 provides that a credit of an overpayment against a barred deficiency or a credit of a barred overpayment against a deficiency which is not barred, shall be void if payment of the deficiency in the first case or the making of a refund in the second would constitute an overpayment or an erroneous refund under section 607 or 608. In other words, the credit is void if either the deficiency or the overpayment is barred. . Section 609 applies to any credit made before or after the enactment of this Act.
SEC. 610. RECOVERY OF AMOUNTS ERRONEOUSLY REFUNDED.

This section relates to the recovery of erroneous refunds as defined in section 608 and also to refufinds which are erroneous independently of section 608. The section provides that any erroneous refund, of either class, may be recovered by suit brought in thbaname of the United States if such suit is begun within two years after the making of the refund.

WERE FILED. Prior to the, enactment of the Revenue Act of 1924 it was the administrative practice to assess immediately additional taxes determined to be due. Upon the assessment, taxpayers were frequently permitted to file claims in abatement with the collector and thus delay the collection until the claim in abatement could be acted upon. Of this practice had not been followed, undue hardship undoubtedly would have been imposed upon the taxpayer. It was supposed that there was no limitation upon the collection by distraint of the amount ultimately determined to be due. However the Supreme Court has recently held in a case in which the period for assessment expired prior to the enactment of the 1924 Act, that the period for collection was limited to five years from the date on which the return was filed. Decisions upon claims in abatement are being made every day. Amounts have been paid, are being paid, by the taxpayer even though the statute of limitations may have run. Exceptionally large amounts are involved. Accordingly, it is of utmost importance to provide that the payments already made should not be refunded. In order to prevent inequality, it is also provided that the amounts not yet paid may be collected within a year after the enactment of the new Act. Your Committee appreciates the fact that this provision will probably be subjected to severe criticism by some of the taxpayers affected. However, it must be borne in mind that the provision authorizes the retention and collection only of amounts properly due, and merely withdraws the defense of the statute of limitations. If it is determined that the amount paid is in excess of the proper tax liability, computed without regard to the statute of limitations such excess will constitute an overpayment which may be refunded or credited to in the case of any other overpayment.

SEC. 611. COLLECTION8

IN

CASME IN WHICH CLAIms IN ABATEMENT

THHE REVENUE BLL OF I928 85

cases.

SEC. 618. LIEN FOR TAxU. Section 7)l86 of the Revised Statutes creates a lien upon the taxpayer's property if he neglects or refuses to pay his tax liability after demand. The lien is valid as against mortgagees, purchasers, and Judgment creditors if notice thereof is filed in accordance with existing State law or future modifications thereof.'. If the State has made no provision by law for such filing, then the notice is required to be filed in the office of the clerk of the United States district court. The lien continues until the liability for the amount thereof is satisfied or becomes unenforceable by reason of lapse of time. Section 613 amends section 3186 of the Revised Statutes in several respects. It provides that under departmental regulations the appropriate collector of internal revenue may issue a certificate of release of the lien if the liability for the amount assessed has been satisfied or has become unenforceable. The collector may also issue a certificate on the giving of a bond conditioned to pay the amount assessed with interest, thereby releasing the property from the lien of the tax. Provision also is made for a certificate of partial discharge if the collector finds that the fair market value of the property remaining subject to the lien is at least double the amount of all prior liens upon the property. The certificate of release authorized by this section shall be conclusive as to the extinguishment of the lien upon the property covered by the certificate. The regulations issued under this section may provide that a single bond may be given to comply with section 272(j) and with subsection (c) of this section. The second sentence of section 315 (a) of the Revenue Act of 1926 is repealed, since the above section is applicable to estate tax as well as to income tax

SEC. 614. INTEREST ON OVERPAYMENTs The principal change made in existing law is that in the case of a refund the interest period now terminates with the allowance of the refund, a date which often precedes the actual making of the refund by a considerable period of time and thus deprives the taxpayer of interest during that period. Under the above provision of this bill interest runs to a date not more than 30 days preceding the date o the refund check, such date to be determined by the Commissioner. This provision is administratively practicable and it will result in giving the taxpayer interest to within approximately 30 days of the date of the refund.
SE. 615. INTEREST ON JUDGMENTh.

A change similar to that described in the preceding paragraph is made in connection with interest on judgments, the interest period in such case to terminate at a date preceding the date of the refund check by not more than 80 days such date to be determined by the Commissioner.

.36

THE REVENUE BILL OF 19

SEC. 616. COMPROMISES-CONCEALMENT

OF

A SSETS.

There is no corresponding provision in the 1926 Act. This section is intended to provide a penalty if in connection with a compromise, or with a closing agreement under section 606, any person wilfully conceals any property belonging to the estate of a taxpayer 01: other person liable in respect of a tax, or receives, destroys, mutilates, or falsifies any book, document, or record, or under oath makes a false statement as to financial condition. The penalty provided is $10,000 or one year imprisonment, or both.
GENERAL PROVISIONS.
SEC. 705. BASIS
OF

PROPERTY UPON SALE BY ESTATE-RETROACTIVE.

Section 705 provides, with respect to the basis for determining gain or loss upon a sale of property by an estate, that if the basis was computed in accordance with the regulations in force at the time the return was filed and if prior to the enactment of this Act no claim for credit or refund in respect of such basis has been made, the computation of gain or loss shall be made upon such basis. In every other case the computation shall be made without regard to any provision of this Act in accordance with the law properly applicable to each case so that any taxpayer who did not follow the regulations will have an opportunity to test out in the courts the legality of his action.

RETROACrIvE. Section 214(a) (3) of the Revenue Act of 1926 and corresponding provisions of prior revenue Acts permit a deduction, from gross income in computing the net income subject to tax, for taxes paid or accrued (luring the taxable year. Obviously this provision applies only to taxes imposed upon the taxpayer, and does not permit the deduction of taxes paid by a volunteer. Extraordinary difficulty has been encountered in applying this deduction in the case of estate, inheritance, legacy, ans succession taxes, imposed by a State, 'Veriritory, or a foreign country. These taxes are usually paid by the executor of the estate. Under the regulations of the department the deduction was allowed the estate, in computing- its income tax, if the tax was considered as an estate tax, and was allowed as a deduction to the beneficiary if the tax was considered to be an inheritance, legacy, or succession tax. As a result of recent Supreme Court decisions (Keith v. Johnson, and United States v. Mitchell), redeterminations of the deductions claimed by the estate by the beneficiary will be necessary unless the situation is remedied by retroactive legislation. Consequently your committee deems it advisable to insert section 705 in the bill, the general effect of which will. be to ratify what the taxpayers have done and to prescribe specific rules for future action.

SEC. 706. DEDUCTION

OF

ESTATE AND INHERITANCE TAXES-

THE REVENUE BILL OF 1

37

SEo. 707. TAxABLrTY OF TRuSTS AS CORPORATIONa-RuTROACTI1VL Difficulty has been experienced in determining whether under prior revenue laws an organization was taxable as a trust or as a corporationt. The rules have differed from time to time. There have been conflicting court decisions, and it appears desirable to clarify the situation by making definite provision for such cases. Section 707 provides that if a return was filed as a trust for any taxable year preceding the taxable year 1925, the organization shall be taxed as a trust for such year if it was taxable as a trust under the regulations or any interpretative ruling of the Bureau of Internal Revenue in force at the time the return was filed or when the trust was terminated. Retroactive relief appears to be proper in connection with organizations of this character because in many cases no question was raised as to tax liability until after the trust had been dissolved. It is believed that the foregoing rule will operate equitably. SEC. 708. Bunimu OF INTLRNAL REVENuE-TRAVELING EXPENSES.

Under existing law (39 Stat. 87) the Commissioner of Internal Revenue may designate the post of duty of the employees of the Internal Revenue Service engaged in field work. Stich employees, when ordered from their designated post of duty, are entitled to receive their traveling expenses and subsistence allowances. However, the Commissioner is unable to bring field agents to Washington except for temporary detail (34 Stat. 449, Sec. 6). The creation of the Special Advisory Committee and the necessity to procure for it the best personnel in the internal revenue service, has made it advisable to grant authority for the detail, beyond the temporary detail of 60 days now permitted. The grant of this authority carries with it the authority to pay the traveling and subsistence expenses or allowances, in accordance with existing law.