The Federal Tax System of the United States: A Survey of Law and Administration 9780231893817

Table of contents :
FOREWORD
PREFACE
CONTENTS
INTRODUCTION
Part One: THE INTERNAL REVENUE CODE
THE INCOME TAX
THE ESTATE TAX
THE GIFT TAX
Part Two.THE INTERNAL REVENUE SERVICE
THE ORGANIZATION OF THE INTERNAL REVENUE SERVICE
OFFICE OF THE REGIONAL COMMISSIONER
THE NATIONAL OFFICE
Appendix A THE INTERNAL REVENUE SERVICE An Outline of Its Organization
Appendix B THE LEGISLATIVE PROCESS
SUPPLEMENT PRINCIPAL CHANGES MADE BY THE INTERNAL REVENUE CODE OF 1954
INDEX

Citation preview

THE FEDERAL TAX SYSTEM OF THE UNITED STATES

THE Federal Tax System of the United States A SURVEY OF LAW AND ADMINISTRATION

BY JOSEPH P. CROCKETT TECHNICAL ADVISOR, INTERNATIONAL TAX RELATIONS DIVISION UNITED STATES INTERNAL REVENUE SERVICE

NEW YORK 1 9 5 5 COLUMBIA

UNIVERSITY

PRESS

COPYRICHT

ìgjr,

BY

COLUMBIA

UNIVERSITY

PRESS, NEW

YORK

PUBLISHED IN GREAT B R I T A I N , CANADA, INDIA, AND PAKISTAN BY

G E O F F R Y C U M B E R L E C E , OXFORD UNIVERSITY

PRESS,

LONDON, TORONTO, B O M B A Y , AND K A R A C H I

MANUFACTURED

IN T H E UNITED STATES OF

AMERICA

L I B R A R Y OF CONGRESS CATALOG CARD N U M B E R :

54-9258

FOREWORD

THE ENORMOUS governmental expenditures for war, reconstruction, and economic development during the past fifteen years have required considerable revision of traditional revenue-raising devices. Economists and politicians agreed that a large portion of the military expenses should be financed through borrowing; but the costs of war and its aftermath could not be entirely bequeathed to a reluctant posterity. Consequently, methods were hurriedly devised to raise increased amounts of revenue currently through taxation.

Prior to World War II the world's tax revenues were derived primarily from easily administered, indirect taxes on the manufacturing, consumption, and use of commodities and by direct taxes on land. Since indirect taxes are not normally imposed on the necessities of life, there are practical limits to the revenues which may be raised by these taxes. T o increase the tax burden by broadening the excise tax base penalizes the poor, who in most underdeveloped countries are already existing on marginal or submarginal subsistence standards and must be subsidized by the government. In most underdeveloped countries ambitious programs of economic development are now requiring vast governmental expenditures. Traditionally, the domestic borrowing capacities of these countries are limited because large amounts of domestic capital are frozen in land investment as a hedge against inflation. Investors' unfortunate experiences with foreign securities during the 1920's and ig3o's

VI

FOREWORD

make it difficult for underdeveloped countries to borrow any substantial sums in the capital markets of New York and London. Consequently, development programs must be financed largely through taxation. By imposing export taxes on, and by creating governmentowned marketing boards for, export commodities, some countries, like Burma and Thailand, have been able to finance limited development programs as a result of high world prices obtained for commodities sold to other countries. However, in some instances export taxes have caused international economic complications—for example, the export tax which both Pakistan and India imposed on jute and jute products probably did much to encourage the development of cheap, high-quality paper bags to compete with the jute industry. Since fear of competition or externally fixed world prices practically eliminates the opportunities for shifting export taxes to the buyers, most underdeveloped countries have been forced to re-examine their tax systems and to place greater emphasis on direct taxation. In some countries large and frequently profitable groups of the economy are still completely exempt from the income tax; in other countries only the very rich are expected to pay income taxes, and they, because of inefficient administration, pay only a portion of the tax due. Simply to increase the tax rates on existing taxpayers is not enough. T o do so would merely invite increased evasion and the already burdened tax administration would undoubtedly collapse. Taxpayer morale and compliance would then sink to new depths. That the solution to the problem of obtaining additional tax revenues is not an easy one is illustrated by the recent fiscal history of the United States. T h e revenue needs of the early 1940's resulted in a reorientation of our income tax

FOREWORD

vii

system in 1942 and 1943. Rates were increased, but more important, the tax base was broadened so that overnight more than thirty-five million persons became income taxpayers for the first time. As a result, our Federal taxing system changed from one which in 1939 obtained slightly more than 40 percent of its revenues (about two billion dollars) in income taxes at relatively low rates from three or four million individual and corporate taxpayers to one which in 1944 collected more than thirty-three billion dollars (about 80 percent of its total revenues) in income taxes from more than forty million taxpayers. T o solve the dilemma of increasing tax revenues, creating a balanced tax structure and improving tax administration many countries seek expert assistance from various sources. Some countries have invited economic missions to review their fiscal structure. For example, both the Shoup Mission to Japan and the Klein Mission to Peru have recommended improvements in tax structure and administration. In other cases United Nations and United States Government technical assistance missions have suggested revisions of tax systems. Both the foreign experts and domestic administrators work under great handicaps. T h e expert would probably prefer to scrap the old system and begin anew. However, he knows that, even if a complete change were acceptable to the local officials, the already inadequate tax administration would be unable to adjust to new problems without a long period of training. T h e tax administrator, although he may recognize the problems of the present system, normally resists change on the ground that his already difficult task would become all but impossible. However, the most formidable obstacle is that political conditions in most countries would not permit sweeping changes. For example, even though effective tax administration in many countries

viii

FOREWORD

w o u l d almost double tax revenues, responsible officials have f o u n d that raising the rates of existing taxes is m u c h less controversial than enforcing existing laws. T h e result of these conflicting views is that the local authorities may only file the report of a foreign mission for f u t u r e reference unless the foreign expert makes serious efforts to adapt his recommendations to local conditions. O n e way for the foreign expert to handle this is to divide appraisal of the taxing systems into two parts. T h e substantive part recommends gradual revision of the existing system first by eliminating certain nuisance taxes, by simplifying the income tax laws, and by broadening income tax coverage. In some instances the expert hopes to increase voluntary compliance with the tax law by fixing rates which are more suited to the public mores. T h e second part of an expert's activities is to review the entire administrative system and to suggest both specific methods to improve the administration of the existing laws and a series of changes of administration and policy to be put into force along with the revision of the tax laws and the expansion of the income tax base. T h e need to adjust tax administration to meet the expanded coverage has focused attention on the techniques developed by the United States Bureau of Internal R e v e n u e (now the Internal R e v e n u e Service) to handle the income tax returns of more than fifty million taxpayers. T h e foreign tax administrator visualizes that the problems faced by the Internal R e v e n u e Service are no more than a magnification of his o w n problems. Consequently, in the eyes of foreign tax administrators the United States administrative system serves as an experimental laboratory in which various techniques for effective administration have been and continue to be tested. Before W o r l d W a r II officials of the Bureau of Internal

FOREWORD

ÍX

R e v e n u e met occasionally to exchange ideas and experiences with their opposite numbers in the tax services of various countries. However, since 1946 the United States Internal R e v e n u e Service has unofficially become a recognized practical training center for officials who desire to obtain vicariously the administrative experience needed to solve their own accumulating tax problems. H i g h ranking tax officials have come to the U n i t e d States for short periods of time to study organization or perhaps only to obtain a broad perspective of U n i t e d States tax administration. Other officials come to Washington for several months to study specific problems of top-level administration. Some foreign officials come to the U n i t e d States for extended periods to study tax administration in greater detail. In all cases the foreign officials observe U n i t e d States administrative operations under a considerable disability. T h e complexities of our tax system cast a spell of mysticism over all but the purely mechanical features of administration: and the mechanical features, the foreign officials find, are handled by machines. Recently, a very capable tax official wondered how the Internal R e v e n u e Service could possibly be doing an adequate j o b of examining corporate tax returns. H e pointed out that in his country, before computing the correct amount of tax, the revenue agents carefully investigate each business tax return to verify the detailed income and expense items. In spite of these detailed examinations he believes that businesses avoid a considerable portion of the income tax. " I n view of our experiences in h a n d l i n g business taxes, how," he asked, "can a single U n i t e d States revenue agent be expected to investigate fifty to two h u n d r e d individual and corporate tax returns each year?" T h i s question is not one which can be answered lightly with the statement that taxpayers are more honest in the U n i t e d States

X

FOREWORD

and therefore need not be so carefully examined or that the Internal Revenue Service trains its agents so well that they are able to spot inaccuracies at a glance. The explanation of the process of selecting tax returns for examination is one that requires a detailed discussion of United States corporate income tax laws, the corporate tax return, personal training methods and the past experience of the Internal Revenue Service. Before a foreign official can hope to evaluate the administrative techniques developed by the Internal Revenue Service, he must acquire at least a basic understanding of the law the administration is designed to enforce. Without this background most foreign officials who desire to examine our tax administration in action may return to their own countries discouraged by the fact that United States administrative techniques are far too complex to be of assistance in solving their problems. Instead of seeing a system designed to enforce specific laws and regulations, they see a mass of administrative circulars, numerous reorganizations, and thousands of expensive machines. Foreign officials and graduate students from twelve countries who are attending Harvard Law School's International Program in Taxation met similar obstacles. Most of them have scholarships from the United Nations and the United States Government for training in problems of tax policy, legislation, and administration. We had hoped to begin instruction in tax administration early in the year but we soon found that the foreign participants did not know enough about United States tax law to compare the techniques being used in the United States to the conditions of their own countries. We therefore devoted a portion of the fall term to a comparison of United States tax law with the tax laws of their own countries. On the basis of this specialized instruction the foreign officials were able to obtain a sufficient background in United States taxation and an understand-

FOREWORD

xi

ing of the similarities to, and differences from, their own laws to evaluate the possibilities for adapting United States tax administration to their own problems. The Internal Revenue Service has neither the staff nor the facilities to undertake comparable instruction even if the foreign officials could spend the time necessary to acquire this type of background. In some instances it might be advantageous for foreign tax officials to attend the intensive Internal Revenue Agent training course; unfortunately, few foreign officials investigating United States tax administration can spend even a month obtaining the needed understanding of United States tax law. Furthermore, few visitors can be expected to read more than a small part of the rapidly accumulating literature on United States taxes. There is, therefore, a real need for a comprehensive but brief discussion of portions of the Internal Revenue Code which cause the principal administrative problems. Some texts, like Stanley and Kilcullen's The Federal Income Tax: A Guide to the Law can provide an excellent background of particular provisions of the Code. Others, like Roy Blough's The Federal Taxing Process, will give the reader an understanding of the broader questions of how our laws are made as well as a discussion of the principal tax issues. However, there is no single text which explains the entire tax system. Case books like Dean Griswold's Cases and Materials on Federal Taxation are sufficiently complete but they are designed as teaching guides for law students not as explanatory texts for those who want to obtain a perspective of the substantive taxing provisions. Mr. Crockett's book is intended to fill this void. It is both comprehensive and brief in its discussion of the provisions of the Internal Revenue Code. The professional reader will find that this book has many of the faults of generalization, but the specific details upon which a United States tax ad-

xii

FOREWORD

viser must depend are not necessary for an understanding of the taxing provisions. Mr. Crockett's continuing references to the official tax forms will be somewhat disconcerting to many readers. But day-to-day tax administration always begins with the filing of the tax return. One of the first questions foreign administrators ask is how the law is reflected in the tax return. Keying the discussion of various provisions to the pertinent forms enhances the usefulness of the book for foreign officials. Indeed, in the choice of subject matter covered in "The Federal Tax System of the United States" Mr. Crockett drew upon his considerable experience of working with foreign tax officials both in the United States and abroad and was guided by the particular interests of hundreds of foreign officials. Although Mr. Crockett's book will be of little value or interest to tax lawyers and accountants, its usefulness is not limited to foreign officials and other students of United States taxes. The description of the various tax laws is sufficiently nontechnical to be of interest to many lay readers. But even more interesting and important is that, for the first time, the workings of the Internal Revenue Service are explained in a readable manner. Previously the general public, thinking of tax administration as a mixture of sorcery and bureaucracy, left this field exclusively to the tax specialist. Mr. Crockett has eliminated the sorcery and has explained the bureaucracy. He shows a living system intelligently, if somewhat laboriously, administered. His book will give the public a chance to become informed about the operations of the tax administrator, who affects the economic life of every person in the United States. HERRICK K .

Harvard Law School Cambridge, Massachusetts January 15, 1954

LIDSTONE

PREFACE

foreign nations have shown an unprecedented and steadily increasing interest in the industrial, commercial, and governmental practices of the United States—an interest which has been stimulated by the United Nations, particularly its Fiscal Division and Technical Assistance Administration. T h e Federal Government, through the State Department, the Department of Defense, and more recently the Point Four program and the Foreign Operations Administration, has actively encouraged it, and with the participation of officials of Federal and State Governments and the voluntary cooperation of industrial and commercial enterprises, has enabled officials and other citizens of foreign countries to become acquainted with American practices and technical methods in numerous fields of activity. This information has been disseminated by books and other publications, but more effectively perhaps by arranging visits to appropriate centers in this country, where the foreigner could see at first hand what interested him, and by sending American technicians abroad for consultation. DURING THE PAST DECADE

The fiscal requirements of the United States for meeting ever increasing Federal expenditures have attracted a substantial share of this interest to its tax system. Prior to World War II there had been occasional meetings between officials of the Internal Revenue Service and their corresponding numbers in Great Britain and France for an exchange of ideas and a pooling of experience. Since the end of hostili-

xiv

PREFACE

ties in 1945 tax officials from many countries have visited the Service for periods varying from one day to one year. Some have been brought here under Federal programs of technical assistance; some under similar programs of the United Nations; others have been sent by their own governments. T h e y have ranged in position from finance minister to apprentice auditor, but most have been men of high rank and long administrative experience. They have studied and observed the operations of the Internal Revenue Service in the National Office at Washington, D.C., and at offices in various cities throughout the country. Many have also been received by state tax officials. Most have had an adequate knowledge of English; some have required interpreters. T h e great variation in the specialties of these visitors, in the time at their disposal, and in their experience in the field of taxation has made it impossible to formulate any fixed program of lectures or conferences that would meet the requirements of all or even of a substantial number of them. Instead, special arrangements had to be made for each one, and the difficulty of providing an adequate background for the conferences attended and the operations witnessed has been greatly increased by the sheer bulk and complexity of the Internal Revenue Code, of the regulations promulgated under it, and of the operating manuals for personnel. While brief summaries and organizational charts were of some help, there was no comprehensive description lying between a bare outline and an exhaustive presentation (the hundreds of pages of Regulations 118, to cite one example, are enough to discourage the most determined reader confronted with the Federal income tax for the first time). T h e author has accordingly prepared this book to meet the needs of those persons who wish to become acquainted with the Federal tax system and its administration, or some portion of them; to answer requests received from foreign

PREFACE

XV

governments or institutions for a survey of the system; and to serve as a ready reference work for the American tax technician sent abroad as consultant to a foreign government. It is hoped that data on each subject discussed will be sufficient to relieve the reader of the necessity of taking notes on elemental matters and to give him sufficient background to take notes more intelligently on the details of his specialty. It cannot be too strongly stressed that this book provides only a general picture of the tax laws and their adminstration. General statements have been freely used, and numerous subjects on which there is an extensive body of law and regulations and which occupy a large number of specialists in the Service, have been omitted or only cursorily mentioned because even a condensed analysis of them could not be brief. These are subjects which, in the author's opinion, would contribute little to the general picture, and the space required for their adequate presentation would only distract attention from the tax scheme as a whole and serve to distort it in the reader's mind. An example of such an omission is the tax treatment of pension trusts, with which an entire branch of the National Office is exclusively concerned. Regulation of the manufacture, storage, and sale of alcoholic beverages has not been described except insofar as taxes are involved. In choosing subjects for detailed or extended treatment the author has been guided largely by what foreign officials have seemed most interested in knowing. No effort has been made to allot to each section of the Code or to each administrative function a treatment nicely proportioned to its importance for domestic purposes in the taxing scheme. But care has been taken to provide references to Code sections, regulations, and other official publications which will facilitate the more detailed study of a specialist. The reader should bear in mind that parts of the Internal

xvi

PREFACE

Revenue C o d e are frequently modified, amended, or repealed by Congress, and that the organization and administrative procedures of the Internal Revenue Service are under constant observation and study for possible improvement. D u r i n g 1951 a major reorganization of the Service was begun, and changes made since then are reflected in the following pages. Because further changes of lesser scope are already projected in certain procedures, permanence is not to be assumed for the taxes or the administration as they are described here. JOSEPH P .

CROCKETT

Alexandria, Virginia January 2, 1954

ADDITIONAL

NOTE

W h e n this volume was already in proofs, the Internal Revenue C o d e was the subject of a general legislative revision. By it obsolete sections were deleted; those retained were arranged in a more logical order, and many were rephrased in clearer language. Substantive changes in the former law, while very numerous, were designed in large part merely to facilitate and simplify administrative procedure. New sections which have no counterparts in prior provisions or which vary the substance of corresponding prior provisions involve, in general, details within the system, and represent no fundamental change in its structure or departure from the pattern of taxation here described. T h e numerous revenue acts passed after enactment of the Internal Revenue Code of 1939 were designed as amendments to that Code and consequently embodied only changes made in it. T h e act approved August 16, 1954, differs in form from these in that it represents the

xvii

PREFACE

enactment of an entire Code, not merely of amendments to a pre-existing Code. T h e principal changes of substance effected by it are summarized in a Supplement on pages 253-67, and aptly serve to illustrate the small steps in the steady evolution that has enabled the Federal T a x System of the United States to maintain its basic character without rigidity and to adapt itself to changing conditions and demands. J. P. C. October,

1954

CONTENTS

Foreword, by Herrick K. Lidstone

V

Introduction

3

Part One:

The Internal Revenue

Code

The Income T a x Determining Taxable Income The Individual's Income T a x Return The Withholding of Taxes The Corporation's T a x Return The Excess Profits T a x Special Classes of Taxpayers Special Provisions

>3 16 21 30 41 44 51 63

The Estate T a x

70

T h e Gift T a x

78

Employment Taxes (Social Security)

81

Taxes on Alcohols, Liquors, and Wines

90

Tobacco Taxes

98

Stamp Taxes

107

Excise Taxes

112

Interest, Fines, and Penalties

129

CONTENTS

XX

Part Two:

The Internal Revenue

Service

The Organization of the Internal Revenue Service

141

Office of the District Director of Internal Revenue The Administrative Division The Collection Division The Audit Division The Intelligence Division Alcohol and Tobacco Taxes The Appellate Division (Regional)

146 146 148 170 180 182 183

Judicial Review of T a x Determinations

188

Office of the Regional Commissioner

195

The National Office The Assistant Commissioner (Operations) The Assistant Commissioner (Technical) The Assistant Commissioner (Inspection) The Assistant Commissioner (Administration) The Assistant Commissioner (Planning) The Chief Counsel's Office

202 202 210 218 221 229 231

Appendix A: The Internal Revenue Service; an Outline of Its Organization 241 Appendix B: The Legislative Process

247

Supplement: Principal Changes Made by the Internal Revenue Code of 1954 253 Index

271

TABLES

î. 2. 3. 4. 5.

6.

Sources of Federal Revenue, Fiscal Year 1951 Sources of Revenues of State and Local Governments, 1951 Federal Expenditures, Fiscal Year 1951 Federal Receipts and Expenditures, 1947-1951 Relation of Federal, State, and Local Government T a x Collections to National Income, ^so-w0 Public Debt of the United States, Fiscal Year 1

7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

5 6 7 8

8

95 1 9 Income Taxes, Fiscal Year 1951 15 Computation of Normal Depreciation 21 Estate Taxes, 1949 77 Employment Taxes, Fiscal Year 1951 8g Special Occupational Taxes on Dealers in Alcohol 96 T a x Collections and Production Data on Alcohol, Fiscal Year 1951 97 T a x Classifications and Rates on Tobacco and Cigarette Paper 9g T a x Collections and Production Data on Tobacco, Fiscal Year 1951 105 T a x Rates on Articles Subject to Manufacturers' Excise Taxes 113 Total Collections of Manufacturers' Excise Taxes, Fiscal Year 1951 114

xxii 17. 18. 19. 20. 21. 22.

TABLES

T a x Rates on Articles Subject to Retailers' Excise Taxes Total Collections of Miscellaneous Excise Taxes, Fiscal Year 1951 Special Taxes on Manufacturers, Importers, and Dealers in Firearms Special Taxes on Manufacturers, Importers, and Dealers in Narcotics Federal Excise T a x e s on Selected Items as a Percent of Retail Price Including T a x Prosecution Record of Criminal Fraud Cases, 1947-»950

115 116 121 122 127 137

ILLUSTRATIONS

Form 1040: U.S. Individual Income T a x Return 31 Form 1040, Schedule C: Profit (or Loss) from Business or Profession 34 Form 1040, Schedule C-a: U.S. Report of Self-Employment Income 35 Form 1040, Schedule D: Gains and Losses from Sales or Exchanges of Property 36 Form 1040 F: Schedule of Farm Income and Expenses 37 Form 1040-ES: Declaration of Estimated Tax 39 Form W-2: Withholding Statement 39 Map of the Districts and Regions of the Internal Revenue Service 140 Organizational Diagram of the Internal Revenue Service 144

THE FEDERAL TAX SYSTEM OF THE UNITED STATES

INTRODUCTION

F E D E R A L T A X E S are now imposed by an internal revenue code which embodies all Federal taxing laws except those relating to customs duties. Prior to 1939 tax laws were very numerous. Some repealed all or parts of others; some expressly modified portions of others; some implicitly changed or repealed others. As a consequence, to ascertain the law on a given question required research that at best was burdensome and time-consuming, and at worst generated uncertainties, doubts about interpretation, and conflicting provisions. This lack of integration and coherence fostered litigation and was an impediment to orderly administration. In 1939 the various taxing laws were consolidated and re-enacted as the Internal Revenue Code, and since then, all new revenue laws and repeal or modification of ones already existing have normally been enacted as amendments to it.*

T h e Internal Revenue Service,f the largest agency of the Treasury Department, collects the taxes imposed by the Code. In addition to its national headquarters in Washington, D.C., the Service operates through nine regional offices, sixty-four district offices, and over twelve hundred suboffices located throughout the country. At the end of 1951 its employees numbered 57,795; in 1953, about 55,000. Of the appropriation of $748,208,222 for operation of the Treasury Department in 1951, $246,820,000 was • See scction 1 of Supplement. t Prior to J u l y 9, 1953, the Internal R e v e n u e Service was known as the Bureau of Internal Revenue.

4

INTRODUCTION

allocated to the Internal Revenue Service, which for all purposes spent $245,869,538. Since a total of $50,445,686,3 1 5 in taxes resulted from its operations, the cost of collection may be computed at about forty-nine cents for $100. T h e scope and importance of the Service's activities become even more apparent when the sources and amounts of Federal revenue are described and are contrasted with those of State revenue. T h e Federal Government's principal source of revenue is the tax on income. In the fiscal year 1 9 5 1 the proceeds of this tax were over $37.3 billion, of which about $23 billion was paid by individuals and $ 1 4 . 3 billion by corporations. A l l other Federal internal taxes produced an aggregate of about $ 1 3 . 6 billion, and customs duties, about $630 million. T a b l e 1 shows collections by class of tax and the sources of revenue expressed as percentages of total revenue. State and local governments, on the other hand, imposed and collected taxes which in the aggregate amounted to about $ 1 7 billion.* T h e sources and amounts of these are shown in T a b l e 2. Although some States and local governments imposed income taxes, the principal sources of revenue were sales and gasoline taxes (States) and property taxes (county and municipal governments). T h e $ 5 1 billion in taxes collected by the Federal Government and the $ 1 7 billion collected by State and local governments resulted in a total national tax burden of about $68 billion for 1 9 5 1 . T h i s burden was borne by a population of about 1 5 1 million persons and • T h e tax laws and ordinances of States, counties, municipalities, and districts are administered through offices of the taxing government. These offices are wholly separate from, and independent of, the Federal tax administration except in the case of employment taxes (references to these will be made later). In recent years, however, there has been an increasing exchange of information between State and Federal offices for enforcement purposes.

INTRODUCTION TABLE

I

SOURCES OF FEDERAL R E V E N U E FISCAL Y E A R

(Collections

in Round

1951

Thousands

Source of Revenue Income tax, individuals Income tax, corporations Social Security taxes T a x on decedents' estates T a x on gifts Taxes on liquors and wines Taxes on tobacco Stamp taxes (on bonds, shares, etc.) Excise taxes on manufacturers Excise taxes on retailers Taxes on telephone and telegraph services Taxes on transportation of persons Taxes on transportation of property Taxes on admissions to public entertainments Taxes on club dues T a x on sugar Miscellaneous taxes Customs duties on imported goods Total

of Dollars) Amount Collected $22,997,308,000 * 14,387,569,000 3,627,480,000 638,523,000 91,207,000 2,546,808,000 1,380,396,000 93,107,000 2,383,677,000 457,013,000 644,980,000 237,617,000 381,342,000 389,138,000 30,120,000 80,192,000 79,208,000 629,968,000 $51,075,653,000

Percent of Source of Revenue Total Revenue Income tax, individual 43.7 Income tax, corporation 26.9 Social Security taxes 7.4 Other internal taxes 17.7 Customs duties 1.2 Miscellaneous receipts 3.1 Total 100.0 « Of this amount, $13,089,769,000 was collected by employers' withholding. absorbed over 2 9 percent of the national income as estimated f o r that year. In addition to the $ 5 1

billion collected as taxes, the

Federal G o v e r n m e n t also derived income from miscella-

6

INTRODUCTION TABLE 2

SOURCES OF REVENUES OF STATE AND LOCAL GOVERNMENTS, 1 9 5 1 »

(Collections

in Round

Millions

of Dollars)

Local State Governments Governments $ 810,000,000 $ 64,000,000 682,000,000 7,000,000 546,000,000 196,000,000 7,000,000 430,000,000 1,710,000,000 18,000,000 2,001,000,000 484,000,000 346,000,000 7,056,000,000 2,193,000,000 383,000,000 $8,932,000,000 57,998,000,000 » Or for nearest annual period reported; the figures, therefore, do not always coincide with the Federal fiscal year ending on June 30. bThe classifications by type are necessarily rough; the taxes grouped under income taxes, differ somewhat from each other and from the Federal income tax. c Imposed by all States at a rate ranging from 3 to 7 cents a gallon.

Source of Revenue b Income tax, individuals Income tax, corporations Taxes on liquors and wines Taxes on inheritances and gifts Taxes on tobacco Taxes on gasoline c Taxes on amusements Sales taxes Property taxes Miscellaneous taxes Total

neous sources such as the sale of surplus property, earnings of

Federal

agencies

(e.g.,

the

Reconstruction

Finance

C o r p o r a t i o n ) , interest on loans, fines a n d forfeitures, rents, a n d royalties, so that its total receipts for the year aggregated $ 5 3 , 3 6 8 , 6 7 1 , 8 9 2 . A f t e r a deduction of $ 3 , 1 1 9 , 5 3 6 , 7 4 4

ap-

propriated f o r social security trust funds a n d $ 2 , 1 0 6 , 5 3 0 , 6 1 5 disbursed as r e f u n d s of monies previously

received,

there r e m a i n e d available for use $ 4 8 , 1 4 2 , 6 0 4 , 5 3 3 . D u r i n g the year Federal expenditures aggregated $44,6 3 2 , 8 2 1 , 9 9 8 , so that a surplus of $ 3 , 5 0 9 , 7 8 2 , 6 2 5 r e m a i n e d o n h a n d at the b e g i n n i n g of the fiscal year 1 9 5 2 . T h e expenditures agencies in

of

the

1951

principal

Federal

are s h o w n in T a b l e

departments 3;

total

and

Federal

receipts and expenditures f r o m 1 9 4 7 through 1 9 5 1 in T a b l e

7

INTRODUCTION TABLE

3

FEDERAL EXPENDITURES FISCAL Y E A R

1951

T h e Legislative Branch T h e Judiciary Executive Office of the President Funds appropriated to the President Department of Agriculture Department of Commerce Department of Defense: Military functions Civil functions Department of the Interior Department of Justice Department of L a b o r Post Office Department Department of State Treasury Department: Interest on public debt Other Atomic Energy Commission Civil Service Commission Export-Import Bank. Reconstruction Finance Corporation Tennessee Valley Authority Veterans Administration Federal Security Agency Not specified

$

60,747,757 25,011,186 8,710,278 4,158,371,112 834,210,873 802,597,366 19-77'. 530.243 994,296,653 587,007,006 150,879,124 232,707,296 625,925,194 281,286,876 5,615,246,850 748,208,222 896,759,065 323,924,788 75,663,805 92,126,956 72,161,105 5,389,115,526 1,570,588,230 1,500,600,309

4; and the relation of Federal, State, and local g o v e r n m e n t tax collections to the national i n c o m e in T a b l e 5. T h e p u b l i c d e b t of the Federal G o v e r n m e n t at the beg i n n i n g of the fiscal year 1951 aggregated $257.4 billion; at the close of the year, $255.3 billion. O f the latter total, $137.9 b i l l i o n was represented b y p u b l i c l y issued marketable bonds, notes, and certificates of indebtedness. T a b l e 6 gives the amounts of the o b l i g a t i o n s of the Federal G o v e r n m e n t for 1951 according to class of investor. It is in this c o n t e x t — t h e total financial picture of the

8

INTRODUCTION TABLE FEDERAL

4

R E C E I P T S AND EXPENDITURES,

(In Billions Fiscal Year

Budget Receipts

1947 1948

$40.0 42.2

of

1947-1951

Dollars) Surplus or Deficit

Budget Expenditures

a

$+0.8

139-3 33-8 40.1 40.2 44.6

+8.4 -1.8 38.2 1949 195° 37-° -3-1 48.1 '951 +3-5 a Budget receipts are those collected for expenditures reflected in the Federal budget; they do not include amounts collected for social security trust funds and refunds of taxes erroneously collected. Thus, total actual collections for the fiscal year 1951 were $51,388 million.

Federal Government—that the Federal tax system and administration must be viewed. In Part I of this book, an outline of the taxes, taxing concepts, and legal enforcement procedure as provided in the Internal Revenue Code will TABLE

5

R E L A T I O N OF FEDERAL, S T A T E , AND L O C A L G O V E R N M E N T COLLECTIONS

TO NATIONAL

(Income

Year 1 939

1940 !94i !942 !943 1944 '945 1946 1947 1948

National Income 1 72.5 81.3 103.8 137-1 169.7 183.8 182.7 180.3 198.7

a

in Billions

Percentage as Federal 9-3 10.7 15.1 16.9

Paid Tax

INCOME,

of

TAX

1939-1950

Dollars)

Percentage Paid as State, Local Taxes

Total Percentage Paid as Taxes

11.9 11.2

21.2 21.9

9-2

24-3 24.0 29.2 28.2

23-3 22.6 23-5 22.0 22.1

223-5 19-7 216.7 18.3 »949 21.1 »95° 239-0 a National income is estimated on the basis of Federal fiscal year ends June 30.

7-i 5.8 5-5 5-9 6.7 7.0 7-i 8.0 8.1

29-4 28.7 29.1 26.8 26.3 29.2

a calendar year while the

9

INTRODUCTION TABLE

6

P U B L I C D E B T OF THE UNITED FISCAL YEAR

(In Billions

STATES

1951

of Dollars)

Class of Investor Individuals Corporations Insurance companies State and local governments Mutual savings banks Commercial banks Federal Reserve banks Miscellaneous investors Federal Government accounts

Amount of Obligation 5 65.2 20.2 17.0 9.4 10.2 584 23.0 10.9 41.0

Total

summarize the Federal system of taxation; and in Part II, an outline of the Internal Revenue Service's organization and operating methods will provide a comprehensive picture of administration.

Part

One

THE INTERNAL REVENUE CODE

THE INCOME T A X

BY Chapter 1 of the Internal Revenue Code a tax is imposed on the annual income of all individuals who are citizens of the United States regardless of their place of residence and of all residents of the United States regardless of their nationality, and of all corporations organized under domestic law. T h e entire income of each is subject to tax regardless of domestic or foreign origin with the exception of elements specifically exempted. On the other hand, nonresident alien individuals and foreign corporations are taxable only on income from sources within the United States. T h e income of the individual citizen or resident, as reduced by allowable deductions and exemptions, is subject to a normal tax of 3 percent and to a surtax at rates which begin at 19.2 percent on the first $2,000, increase to 21.6 percent on the next $2,000, and progress to a maximum of 89 percent on the amount of income in excess of $200,000. The combined normal and surtax rate thus ranges from 22.2 percent of taxable income not in excess of $2,000 to 92 percent of that portion which exceeds $200,000. (For the head of a household the increase in rate is lower, reaching 92 percent at $300,000.) It is to be noted that under this scheme the tax on a net income of $500,000 is not 92 percent of $500,000 but a lesser figure which reflects the several lesser rates on portions of the income below $200,000. Furthermore, it is provided that in no event shall the tax exceed 88 percent of the total net income.* * See section 2 of Supplement.

>4

T H E INCOME T A X

T h e income of the nonresident alien individual or corporation from sources within the United States is subject to a tax computed in one of three ways according to the taxpayer's circumstances. If the individual or corporation is not engaged in trade or business in the United States, and if the individual's income from United States sources does not exceed $15,400, the tax rate is 30 percent of the income, undiminished by exemptions and deductions allowed to the citizen and resident. If the income from United States sources exceeds $15,400, the individual must file an income tax return on which all such income is reported; certain deductions and one personal exemption are subtracted, and tax is computed on the resulting figure— not at 30 percent, but at the rates applicable to United States citizens. If the individual or corporation is engaged in trade or business, or is employed in the United States, his net income derived from United States sources and computed to reflect business expenses and other deductions is taxed at rates applicable to the resident individual or the domestic corporation, as the case may be. T h e income of corporations organized under the laws of a State or territory of the United States, whether or not such income was derived from domestic or foreign sources and whether or not it was converted into dollars or was brought into the United States, is subject to a normal tax of 30 percent and a surtax of 22 percent, or a combined rate of 52 percent.* Prior to January 1, 1954, if the corporation's profits were in excess of its normal earnings, the amount of the excess, determined by complicated formulas (described on pp. 44-51 below), was subject also to an excess profits tax of 30 percent, which might, however, be reduced to 18 percent under certain circumstances. Unlike the income tax system in Great Britain, the corporation and individual income taxes under United States law • See section 3 of Supplement.

T H E INCOME T A X

»5 TABLE 7 INCOME TAXES FISCAL YEAR 1951

Total collections (including taxes on employment) Individual income taxes Paid directly by taxpayer Paid by withholding at source Unemployment insurance Corporation income and excess profits taxes

$41,012,357,351 26,624,787,948 9.907.539.090 16,480,297,311 136,951,546 14,387,569,402

Total number of returns filed:

59,842,254

Individuals Citizens and resident aliens Nonresident aliens Declarations of income Fiduciaries Partnerships Withholding agents Corporations Income and excess profits Personal holding companies Exempt organizations Other

52,383,403 74,568 5,360,660 33 6 . 8 7o 891,277 10,104 678,038 5.528 83.749 18,057

SOURCE OF TAX BY INCOME CATEGORIES Individuals Reporting Income of: Under $3,000 $3,000 to $5,000 $5,000 to $ 10,000 $10,000 to $25,000 $25,000 and over

Corporations Reporting Income of: Under 525,000 525,000 to $50,000 550,000 to $100,000 $100,000 and over

Percentage of Total Individual Taxpayers 40.1 40.5 15.0 3-6 0.8

Percentage of Total Individual Income Tax

Percentage of Total Taxable Corporations

Percentage of Total Corporation Income Taxes Collected

70-3 12.3 7.0 10.4

2-5 2.7 4.1 90.8

10.8 23-9 21.0 16.9 27.4

i6

THE

INCOME

TAX

are not integrated. T h e corporation is considered as an entity completely distinct from its stockholders and is separately taxed on its entire income. T h e individual stockholder must report as taxable income all the dividends he receives, even though the corporation has already been taxed on profits from which the dividends were distributed. Because of the apparent double taxation of corporate profits, various measures have from time to time been suggested to lessen the burden of individual shareholders.*

DETERMINING T A X A B L E

INCOME

T h e first step to be taken by the taxpayer in the computation of his income tax is the determination of gross income. Gross income is broadly defined to comprise gains, profits, salaries, wages, compensation for personal services, from professions, vocations, trades, commerce, sales, dealings in property, interest, rent, dividends, securities, the transaction of business, and finally, "from any source whatever." It need not be received in cash, and the form of payment is immaterial. It includes profits from transactions not connected with any business, but casually or exceptionally made, such as the sale of one's automobile or the exchange of it for other property, or the winnings from lotteries, gambling, and illegal or criminal activities, commonly called "rackets." As one might suspect, income from rackets is seldom reported voluntarily; it is determined by receipts which are usually ascertained through investigation, and expenses illegally incurred in producing it, such as bribes paid, are not deductible. There must, however, be a receipt or other realization to constitute income. A mere increase of property held is not considered income, nor concept comprise the benefits flowing from the * See section 4 of Supplement.

form of in value does the personal

DETERMINING TAXABLE

INCOME

use or consumption of the taxpayer's own property. In this respect it differs from the British view that the annual value of a home occupied by the owner is income. It also differs f r o m the British view that the sale or exchange of securities held for investment or of property not used in trade or business does not give rise to income. T h e conversion of any asset (except inventory and other business property on which depreciation is deductible) into cash or other property for more than its cost produces under the Federal concept a capital gain, which is income, although a type of income taxable in an exceptional manner.* Gross income, however, does not mean gross receipts. In the case of a mercantile business, for example, it is the net profit of the year: gross receipts from the sale of merchandise less the cost of the merchandise sold and less the expenses incurred in its production. Similarly a physician's gross income consists of the fees he has received less the ordinary and necessary expenses incurred in the practice of his profession. Gross income, moreover, does not include money or property received as a gift, a legacy, or an inheritance; nor does it include the proceeds of an insurance policy paid by reason of the insured's death or by reason of personal injury or sickness of the insured; nor money received as damages for personal injury or in repayment of a loan made by the taxpayer. Compensation in cash for personal services includes not only the salary received but also amounts paid by the employer for the employee's account, such as taxes withheld, insurance premiums, and union dues. It further includes any bonus or " g i f t " from the employer, and the value of an exercised right, such as the privilege of purchasing shares of a corporation at a price less than market value. If, however, the employee is required to bear expenses for w h i c h he receives no reimbursement—a salesman's traveling costs • See section 5 of S u p p l e m e n t .

i8

THE INCOME

TAX

or an actor's costumes, for instance—these expenses may be deducted. And in general any expense paid or incurred in the production or collection of income, or for management and maintenance of property held for the production of income, is deductible.* In the case of buildings, machinery, or other assets which have a limited useful life, a deduction of a portion of their cost on account of depreciation is also allowable. A deduction is also granted on account of the depreciation or obsolescence of property used in business or to produce income, and on account of the depletion of mines, oil and gas wells, other natural deposits, and timberlands. T h e figure remaining after the taxpayer takes the business deductions allowed him is termed his "adjusted gross income," and from this adjusted gross income other specified deductions of a personal character may be subtracted to arrive at "net income." These personal deductions Congress may or may not allow at its pleasure because they represent payments from "income," not proper adjustments in converting receipts to "income." They comprise interest on indebtedness, taxes (except Federal income, estate, and gift taxes, and import duties); losses sustained in a trade or business, or in a transaction entered into for profit; and losses resulting from thefts or such casualties as fire, storm, or shipwreck, to the extent not compensated by insurance. They also include, to a limited extent, losses from the sale or exchange of capital assets; for example, a loss on the sale of a corporation's shares. Since the taxation of "capital gains" and computation of "capital losses" are the subject of special provisions, they will be discussed below in more detail. Wagering losses are deductible, but only to the extent that they offset wagering winnings. Bad debts are deductible, but if of a nonbusiness character, in the limited manner prescribed for capital losses. Deductions are also * See section 6 of Supplement.

DETERMINING

T A X A B L E INCOME

19

allowed for gifts to a domestic government for public purposes and to domestic charitable organizations not operated for profit, such as churches, hospitals, and the Red Cross. The aggregate deductions of gifts to governments and charitable organizations, however, may not exceed 20 percent of the taxpayer's adjusted gross income. Further, he may deduct those expenses for medical care of himself and his dependents which exceed 5 percent of his adjusted gross income. If he or his wife is over sixty-five years old, he may deduct all his medical expenses without the percentage limitation; the deduction, however, may in no case exceed $5,000.» It will be noted that some of the deductions listed above may be appropriate either to the determination of adjusted gross income or to the determination of net income. T h e application of any specific deduction depends upon its relation to the taxpayer's business or income-producing property. For instance, if he borrowed money and purchased with it a house which he rents, he deducts the interest on the loan and local taxes on the house from the rents received, and includes the profit in adjusted gross income. If, however, he has borrowed money to pay for the home which he occupies, he deducts interest on the loan and local taxes on the home from his adjusted gross income when he computes his net income. The deduction on account of depreciation relates exclusively to business and income-producing property. It is applicable to buildings but not to land. T h e annual deduction is an amount equal to the cost divided by the number of years during which the property will probably be serviceable. Thus, a taxpayer who purchases a truck for use in his business at a cost of $2,500 and who has found from experience that trucks are not serviceable for more than five years is entitled to an annual depreciation deduction • See section 7 of Supplement.

20

THE INCOME TAX

of $500 (an adjustment must be made for salvage value). T h e period of prospective use is, of course, an estimate which the taxpayer must support by evidence, if required. But for his guidance the Service has published Bulletin F, showing the normal rates of depreciation for various types of property (See Table 8 for examples of these). T h e usable lives shown in the table are not binding, and the taxpayer is free to prove that a different period of use is reasonable. A n analogous deduction may also be taken for obsolescence, which occurs, for example, when an improved type of machine makes it expedient to replace old types or when changes in public demand render the taxpayer's equipment or goods on hand of little or no value. T h e deduction for depletion is likewise exclusively of a business character and is somewhat complicated. T h e normal rule is that those having an economic interest in a mineral deposit or in timberlands may deduct annually a percentage of the cost of their interest corresponding to the estimated percentage of the mineral or timber removed until the aggregate deductions equal cost or other basis. A n economic interest comprises the interest of operating owners, lessors, lessees, and holders of royalty rights. There are, however, exceptions to the normal rule. If the mineral deposit was discovered by the taxpayer, the value of the deposit within thirty days of discovery is the basis recoverable by deductions. In the case of oil and gas wells, a depletion deduction equal to 27.5 percent of gross income but not exceeding 50 percent of net income from the property is allowed as long as the well is productive. In the case of other specified minerals, deductible depletion is also computed as a percentage of gross income limited to 50 percent of net: deposits of sand, gravel, slate, clay, stone, sodium chloride, calcium chloride, magnesium chloride, bromine, 5 percent; coal, asbestos, brucite, dolomite, mag-

THE

INDIVIDUAL'S

RETURN

21

TABLE COMPUTATION

Type of Property Passenger a u t o m o b i l e T r a c t o r , farm Office f u r n i t u r e Adding machine Clock Carpet Grain binder Hotel

OF

8

NORMAL

DEPRECIATION

Years of Usable Life

Type of Property

Number of Years

5 10 20 10 15 10 14 50

P r i n t i n g press Aircraft Steam l o c o m o t i v e Steamship C r e a m separator Gasoline l a u n c h Steel blast f u r n a c e Sewing m a c h i n e

25 5 30 33 16 25 25 15

nesite, perlite, wollastonite, calcium carbonates, magnesium carbonates, 10 percent; metal mines and certain others, 15 percent; sulphur, 23 percent.*

THE

INDIVIDUAL'S INCOME T A X

RETURN

Once the taxable income is determined, the taxpayer, if he is an individual, computes his tax on Form 1040, the "United States Individual Income T a x Return" (reproduced on pages 31-38).f First, he computes his adjusted gross income by using the many schedules on page 2 of the form and adding to it his salary income. Next, he subtracts his itemized personal deductions (listed on page 3 of the form) from the adjusted gross income and arrives at his net income. If his adjusted gross income is over $5,000, he may, instead of itemizing his various personal deductions, subtract 10 percent of his adjusted gross income as a standard deduction. T h e maximum standard deduction is $1,000, or $500 each if a married couple decides to file separate returns. T h e individual's income tax is then computed on the • See section 8 of Supplement. f T h e computation of tax by a corporation is discussed on pp. 41-44 below.

22

T H E INCOME T A X

basis of his net income less an additional deduction for the personal exemptions permitted to him and certain members of his family. Each taxpayer is entitled to a personal exemption of $600 for himself and for each of his dependents to whom he owes a duty of support and of whom he is the principal support. The amount of the exemption is not intended to represent the cost of living at a subsistence level, or "vital minimum," as it does in some countries, but is lowered or raised in accordance with revenue needs. Persons who may qualify as dependents for this purpose are his wife and children, grandchildren, uncles, aunts, nephews, nieces, sons-in-law, daughters-in-law, and his own or his wife's parents, brothers, and sisters. A nonresident alien, however, does not qualify as a dependent. If the taxpayer or his wife is over sixty-five years of age, he receives an additional $600 exemption; if either of them is blind, another $600 exemption. If both are over sixty-five years of age or both are blind, two or four exemptions may be claimed.* A husband and wife may file separate returns but are given the option of filing a joint return on which the incomes and deductions of each are reported. They may do this even though they live apart provided they are not legally separated. On a joint return, tax is computed on half the combined income and then multiplied by two. Since rates increase as the amount of income increases, use of the joint return usually results in a lesser tax. The lower rates applicable to the head of a household, mentioned above, never apply to a married person but only to an unmarried taxpayer who maintains a home for dependents other than a spouse. In order to avoid the hardship of both a foreign income tax and a United States income tax on income derived from foreign sources, the Code allows a proportionate credit * See section 9 of Supplement.

T H E INDIVIDUAL'S

RETURN

23

against the United States tax for foreign tax paid. T h i s credit is limited to the amount of the United States tax on the foreign income as computed under United States source rules. T h e final step in computing the income tax payable by an individual is to subtract the foreign income tax credit computed on Form 1 1 1 6 from the income tax otherwise due. But if the taxpayer elects to take the standard deduction described above, he is not entitled to claim any credit for foreign income taxes. T o the income tax payable for the year the taxpayer adds the self-employment tax, if any, which he has computed and reported on page 3 of Schedule C (reproduced on page 35). Against the total taxes payable there are credited amounts already paid on account by the taxpayer during the course of the taxable year and amounts withheld from salary or other income by the taxpayer's employer or other agent required to withhold. Any remainder due must be paid on or before March 15 * of the year following the taxable year. If the amounts previously paid, plus the amounts paid by withholding agents, exceed the amount of tax payable, the taxpayer may elect to have the excess refunded or to use it as a payment credit for the income tax of the next taxable year. If a refund is requested, the Director of his District will mail him a check for the amount within two months or so after the return is filed. Any taxpayer whose income was less than $5,000 may, if he chooses, report only his adjusted gross income and his exemptions in detail, and determine his tax by referring to a table on the back of the form. On columns of this table, income figures u p to $5,000 are shown in amounts increasing by $25 a step from $675 to $3,000 and by $50 a step from $3,000 to $5,000. T h e tax due at each level is separately indicated in parallel columns for a single or married taxpayer filing a separate return, for a married couple filing • See section 10 of Supplement.

24

THE INCOME T A X

a joint return, for a taxpayer who is head of a household, and for each number of exemptions claimed by a taxpayer up to "8 or more." T o apply the table, the taxpayer has merely to find the income figure corresponding to his reported income and to insert the tax figure opposite it—the tax due—in the appropriate column. The tax figures on this table are not precisely accurate in that no account is taken of income difference of $25 or $50. They are calculated to reflect the standard deduction of 10 percent. If the taxpayer can claim a very large amount of deductions, it is to his advantage to prepare the return in full. For individual citizens and residents whose income is less than $5,000 and consists of wages from which tax was withheld at the source and not more than $100 of other income such as dividends or interest, a simpler form than 1040 is provided: Form 1040A ("Employees Optional Return"). On this return the taxpayer reports only the number of exemptions claimed, his wages, the total of other income and the amount of tax withheld. He does not compute the tax payable. Instead, the Director of Internal Revenue computes the tax and either sends the taxpayer a refund for the overpayment or bills him for the balance due. Although most individuals report their income on the basis of cash receipts and disbursements for the calendar year, the taxpayer may, if he chooses, report on the basis of any twelve-month period and compute income by an accrual method of accounting. The return prepared for a calendar year must be filed not later than March 15 of the following year; that for a fiscal year, two and a half months after the year's close. Nearly all taxpayers mail their returns to the Director's office of their district and enclose a check for the amount of tax shown payable; a few bring it personally to the office of the cashier. Receipts are given if requested. There are few requests if payment is made by check.

THE

INDIVIDUAL'S

RETURN

25

In addition to Form 1040, on which income of the preceding year is reported, individual citizens and residents must also file on or before March 15 * an estimate of their income taxes for the current year if prospective income will exceed $600 or, in the case of employed persons not expecting more than $100 of income other than wages, $4,600 after exemptions.f Form io4oES, "Declaration of Estimated Income T a x , " is used for this report and is reproduced on page 39. On the form the taxpayer also estimates the amount of tax, if any, which will be withheld from salary or wages by the employer or other withholding agent; adds the amount of the overpayment, if any, on tax for the prior year if the taxpayer chose to use the overpayment as a credit, and subtracts the sum from the amount of tax estimated as likely to be due for the current year. The remainder may be paid in full when the estimated tax return is filed or in quarterly installments, the last being payable by January 15 of the following year. If loss of employment, an unexpectedly large profit, or other event changing income prospects should occur in the course of the year, an amended estimate on Form 1040ES, should be filed. A table on the back of the form indicates the tax that will probably be due on various levels of income with separate columns for categories of taxpayers and number of exemptions. Because Form 1040 is designed to meet the reporting requirements of all individual taxpayers, it has been found expedient to provide supplementary schedules for a more detailed report of profits from businesses and professions, from farming, and from the sale or exchange of capital assets. These schedules are filed with the return by taxpayers having income from the activities covered. Schedule C, "Profit (or Loss) from Business or Profession," reproduced on page 34, must be used by all tax• See section 10 of Supplement. + See section 11 of Supplement.

26

THE INCOME TAX

payers who carry on businesses or professions as individuals. This schedule which also serves as the basis of computation of the self-employment tax (discussed on p. 87 in connection with social security taxes) is designed for general use by all businesses and professions, and inapplicable lines on the schedule may be omitted. Thus, doctors and lawyers and others not engaged in manufacturing and selling will probably not complete the "cost of goods sold" portion of the schedule. Manufacturers, retailers, and the like compute their gross profits from sales by subtracting the cost of goods sold (lines 2 through 8) from gross receipts. In determining the cost of goods sold, inventories may be valued either at cost or at cost or market value, whichever is lower. In determining inventory costs taxpayers may elect the "last-in, first-out," or LIFO, method. Under this method the taxpayer compares the amount of each class of goods in his opening inventory for the year with the amount in his closing inventory. T o the extent that the closing inventory contains the same units the inventory value will not change from the opening inventory. Any excess above the amounts in the opening inventory may be valued at cost in the order of acquisition or at an average cost or at the cost of the last units purchased. As indicated on Schedule C, the gross profit is then reduced by various other business expenses to determine the net profit from the business. T h e net profit is then carried over to page 2 of Form 1040 in order to compute the taxpayer's adjusted gross income. Schedule D (reproduced on page 36) serves for the declaration of gains and losses from sales or exchanges of property. "Capital gains and losses" are subject to special rules of computation for tax purposes. A "capital asset" is broadly defined to include all property owned by the taxpayer with the exception of that used or held for sale in a business and certain copyrights and government obliga-

THE

INDIVIDUAL'S

RETURN

27

tions.* T h e gain or loss is computed by subtracting from the selling price the cost or other basis of the property (determined after subtracting all allowable depreciation) plus expense of sale. If the taxpayer owned the property "for not more than six months," all of the gain is taxable; if for more than six months, only 50 percent is taxable. Each transaction must be separately reported, and the schedule segregates them into two groups corresponding to the two lengths of tenure. If the long-term capital gain exceeds short-term and/or long-term capital loss in a taxable year, 50 percent of the excess is taxable income and is reported on Form 1040. If a loss appears, the loss is carried into the computation of adjusted gross income, but in an amount not exceeding $1,000. T h e portion of the loss above $1,000 may be used as a deduction under the following conditions: it must be absorbed within five years and in an amount not exceeding for any one year the net capital gains of that year plus $1,000. Although 50 percent of the net long-term gain is includible as taxable income on Form 1040, the Code in effect provides that the tax on long-term capital gains shall not exceed 25 percent.f For individuals with large incomes who would otherwise pay tax on their capital gains at rates greater than 25 percent, Schedule D provides a method of computing the limitation. T h e taxable portion of capital gain is subtracted from net income less exemptions (the base to which the tax rates are applied); the tax on that amount of income and the tax on capital gain are separately computed and added. If the sum is less than the amount • S e e section 12 of Supplement. f It should be noted that the Code provides both for an exemption of 50 percent of the long-term capital gain and for preferential treatment for taxable 50 percent of the long-term capital gains. T h e m a x i m u m tax on long-term capital gains therefore is more accurately referred to as 50 percent of 50 percent of the gain. Prior to January 1, 1954, the m a x i m u m rate was 52 percent of 50 percent of the gain or a maximum rate of 26 percent.

28

THE INCOME TAX

of tax regularly computed, it is taken as the amount of tax payable, and so appears on the return (page 3, line 9, "alternative tax"). Profits from farming and live-stock raising must be computed on Form 1040F (reproduced on pages 37-38) which must be filed with Form 1040 by farmers and stock raisers most of whom report income on the basis of cash receipts and disbursements. Since few farmers keep regular books, the form is designed as a guide for computation; there is no basic difference, however, in the method of computing and taxing farm income and income from other businesses. Form 1040F contains four columns: in the first are separately entered the quantity sold of cattle, horses, sheep, chickens, and other classes of animals and fowls raised on the farm, and the total amount received for each class. Similar entries for produce, e.g., grain, cotton, tobacco, dairy products, honey, appear in the second column. In the third column appear entries of amounts received for the renting of machinery or horses to other farmers, or for services performed for them; amounts received under government programs to support agriculture; or amounts from any other source. T h e kinds and quantities of animals, fowls, grain, and other goods sold, which were not raised on the farm but purchased by the taxpayer, are listed in the fourth column. T h e date of acquisition, selling price, cost, and depreciation allowable, if any, are shown, and from these the profit on the sales are computed. T h e sum of the receipts and profits appearing in the four columns constitutes gross farm profits. Expenses of operation are listed on page 3 of the form by types: for example, wages of labor, feed, seed, fertilizer, fuel and supplies purchased; rent paid for machinery or for the farm itself, if held on lease; repairs on machinery, trucks, and equipment; cost of electricity and telephone, taxes, in-

THE INDIVIDUAL'S

RETURN

29

surance, and if money has been borrowed for the purchase or operation of the farm, interest on the loan. In a separate table amounts claimed as depreciation are shown with detail of the acquisition date, cost, probable useful life of each depreciable asset. Examples of depreciable assets are tractors, threshing machines, and barns used in the production of income. Depreciation on the farmer's home and an automobile not used for business purposes are not deductible because unconnected with business operations. Individuals engaged in farming operations who maintain regular books of account may report income on an accrual basis, and for them Form 1040F provides a table showing the inventory of animals and produce at the beginning and end of the year, purchases and sales made, losses and consumption during the year. T h i s table sets forth information analogous to that shown on Schedule C. By it gross farm profits are computed to reflect an increase or decrease in the inventory of merchantable goods during the year. For the valuation of inventory the taxpayer may use the "farm-price" method or the "unit-livestock price" method. By the first he enters his animals and produce at market value less direct costs that he would incur in selling them. By the second method he divides his stock into classes, and assigns a unit price to each animal of a class. For animals raised on the farm the unit price must reflect the normal costs of producing and raising. T h u s , if experience indicates $15 as the cost of a calf and $7.50 as the cost of its annual maintenance to maturity, the inventory should reflect newborn calves at $15 each; yearling calves at $22.50, two-yearold calves at $30, and mature calves at $37.50. A f t e r electing to use an accrual basis for reporting income and a method for valuing inventory, the taxpayer may not change the basis or method unless he has obtained the permission of the Commissioner.

THE

3«

THE

WITHHOLDING

OF

INCOME

TAX

TAXES

A n integral part of the Federal tax collection system is the requirement that employers, including individuals, corporations, and government agencies, withhold income tax out of all payments to employees of salaries, wages, fees, bonuses, and commissions, and pay the amounts withheld to the Director of Internal Revenue. (Employees' social security taxes, which are also withheld by the employer, are discussed below, pp. 8i-8g.) W i t h h o l d i n g is not required, however, on wages paid to domestic servants and agricultural laborers, to nonresident aliens, to those employed and taxed in foreign countries, or to those not regularly employed w h o receive less than $50 a quarter. W i t h h o l d i n g is also not required in the case of payments made to physicians, lawyers, contractors, and others who are not covered by the normal meaning of employee. T h e amounts to be withheld are shown on tables w h i c h the Service furnishes to employers. Separate tables are provided for various payroll periods and for progressive amounts of wages. For each amount, furthermore, the tax to be withheld varies slightly with the n u m b e r of the employee's exemptions. If he has n o dependents, the a m o u n t to be withheld is 20 percent of the wages due; it decreases slightly as the n u m b e r of exemptions increases. A n employer is also permitted to compute separately the tax to b e Avithheld by multiplying the amount of one exemption for the pay period by total exemptions of the employee, subtracting the product from the wages, and retaining 20 percent of the remainder as tax to be withheld. T o implement this system the employee is required to file with the employer a statement on Form W-4 of the n u m b e r of exemptions to which he is entitled, and to amend it if the

b'] FORM 1 0 4 0

w taxable year beginning

1953, and ending . .

(PLEASE P R I N T .

HOME ADDRESS

(PLEASE P R I N T .

I £ : I

(Cashier's Stamp)

(Postal zone number)

Occupation ..

1 . List your name. If your wife ( o r husband) had no income:, or if this is a joint return, list also her ( o r h i s ) name.

Ì.y ¿Your ? Inleome

Do not write In liicsc spaces

Street and number or rural route)

(City, town, or post office)

i

195—.

If this u a joint return of husband and wife, use first Dimes of both)

Social Security No

ïour exemptions

1953

U. S. INDIVIDUAL INCOME TAX RETURN FOR CALENDAR YEAR 1953

Check below il at tha end of your taxable year you or your wlte were— 65 or over • 65 or over •

A B

or J mi b.d lacom. ool included m ibi. r.tura I C. List names o f your children (including stepchildren and legally adopted children)with 1953 gross incomcs of less than $600 w h o received more than one-half of their support from you in 1953. See Instructions.

Blind • Blind Q

On lines A and B below— It neither 65 nor blind write the figure 1 It either 65 or blind write the figure 2 It both 65 and blind write the figure 3 Number of exemptions for you Number of her (or his) exemptions.

• A ~

Nim«—aid itidreii ¡I dlllefint from ¡touts

Enter number of children l i s t e d . . . .

D. Enter number o f exemptions claimed for other close relatives listed in Schedule I on page 2 E . Enter total number of exemptions claimed in A to D above '2. Enter your total wages, salaries, bonuses, commissions, and other compensation received in 1953, btfort payroll deductions. Persons claiming traveling or reimbursed expenses, sec Instructions. Wdw( Emplojtd (CUT Hid Stile) liKsmi Tu withheld Pilat tJnpltiv'iNim«

Enter total - >

3. I f you received dividends, interest, or any other income ( o r loss), give details on page 2 and enter the total here 4. Add amounts shown in items 2 and 3, and enter the total here

"(Unmarried or legally separated persons qualifying under Schedule J as " H e a d of Household," check here • . ) How to IF YOUR INCOME WAS LESS THAN S5.000.—Use' the tax table on page 4 unless you itemize deductions. T h e table allows figure about 10 percent o f your income for charitable contributions, interest, taxes, medical expenses, e t c . I f your deducthe tax tions exceed 10 percent, it will usually be to your advantage to itemize them and compute your tax on page 3. IF YOUR INCOMF. WAS $5.000 OR MORE.—Compute tax on page 3. Use standard deduction or iremize deductions, w h i c h ever is to your advantage. ( A ) Enter your tax from table on page 4, o r from line 13, page 3 ( B ) Enter your self-employment tax from line 35, separate Schedule C. „. How much have you paid on your 1953 income tax? Tax ( A ) B y t a x w i t h h e l d ( i n i t e m 2 , a b o v e ) . Attach Original Forms VV-2. dllO OF ( B ) By payments on 1953 Declaration of Estimated T a x (include a n y overpayment on your 1952 tax not claimed as a refund). rotund

Enter total here

$ Enter total here

7. If your t a x _ ( i t e m 5 ) is larger than payments (item 6 ) , enter balance of'tax due here. T h i s balance must be paid in full w i t h return

8. If your payments (item 6 ) are larger than your tax (item 5 ) , enter the overpayment here Enter amount of item 8 you want $

(Credited on 19M estimated

i

$

'Re1 -• '-.' I

Do you owe any prior year Federal tax for which you have been billed? ( Y e s or N o ) Is your wife ( o r husband) making a separate return for 1953? ( Y e s or N o ) If " y e s , " write her (or-his) name If you have filed a return for a prior year, state latest year 19 Where filed? To which District Director's office did you pay amount claimed in item 6 ( B ) , above? I declare under the penalties of perjury that this return (including any accompanying schedules and statements) has been examined by me and t o the best of my knowledge and belief is a true, correct, and complete return. (Si|n»ture of person, other than taxpayer, preparing this return) (Name of firm or employer, if any)

(Date)

(Signature of taxpayer) (Signature of taxpayer's wife or husband if this is a joint return)

^ To uture split-income beoc&M. husband sod wile must iocludc sit [heir income and. ereo though ootr ooe has income. BOTH MUST SIGN.

(Date) (Date)

to— 00199.

M Stheriul« Nkm rt cassate» Wtiarisj dirtiMd

$ _

I N C C M E F R O M DIVIDENDS Name «1 cofparjBon deciuloi ttwWtafl

Annua}

_

Pipi

$_ Enter total h a u - )

Scindiate B . — I N C O M E F R O M Ansaci

INTEREST NïRU gl M r "

$

JblHUlt S

E n t e r t o t a l here —^ Scheduli) C S u m m a r y . — P R O F I T ( O R L O S S ) F R O M B U S I N E S S O R P R O F E S S I O N , F A R M I N G , AND P A R T N E R S H I P

1. Business profit ( o r loss) from separate Schedule C, line 23 1 . Farm profit (or loss) from separate schedule. Form 1040F Î . Partnership, etc., profit (or loss) from Form 1065, Schedule K , Column 3 . . . (Partnership name)

(Address)

4. Total of lines 1 , 2 , 3 5. Less: Net operating loss deduction (attach statement) 6. Net profit (or loss) (line 4 less line 5)

S c h e d u l e O . — N E T GAIN OR L O S S F « o a n S A L E S OR E X C H A N G E S O F C A P I T A L A S S E T S , E T C .

1. From sale or exchange of capital assets (from separate Schedule D ) 2. From sale or exchange of property other than capital assets (from separate Schedule D ) S c h e d u l e E . — I N C O M E F R O M A N N U I T I E S OR P E N S I O N S

1. Cost of annuity (amount you p a i d ) . . 2. Cost received tax-free in past years. 3. Remainder of cost (line 1 less line 2 )

$.

4. Amount received this year.. $.. 5 Excess of line 4 over line 3 . . I 6. Enter line 5, or3percentof line 1, whichever is greater (but not more than line 4 ) . 1 ."V "

• AaettMd reo! M

I KM MS tacallaii si psMrtr

$

mm

:' or . ..

(asciala in Scbaduls H) $......

t Rspllrs iattach lMMISd USI)

:

$ 1$ $ 1. Totals 2. Net profit (or loss) (column 2 less sum of columns 3. 4. and 5 ) . Schedule G . — INCOME FROM OTHER SOURCES

5. Other expenses (attach Itemized irsi)

$._

1$

I N C L U D I N G E S T A T E S AND T R U S T S

1. Estate or trust 2. Other sources (state nature) Total income (or loss) from above sources (Enter here and as item 3, page 1).

S c h e d u l e H . — E X P L A N A T I O N O F DEDUCTION F O R D E P R E C I A T I O N C L A I M E D IN S C H E D U L E F i Remains cert a E. Ute used In 1. KknJ »1 jjropefty (It building state material of 4. Depreciation al7. Estimated Hit i Data accumula fi nj wUlch coajtmclcili. Exclude land and other other bas!« to 1» 3, Cost or other bads lowed (or allowable) from beginning «enured depreciation tendepredabie projutj Id prior jean of near raster ed $ $ $

S c h e d u l e I . — E X E M P T I O N S F O R C L O S E R E L A T I V E S O T H E R T H A N W I F E AND C H I L D R E N — ( S e e I n s t r u c t i o n s ) 3. Did dependent durinf 19S3— J, Nam* of dependent retati». Also tf»» (a) (b) (c) l Retatieashif addrm If différait from yturs Hare gross Income Reside in roar Recato entire sopperì from pu? •f J6£0 or more? home!

t

ir

Yeu (and y w «rife If this It a Joint return)

Enter here and as item I D , page 1, the number o ' other close relatives claim« Schedule J . — H E A D OF HOUSEHOLD ( S e e I n s t r u c t i o n s ) ( N o t a p p l i c a b l e w h e r e w i l e or h u s b a n d d i e d d u r i n g t a x a b l e y e a r ) I f a t ! o f t h e f o l l o w i n g q u e s t i o n s a r e a n s w e r e d " Y e s , " y o u m a y deterL i s t n a m e ( s ) and r e l a t i o n s h i p t o y o u . m i n e y o u r t a x as H e a d o f a H o u s e h o l d : 1 . Were you unmarried ( o r legally separated) at tile close o f your t a x a b l e year?

( Y e s or N o )

e n t i t l e d t o a n e x e m p t i o n , o r ( ¿ ) y o u r unmarried c h i l d , g r a n d c h i l d , o r s t e p c h i l d , e v e n t h o u g h not a dependent?

( Y e t or N o )

Others, and by de»» eat from own tuffi

$_ .

r

3 . D i d y o u f u r n i s h m o t e t h a n o n e - h a l f o f t h e c o s t o f maintaining household during the taxable year?

c i p a l residence o f b o t h y o u r s e l f and ( * ) a person f o r w h o m y o u are

$

te e i t h e r 3(b) or 1(0 It "It" enter amount spent for dependent's i i a l is 1953 b y -

$

2 . W a s y o u r borne occupied d u r i n g t h e entir'e t a x a b l e y e a r as t h e prin-

t Depredati«! aloaabia lös inI

( Y e s or N o )

If y o u did n o t f u r n i s h t h e e n t r r c c o s t , s t a t e t o t a l a m o u n t furnishd by you $

; b y a l l o t h e r s ( i n c l u d i n g those stal-

ing your h o m e ) $ D e d u c t i o n s on pagt) a i t t o be determined w i t h o u t reference t o t h i s schedule, ifr-iau*

[33] ITEMIZED D E D U C T I O N S — F O R P E R S O N S N O T U S I N C T A X T A B L E O N P A G E < O R S T A N D A R D D E D U C T I O N O N L I N E 2 B E L O W —

If Husband and Wife (Not Legally Separated) File Separate Returns and One Iterni7.es Deductions, the Other Must Also Itemize Csmiua Usil«tlcBi ami siala lo t u n paid, il mora [paca Is iiîsrftd. aiuta additional s

CsntriMons

Total Contributions ( n o t more t h a n 20 percent of item 4, page 1 ) . Interest

Tota! Interest. ?

—

Taxes Total T a x e s . j

Losses f r o m lire, storm, o r other casually, or thai!

Total Allowable Losses ( n o t compensated by insurance or s

Medici and dental expenses (if ever 65 sec Instructions)

Net Expenses ( n o t compensated by insurance or o t h e r w i s e ) . . . . $ Enter 5 percent of item 4, page 1; subtract from Net E x p e n s e s . . . . Allowable Medical and Dental Expenses. See Instructions for limitation

Missel(See Instructions)

Total Miscellaneous Deductions. Total Deductions. T A X C O M P U T A T I O N F O R C A L E N D A R Y E A R 1 3 5 3 (Fat Ollwt Tstabfe ( - ts much FCfH IMO FY)

L Enter amount s h o w n in item 4, page 1. This is your Adjusted Gross Income 2. If deductions arc itemized abose, enter total of such deductions. If deductions are not itemized and line 1, abm, is Si,000 or more: ( a ) married persons filing separately enter $500, ( i ) all others enter 10 percent of litae 1, but not more t h a n $1,000 3. Subtract line 2 from line 1. Enter the difference here. T h i s is your Net Income 4. Multiply $600 by total number of exemptions claimed in item I E , page L Enter total here . . 5. Subtract line 4 from line 3- Enter difference here. (If line 1 includes partially tax-exempt interest, see Instructions)' • II I n 5 is m l more than 52.000

6. Enter 22.2 percent of amount shown on line 5 and disregard lines 7, 8, and 9.. B1Ì!* 5 is more

to

52.000

7 . And IIU ITO a single perseti, a married person ftling separately, or a head of household

Single persons and married persons filing separately use Tax Rate Schedule I on page 12 of Instructions to figure tax on amount on line 5; heads of household use T a x Rate Schedule II. . 8 . And yon a n filing a Joint

(a) Enter one-half of amount on line 5 ( i ) Use Tax Rate Schedule I on page 12 of Instructions to figure tax on amount on line 8 (a) (c) Multiply amount on line 8 ( b ) by 2. 9. If alternative tax computation is made, enter here tax from separate Schedule D . DtaEtarf tines 1 0 . 1 1 , and 1 2 , and copy on line 1 3 t h e same figure you entered on lino 6 , 7 , 8 (7 »3 so >7 >7 »7 »7 «3 »3 9 9 8 8 7 6 5 8 6 6 6 6 9 5 5

10

8

12

9 4 5 9

10

9

128

EXCISE T A X E S

tions; wagers placed with, or on any wager placed in, a wagering pool conducted by a pari-mutuel wagering enterprise licensed under State law; and any wager placed in a taxable coin-operated device. T h e tax applies to wagers accepted in the United States or placed by a person who is in the United States with a person who is a resident or citizen, or in a wagering pool or lottery conducted by a person who is a citizen or resident. A person liable for the tax is required to keep accurate records and to file a monthly return on Form 730 with the District Director of the district in which his principal place of business is located. He must apply for registration to engage in the business on Form 1 i-C, and pay an annual occupational tax of $50 in J u l y . Failure to do so subjects him to a fine of not less than $1,000 or more than $5,000. On Form 1 i-C he must state the name and address of each place where his business is conducted, and the name, address, and special tax stamp number of each agent or employee who may accept wagers on his behalf. A supplemental Form 1 i-C must be filed within ten days of the date on which he engages an additional employee or agent. Payment of the tax is evidenced by a special tax stamp which must be conspicuously displayed in the taxpayer's principal place of business. Any person who willfully fails to pay the taxes due, to file returns, or to keep records, or attempts in any manner to evade or defeat the tax, or fraudulently uses any certificate issued, is subject to a fine of $10,000 or imprisonment, or both, with costs of prosecution, and is also liable to a penalty equal to the amount of the tax not paid. T h i s tax has been in effect too short a time for statistics to be shown.

INTEREST, FINES, AND PENALTIES

FOR THE ENFORCEMENT and proper collection of the numerous Federal taxes administered by the Internal Revenue Service, the Code contains provisions for the addition of interest on amounts of tax not paid on or before the date due; for "additions" to such amounts in the nature of fines, and for civil and criminal fines and penalties, including prison sentences for specified infractions. The various taxes, singly or in kindred groups, are imposed by separate chapters and subchapters of the Code. Usually, provisions for interest, fines, and penalties applicable to a specific tax are separately set forth in the chapter or subchapter which imposes it. In some instances the interest and penal provisions appearing in another chapter or subchapter are made applicable by reference. There are also general penal provisions which are duplicated in some chapters and subchapters by the same or similar provisions applicable to a specific tax or are made inapplicable to a specific tax.

An exhaustive exposition of the statutory provisions imposing interest rules and penalties for evasion or violation of the various tax laws and regulations would exceed reasonable limits. Indeed, a bare transcription of the pertinent Code sections would fill many pages, and to be intelligible, would require extended explanations of other sections cited in them by number and of technical phrases used. It is believed, therefore, that the following general but incomplete summary of interest rules and common penalty provisions

130

INTEREST,

FINES,

AND

PENALTIES

will nonetheless furnish a clearer composite picture than an exhaustive presentation would. INTEREST

PROVISIONS

On all or any portion of the tax due which is paid after the date prescribed for payment 6 percent interest is added, calculated from the date due to the date of payment (see Code sections 292, 294-98, 890-93; 1020-23; 1420; 1717; 3310). If no return is required, as in the case of stamp taxes, the interest runs only from date of demand for payment of a deficiency. T h e addition of interest is mandatory. SUMMARY

OF

CIVIL

PENALTIES

If any part of a deficiency (i.e., amount of tax officially determined above that reported by the taxpayer) is due to negligence or intentional disregard of rules and regulations but without intent to defraud, 5 percent of the deficiency is added as a penalty. See section 293 (income tax); section 1019 (gift tax). If any part of a deficiency is due to fraud with intent to evade tax, 50 percent of the deficiency is added as a penalty in the case of income tax, and 50 percent of the tax in the case of numerous other taxes.* If a return is not filed on or before the date due, 5 percent of the tax is added as a penalty for each thirty days of delay up to a maximum of 25 percent. This penalty is not imposed if the taxpayer shows that late filing was due to reasonable cause and not due to willful neglect. If a tax (other than an income, estate, or gift tax) is not paid within ten days after a demand notice for it has been sent to the taxpayer (demand notices are sent only after a bill has been ignored), a penalty of 5 percent is added to * See section 41 of Supplement.

INTEREST, FINES, A N D PENALTIES

»3»

the amount of the tax demanded in addition to the 6 percent interest. Section 3655(b) provides that addition of this penalty is mandatory. T h e above penalties, or similar ones, are prescribed in connection with most of the taxes imposed. While interest and the 5 percent penalty for failure to pay after a demand notice has been sent are mandatory, the 5 percent negligence penalty and 50 percent fraud penalty and the 5-25 percent penalty for tardy filing require the use of administrative discretion which is subject to judicial review. With exception of the negligence and fraud penalties, which are by their terms mutually exclusive, interest and other penalties are cumulative. Thus, a taxpayer who filed a fraudulent return after the due date could be obliged to pay the correct amount of tax plus interest, plus the 25 percent penalty for tardy filing, plus the 50 percent penalty for fraud. In practice the negligence penalty is not applied because of minor errors or clerical mistakes or incorrect entries and omissions on the return which resulted from the taxpayer's honest misunderstanding of facts or interpretation of law. It is not asserted where disclosures on the return are adequate for a detection of the error. It is applied, however, where deductions are grossly overstated, substantial receipts are omitted, or other errors have resulted from irregular bookkeeping. If there is reason to infer that the errors were not the result of mere negligence but of a fraudulent intent to evade tax, the 50 percent penalty is imposed. Since intent is essential to support the penalty, it must appear that the taxpayer sought deliberately to deceive: for example, a taxpayer tries to conceal the existence of his taxable income by failing to file a return; or the income he reports in successive years is found to be far less than the value of property

1J2

INTEREST, FINES, AND PENALTIES

he accumulated during that time, and he cannot explain the discrepancy satisfactorily. In such cases the Commissioner may determine as the taxpayer's annual income for those years the annual increases in his net wealth and on that basis compute tax with the penalties for negligence and fraud. In this, as in all other cases, the taxpayer may contest the penalties as well as the tax before the T a x Court, and the burden rests on the Commissioner affirmatively to establish fraud. T o o many incidental considerations enter into a determination of fraud to admit of any summary of criteria. Individual circumstances are considered. It may be stressed, however, that fraud is not negligence, however gross, but is intentional wrongdoing for the purpose of evading a tax believed to be due. It is a question of fact, and all the facts and circumstances surrounding the conduct of the taxpayer's business and all the facts incident to the preparation of the return are taken into account. Examples of facts indicating fraudulent intent are keeping a double set of books, making false entries or alterations or false invoices or documents, destroying books or records, concealing assets or covering up sources of income, handling one's affairs to avoid making the records usual in transactions of the kind. Full disclosure by a taxpayer of an error or omission, before an investigation is begun, may be considered in his favor but is not necessarily a conclusive indication of his innocence. Imposition of the penalty for failure to file a return on time is not mandatory. For late filing, some causes which have been considered sufficient to excuse are: serious illness of the taxpayer or a member of his family; destruction of records by fire or loss of them by theft; emergencies such as personal accidents or unavoidable absences. Each case is judged on its peculiar facts.

INTEREST, FINES, AND PENALTIES

133

O t h e r typical, administratively collectible civil penalties are: Any person who fails to furnish a required statement or presents a false statement of another's wages subject to employment or withholding tax, for each offense, $50. Section 1634 (b). Any person who willfully fails to pay, collect, or truthfully account for, and pay over, any specified miscellaneous taxes, or willfully attempts in any manner to evade or defeat the tax or the payment of it shall, in addition to other penalties, be liable to a penalty of the amount of the tax evaded. Sections 1718(c); 2707(a). Any person who has in his custody or possession any articles subject to tax (e.g., packs of cigarettes) for the purpose of selling in fraud of the internal revenue laws shall be liable to a penalty of $500 or not less than double the amount of the taxes fraudulently attempted to be evaded. Section 3320. T h e following civil penalty is an example of one for which suit must be brought in court: Whoever fails to comply with any duty imposed upon him by sections 820, 821, or 864 (relating to the filing of estate tax returns) or having in his possession or control any record, file, or paper containing information about a decedent's estate or property of the estate and fails to exhibit the same at an examining revenue agent's request shall be liable to a civil penalty of $500 and costs of suit. Section 894(b).

SUMMARY

OF

CRIMINAL

PENALTIES

In addition to the interest and civil penalties, criminal fines and/or prison sentences are imposed for n u m e r o u s violations of C o d e provisions, of which the f o l l o w i n g are typical: Any person required to pay income tax, to make a return or declaration, keep records or supply information connected therewith, who willfully fails in his duty, shall be guilty of a misdemeanor, and upon conviction fined not more than

134

INTEREST, FINES, AND PENALTIES

$10,000 or imprisoned n o t more t h a n o n e year, or b o t h , tog e t h e r w i t h costs of prosecution. Section 145(a). A n y person required to collect, account for a n d pay over any i n c o m e tax, w h o w i l l f u l l y fails to d o so, a n d any person w h o w i l l f u l l y attempts in any m a n n e r to evade or defeat any i n c o m e tax or the p a y m e n t thereof, shall be g u i l t y of a felony a n d u p o n c o n v i c t i o n fined not more than $10,000 or imprisoned not more than five years, or both, together w i t h costs of prosecution. Section 145(b). S i m i l a r p e n a l t i e s a p p l y i n t h e case o f o t h e r t a x e s : estate t a x , s e c t i o n 894(b)(2); g i f t t a x , s e c t i o n 1024; t a x o n a d m i s s i o n s a n d d u e s , s e c t i o n 1 7 1 8 ; s t a m p t a x e s , s e c t i o n 1 8 2 1 ; tob a c c o taxes, s e c t i o n 2 1 5 6 ; t a x e s o n

firearms,

employment,

r e t a i l e r s e x c i s e taxes, s e c t i o n 2 7 0 7 ; n a r c o t i c s , s e c t i o n 2570; m a t c h e s , s e c t i o n 2656; l i q u o r s , s e c t i o n 3 1 7 3 . A n y person w h o w i l l f u l l y makes a n d subscribes any return, statement, or other d o c u m e n t , w h i c h contains or is verified by a written declaration u n d e r penalties of p e r j u r y a n d w h i c h he does not believe to be true shall be guilty of a felony a n d u p o n conviction shall be fined not more than $2,000 or imprisoned not more than five years, or both. Section 3809. Every person w h o stimulates or falsely or f r a u d u l e n t l y executes or signs any b o n d , permit, entry or o t h e r d o c u m e n t req u i r e d by the internal revenue laws or regulations, or procures, advises, aids in or connives at such e x e c u t i o n shall u p o n conviction be imprisoned not less than one year or more than five years a n d the property to w h i c h the instrument relates shall be forfeited. Section 3793(a). A n y person, w h o w i l l f u l l y aids or assists in, or procures, counsels or advises the preparation or presentation under or in connection w i t h any matter arising u n d e r , the internal revenue laws, of a false or f r a u d u l e n t return, affidavit, claim or d o c u m e n t , shall be guilty of a felony, a n d u p o n conviction shall be fined not more than $10,000 or imprisoned not more than five years, or both, together w i t h costs of prosecution. Section 3793(b). I n a d d i t i o n t o fines a n d p e n a l t i e s , a s e i z u r e of a r t i c l e s a n d w a r e s o n w h i c h t h e p r e s c r i b e d t a x has b e e n e v a d e d a n d t h e

INTEREST, FINES, A N D

PENALTIES

135

forfeiture of such articles is also authorized, and in some cases the conveyance in which the goods are b e i n g transported when seized is forfeited. See tobacco products, sections 2154-2155, 2160-2181; oleomargarine, etc., sections 2309, 2358; narcotics, section 2571; matches, section 2657; liquors and wines, sections 2806, 2912, 3043, 3 1 1 6 , 3159. T h e fines and penalties cited above relate to attempted tax evasion. T h e r e are likewise numerous criminal fines and penalties for various infractions of laws and rules regulating the manufacture, possession, and sale of specific goods, such as alcoholic beverages, narcotics, firearms, tobacco, certain oils, and matches; the misuse or counterfeiting of tax stamps and labels; obstructing the examination of premises subject to official inspection; the misrepresentation of controlled m a n u f a c t u r i n g plants. For example: Any person who forcibly obstructs or hinders any authorized officer in the execution of his duties or forcibly rescues or attempts to rescue seized articles shall, for each offense, forfeit $500 or double the value of the rescued property or be imprisoned for not over two years at the discretion of the court. Section 3601. By section 3614 of the C o d e the Commissioner (or his authorized agents) is empowered to examine any books, papers, records, or memoranda of a taxpayer or of any person having k n o w l e d g e in the premises and to require the taxpayer or such person to answer under oath questions relating to matters bearing on a correct determination of the taxpayer's tax. T o this end, the authorized agent may summ o n the taxpayer o r other person having knowledge to appear before h i m a n d to bring specified records (section 3615). In the event that the person summoned neglects or refuses to obey such summons, or to give testimony, or to answer interrogatories as required, the Collector [now Director of Internal Revenue] may apply to the judge of the

136

INTEREST, FINES, AND

PENALTIES

district court or to a United States Commissioner for the district within which the person so summoned resides for an attachment against him as for a contempt. It shall be the duty of the judge or Commissioner to hear the application, and, if satisfactory proof is made, to issue an attachment . . . for the arrest of such person, and upon his being brought before him to proceed to a hearing of the case; and . . . to enforce obedience to the requirements of the summons and to punish such person for his default or disobedience. Section 3615(e). T h e punishment for neglecting to appear and produce records is a fine not exceeding $1,000 or imprisonment not exceeding one year, or both, with costs of prosecution. Section 3616(b). T h e same penalty applies for delivering false records with intent to defeat or evade the tax. Section 3616(a). Since it is commonly known that a summons can be enforced by court order, and that noncompliance is punishable, issuance of the summons is not necessary in most cases. T h e taxpayer or one having knowledge or documents bearing on the taxpayer's tax liability makes voluntary disclosure to an examining revenue agent. For enforcement of all the criminal fines and penalties enumerated above court action must be initiated. Such action with respect to most taxes is recommended by the Enforcement Counsel of the Service to the Department of Justice. The Department of Justice undertakes the prosecution if, and only if, it concludes that the taxpayer is guilty and that there is a reasonable probability of conviction. It will be recalled that for a fraudulent attempt to evade tax separate provision is made for a civil and a criminal penalty. T h e two are cumulative, but only the civil penalty is applied in most cases. The distinction between civil and criminal fraud may depend upon the flagrancy of the offense, the available evidence, and the Government's burden of proof. Civil fraud must be established by clear and convincing proof. For criminal fraud the degTee of evidence required

INTEREST, FINES, AND PENALTIES

137

TABLE 22 PROSECUTION RECORD OF CRIMINAL FRAUD CASES, 1947-1950 Year 1950 1949 1948

»947

Referred

567 675 447 655

Indicted 518 424

4'5 347

Plea of Guilty 410

3»5 3>8 161

Dismissed 22 18 48

»3

Convicted 48

45 39 33

Acquitted

«5 12

»9 16

to convict is greater; the Government must establish guilt beyond any reasonable doubt. During the fiscal year ended June 30, 1952, the 50 percent civil penalty for fraud was determined in 17,494 cases. Criminal prosecution was recommended in 1,284 cases, about 50 percent of which were in the "gambler and racketeer" classification. During the year, 1,063 indictments, some still awaiting trial, and 563 convictions and pleas of guilty or nolo contendere were obtained by the Department of Justice. During the fiscal year 1951 the Department of Justice referred 398 cases, involving 448 defendants, to United States Attorneys for criminal prosecution. Indictments were returned against 4 1 5 defendants; 283 defendants entered pleas of guilty or nolo contendere; prosecutions of 78 were dismissed or nol-prossed; 41 were convicted; and 13 were acquitted. Corresponding figures for prior years are given in Table 22. It is to be noted that the figures in the table reflect the year's record and not necessarily the action on the specific defendants referred to the Department of Justice or indicted during the year indicated. Some convicted or acquitted, for example, were indicted in a prior year.

Part

Tico

T H E I N T E R N A L REVENUE SERVICE

THE ORGANIZATION OF THE INTERNAL REVENUE SERVICE

THE Commissioner of Internal Revenue is in charge of the operations of the Service, and is responsible for administration of the tax and regulatory laws described in Part I. T h e Commissioner is appointed by the President of the United States. All other officers and employees are initially chosen from lists of persons whom the Civil Service Commission has found qualified, and who hold civil service status. In the discharge of his heavy responsibilities, the Commissioner is assisted by a Deputy Commissioner, who provides executive leadership at the highest level and acts as Commissioner when the Commissioner is absent or ill, or when designated to do so. Because of the multiplicity of its functions, the vast area covered by its operations, and the large number of its offices outside Washington, the Service is divided and subdivided by geographical areas (see accompanying map) and concurrently by functions with lines of authority which culminate in the National Office at Washington. T h e mission of the National Office is to develop broad nationwide policies and programs for administration and to direct, guide, and coordinate the activities of the Service. It exercises a supervisory authority over the operational offices, but in most instances final decision in individual cases is the function of the district or regional office for the area in which the taxpayer resides. Geographically, the United States is divided into sixty-

142

ORGANIZATION

OF T H E

SERVICE

four Districts, each of which is administered by a District Director of Internal Revenue. T h e Director has an office in the principal city and dependent offices in other cities and towns of his District. T h e dependent offices—over twelve hundred of them—are known as major and minor branch offices according to size. T h e sixty-four Districts in turn are grouped into nine Regions, and over each of these a Regional Commissioner has supervisory authority and in certain specified matters operational duties. T h e Regional Commissioners are directly responsible to the Commissioner. Functionally, administration is divided into Operations, Technical Matters, Inspection, Administration, and Planning. Each of these fields is under an Assistant Commissioner at the National Office. There is also a Chief Counsel to the Commissioner under the General Counsel of Treasury. He heads a large staff of attorneys who furnish legal advice and represent the Commissioner in proceedings before the T a x Court. Each Regional Commissioner is aided by six Assistant Regional Commissioners having charge, respectively, of (1) administration (i.e., personnel, procurement, office payrolls and the like); (2) collection of taxes; (3) audit of returns; (4) intelligence (i.e., the investigation of taxpayers suspected of fraud); (5) taxes on alcohol and tobacco (a specialized field because of regulatory controls); and (6) appellate work, or a review of the decisions made by revenue agents. There is also a Regional Counsel with attorneys, forming part of the Chief Counsel's staff, and a Regional Inspector under the Assistant Commissioner (Inspection), who checks accounts, employees, and the general conduct of all offices in the Region. The Director's office, the principal operating unit of the system, is headed by a District Director, with whom is asso-

ORGANIZATION

OF T H E

SERVICE

143

dated an Assistant District Director. The Assistant automatically assumes charge in case of the death, resignation, incapacity, or absence of the Director. The office is divided into four divisions—administration, collection, audit, intelligence—and connected with it is the alcohol and tobacco tax division of the Regional Commissioner. Attached to the larger offices is a field office of the Regional Counsel and a field office of the Appellate Division of the Regional Commissioner's Office. All of the divisions of the National Office, the Regional Commissioners' Offices, and the Directors' Offices are further divided into branches, the branches into sections, and some sections into units. While the bare description of organization may suggest a duplication or triplication of functions, it should be stressed at the outset that functions at the two highest levels are principally those of planning, review, and direction—not operational as at the Director's level. (The accompanying diagram shows the functional relationships among the principal officers and divisions of the Service. An outline of the organization of the entire Service is given in Appendix A.)

OFFICE OF T H E DISTRICT DIRECTOR OF INTERNAL REVENUE

W I T H THIS general introduction a more detailed description of a District Director's Office will be given first, and its main divisions analyzed.

THE

ADMINISTRATIVE

DIVISION

The Administrative Division consists of three branches, which are concerned solely with office maintenance, not with tax administration: The Budget and Finance Branch is charged with preparing plans for the operating cost of offices in the district, the maintenance of personnel payrolls and all office accounts, and the examination of vouchers for expenses incurred. Since taxes collected must be deposited within twenty-four hours and can never be used by the office itself, Congress appropriates each year for support of the Service an amount of money which is apportioned among its several offices. All costs of operation must be met by an allotment from this fund. The Personnel Branch conducts interviews with applicants for positions; keeps a personnel file for each employee; gives notice of promotions, discharges, retirements or other changes in status. When a new employee is needed, the branch advises the local officer of the Civil Service Commission, which supplies applicants for selection from its rolls. All employees of the Service must have civil service status

ADMINISTRATIVE DIVISION

except the Commissioner and the lawyers of Chief Counsel's Office. At intervals the Civil Service Commission holds examinations for all types of Federal positions under civil service, and maintains in the principal cities lists of those persons found qualified and desirous of employment in a specified locality. In response to the notice of a vacancy the Commission officer sends the three on his list showing the best qualifications for the particular position to the Personnel Branch for interview. T h e Personnel Branch normally calls into the conference the chief of the branch or section in which the vacancy exists, and one of the applicants is usually chosen, subject to a character investigation by the Regional Inspector. Thus, there is no rigidity in the employment policy, and many who pass the civil service examinations are never hired. At the same time no one can successfully apply for a position unless he has demonstrated the minimum qualifications which the Civil Service Commission prescribes for it. Once employed, the applicant is eligible for promotion to higher grades, but the Personnel Branch must demonstrate to the civil service officer that the employee has had the experience or additional training which the Commission has prescribed as minimum qualification for the higher position. T h e r e is not, however, an additional examination. T h e new employee is on probation for the first year of employment and may be summarily dismissed if found unsatisfactory. After a year he may not be dismissed without an opportunity to contest written charges against him. Decision on dismissal is made by the Regional Commissioner or one designated by him. T h e Miscellaneous Service Branch is the procurement office for supplies and equipment, for the storing and distribution of them, and for general maintenance of the premises.

148

THE

O F F I C E O F T H E DISTRICT

COLLECTION

DIRECTOR

DIVISION

T h e Collection Division is a major operational unit of the Director's office. It is divided into four principal branches: the Cashier Branch, the Returns Processing Branch, the Accounting Branch and the Delinquent Accounts and Returns Branch. The division receives and accounts for all taxes, interest, and penalties collected. CASHIER BRANCH

In the Cashier Branch, where its functions begin, all returns are filed, all stamps are sold, and all payments are received. As the great majority of returns are sent by mail and are normally accompanied by checks (usually uncertified) in payment of tax, all mail for the entire Director's Office is delivered to the Mail Unit of the Receipts and Deposits Section of this Branch. In an average office, e.g., Baltimore, Maryland, the volume may reach two hundred large mailbags a day. T h e mail is opened by this unit, and the date of receipt is stamped on each piece. Those accompanied by remittances, that is, tax returns and tax bills (called Statements of T a x Due), are segregated from other documents and letters and sorted by type of tax. Correspondence is assembled by subject matter and distributed to the proper office for attention. All returns not accompanied by remittances are sent to the Returns Processing Branch. Returns and bills accompanied by remittances pass to the Receiving and Clearing Unit of the Receipts and Deposits Section. In the Receiving and Clearing Unit the amount of remittance (check, money order, or other payment document) is compared with the amount shown due on the return or bill, and if equal to it, a blue circle is drawn around the figure on

COLLECTION

DIVISION

>49

the return or bill; if not equal, then the amount remitted is written with a blue pencil near the top of the document. T h e fully paid are referred to as "perfects"; the others as "imperfects." A l l returns are then carefully sorted into groups for convenience in further processing: by type of tax; by "perfects" and "imperfects"; by inclusion of Schedule C (Business) or Schedule F (Farming). There are further segregations by amounts of income reported. A n identical number is stamped on each return and the accompanying payment document. T h i s number consists of six or seven figures (or figures and letters) which serve as symbols indicating the various sorting segregations—except the end figures which are in numerical sequence. As returns are processed and filed in bundles of 100, these end figures aid in locating the return in the bundle. T h e stamped number becomes the taxpayer's account number for that year, and appears on an index card bearing his name. These cards are alphabetically arranged in a reference file. After the numbering, the checks and returns are passed to the Deposits Unit of the section. It occasionally happens that currency is enclosed with a return. In such case currency and return are sent to the Window Tellers Unit where a receipt is prepared and mailed to the taxpayer. Some returns are presented at the window and payment made there in cash. A receipt is given the taxpayer and a duplicate receipt retained. T h e returns are then sent to the Receiving and Clearing Unit where they are sorted with others received with enclosed remittances. Sometimes remittances are received by mail without accompanying returns or letters which identify the tax to which they are to be applied. These are segregated as "unclassified"; the checks are passed to the Deposits Unit and a voucher containing all available data is prepared and sent to a Suspense Accounts Unit in the Accounting Branch

150

OFFICE OF THE DISTRICT DIRECTOR

where research, an inquiry, or later correspondence with the taxpayer usually provides a basis for proper crediting. In the Deposits Unit amounts credited on fully paid returns are listed on Form 23E (an assessment list) and those credited on "imperfects," on Form 813. Remittances are listed on Form 783. T h e two totals must, of course, be equal, and their correspondence confirms the accuracy of the day's operations. T h e checks are detached from the returns, endorsed to the Treasurer of the United States, and together with cash collected at the windows, must be deposited in a Federal Reserve bank or other authorized bank within the day. A deposit certificate, to be signed by the bank, is prepared in quadruplicate: one copy for the Treasurer, one for retention by the depositary, one for the Collection Division of the National Office, and one for the Director's files. A recapitulation of the day's collections by types of tax is prepared on Form 784; and a monthly report on Form 49 is sent to the Collection Division of the National Office, showing the past month's deposits. It occasionally happens that checks are returned uncashed by the bank for lack of funds to the drawer's credit. These too are channeled to the Deposits Unit which communicates with the taxpayer in an effort to make collection, and if no collection results sends a notice of each bad check to the Accounting Branch for cancellation of credit. A debit voucher on Form 5504 is sent the bank, and the total amount of returned checks is reflected as a deduction in the day's recapitulation of collections. T h e returns and bills from which checks have been detached are assembled in bundles of 100 each, covered by a registry sheet. Entries are made in a cashier's journal to reflect the day's work, and recapitulations are prepared of the registers and deposit certificate. T h e returns, accompanied by Forms 23E and 813 are then sent to the Returns Process-

COLLECTION

DIVISION

'5'

ing Branch; the journal and notice of bad checks are routed to the Accounting Branch. In preparing lists, endorsing checks, and in other operations, machines are extensively used. Under the assistant head of the Cashier Branch are the window tellers and the stamp tellers. It has been noted above that the window teller receives returns personally presented for filing and payments tendered. He issues the taxpayer a receipt for monies paid, stamps "Received with Remittance" on the return, bill, or other document, and transmits them to the assistant cashier. Returns on which no tax is paid, letters and other documents handed in without money, are sent to the Mail Unit. The stamp teller is charged with the custody and sale to properly authorized purchasers of all types of stamps used in the payment of taxes. It will be recalled that certain stamps may be sold only to registered manufacturers or dealers; others only on certificate of the Collector of Customs that taxable goods have been imported by the applicant. The teller requisitions his supplies, as needed, from the Stamp Section, Collections Accounting Branch, Collection Division of the National Office. He prepares schedules of damaged and unused stamps returned, for which credits are claimed. He, of course, keeps detailed daily records of stamps received and sold and of balances on hand, and sends a daily report to the cashier. It was mentioned above that in the lesser cities and towns of a Director's district there are branch offices of varying size directly dependent upon the principal office. Usually each has a teller who receives returns, accepts tax payments and sells stamps. T h e branch teller, however, mails each day to the Director all returns filed with the checks attached. He either deposits cash paid to him (sometimes checks, too) or purchases with it a bank draft in the Director's favor which

»52

OFFICE OF T H E DISTRICT DIRECTOR

he also transmits. T h e documents, deposit certificate or draft are covered by adequate descriptive sheets, and upon receipt at the Director's Office the returns are processed and the collections accounted for as in the case of returns filed and money paid there. T h e cashier at a branch office requisitions his stamp supply from the Cashier Branch of his Director, and sends in a monthly report of stamp and cash transactions. RETURNS PROCESSING

BRANCH

T h e Returns Processing Branch comprises two sections, each of which is divided into three units. Returns and other documents pass in and out of this branch at various stages for specified attention so that the following description of functions will in many instances relate to returns and other documents that have been the subject of mathematical verification, collection efforts, litigation, and other action, which remain to be described. It can be said in general that this branch takes care of administrative detail of a routing nature, relieving other branches and divisions of burdensome checking, reference, and recording. T h e Computation, Verification and Matching Section consists of the Computation, Verification and Matching Unit, the Calculating Machine Unit, and the Stenographic and Typing Unit. In this section returns and other documents are examined for the detection of errors such as miscalculations and discrepancies in reports, and when necessary, the amount of tax, interest, and penalties due are computed. It will be recalled that returns and tax bills accompanied by remittances are channeled from the Mail Unit to the Receiving and Clearing Unit in the Cashier Branch for attention. Returns and other documents unaccompanied by remittances are sent from the Mail Unit directly to the Computation, Verification and Matching Unit

COLLECTION

DIVISION

153

of this section. T h e r e they are sorted, classified, and stamped with account numbers of symbolic significance just as the others are in the Receiving and Clearing Unit. A n d the others too, after having been channeled from the Deposits Unit to the Accounting Branch for proper crediting of payments to the taxpayers' accounts, are sent to this unit, already classified and numbered. Besides returns the Unit also receives from other offices numerous documents on which action has been taken or is proposed, such as applications for exemption, for registry of factories and warehouses, and notices of additional assessments. A number of operations are performed, varying according to the character of the return or document. A l l figures that are supposed to agree are examined for matching. Thus, the amounts shown as wages paid and tax withheld by the employer on Form W-2 accompanying the individual return, Form 1040 or 1040A, are compared with the corresponding amount reported on the return. T h e r e is a mathematical check of all calculations on returns. T h e taxpayer filing Form 1040A (income of less than $5,000 from wages) is not required to compute his tax; the computation is made in this unit. In the case of returns filed after the due date and payments on returns or bills tardily made, the amounts of interest and additions (penalties) are computed here. Similarly, determinations resulting from audit, investigation, litigation, agreed settlement, and the like, in other divisions and branches, are sent here for interest and penalty computations; likewise refund claims, approved for payment, on which interest is due the taxpayer from the government. T h e unit maintains "master lists" of employment and excise taxpayers in the various categories, containing the names and addresses of those who filed a return of one of the several types for the preceding year. As returns are re-

154

OFFICE

OF T H E

DISTRICT

DIRECTOR

ceived, the filers' names are checked off the list so that names remaining after the due date can be readily assembled as possible delinquents. A small metal plate, embossed with the taxpayer's name and address, is prepared for use in addressing communications to him. If the current year's return shows a new address, a corrected plate is substituted for the old one. T h e information returns, Forms W-2, are detached, sorted, and with the employer's corresponding statements, Forms W-2a, are sent by this unit to the Processing Branch (of the National Office, not of the Director's Office) at Kansas City, Missouri, where all information returns are assembled for a general checking program; those showing discrepancies are returned for attention by the Audit Division. T h e irregular returns—those disclosing errors in computation or lacking a requisite form or schedule—are sent to the Stenographic and T y p i n g Unit where an appropriate letter (often a form letter can be used) is prepared and sent to the taxpayer. Returns for which the mathematical check is very complicated—for example, Form 1 1 2 0 (corporate), 1 1 2 0 EP (excess profits), estate and gift tax returns, and Form 1040A, on which tax must be computed—are sent to the Calculating Machine Unit for attention. Most other returns are sent after processing to the Accounting Branch for proper recording and crediting of payments. Some, however, such as Form W-3 (the employer's listing of all taxes withheld by him) and certain nontaxable returns are sent directly to the Returns Files Unit. It is also to be borne in mind that many of these returns after audit and after investigation or litigation will be transmitted back to the Computation, Verification and Matching Unit for interest and penalty computations. After any final operation they are all sent to the Returns Files Unit.

COLLECTION

DIVISION

I 55

In this general survey of functions many minor operations are not mentioned. It is well to note a few for illustration. Forms SS-4 (employer's registration application, employment taxes) are routed to the Miscellaneous Service Unit where identification numbers are assigned. Requests for extending time for filing are sent to the Stenographic and Typing Unit for the reply. T a x exemption applications (by an educational institution, for example) are sent to the National Office. Likewise, required duplicates of information returns relating to Social Security taxes such as wage and self-employment schedules and employer's registries (SS-4) are sent to the Department of Health, Education and Welfare; those relating to railway employees (Ct-i and Ct-2) to the Railroad Retirement Board. Closely associated with the Computation, Verification and Matching Unit is the Calculating Machine Unit, to which the former passes the complicated returns and additional assessment notices that cannot be visually verified with speed. Interest computations are often referred to this unit. The use of machines varies according to the size of the office. The most remarkable machine, the electronic calculator, is used in large offices to compute the tax payable or refundable 011 Form 1040A. The data on these returns consists of the taxpayer's name, address, and account number, the number of his exemptions ($600 each for himself, wife and each dependent), the amount or amounts of wages received from his employer or employers, other income (under $100) and the amount of income tax paid by withholdings from wages. All of this data is transferred to small cards, measuring about 3% by 7% inches, by machines which punch small holes in the cards. The returns, in bundles of 100, are transcribed twice to cards by different punch-machine operators. T h e two packs of 100 are then run through a verifying machine which automatically in-

156

OFFICE OF THE DISTRICT DIRECTOR

serts a thin pink sheet of paper between any two cards which should contain holes identically spaced but do not. In this way errors in transcription are detected, and correction is made. T h e cards are then fed into the electronic calculator which totals the income, subtracts the proper amount of exemptions, computes the tax .due, and subtracts the amount of tax withheld. If the tax due is more than that withheld, the machine automatically prints in the taxpayer's name and address and the additional amount payable on printed notice cards inserted within it. If the amount withheld exceeds the tax due, it stamps the amount of the excess on a second group of cards which serve as refund vouchers. T h e ink and arrangement on the card is such that the check can be prepared from the card. If the tax withheld equals or approximates the tax due within one dollar, the punch card is deposited by the machine in a receptacle beneath it, and the card is similarly used to prepare a notice to that effect which is sent the taxpayer. No refund or demand for payment is made. T h e electronic calculator performs all the multiple calculations and other operations at the rate of 100 punch cards a minute. After removal of the cards and preparation of the notices and checks, the cards are again used for preparing address slips which are inserted in envelopes containing transparent paper over the space containing the taxpayer's name and address. Return forms for the following year are inserted in the envelopes and mailed at the proper time. During the operation the electronic calculator also prepares a sheet listing the taxpayers, segregating them into deficient, even (within the $1 range), and refundable, and totals the taxes due and the refunds, thereby relieving the Accounting Branch of much labor. T h e punched cards are thereafter run through a sorting machine which arranges thein

COLLECTION

DIVISION

157

alphabetically and then through an interpreting machine which transcribes the data indicated by the holes (including name, address, and account number) into letters and figures on index cards ready for filing. Many other types of machines are also used, not only in the Calculating Machine Unit but in other offices. In the case of "perfect returns," for example, accounting is done entirely by machines; in the case of "imperfects" and other irregulars personal attention is necessary to a large extent. Mail is rapidly opened by a machine; checks are endorsed by a machine; in the compilation of statistics machines are used, and their use is steadily increasing. Because of the great cost of the large types, however, it is not found economical to purchase or rent them in small offices where the volume of work would not keep them in steady operation. T h e Stenographic and Typing Unit has duties which its name implies. It also prepares the proper form letters required and maintains a file of all correspondence of the branch on pending cases. T h e Returns Index and Service Section of the Returns Processing Branch performs functions akin to those of the Computation, Verification and Matching Section with regard to returns, applications, and the like, on which work has been concluded. It is divided into three units: the Returns Files Unit, the Card Index Unit, and the Miscellaneous Services Unit. T h e Returns Files Unit receives all returns, files and stores them in the bundles of 100, and answers requests for a filed return from any other office; it keeps charge records of returns sent out on request. A return desired is sought by consulting the alphabetical index cards of taxpayers; the account number and year are taken from the card, and are sufficient to enable this unit to locate the bundle in which the return is tied.

i58

OFFICE

OF THE

DISTRICT

DIRECTOR

For statistical purposes the National Office annually requires that "sample" returns of income, estate, and gift taxes of a given year be transmitted to the Statistical Division in Washington for use in the compilation of data of economic and financial interest. T h e "sample" returns are those bearing arbitrarily chosen account numbers: two numbers in a thousand income tax returns of the serials indicating that less than $10,000 gross income was reported; five in a hundred of the serials used for those on which between $10,000 and $30,000 was reported and so on. From these samples numerous tables are prepared of value for administrative and legislative planning. T h i s unit transmits the returns bearing the indicated numbers, which are later sent back to the office from which they came. Alphabetical files are maintained for Forms W-3 (employer's summary of withheld taxes), employment and excise tax returns, duplicate estate and gift tax returns, and "guide cards" of employers subject to employment taxes and applications to register. Returns are sent to the files, of course, only after operations connected with them are considered completed. T h e Card Index Unit maintains the alphabetically arranged index cards which bear the taxpayers' names, addresses, and account numbers, including certificates of registration, and cross references. A revenue agent, for instance, wishing the return of a taxpayer for a year prior to that under investigation would request this unit to supply the account number whereby the Files Unit could locate the return. Because the Miscellaneous Service Unit not only prepares the guide cards for returns, but also the metal plate on which the taxpayer's name and address is stamped by an addressograph machine, all returns received are channeled through the unit at some stage of processing. It is the duty

COLLECTION

DIVISION

>59

of this unit to mail to taxpayers such items as return forms and bills for unpaid taxes, and in the case of income taxpayers, to prepare small papers bearing the names and addresses of taxpayers who filed returns for the preceding year or taxable period and to transmit these slips to the Processing Branch of the National Office at Kansas City, where two return forms of the same kind previously used, together with the appropriate instruction booklet, is packaged and mailed to the taxpayer—usually in J a n u a r y — f o r use in reporting his tax that year. These address slips are carefully grouped according to the form used by the taxpayer—1040, 1040A, Schedule C (business), Schedule F (farming)—so that the Processing Branch has merely to package a number of proper forms for each category, affix the address slips to them, and mail. In the case of notices for installments of estimated tax, employment taxes, and others paid quarterly or more often, the unit itself attends to the packaging and mailing. Of course, no taxpayer is excused from filing a return because he receives no form, and all forms may be obtained free at windows of the Cashier Branch, but the mailing of return forms has been found to exert a stimulating influence on taxpayers for voluntary compliance with filing requirements. T h e Miscellaneous Services Unit also makes a microfilm of all card indexes and accounting records. These films can be inserted in tubes which occupy a small fraction of the space required for the files, and when needed, the film can be examined, greatly magnified, under a glass screen. Microfilming permits an early destruction of returns with resultant economies in storage of records. T h e unit also operates the offices' photostating equipment. It receives for mailing from other sections of the office many documents such as tax bills and delinquency notices. It forwards returns and other

i6o

OFFICE OF THE DISTRICT DIRECTOR

documents required by the National Office and other Federal agencies. It processes applications for registry, and prepares plates with employers' identification numbers. ACCOUNTING BRANCH

The Accounting Branch of the Collection Division maintains accounts of all taxpayers and the general ledger of the office itself, and makes the preliminary examination of claims. A full description of its accounting system cannot be presented within reasonable limits, but an outline of the functions performed by the several sections and units will afford some idea of the general picture. The branch is divided into an Accounts Section and a Claims Section. The Accounts Section consists of seven units: control, bookkeeping, account card, adjustment, listing, bills and warrants, and suspense accounts. T h e Claims Section is not subdivided. The Accounts Section is charged with keeping the accounts. T o its Control Unit the tax returns, bills, and other documents on which tax is due, whether paid or not, are channeled. Those recently delivered are received under cover of the classifying sheets prepared in the Cashier and Returns Processing Branches; bad check vouchers, notices from the Suspense Accounts Unit of "unclassified" payments which have been identified for proper crediting, and recognized claims which have been certified for payment by the Claims Section are also channeled to the Control Unit. From these documents the unit staff enters in a journal the totals of each class of tax, the totals of credits and debits to be posted to each taxpayer's account, and prepares vouchers of transfer for accounts received from or sent to another Director's Office in cases where it appears that the taxpayer has changed his residence. Having recorded the day's accumulation of documents requiring accounting, the Control Unit

COLLECTION

DIVISION

passes the documents to the Listing U n i t ; and the journals and abstracts, to the ledger clerk of the branch. Lists or schedules of all returns filed are prepared in the Listing Unit. In the case of returns for tax payable in quarterly installments, e.g., the estimated income tax F o r m 1040ES, there are prepared with carbons on an electric typewriter the three bills for each of the three succeeding quarters (unless an amended 1040ES is filed, the installments are equal), an index card, and a mailing address slip. T h e index card is sent to the Card Index U n i t , the returns to the Returns Files Unit, and the other documents to the Miscellaneous Services U n i t for timely mailing. T a x a b l e returns on which the tax shown d u e is not fully paid are then transmitted to the B o o k k e e p i n g U n i t . T h o s e fully paid are sent to the A u d i t Division without channeling through the Bookkeeping Unit, since, if correct, no individual account need be set up for them. T h e unit also prepares for current income tax returns schedules of credits claimed and refunds which are sent to the Claims Section. Many of these refunds result f r o m excessive withholdings from wages reported on Forms 1040 and 1040A. In the Bookkeeping Unit an individual account is opened for each taxpayer whose return indicates more tax due than he has paid and also for those against w h o m additional assessments have been made. T h e account is debited with the total tax due and credited with payments, if any, made then and subsequently. It will be noted that the individual account card is not needed when the correct tax is reported and fully paid, but only in those cases where the payment is less than the tax reported or the tax reported d u e is increased after audit or investigation, or a claim for abatement or refund is allowed whereby the tax reported due is recognized as excessive. Of course, complete account data on the "perfect" returns is available from the assessment

16s

O F F I C E OF T H E DISTRICT

DIRECTOR

lists, Form 23E, and the totals for " p e r f e c t " returns, w h e n added to the totals due and totals paid on "imperfects" or adjusted returns, provide accurate summaries of total taxes due and total taxes paid. A c c o u n t cards prepared for those returns for which accounts have been opened pass next to the Account Card Unit where they are microfilmed and filed for control purposes. O n these cards subsequent payments are entered by the B o o k k e e p i n g U n i t , and when the account has been fully paid, written off as worthless, or otherwise closed, the card is removed to a closed-account file. Each month the open accounts are reviewed and report of outstanding balances is sent to the ledger clerk. H e prepares monthly analytical reports, Form 820, on the status of all the office's accounts and maintains a ledger for them. H e forwards monthly reports to the National Office. W h e n tax payable remains unpaid after the due date, the Bills and Warrants Unit, guided by the records in the Account C a r d U n i t , prepares and issues the requisite notices to taxpayers. It will be recalled that bills for installments of estimated income tax are prepared in the Listing U n i t and sent to the Miscellaneous Services Unit for timely mailing. Bills, on Forms 17 and 19 (Statement of T a x Due), are also prepared in this unit in such cases as the following: an amended return shows increase in tax due; a taxable return is unaccompanied by remittance or accompanied by a bad check; an additional a m o u n t of tax has been finally determined due. If no remittance is received within ten days, a second notice for payment is prepared and sent: T h e taxpayer is advised that unless payment is made within ten days, action for collection by distraint of his property will be taken. T h e s e are channeled through the Miscellaneous Services Unit for mailing. If no payment is received, the unit pre-

COLLECTION

DIVISION

163

pares a warrant for distraint of the taxpayer's property on Form 69, and other related documents, and sends them to the D e l i n q u e n t Accounts and R e t u r n s Branch for enforcement. T h e s e steps, like all others relating to the account, are fully noted in the A c c o u n t Card U n i t . If collection is made by distraint, it is noted on the card, w h i c h is then removed to the closed-account card file, and the payment is recorded by the B o o k k e e p i n g U n i t . T h e Suspense Accounts Unit receives from the R e c e i v i n g and Clearing U n i t in the Cashier Branch vouchers containing all available data about remittances received without a return, letter, or other d o c u m e n t indicating the tax to which it is to be applied. Sometimes even the remitter's name does not appear in the index cards. T h e remittances are deposited and credited to a "suspense account," which is held in trust for proper application. It is this unit's duty to ascertain by research in the files, by correspondence with the remitter if his address is k n o w n , or by any other means, the tax for which credit should be given. A journal and control records are maintained here for all unclassified remittances. T h e Adjustments Unit, like the Suspense A c c o u n t Unit, is concerned with accounts which require more than routine attention for a c c o u n t i n g purposes. W h e n adjustments are made in the a m o u n t of tax d u e — a s a result of audit, investigation, litigation, compromise, or agreed settlement—this unit receives and analyzes the record of the final action taken, and prepares a voucher showing the amount of credit or debit which should be entered on the taxpayer's account. It passes these vouchers to the Control Unit which routes them to the successive units concerned. T h e unit keeps a record of remittances accompanying offers in compromise of tax liability. T h e remittances are deposited by the Cashier in a Special Deposit Account (Form 209) for disposition in accordance with action on the

164

OFFICE OF THE DISTRICT

DIRECTOR

offer. T h e offers (Form 656) are numbered and recorded in the unit and forwarded to the proper office for decision. T h e unit also keeps a file on taxpayers w h o submit offers in compromise to be paid in installments. It sometimes happens that because of financial difficulties one may be unable to pay the full amount of a tax on the d u e date, and to prevent collection by distraint, offers to make payment of a stated a m o u n t at stated intervals. If this offer is accepted, the installments are credited as paid. T h e agreement is noted in the A c c o u n t Card U n i t . U p o n default in a payment, all remaining tax becomes immediately due and collectible by distraint. T h e unit also answers taxpayers' inquiries about their accounts, whether made by letter, telephone, or visit, and prepares certified copies of accounts for official u s e — i n a court proceeding, for example. It also maintains a file of accounts of taxes deferred for payment because the taxpayer is in military service and a check file on waivers, Form 900, by which the taxpayer agrees to extend the statutory time within which collection can be made. A taxpayer is often willing or desirous to do this if his liability is the subject of unfinished negotiations with a revenue agent or other officer shortly before expiration of the collection period. If he did not, the tax w o u l d be assessed before expiration, and his only redress would be by court proceeding. T h e Claims Section of the A c c o u n t i n g Branch receives from the Mail U n i t all claims of taxpayers (Form 843 is in most common use) for abatement or r e f u n d of taxes. For example, if the taxpayer believes that he erroneously reported more tax than was due, he seeks an "abatement" of the assessment if he has not already paid more than he thinks due, or a " r e f u n d " if he has paid more. T h i s unit checks the adequacy of f o r m and presentation of the claims and advises the taxpayer if he has prepared the f o r m in-

COLLECTION

165

DIVISION

correctly or if, on the face of the form, additional information is necessary. T h e unit assembles the return and any other pertinent documents and information, and transmits them to the Audit Division or to the National Office for consideration. Like the Adjustment Unit, it prepares vouchers setting forth the final action on a claim, passing them to the Control Unit for recording and the usual routing. It also prepares schedules of abatements, credits, and refunds granted, and answers taxpayers' queries about their pending claims. After decision the claims are sent back to it. Rejected abatement claims are channeled for notation through the Account Card Unit to the Bills and Warrants Unit for issuance of collection notices. D E L I N Q U E N T ACCOUNTS AND RETURNS

BRANCH

T h e Delinquent Accounts and Returns Branch is charged with the enforcement of collection against taxpayers who fail to make voluntary payments of taxes assessed and with the procurement of returns from those who fail to file. It is divided into a Delinquent Accounts and Returns Section, a Special Procedures Section, and an Alien T a x Section. T h e Delinquent Accounts and Returns Section receives from the Bills and Warrants Unit of the Accounting Branch a group of prepared forms for use in enforcing collection against delinquent taxpayers. The documents consist of a Warrant Letter (Form 21-A) giving notice of the intended action; the Warrant for Distraint (Form 69); a Warrant History Sheet (Form 69-A) for recording action; and a Record of Warrants for Distraint on two cards (Forms 824), which serve for record and controls. The delinquent taxpayer at this stage has already failed to heed a tax bill and a second notice demanding payment. T h e Warrant Letter, threatening action, is now sent him by this branch and if no response is received within twenty days, the warrant is assigned to a

166

OFFICE OF THE DISTRICT DIRECTOR

collection agent. This officer first tries to get in contact with the taxpayer and induce him to pay. If he fails in this attempt, he then tries to locate property of the taxpayer which can be "distrained" (seized); to ascertain his employer, if any, and the amount of his salary; to find persons who owe him money or hold property belonging to him. In carrying out this investigation the agent has authority to serve a summons requiring the taxpayer or anyone having knowledge of the taxpayer's property to disclose it and to display any records or documents relating to it. After discovering property, the agent proceeds to execute the warrant for distraint—for example, by levying on a bank balance or by seizing specified property or by attaching salary. If, on the contrary, no property can be found and if the taxpayer has no salary and his prospects do not offer any probability of collection, the agent recommends that the account be written off as worthless. It may happen that the taxpayer claims inability to make payment or requests the privilege of paying in periodical installments or proposes to pay a part in compromise of the full liability. In all such cases the agent endeavors to procure financial statements, to compile a complete report of the taxpayer's condition, and recommends appropriate action. If a distraint action is considered advisable, the agent seizes and lists personal property which the taxpayer owns, and after giving a list of the property to the taxpayer, advertises a sale of it in a newspaper in the county. The sale is held not less than ten or more than fifty days after the date on which the owner or possessor of the property is notified of it and at a place within five miles of where distraint was made. The agent himself may act as auctioneer or he may engage a professional auctioneer to sell. Proceeds of the sale are applied to payment of the sale costs, taxes, interest, and penalties due; the remainder, if any, is given to the tax-

COLLECTION

DIVISION

167

payer or other person having valid claim to it. If there are no bids, the auctioneer may declare the goods purchased by the United States, and turn them over to the Director, who can sell them at public auction at a later date. Collection may be made from the taxpayer or levy may be made on anyone else who has property of the taxpayer in his custody. T h u s , a levy may be served on a bank which is obliged to pay over any money or securities on deposit with it to the taxpayer's credit, or on a warehouse company with which the taxpayer had stored property. When personal property is sold, the agent is authorized to issue to a purchaser a certificate of purchase which is valid to transfer title, and to the holder of the taxpayer's securities, notes or evidence of indebtedness, a receipt which is valid against all claims. In the case of real estate sold, a certificate of purchase is given the purchaser by the agent, but the taxpayer, or anyone having an interest in the property or a lien on it, may redeem and reacquire it within one year of the sale by paying the cost of it to the purchaser plus 20 percent interest. If the real estate sold in this way is not redeemed, a quitclaim deed is issued to the purchaser on expiration of the year. A person (and person in this connection includes companies and other legal entities) who owes money to the delinquent taxpayer or holds property of the taxpayer, is served with a levy (Form 668-A), which sets forth the amount of the taxpayer's obligation and demands delivery of monies due or property of the taxpayer in his possession. Upon failure to comply, a "Final Notice and Demand" (Form 668-C) is served in which is quoted the Code section definin 0 the Director 's right to such monies and property, and the addressee is advised that if he fails or refuses to deliver within five days, action will be taken to seize his own property in an amount equal to the taxpayer's obligation

i68

OFFICE OF THE DISTRICT DIRECTOR

or the value of the taxpayer's property that is or was in his possession to the extent of the obligation. If he still fails or neglects to turn over the property, a suit may be filed to enforce the levy. In the exercise of powers available for enforced collection a lien lies in favor of the United States for the amount of taxes, interest, and penalties remaining unpaid after demand, but it is not valid against any mortgagee, pledgee, purchaser, or judgment creditor until it has been publicly recorded. T h e effect of the recording is that the taxpayer's listed property is pledged for the payment of tax, and he cannot validly dispose of it. If he should do so nonetheless, the property could still be seized for his taxes. A recorded lien, of course, adversely affects credit standing and prevents any dealing in the property. When full payment of tax and interest has been made, a full discharge of the lien, on Form 669, is issued. T h e taxpayer may procure discharge of a lien by giving an acceptable bond to secure payment of the amount due. He may also secure the release of a specific piece of property from the effect of a lien by paying the Director an amount equal to the value of the interest of the United States in the property. Because of the protection afforded by a lien, account is taken of the probable effect which an immediate seizure of property might have on the taxpayer's business or means of livelihood, and as stated above, the taxpayer may be permitted to pay the amount due in installments. Thus, the operator of a laundry, having no substantial assets other than his business premises and equipment, might be forced to discontinue his business if those assets were taken. Another function of the Delinquent Accounts and Returns Section is the securing of returns from those who fail to file voluntarily. If investigation discloses taxable income of such a person, the agent invites him to file a return, and

COLLECTION

DIVISION

169

if he fails to do so, the agent prepares a return for him on the basis of such information as he can gather. T h i s information may be bank deposits, purchases of securities or of real estate; there may be evidence indicating deductible expenditures, or the repayment of loans, or mortgages on property purchased. T h e agent always invites or summons the taxpayer to a conference, and sometimes procures more information as a result. But if the taxpayer is hostile and uncooperative, if he denies keeping any books and records, and refuses to explain the source of bank deposits or money used for purchases, the agent may make a computation of annual increase in net worth, reflecting in it receipts and disbursements uncovered in the character which they seem to have and subtracting deductions and exemptions indicated by the evidence. O n the income so determined he computes the tax, and adds a penalty of 5 percent for each thirty days of delay up to a maximum of 25 percent for failure to file a return and the 50 percent penalty for fraud. T h e return is filed, and assessment and collection made in the usual manner. T h e Field Clerical Force, closely associated with the above section, not only renders it the necessary clerical services, but also is responsible for sending proper notices to the taxpayers, arranging conferences, checking taxpayers' addresses, and periodically re-examining accounts which have been reported as uncollectible. It serves in general as a mentor to prevent the overlooking of timely action in installment payment cases. T h e Special Procedures Section is assigned collection cases complicated by court procedures in which timely claim or investigation by the Director is necessary to secure payment of tax and protect certain rights of priority for tax collection over unsecured creditors. If the taxpayer is in bankruptcy or receivership, or being insolvent, has made

1^0

OFFICE

OF T H E DISTRICT DIRECTOR

an assignment for the benefit of creditors; if a corporation is in dissolution; if a taxpayer has died and his estate is subject to administration and orders of a probate court, a multitude of legal and technical steps are necessary to insure recognition and payment of taxes due. It is this section's duty to prepare the records and evidence so that proper tax claims may be formally presented. It also makes recommendations to institute suits for the collection of taxes; it reviews and analyses summons and complaints in suits for refunds brought against the Director; and it collaborates with the attorneys representing the government in tax cases, supplying explanations, documents and testimony when needed. The Alien Tax Section receives and examines the returns, Forms 1040 c , and collects tax due, if any, from departing aliens. All aliens are required to file an income tax return and to pay the tax due within a few days of their departure from the United States. The section issues a certificate of compliance to those who have discharged this obligation (the certificate is required before departure is permitted). This section has under it agents at all the principal ports. T H E AUDIT DIVISION

While the Collection Division is responsible for receiving and accounting for monies voluntarily paid in as taxes, the Audit Division is charged with the examination, investigation, and correction of returns. The work of this division involves great numbers of decisions on the amount of tax due. T o insure consistency and provide a unified operation, the review staff (described in connection with the Office and Field Audit Branches), considers and passes on all reports

AUDIT DIVISION

1 71

and recommendations of the revenue agents, and prepares the notices of determinations. OFFICE AUDIT

BRANCH

T h e Office A u d i t Branch receives from the Collection Division individual income tax returns, Forms 1040A and 1040, on which none of the income reported represents the profits of a business; wage and excise tax returns not selected for examination by agents of the Field Office Branch; and returns of nonresident aliens and foreign corporations. It also receives reports and information on taxpayers which may be supplied by informers, its own agents investigating another case, or agents of the Intelligence Division. T h e s e reports are associated with the returns. T h i s branch handles the types of returns which can be investigated by correspondence or interview at the office. For administrative purposes it is divided into sections: Individual and Corporation Income T a x and W a g e and Excise T a x . It receives no estate or gift tax returns. T h e Individual and Corporation Tax Section examines all individual income tax returns (nonbusiness), and also simpler corporation returns which the Field A u d i t Branch refers to it if it appears that adequate investigation can be made by office interview or correspondence. It also receives for such investigation income tax returns filed by nonresident aliens, foreign corporations, nonresident citizens, and domestic corporations that keep their books in a foreign country, and in addition, claims for refund. Agents of this section audit the returns, and investigate each one on which adjusted gross income of $50,000 or over is reported (an investigation of such taxpayers is required once every two years). Because it is possible to investigate only a small percentage of the other returns, the object of

179

rector may proceed, after giving ten days' notice, to use all his legal remedies for collection of the balance. He can do this because the full amount reported is entered on the assessment roll. But if examination or investigation indicates that additional tax is due, this addition will not be assessed until the taxpayer has been afforded all the rights of review provided by the Code. Thus, no taxpayer need pay the additional tax if he wishes to contest a determined deficiency in income, estate, or gift tax before the T a x Court until the Court's judgment becomes final. In respect of other taxes, review ends in the Appellate Division. When the Court's judgment has become final or when the administrative conferences have ended without appeal to the T a x Court and the ninety days have expired or when the taxpayer has agreed to earlier assessment, then and then only are the deficiencies "assessed" and the Director may proceed to collect. There is one exception to this: a jeopardy assessment may be made sooner as an emergency measure if there is reason to believe that the taxpayer is seeking to conceal his assets or otherwise evade payment of a deficiency that may be held due, but the jeopardy assessment does not deprive him of any review right. In the course of the conferences in the Audit Division and those in the Appellate Division, which will be later described, the taxpayer is entitled to be accompanied or represented by counsel. T o be recognized as a representative, however, the counsel must hold a power of attorney from the taxpayer to act for him, and in addition, a card evidencing his right to practice before the Treasury Department. Such card is issued to an applicant attorney or accountant only after investigation by an agent of the Intelligence Division discloses the applicant's ethical fitness to represent clients. In case of subsequent malfeasance the card is re-

l8o

OFFICE

OF

THE

DISTRICT

DIRECTOR

voked. T h e Review Staff maintains for reference a file of those authorized to represent clients. THE

INTELLIGENCE

DIVISION

T h e Intelligence Division conducts the investigation of cases in which fraud is suspected. It consists of the T a x Fraud Branch and the Special Investigations Branch. When a revenue agent of the Audit Division uncovers evidence which leads him to believe that the taxpayer under investigation has endeavored to evade tax by a fraudulent return, misrepresentation, or concealment (by failing to file any return, for instance), and the Intelligence Division agrees that there is reason to suspect fraud, a special agent, as the investigators of the Intelligence Division are called, is assigned to cooperate in the investigation. T h e revenue agent collaborates with the special agent when needed, and drafts technical tax findings and recommendations which the Review Staff of the Audit Division uses to prepare a deficiency notice (the ninety-day letter) to the taxpayer. If the Intelligence Division itself initiates a case, the cooperation of a revenue agent is requested for the investigation. TAX FRAUD BRANCH

T h e T a x Fraud Branch of this division receives cases referred by the Audit Division and also initiates cases. All the means described above for forcing disclosures from the taxpayer or persons having knowledge of matters affecting the taxpayer's taxable income are available to the special agents. T h e i r investigations, however, are more detailed and usually cover more years than those of the revenue agents. Investigations initiated by the branch are based on data obtained from various sources, such as voluntary informers who report evasions. A very large number of these reports

INTELLIGENCE DIVISION

l8l

are received in all offices, and promptly routed to the Intelligence Division. Some come by telephone, others by letter. There are anonymous reports and signed reports. If the informer does not expressly authorize the use of his name, his identity is kept scrupulously secret. Some offer to collaborate with the special agents, and a fund is available for the reward of those whose services have been very valuable. Although the informant has no enforceable right to a reward, this branch will consider his claim for one and make a recommendation with regard to it. Many reports of evasion are false, based on mere suspicion or prompted by malice. The plausibility of each is carefully considered before action is taken. Many, however, are well founded and give leads that result in quick detection. After completing an investigation, the special agent prepares a report of it, and if prosecution is not contemplated, he calls the taxpayer to a conference and endeavors to get his agreement to the proposed taxes and penalties, as the revenue agents do. At all conferences the taxpayer is entitled to be accompanied by counsel or have counsel represent him. The reports are passed to a review staff of the division for approval or modification. Each contains a recommendation as to prosecution, fraud penalties, and civil liability, and in cases where court action is necessary, the special agent assists the United States Attorney in preparing the evidence after approval of the report by Enforcement Counsel and the Department of Justice. The branch may also recommend a jeopardy assessment. The Tax Fraud Branch investigates the character of attorneys and accountants who apply for enrollment to practice before the Treasury Department and charges of improper conduct made against those enrolled. If the charges are found justified, the person will be deleted from the roll, and will not thereafter be recognized as counsel for anyone.

i8a

OFFICE

SPECIAL INVESTIGATION

OF THE

DISTRICT

DIRECTOR

BRANCH

T h e Special Investigation Branch of the division performs functions similar to those of the T a x Fraud Branch, but specializes in cases involving racketeers, criminal gangs, and enterprises engaging in accepting bets and wagers on horse racing and other forms of gambling. In short, this branch seeks to uncover for tax purposes the profits of organized crime, or of individual criminals. A L C O H O L AND T O B A C C O

TAXES

Taxes on alcohols, liquors, wines, beer, and on tobacco products, it will be recalled, are collected principally by the sale of stamps and certificates which are procured from the Cashier Branch in the Director's Office, and payment is received and accounted for by that branch. Proper enforcement of these taxes is carried out not so much by an audit and investigation of returns as by the supervision and regulation of manufacture and sale. This enforcement is a function of the Assistant Regional Commissioner, Alcohol and Tobacco T a x , of the Region under which the Director falls, and his duties will be later described. For administrative purposes the country is divided into thirty-seven Districts in which a Supervisor in Charge under the Assistant Regional Commissioner is responsible for the investigation, prevention, and detection of violations of the tax and regulatory laws relating to alcoholic and tobacco products and to firearms. T h e investigators and inspectors prepare reports of violations for the Regional Commissioner's Office; apprehend violators and prepare evidence against them for the United States District Attorney in cases selected for prosecution. They are also responsible for the seizure, custody, forfeiture, and disposition of contraband

APPELLATE

DIVISION

] 83

or other seized property in accordance with law and regulations or court order and for control of the flow of raw materials used in manufacture. But the stamps and certificates are sold in the Director's Office; assessments when necessary are made there, and the Director accounts for all collections of tax.

T H E A P P E L L A T E DIVISION

In conjunction with the Director's Office but wholly independent of the Director, the Appellate Division operates as an appeal agency for the review of determinations of tax liability which have been made by the Audit Division. T h e personnel of this division is under the Assistant Regional Commissioner (Appellate) of the Region in which the District lies. As previously outlined, a taxpayer who cannot reach an agreement with the Audit Division may file a sworn protest to the adjustments proposed and request transfer of his case to the Appellate Division or he may secure the issuance of a deficiency notice (the 90-day letter) and file a petition with the T a x Court. In either event the case is transferred to the Appellate Division which has authority to settle it. If the case is pending before the T a x Court, however, Appellate Counsel must concur in the settlement. A case transferred to the division is assigned to a staff member for study of the facts and issues of law in dispute. For advice on the legal issues involved, the services of Appellate Counsel are available. If the case is one in which no petition has been filed with the T a x Court, the staff member arranges an informal conference with the taxpayer. T o it the taxpayer may bring witnesses to assist in establishing facts and may submit any documents and arguments which he chooses in support of

184

OFFICE OF THE DISTRICT DIRECTOR

his contentions. In the conference the taxpayer may be represented by counsel. He may allege facts not previously presented to the Audit Division, but if he does so, he must submit them under oath in the form of an affidavit. If they have an important bearing on the controversy, the Appellate Division may refer them to the Director for investigation by a revenue agent. If an agreement is reached, tax is assessed and collected in the manner previously described. If no agreement is reached and hence no settlement of the case is made, a deficiency notice (the 90-day letter) is prepared by the Appellate Division and mailed to the taxpayer. If the case transferred is one in which the taxpayer has filed a petition with the T a x Court and one which had not previously been considered by the Appellate Division, the taxpayer will usually be invited to discuss the possibilities of settlement. If, however, the case had been previously transferred to the division and considered by it, a further settlement conference will be arranged only if the taxpayer requests it. If agreement is reached, a stipulation of the amount of tax due, if any, reflecting the agreement, is filed with the Court which enters its judgment accordingly. If no agreement results, the case will be tried and decided by the Court. CLOSING

AGREEMENTS

A power of the division deserves special attention. By section 3760 the Commissioner and officials of the Service designated by him are authorized to enter into an agreement with a taxpayer with regard to the taxpayer's liability for any internal revenue tax for any taxable period. If the agreement is approved by the Secretary, Under Secretary, or an Assistant Secretary, it is final and conclusive unless it was procured by fraud, malfeasance, or misrepresentation of material fact. T h e function of the Secretary has been

A P P E L L A T E DIVISION

1 85

delegated to the Commissioner to approve such an agreement if it relates to a past taxable year and covers the total tax liability of that year. T h e agreement may cover total tax liability (Form 866) or one or more separate items affecting tax (Form 906). It may relate to a past taxable year or it may cover separate items if a liability of a current or future year is involved. By items is meant factors that enter into tax computation, such as the proper rate of depreciation on a building or machine, or the amount to be treated as the cost of property sold or to be sold. T h e purpose of a closing agreement is to give assurance to a taxpayer that his tax liability for a past year is settled with finality or that the official determination with regard to a separate item entering into tax computation will not be disturbed for the taxable year, or if the factor is recurrent, for future years. In respect of closing agreements covering total liability, it should be understood that in the absence of such an agreement an additional assessment of tax made after the investigation of a revenue agent does not preclude other investigations and additional assessments falling within the statutory period prescribed for making assessment. This period is three years from the filing of the return in the case of income tax; five years if the taxpayer erroneously omitted from his return an amount of gross income equal to 25 percent or more of that reported. A taxpayer who wishes to guard against any further changes and settle his liability once for all may seek to do so by a closing agreement. T h e Government will agree if there appears to be an advantage in the settlement: For example, the case may involve disputed issues on which both parties have made mutual concessions. T h e Government will also agree if the taxpayer in an undisputed case shows good reason for desiring the agreement: For example, the executor of an estate may wish a final settlement of taxes of the estate

186

OFFICE

OF THE

DISTRICT

DIRECTOR

so that he can be discharged by the probate court without awaiting expiration of the statutory period prescribed for assessment. T h e form, completed and signed by the taxpayer seeking such an agreement, is submitted to a revenue agent or member of the Appellate Division. T h e receiving officer and his superior will recommend that the request be accepted or rejected, and will transmit the form and supporting documents to the division of the National Office for consideration. If the proposed agreement is accepted, its terms will be carried out by the Director concerned and may not be annulled or modified by any court. COMPROMISES

By section 3761 authority is granted to the Commissioner to compromise tax, interest, and certain penalties for a lesser amount than that due. Compromises are not frequent, and with a few exceptions will not be accepted if criminal prosecution is contemplated or begun. A taxpayer should make the offer to a Director. Payments made on the offer are deposited in a special account by the Director for disposition according to action on the offer. In cases involving financial inability to pay, the taxpayer must submit a financial statement, showing all his assets and liabilities. T h e offer and related documents are sent to the Audit Division for investigation by revenue agents who later return them with a report of findings. T h e Director is authorized to reject an offer of any amount with the exception of those which involve taxes on alcohol, tobacco, firearms, and narcotics and of those which require the approval of the Chief Counsel's Office because of civil suit or criminal prosecution. He is authorized to accept an offer involving less than $500, with the exception of the types of cases previously enumerated and specific pen-

A P P E L L A T E DIVISION

187

alties. Offers made in respect of liability for taxes on alcohol and tobacco are transmitted not to the Audit Division but to the Assistant Regional Commissioner, Alcohol and Tobacco T a x , for consideration and recommendation; those made in respect of taxes on narcotics (with certain exceptions) to the Bureau of Narcotics for acceptance or rejection. Offers recommended by the Director for acceptance which involve liability in excess of $500 are transmitted to the Compromise Branch, Audit Division of the National Office for review, then to Chief Counsel's Office for a legal opinion, and finally to the Commissioner for approval. In accepting an offer in compromise the Director or Compromise Branch considers all evidence available concerning the taxpayer's inability to pay now or in the future, or concerning any doubts as to his liability. If liability is undisputed and probability of collection good, the taxpayer's offer will be rejected. If there is scant expectation of collection, it may be accepted, measured by his ability to pay if collection were enforced. Similarly, if disputed questions of fact or law throw substantial doubt on the liability itself, the offer may be accepted, measured by the degree of doubt. But hardship which full collection may cause or sympathy which it may excite are not factors to be considered. During the fiscal year 1 9 5 1 , 3,862 offers in compromise were received; final disposition was made in 3,338 cases—some received in the preceding year. Of this number 1,238 offers were accepted.

JUDICIAL REVIEW OF TAX DETERMINATIONS

described above, of proposed official determinations of tax by the group chief of the examining agent, the Review Staff of the Audit Division, and a representative of the Appellate Division are administrative functions performed by personnel who are employees of the Service and as such subject to the Commissioner. A taxpayer dissatisfied with the final decision reached by the administrative officers has in all cases recourse to courts which are entirely independent of the Commissioner and of the Secretary of the Treasury. If it has been determined that a greater amount of income, estate, or gift tax is due than was reported on the return, the taxpayer may seek a review by the T a x Court of the United States. If a deficiency in any other type of tax has been determined, it is assessed after administrative review, and the taxpayer must pay it. But if he has paid it or if he believes that he has voluntarily overpaid any type of tax, including income, estate and gift taxes, he may file a claim for refund, and upon rejection of the claim he may bring suit for refund in the Federal District Courts or the Court of Claims.

THE SUCCESSIVE REVIEWS,

TAX

COURT

PROCEEDINGS

Some account will first be given of the T a x Court and the procedure to be followed in presenting a case to it. After a taxpayer has received notice of a determination of a de-

JUDICIAL REVIEW

OF

DETERMINATIONS

189

ficiency in income, estate, or gift tax, he may, upon paying the ten-dollar filing fee, file a petition with the Clerk of the Court within ninety days of the date of the notice, and in such event no assessment or collection (except a jeopardy assessment) can be made until the Court's decision becomes final.* In his petition the taxpayer may charge error in some or all of the changes, deletions, or additions which appear in the letter of deficiency and also in entries on the return prepared and filed by him. H e may also claim that he overpaid his tax. H e must set forth briefly allegations of fact in support of each error assigned. Although most taxpayers have attorneys to represent them in T a x Court proceedings, a taxpayer may represent himself. In some cases qualified accountants appear for taxpayers. Before attorneys and accountants are permitted to represent taxpayers, they must be admitted to practice before the Court. Attorneys are admitted to practice on motion. Accountants and others must satisfactorily complete a written examination before they are eligible for admission. After a petition is filed, the Clerk of the Court promptly serves a copy on the Commissioner of Internal Revenue through his Chief Counsel, who must file an answer within sixty days. In his answer the Commissioner may admit or deny the errors and allegations of fact contained in the petition, and he may also make claim for tax in addition to that originally determined, alleging facts in support of an increased deficiency. In such event the petitioner must reply within forty-five days. Amendments to the pleadings, depositions, stipulations of fact, and so on, are permitted on motion in accordance with general judicial practice and the Court's rules. After issue has been joined, the case is set down for trial, and as the judges travel constantly to various parts of the • See section 42 of Supplement.

1 go

J U D I C I A L R E V I E W OF

DETERMINATIONS

country, the place of hearing is arranged as near as possible to accord with the taxpayer's request. Procedure is formal. A f t e r introductory statements by counsel, evidence is received in accordance with the rules applicable in the District of Columbia, and thereafter oral argument may be made, but is not often desired. Counsel may later present briefs. T h e Commissioner's determination of tax as set forth in the letter of deficiency is presumed to be correct and the burden of proving that a different amount is correct rests upon the taxpayer. T h e burden of proof, however, falls on the Commissioner (1) to establish fraud if a fraud penalty is asserted by him; (2) to establish transferee liability, i.e., the liability of one person for the tax actually owed by another (for example, the assets of a deceased person acquired by an heir or the assets of a liquidated corporation acquired by a shareholder may under certain circumstances be charged with an unpaid tax liability of the transferor); and (3) to support any claim for an increased deficiency beyond that asserted in the letter of deficiency. When the trial judge has reached his decision and prepared his report, usually consisting of findings of fact and an opinion, he transmits it to the Chief Judge, who in his discretion may promulgate it or submit it for consideration to a conference of the judges. Decisions involving new legal issues or those conflicting with other decisions of the T a x Court or higher courts are normally reviewed by the entire Court of sixteen judges, and the report is promulgated only if it receives a majority vote of the judges present. If it does not, the case is reassigned for a new report conforming to the majority's views. A l l opinions which are reviewed by the Court and singlejudge opinions considered to be of general interest are published officially in Reports of the Tax Court of the United

JUDICIAL REVIEW

OF

DETERMINATIONS

•91

States, or prior to 1943, in Reports of the United States Board of Tax Appeals.* Other opinions, known as memorandum opinions, are not published in the official reports, but they are collected and offered for sale by commercial publishers. A l l reports of, and indeed the entire records of, proceedings before the T a x Court, as well as the brief submitted to it, are public documents available for public inspection at the office of the Court in Washington.f After judgment is entered in accordance with the T a x Court's opinion, the taxpayer or the Commissioner may appeal to the United States Court of Appeals for the District of Columbia or to the Court of Appeals for the Circuit which has jurisdiction over the area in which the taxpayer resides. T h e Court of Appeals may affirm, reverse, or modify the decision of the T a x Court on any issue of law and on any finding of fact which lacks the support of evidence in the record of the proceeding. No new evidence, however, may be presented, but the Court may remand the case to the T a x Court for a further hearing and the taking of more evidence. If the taxpayer or the Commissioner is dissatisfied with the decision of the Court of Appeals, either may petition the Supreme Court of the United States to grant a writ of certiorari whereby the case is brought before it for review and final decision. Certiorari is not granted as a matter of right, but only if an issue is deemed of sufficient importance to warrant it; for example, a question of the constitutionality of a section of the Internal Revenue Code or a • T h e Court was formerly called the United States Board of T a x Appeals. T h e statutory change of name was not accompanied by any change in jurisdiction or power. f Normally, the data appearing on a taxpayer's returns or disclosed in the administrative processing of them are considered confidential and are available only to specified officials, to the shareholders of a corporate taxpayer, or on order of the President of the United States under regulations approved by him.

ig2

JUDICIAL REVIEW OF

DETERMINATIONS

conflict between two or more Courts of Appeals in decisions i n v o l v i n g the same point of law. A f t e r the j u d g m e n t becomes final, the adjudicated amount of deficiency in tax, if any, is assessed by the Commissioner, and thereupon becomes collectible in the same manner as any tax assessment. T h e T a x C o u r t consists of sixteen judges appointed for a term of twelve years by the President with the advice and consent of the Senate. Its functions are facilitated by a staff of about thirty-five attorneys who may be designated as Commissioners for hearings. It is an agency within the executive branch of the Government, and is entirely independent of the T r e a s u r y Department.

SUITS

FOR

REFUND

IN

OTHER

COURTS

H a v i n g paid tax of any kind (including income, estate, and gift tax if no petition has previously been filed with the T a x Court), the taxpayer may file a claim for refund within a prescribed period, usually three years from the date the tax return was filed (see sections 322(b), 910-12, 1027, 1636, 3313). T h e s e claims are referred to a revenue agent for investigation and report, and conferences are granted the claimant or his counsel for presentation of his contentions and supporting evidence. If the claim is recognized as valid, a r e f u n d is made to the taxpayer; if not, the taxpayer may bring suit in the U n i t e d States District Court having jurisdiction over the area of his residence, or in the Court of Claims at Washington, D . C . Suits for refund are heard and decided according to law and rules of procedure of general application except that the C o u r t will entertain no ground for refund which was not set forth in the taxpayer's claim as presented to the Service. T h e taxpayer and the Commissioner may appeal from a decision of the District C o u r t to the C o u r t of Appeals for

JUDICIAL REVIEW

OF D E T E R M I N A T I O N S

193

the Circuit concerned in the same m a n n e r that he may appeal f r o m a decision of the T a x C o u r t , and either party may thereafter petition the Supreme C o u r t of the U n i t e d States f o r a writ of certiorari to review the decision of the C o u r t of Appeals. F r o m a decision of the C o u r t of Claims there is no recourse to a Court of Appeals, but either party may seek a writ of certiorari in the S u p r e m e C o u r t . W h e n j u d g m e n t becomes final, the decision of any of these courts is carried out by the Director.

SUMMARY OF PROCEDURE FOR

REVIEW

Administrative review of income, estate, and gift taxes: Conferences with revenue agents. Appeal to Appellate Division and conferences. Judicial review: For income, estate, and gift taxpayers prior to payment of any deficiency asserted by the Commissioner: Appeal within ninety days of determination to the T a x Court of the United States against any addition to tax reported. Appeal from T a x Court decision within three months to the United States Court of Appeals for the District of Columbia or to the Court of Appeals for the Circuit which has jurisdiction over the area in which the return was filed. Petition within ninety days for writ of certiorari to Supreme Court of the United States for review of decision of Court of Appeals. Administrative review of all other taxes: Conferences with revenue agents. Appeal to Appellate Division and conferences. Judicial review applicable to all taxes after payment (except payment pursuant to T a x Court judgment): Suit for refund in a United States District Court. Appeal to the United States Court of Appeals. Petition for writ of certiorari to the Supreme Court of United States.

194

JUDICIAL

REVIEW

OF

DETERMINATIONS

Suit for refund in the Court of Claims. Petition for writ of certiorari to the Supreme Court of United States. I n an administrative review any issue may be raised; before the T a x Court of the U n i t e d States, any issue raised in the pleadings; in suits for refund, any issue based upon a ground asserted in the claim for refund and raised in the pleadings. T h e constitutionality of the statute imposing the tax is among the issues that may be raised judicially.

OFFICE OF T H E REGIONAL COMMISSIONER

FOUR OR MORE Directors of adjoining Districts, grouped into a Region, are subordinate to a Regional Commissioner who is responsible for the policies, work programs, and procedures of the Directors. T h e Regional Commissioner supervises their operations, provides them with technical advice, and in matters described below stands to them in the position of the Commissioner. Because of the physical size of the United States and because central control of so large an organization as the Internal Revenue Service is difficult, the Commissioner has delegated a large measure of his authority to the Regional Commissioners. Although he has power to group and regroup Districts into a maximum of twenty-five Regions as administrative convenience requires, he has created only nine Regions. T h e Regional Commissioners represent him, and are directly responsible to him for proper administration in their respective Regions. While their duties are chiefly supervisory, in certain fields their offices also have operational functions. Each Regional Commissioner has a staff of six Assistant Regional Commissioners, concerned, respectively, with administration, collection, audit, intelligence (i.e., fraud investigations), alcohol and tobacco taxes, and appellate work (see the organizational diagram on pages 241-45).

ig6

THE

OFFICE

OF THE

ASSISTANT R E G I O N A L

REGIONAL

COMMISSIONER

COMMISSIONER

(ADMINISTRATION)

The Assistant Regional Commissioner (Administration) plans and directs improvements in management and in administrative services of the headquarters office and Directors' Offices of the Region. His functions comprise the development and control of the internal financial planning for the entire Region; its organizational structure and office maintenance; the appointment, promotion, compensation, and training of employees; the preparation of statistics and other activities not directly involving the assessment or collection of taxes. T h e Office is divided into three branches. The Budget and Fiscal Branch supervises all budgeting, administrative accounting, and financial reporting (other than for tax collections). It will be recalled that no collections of taxes, interest, or penalties made by a Director can be used for expenses. T h e funds for operation are derived from an annual appropriation by Congress, and it is the proper expenditure of these funds with which the Budget and Fiscal Branch is concerned. It estimates and prepares a budget for expenses of all offices in the Region and allocates to each a part of the expense allotment for the Region in accordance with the general financial plan. It may request the National Office to change the plan for the Region. It keeps all accounts, prepares payrolls, audits and approves expense vouchers submitted by offices and personnel, and prepares regular and special operating reports for the National Office. The Personnel Branch participates in the planning and execution of the regional program for recruitment, training, and classification of personnel, which as previously

OFFICE

OF T H E

REGIONAL

COMMISSIONER

197

stated, is drawn from civil service rolls and subject to civil service regulations. This branch represents the Region in contacts with the Civil Service Commission. The Operating Facilities Branch is concerned with the planning and direction of procurement, storage, and issuance of supplies, equipment, and furniture, and on occasion the disposition of surplus equipment. It makes surveys for office and storage space needed by the several offices with appropriate recommendations. In addition it maintains a complete inventory of records in offices of the Region and conducts surveys to insure that records are properly kept. It is also concerned with any communication services, printing, and other reproductions that the Region may need. T H E ASSISTANT REGIONAL COMMISSIONER

(COLLECTION)

The Assistant Regional Commissioner (Collection) plans and directs the activities of the Collection Division and assists in the planning and coordination of collection activities in the Directors' Offices of the Region, with which he maintains technical and advisory contact. He is not an operating official but rather a specialist who advises and assists in problems connected with the function of collecting, and studies the collection operations with a view to developing ways of improving them. THE

ASSISTANT REGIONAL COMMISSIONER

(AUDIT)

The Assistant Regional Commissioner (Audit) assists in the planning and coordination of the activities of Directors' Offices relating to investigation of tax returns, the collection of delinquent accounts, and the search for those liable to tax who fail to file returns. The Audit Divisions of Directors' Offices submit selected cases to him for review. In this

198

OFFICE

OF T H E REGIONAL

COMMISSIONER

way, he exercises a general supervision over audit activities within the region to insure uniform application of procedure and solution of technical problems, and advises in controversial or difficult cases. T H E ASSISTANT REGIONAL

COMMISSIONER

(INTELLIGENCE)

The work of the Intelligence Divisions of the Directors' Offices of the Region are planned and coordinated by him. He reviews reports of the special agents and makes allocation of funds and personnel. He is also charged with the training of personnel engaged in this special work. A Review Group, attached to the head office, considers the special agents' reports, not only those pertaining to tax frauds but also those respecting both the character qualification of attorneys and accountants who have applied for permits to practice before the Treasury Department and the charges brought against those who have been permitted to practice. In its reviews, conferences, if desired, are granted to taxpayers, and it may enter into settlement agreements with taxpayers if prosecution is not recommended. The Review Group also acts in an advisory capacity to special agents, and on occasion suggests changes in policy or procedure.

THE

A S S I S T A N T R E G I O N A L COMMISSIONER

(ALCOHOL

AND

TOBACCO T A X )

This official differs from the preceding Assistant Regional Commissioners in that he is charged with operational functions in the administration and enforcement of laws relating to alcohol and tobacco products, including tax laws and laws regulating the production, possession, and sale of

O F F I C E OF T H E REGIONAL COMMISSIONER

igg

such products and of firearms besides. Collection of the taxes, however, most of which are paid by the sale of stamps and certificates, is made and accounted for by the Collection Division of the Director's Office. In the office of the Assistant Regional Commissioner (Alcohol and Tobacco Tax) there are two branches and four sections. The Permissive Branch is charged with the supervision, control, and regulation of the legally qualified liquor and tobacco industries with respect to the production, storage, proper stamping or other discharge of tax liability, treatment, packing, advertising, removal, and distribution of distilled spirits, industrial alcohol, wine, fermented malt liquor, and tobacco products; the determination of the amount of tax and penalties on liquors and tobacco; the investigation of returns for occupational and commodity taxes on alcohols and tobacco. It supervises and controls manufacture and use, and is responsible for the assignment of personnel. Under this branch are three sections. The Inspection Section directs the inspectors who visit the manufacturing and processing plants, the warehouses and depots subject to control, and who investigate applicants for permits, check the taxpayer's reports, and make recommendations in the premises. This section also directs storekeepergaugers who are stationed at certain plants to supervise daily operations. They verify the quantities and qualities of the goods produced, bottled, stored, and withdrawn. In fact, untaxpaid goods must be kept in a locked warehouse to which only the storekeeper-gauger holds the key. Upon a withdrawal of goods from "bond," that is, from a supervised warehouse, the storekeeper-gauger verifies the taxable quantity, computes the tax, and releases the goods to the owner upon proper evidence of payment—usually stamps affixed to the container. At some large plants there

200

O F F I C E O F T H E REGIONAL

COMMISSIONER

is also stationed an employee of the Cashier Branch of the District Director's Office, who sells the stamps and collects the tax. The Bonded Accounts Section analyzes the returns and reports made by the taxpayers, and determines whether or not there has been a proper accounting. It will be recalled that monthly reports of raw materials, production, sales, and other movement of goods and stamps purchased is required, and this section seeks to detect any discrepancies or inconsistencies in the past and current returns and reports. It also processes applications and qualifying documents for permits to engage in a controlled liquor or tobacco business and passes on the sufficiency of bonds offered, of sureties, and plans of the plants and warehouses. It maintains permit-control files and refers requests to use trade names to the National Office for approval. If an examination of returns or inspectors' reports discloses that additional tax is due, the Bonded Accounts Section determines the tax liability and penalty, if any, and decides upon the assessment to be made by the Director. It considers offers in compromise, and prepares recommendations for acceptance or rejection. It examines and processes claims for abatement and refund of taxes, and claims for "drawback" of tax paid on spirits destined to be used in the manufacture of untaxed products. These functions are similar to those performed with regard to other taxes by the Audit Division of the Director's Office. T h e section submits to the National Office monthly reports of the Region's operations. The Laboratory Section chemically analyzes samples of alcoholic products for determining liability to tax or control under provisions of the Code, and also analyzes drugs covered by the Narcotics and Marihuana Act. It advises on other technical matters pertaining to the production, stor-

OFFICE

OF T H E

REGIONAL

COMMISSIONER

201

age, and denaturing of alcohol, and provides expert witnesses when necessary in court proceedings. T h e Enforcement Branch has charge of investigation, prevention, and detection of willful and fraudulent violations of the Federal laws relating to the taxation and regulation of liquor and tobacco and also of firearms, and the gathering of evidence for administrative action, criminal prosecution, and so on. A Special Investigative Section of this branch devotes its attention to the criminal operations of highly organized syndicates and to flagrant violations of provisions relating to basic operating permits and trade practices. It has photographs and fingerprints made of those arrested for violations of law, maintains a file of them, and transmits reports to the Federal Bureau of Investigation.

THE

ASSISTANT

R E G I O N A L COMMISSIONER

(APPELLATE)

T h e Assistant Regional Commissioner (Appellate) is authorized to settle cases of disputed tax liability after the taxpayer has failed to reach an agreement with revenue agents of the Audit Division in the Director's Office. T h e procedure whereby the taxpayer can have a proposed determination transferred for review by personnel of the Appellate Division, the nature of its functions as an appeal agency, and the scope of its authority to settle cases in dispute has been previously described in connection with the Director's Office (see pp. 183-87).

THE NATIONAL OFFICE

of the procedures of operating offices of the Service is an essential preliminary to a presentation of the functions, largely supervisory, performed by the headquarters in Washington, D.C., a detailed description of the numerous divisions, branches, sections, and units of the National Office has been reserved to this point. It may be added, however, that only passing reference has so far been made to the staffs of attorneys available to the Offices of Regional Commissioners and Directors. This omission was prompted by the belief that their functions could be better understood in relation to the role of Chief Counsel's Office to administration at all levels, and a description of that Office will accordingly be presented after this analysis of the National Office.

SINCE AN UNDERSTANDING

In the direction of national activities the Commissioner is assisted by a Deputy Commissioner, an Assistant Commissioner (Operations), an Assistant Commissioner (Technical), an Assistant Commissioner (Inspection), an Assistant Commissioner (Administration) and an Assistant Commissioner (Planning). T h e duties of the Deputy Commissioner have already been described; the Assistant Commissioners are charged with administrative matters suggested by the parenthetical part of their titles.

THE

ASSISTANT COMMISSIONER

(OPERATIONS)

T h e Assistant Commissioner (Operations) is responsible for the administration and operational direction of the

THE

NATIONAL O F F I C E

20J

functions of the National Office and all field offices of the Service pertaining to collection, audit, alcohol and tobacco tax, intelligence, and appellate review. Immediately under him are the following divisions of the National Office, which are subdivided into branches, sections and units: THE COLLECTION DIVISION

T h e Collection Division plans and directs collection methods; it is responsible for proper accounting systems, allocation of funds and personnel for collection, and the improvement of administration. T h e Collection Accounting Branch is divided into three sections. T h e Stamp Section orders requisite supplies of stamps from the Bureau of Engraving and Printing for distribution to operating offices on requisition, receives from such offices for destruction damaged or unused stamps for which credit is claimed, and maintains appropriate records of stamps distributed and returned. T h e Revenue Accounts Section receives the Directors' reports of all collections by the Cashier Branches, and through its Statistical Unit prepares monthly data showing collections by types of tax, returns filed, etc. It also prepares weekly progress reports, various statements for the Treasury Department officials, and news releases. T h e Collection Accounts Auditing Unit audits the revenue and special deposit accounts of Directors and some others such as the Postmaster General's accounts for tax stamps sold through post offices, and maintains other records and accounts with field offices. T h e Refund Accounts Auditing Unit audits that part of the chief disbursing officer's accounts which relate to the refund of taxes overpaid. These refunds are made from a Congressional appropriation, not from current collections. T h e Control Section receives all cases in which changes

204

T H E

NATIONAL

OFFICE

in the tax liability reported have been approved, and prepares certificates for final administrative action. Its Assessment Unit is concerned with those cases in which deficiencies have been administratively fixed. Some of the deficiencies were settled with the revenue agents and g r o u p chiefs of the Directors' Offices. Others may have resulted f r o m settlements reached with the Appellate Division or from decisions of the T a x Court. In any event, if additional tax is due, the a m o u n t must be assessed before it can be collected. T h i s unit computes the interest at 6 percent a year on the deficiency, examines the case file to insure that prescribed procedure has been followed, and enters the amount due on an assessment list which is then sent to the proper Director for collection. O n the basis of the assessment, the Statement of T a x D u e is prepared by the Bills and Warrants U n i t of the Cashier Branch, and mailed to the taxpayer. Similarly, the Overassessment Unit reviews all certificates which indicate that the taxpayer reported and paid too m u c h tax. T h i s unit computes interest of 6 percent on the overassessment. Schedules of overassessment are then prepared for transmission to the Director's Office. A record is also kept of the rejected claims of overassessment. T h e Readjustment Unit receives cases involving special types of changes such as the granting of relief from excess profits tax (section 722 of the Code permits this if the taxpayer can prove abnormal circumstances); a reduction in the tax of a prior year resulting from an operating loss carry-back. Such adjustments are usually very complicated, and require involved computations. T h e Compromise Unit performs like functions with respect to offers in compromise. T h e Collection Procedures Branch is responsible for prescribing efficient methods of collection and accounting,

T H E N A T I O N A L OFFICE

205

for the processing of returns and for the general organization and management in the Collection Divisions. It issues mimeographed instructions in this field to Directors as occasion arises, and maintains the collection section of the Internal R e v e n u e Manual, in w h i c h the m i n u t e details of the operational steps to be taken in connection w i t h collection are set forth. Supplemental pages altering or a m e n d i n g parts of the manual are distributed from time to time. A n d it should be added that the methods of the Service are and have always been in evolution. Experiments which promise to be improvements in some phase of the work are often tried out first in one or two Directors' Offices, and if successful may be generally adopted. W i t h i n this branch is the Methods and Procedure Section, which studies new plans of operation, and the Electronic Accounting and Calculating Procedures Section, which seeks and considers machinery that can be advantageously used in the work. T h e use of machines, already very extensive, is steadily increasing. T h e Delinquent Accounts and Returns Branch is responsible for the establishment of policies, formulation of procedures, preparation of instructions, dissemination of rulings and opinions, reviewing of proposals for new legislation, and initiation and control of programs with respect to enforcement provisions of the C o d e which relate to discovery of persons failing to file returns, the collection of d e l i n q u e n t taxes, and civil phases of laws and regulations governing taxes on wagers. THE AUDIT

DIVISION

T h e A u d i t Division plans for and supervises the A u d i t Divisions of the field offices. U n t i l recently, it reviewed selected cases audited in the field offices. T h e Planning and Procedure Branch prepares instruc-

2O6

THE NATIONAL OFFICE

tions for guidance of the field divisions in the selection of returns for investigation and collaborates in the drafting of return forms and the instruction booklets for taxpayers. It maintains a loose-leaf manual (Parts IV and V of the Internal Revenue Manual), which sets forth in detail the operational processes to be followed and methods to be used. It instructs and advises Field Audit Divisions on special problems, or by circular on general problems. It also issues a digest of field cases which have been reviewed in the National Office and other guide materials. These several functions are divided between an Audit Procedure Section and a Forms and Manuals Section. T h e Uniform Audit Branch receives for review selected cases which have been completed in the field divisions. It seeks to insure uniformity throughout the country in interpretation and application of the Code, regulations, and National Office policy, and if technical questions are involved, the case is referred by it to specialists of the Special Technical Services Division such as the Engineering and Valuation Section, Exempt Organizations Section, Reorganization (corporate) and Dividends Branch. It refers to the Assistant Commissioner (Technical) all cases requiring interpretations of law or regulations arising for the first time, or conflicting legal or administrative holdings. It also prepares an analysis of reviews conducted at the regional or district levels. This analysis is submitted to the Planning and Procedure Branch for consideration. It reviews the reports of revenue agents and special agents (Intelligence Division), and determines civil liability and deficiencies in tax and penalties in all cases involving criminal prosecution. T h e branch consists of five sections. T h e Corporation Audit Section reviews determinations

T H E NATIONAL OFFICE

207

made in Directors' Offices of corporation taxes in cases selected in accordance with instructions, and furnishes Directors with advice on problems connected with corporate taxes. It also reviews the audit reports, and determines the civil liabilities and penalties in the criminal cases mentioned above. T h e Individual Audit Section similarly reviews selected determinations of income tax of individuals, trusts, and estates. T h e Estate and Gift Audit Section reviews estate and gift tax returns from the Directors' Offices, and in the case of gift taxes makes the original audits and issues the thirty-day letter if no investigation is deemed necessary. If the case requires investigation, it is referred to the Field Audit Branch in the Director's Office. When appropriate, the section also issues the notice of deficiency (ninety-day letter). It passes upon claims for credit on account of State inheritance taxes and foreign death duties, and upon claims for refund, which may also be referred to a Field Audit Branch for investigation. T h e Wage and Excise Audit Section reviews returns of those taxes and referred claims involving them. T h e Alien Returns Section audits withholding returns of those remitting income from domestic sources to nonresident aliens and foreign corporations; compiles information required by various tax conventions to be sent to foreign tax commissioners; reviews reports from field offices on nonresident aliens and foreign corporations, and adjusts their returns; determines tax liability of aliens whose property is in custody of the Alien Property Custodian. T h e Audit Services Branch is auxiliary to the Uniform Audit Branch, relieving the latter of the burden of detail connected with the volume of returns which are sent to the National Office for audit. T h e incoming documents are received and routed to the proper officer for attention

2O8

THE

NATIONAL

OFFICE

by its Files Section. If the return is referred back to the Director's Office for investigation, it is channeled through this section. After review has been completed, the return is sent back to the Files Section which performs clerical services incident to closing the case. It maintains the files for all returns audited and correspondence connected with them. T h e Returns Inspection and Bankruptcy Section attends to requests for copies of returns and other documents which may be needed for court purposes or in connection with the investigation of other taxpayers, and also furnishes transcripts of returns requested by the tax authority of a State. It maintains in addition a control index for cases involving bankruptcy, receivership, corporate reorganization, and the like, in which a claim for tax due must be filed. A Stenographic and Typing Section of the branch furnishes general stenographic and typing services to all the Audit Division and any other offices of the Service, as requested. T H E ALCOHOL AND TOBACCO TAX DIVISION

The Alcohol and Tobacco T a x Division is responsible for developing policies, programs, and procedures with respect to alcohol and tobacco taxes, and provides technical advice to the field offices. It also prepares manuals of instructions for the guidance of its agents. It comprises four branches, each subdivided into several sections along functional lines. The Permissive Branch is concerned with the regulation of production, storage, sale, and use of alcoholic products; the Basic Permit and Trade Practice Branch, with action on applications for permits to operate, compliance with advertising regulations, and the enforcement of prescribed trade practices. T h e Enforcement Branch is concerned with the investigation, detection, and

THE NATIONAL

OFFICE

prevention of w i l l f u l and fraudulent violations of the internal revenue laws and certain other laws relating to distilled spirits, wines, fermented malt liquors, and tobacco, and of the National and Federal Firearms Acts. T h e Tobacco Tax Branch not only formulates policies of enforcement but also prepares requisite regulations; reviews and passes on operating applications, bonds, etc.; makes decisions on claims for abatement, refunds, drawbacks, and offers in compromise. THE

INTELLIGENCE

DIVISION

T h i s division plans and coordinates programs for the investigation of taxpayers suspected of fraudulent evasion of tax, of applicants to practice before the Treasury, of charges brought against those enrolled, and directs other special investigations requested by the Commissioner. Its Tax Fraud Branch also considers claims for rewards made by those w h o have given information leading to the discovery of tax evaders. It analyzes tax fraud cases referred by its field offices to Enforcement Counsel with recommendation of criminal prosecution and cases returned for civil settlement. T h e Special Investigations Branch is concerned with programs for tax enforcement against gamblers, racketeers, and criminal organizations. It analyzes selected cases closed by field offices. It maintains relations with other divisions of the Service and with Federal, State and local governments for cooperation in criminal matters of mutual interest. T h e division prepares instruction manuals for its agents, w h o are k n o w n as "special agents." Very numerous reports about tax evaders, voluntarily and sometimes anonymously sent in, are channeled to and reviewed by this division, and those considered sufficiently plausible are sent to an appropriate field office for investigation.

THE

2 IO

NATIONAL

OFFICE

THE APPELLATE DIVISION

T h e Appellate Division of the National Office plans and coordinates the functions of the Assistant Regional Commissioners (Appellate) in the review and settlement of a tax determination proposed by the Audit Division of the Director's Office and disputed by the taxpayer. Acting independently of the Director but as an administrative agency in the exercise of powers delegated to it by the Commissioner, it endeavors to reach with the taxpayer a mutually satisfactory agreement as to his tax liability, and to this end possesses broad authority to make settlement. T h e procedure followed and nature of the appellate review has been previously described in connection with the Director's Office. T h e division of the National Office consists of three branches: T h e Settlement Review Branch conducts a continuing review of selected cases which have been concluded by the Regional Offices. T h e Compromise Branch * reviews field action on offers in compromise and a Special Services Branch furnishes advice on highly complex engineering and valuation problems and provides expert witnesses for the Commissioner at the trial of tax cases. Within the Appellate Division there is also an Excess Profits Tax Council, which reviews and endeavors to settle disputed cases of taxpayers who claim a reduction in World War II excess profits tax because of abnormalcies and other conditions in their business which section 722 sets forih as grounds for relief. THE

ASSISTANT COMMISSIONER

(TECHNICAL)

T h e Assistant Commissioner (Technical) is responsible for directing the planning, rulings, and programs of matters of a technical nature. Four divisions, including the * See section 43 of Supplement.

THE

NATIONAL

OFFICE

21 1

International T a x Relations Division, are responsible to him. THE INTERNATIONAL TAX RELATIONS

DIVISION

The International T a x Relations Division negotiates tax conventions and like agreements with foreign governments; cooperates with the State Department and Congressional committees in procedures leading to ratification of the conventions; coordinates administration under them; and maintains relations with foreign tax officials. This division also collaborates in the preparation of regulations and coordinates rulings on questions arising under the conventions. These conventions are designed for the avoidance of double taxation on income, estates, and inheritances. They also contain provisions for an exchange of information and investigation of taxpayers and provide for reciprocal aid in making collections. At present (1953) the United States has in effect income tax conventions with Australia, Great Britain, Canada, New Zealand, South Africa, Ireland, France, Switzerland, Belgium, the Netherlands, Denmark, Norway, Sweden, and Finland; estate and inheritance tax conventions with Australia, Great Britain, Canada, South Africa, Ireland, France, Switzerland, and Finland; and a gift tax convention with Australia.* THE TECHNICAL

PLANNING

DIVISION

The Technical Planning Division conducts a continuing study of tax problems which are sources of recurring controversy, Code provisions which result in inequities or admit of tax avoidance, and endeavors to solve them by recommending changes in regulations, rulings, or legislation. Its Technical Program Branch prepares reports for committees of Congress; circular instructions representing the * See scction 44 of Supplement.

THE NATIONAL

212

OFFICE

position of the Service on matters of general application; compiles information and may make recommendations for the Analysis and Legal Advisory Staffs of the T r e a s u r y . T h e Technical Analysis Branch initiates research a n d makes studies of the technical problems which develop in administration and of trade and industry practices affecting taxation. T o this end it maintains contact with the N a t i o n a l and field offices of the Service; it analyzes reports of cases, and arranges meetings for discussion of problems, attended by National and operating personnel of the Service and Treasury. It also participates in the drafting of returns and other forms. T h e very important work of drafting forms is assigned to a Forms Committee which consists of representatives of several divisions. THE TECHNICAL

RULINGS DIVISION *

T h i s division is the largest under the Assistant Commissioner (Technical), and in order to understand its functions, a preliminary explanation of a very important phase of administration is necessary. T h e Internal R e v e n u e C o d e is an extensive and complicated piece of legislation which Congress amends and modifies in some respects one or more times a year. Official Treasury Regulations are issued to interpret each tax. W i t h i n permissible limits, the regulations expand the law so that its application to a particular type of situation will be more definite. T h e Commissioner, moreover, is given a broad grant of authority to construe and expand it by regulations which, when approved by the Secretary of the Treasury, have the force and effect of law. T h e C o d e and the regulations are constantly the subject of opinions by the T a x C o u r t and by Federal Courts which may affirm, reverse, or modify interpretations which have been applied in the official determinations of tax. T h e r e is therefore a constant need for keeping the administrative • See section 45 of Supplement.

T H E NATIONAL OFFICE

213

personnel and the public informed of these changes and of the correct construction to be given the Code and regulations in cases as they arise. This information is supplied in large part by the Internal Revenue Bulletin, which will be described below. In day-to-day work, however, a revenue agent is often confronted with tax problems which are not nicely covered by the applicable sections of the Code and regulations, by court decisions, or by prior rulings published in the Bulletin. There may be factual questions which a field officer feels incompetent to decide. In such a situation the Director or a Regional Commissioner, or indeed any official of the Service, may transmit his problem to the Assistant Commissioner (Technical) for a "ruling" (decision). T h a t decision is made in the Technical Rulings Division, which may itself ask the advice of the Chief Counsel's Office if the question is one of law. If the ruling involves a problem of general interest, it will be published in the Bulletin, but without mention of the taxpayer's name and with the statement of facts so edited that his identity is concealed. T h e practice of publishing special rulings is intended to promote uniformity of administration of the highly complex and technical provisions of the Code. T h e services of the Technical Rulings Division are also extensively used by taxpayers. For example, if the comptroller of a corporation is in doubt as to whether or not the contemplated plan of operation of a proposed subsidiary would qualify the subsidiary for the advantageous tax treatment accorded a Western Hemisphere Trade Corporation, he may request a ruling from the Commissioner. In due course he will receive an answer prepared by this division. In fact the taxpayer may, in some circumstances, obtain a closing agreement relating to specific matters affecting a

214

THE NATIONAL

OFFICE

return not yet due. If a university employs a British professor for two years, it may ask for a ruling as to whether it should withhold income tax from his salary. ( T h e salary, in fact, is exempt by the convention.) B u t the inquirer must make a f u l l disclosure of facts, and in every ruling all pertinent facts disclosed are stated, for its application is limited to them. T h i s division is divided functionally into eight branches which are subdivided into sections, and sometimes further subdivided into units: Income Tax Ruling Branch (for individuals, trusts, partnerships, etc.) Corporation Tax Ruling Branch (income and excess profits taxes) Estate and Gift Tax Ruling Branch Employment Tax Ruling Branch Ruling Section 1 (principally individual employers) Ruling Section 2 (principally corporate employers) Ruling Section 3 (principally agricultural, recreational, publishing, educational, trucking employers) Excise Tax Ruling Branch Sales T a x Section Admissions and Communications T a x Section Transportation T a x Section Stamp and Special T a x Section T h e Exempt Organizations Branch receives for consideration the applications of organizations which claim tax exemption under section 101. It will be recalled that exemption from income tax is not granted generally to nonprofit-seeking entities, but specifically to specified types of organizations, corporate or unincorporated, which fulfill prescribed conditions. It is this branch which passes upon applications of such organizations for official recognition of their exempt status, prepares and publishes lists of the organizations which have been held exempt, and furnishes

THE

NATIONAL

OFFICE

2»5

advice, when requested by other offices, on problems involving exempt status. T h e Pension Trust Branch performs similar functions in respect of the exemption status of pension trusts which are funds created by employer corporations to provide pensions and other benefits for their employees. The income of these trusts, usually derived from the investment of payments into them, is tax exempt if the trusts meet prescribed statutory conditions of organization and operation, and in such event the employer's contributions to them are deductible from its income. T h e Reorganization and Dividend Branch is concerned with the taxable status of money, shares, or other property transferred or affected by the consolidation, merger, recapitalization or liquidation of corporations, and the distributions made by them in the course of reorganizational changes. For example, capital gains and losses are not recognized for tax purposes if shares or other evidences of a participating interest in a corporation are exchanged for evidences of like interest in a reorganized enterprise and distributions of money or property made by a corporation beyond the amount of its accumulated earnings are not treated as taxable dividends but as a return of capital. Because the pertinent provisions were too complex for condensation, they were not described in detail. This branch advises taxpayers and prepares rulings. T H E S P E C I A L T E C H N I C A L SERVICES DIVISION

This division has two principal functions: It handles special cases involving complicated engineering and valuation problems, and it selects, analyzes, and edits rulings for publication in the Internal Revenue Bulletin. T h e Engineering and Valuation Branch consists of experts in the engineering and appraisal fields to whom are

2l6

THE NATIONAL

OFFICE

referred for review problems involving the depreciation, depletion, and obsolescence of assets and valuations of property. It maintains for reference price quotations of stock exchanges, reports of prices on other sales of properties, including real estate, and data on natural resources, machinery, and equipment. It acts, in short, as a guide in difficult problems of engineering and valuation. Thus, for the computation of gain on a sale of water power rights, it may be necessary to determine the value of the rights when inherited by the taxpayer in 1929. For the computation of depreciation on a steam locomotive, it may be necessary to determine the probable useful years of service of a locomotive of that type or to determine if an improved type has rendered it so obsolete and unprofitable that its useful life is materially shortened and its cost consequently should be recovered more quickly by larger annual deductions. T h e branch issues information of use to revenue agents in their examinations of returns and its experts serve as witnesses for the Commissioner in court cases in which the official determinations are contested. T h e Bulletin and Ruling Analysis Branch performs the important function of analyzing, selecting, digesting, and editing the various rulings, mimeographs, judicial decisions, and other matter of general interest for publication in the Internal Revenue Bulletin, and it maintains a library of all such material, whether or not selected for publication, for ready reference of employees. T h e Internal Revenue Bulletin, which resembles in form a small magazine, is the authoritative instrument of the Commissioner for the announcement of important substantive and procedural rulings and for the dissemination of Treasury decisions, executive orders, legislation, and court decisions. T h e Bulletin is published every two weeks by the Government Printing Office, and semiannually the sepa-

THE NATIONAL

OFFICE

217

rate issues are consolidated and reissued as the C u m u l a t i v e Bulletin. T h e arrangement of matter follows that of the Code. Copies of the Bulletin are sent to each office of the Service for administrative guidance, and anyone may purchase a single copy for 15 cents and subscribe regularly to it through the Superintendent of Documents, United States G o v e r n m e n t P r i n t i n g Office, Washington 25, D.C. (annual subscription $3.25; $1.35 additional for foreign mailings). T h e Bulletin serves a useful purpose in keeping both the Service personnel and the public informed of developments, policy, a n d interpretations affecting Federal taxes. It is pertinent to explain the force and relative importance of the court decisions, Treasury decisions and rulings which are published for official guidance and public information in the Bulletin. T h e Commissioner is, of course, b o u n d to give effect to any T a x C o u r t decision, but he is not b o u n d to follow it in principle with regard to similar cases. If he decides to do so, he is said to acquiesce in the decision and the principle will be followed thereafter. If he decides not to do so, the principle will not be followed. His acquiescence or nonacquiescence in each decision is published in the Bulletin. T h e C o d e authorizes the Commissioner with the approval of the Secretary to prescribe and publish all needful rules and regulations for the enforcement of the revenue laws, and in addition to this blanket authority the Commissioner with the approval of the Secretary is authorized, more specifically in many sections, to prescribe regulations for carrying out their provisions. T h e specific authority is normally expressed in sections which make general provisions on a c o m p l e x subject a n d the detailed method whereby the law is to be carried into effect is left for the Commissioner to formulate. T h e regulations promulgated under the general grant of authority and the specific provisions made to cover

2 18

THE

NATIONAL

OFFICE

specific sections are called Treasury Decisions, abbreviated as T . D . T h e y must, of course, be referred to the Secretary for approval, and after approval and promulgation they have the force and effect of law, and are binding on Service personnel and taxpayers unless revoked, changed, or judicially held contrary to law. They may, of course, be attacked in court as incorrect insofar as they represent an interpretation of the law, or as improper if they contain provisions in respect of a specific section which a court considers unauthorized and unwarranted in carrying out the general terms of the section. Service rulings are made without referral to the Secretary of the Treasury. T h e y are designated by initials indicating the source office. T h u s I . T . 3560 is the serial number of a ruling by an Income T a x R u l i n g Branch; E . T . 490 refers to a ruling of the Estate and G i f t T a x R u l i n g Branch; G . C . M . 500, to an opinion by Chief Counsel's Office; Mim. 100, to an instruction circulated to Service officials. All rulings proposed for publication are referred for review to the Interpretative Division of Chief Counsel's Office. T h e rulings do not have the force and effect of Regulations and Treasury Decisions, but reflect the conclusion reached in a particular case under facts shown, and may be regarded and cited by Service personnel and by taxpayers as persuasive precedent, particularly in a case based on similar facts and circumstances.

T H E ASSISTANT COMMISSIONER

(INSPECTION)

T h e Assistant Commissioner (Inspection) is charged with planning and carrying out programs of investigation which will establish facts necessary for an informed appraisal of the efficiency of operational methods, the performance of the various offices, and the standards of com-

THE

NATIONAL

OFFICE

2ig

petence and conduct required of and shown by the employees. The Office is entirely independent of others in its operations. T o carry out the inspections as planned by the National Office, the Assistant Commissioner (Inspection) has a Regional Inspector and investigating staff in each of the nine Regions. In the National Office and in each regional office the inspection work is divided functionally into two divisions. T H E I N T E R N A L AUDIT DIVISION

The Internal Audit Division is concerned with the management, accounting, and operational performance of the regional and district offices. T h e Regional Inspector carries out in them examinations designed to disclose conditions sufficiently for an appraisal of the local office's policies, practices, and procedures and for the preparation of a comprehensive report on them. In the performance of his work, the Regional Inspector does not supervise, direct, or order changes in the local office, and his inspection and auditing do not extend to a complete checking of all affairs and accounts of an office. He may, for example, audit all collection and disbursement accounts for a "sample" period or he may inquire into the use made of accounting machines. He may review the records of the office's requisition for supplies and report on its economy or extravagance in their use. Correspondence files may be the subject of his attention, and the promptness and adequacy of replies will be noted. T h e record of the Delinquent Accounts and Returns Branch in seeking out delinquent taxpayers and enforcing collection is another example of phases of the work which may be investigated. The objectives of inspection, however, comprise much more than a determination of how efficiently or inefficiently routine work is done. Fundamental policies, practices, and

220

THE

NATIONAL

OFFICE

procedures are constantly under study at the National Office, and to appraise those in effect the inspector seeks to obtain data of a kind that will enable him to judge their merits equitably, to discover weaknesses in existing methods and controls, and in general to evaluate the effectiveness of management. T h e reports, conclusions, and recommendations are transmitted to the Service officers concerned for their consideration; decision on action, however, is not an inspection function. THE INTERNAL SECURITY DIVISION

This division is concerned with the conduct and character of employees. T h e names of prospective employees and of existing employees proposed for transfer to more responsible positions are referred to it for a report on character and fitness. In addition, complaints made by taxpayers or their representatives about the conduct of revenue agents or other employees are referred to this division for investigation and report. These complaints range from mere allegations of discourtesy to serious charges such as solicitation of bribery. Numbers of them are found to be unjustified; others, found true, result in disciplinary action or dismissal. Action is not taken, however, without giving the employee an opportunity to defend himself, and indications in the report and the conclusion reached are always placed on record in his personnel file. The division similarly receives for investigation the names of employees who for any other reason are suspected of improper conduct. Since the nature of the work performed exposes great numbers to the temptation of bribery or more subtle forms of collusion with taxpayers, those holding positions of trust—some thirty-two thousand—are required from time to time to file a detailed financial statement, declaring all property, debts, income, and expendi-

THE

NATIONAL

221

OFFICE

tures of themselves and their families and any business interest or outside activities that might bear on their employment. T h e income tax returns of these employees are also investigated by revenue agents, and a full report of the agent's findings is transmitted to the division for review. If in the course of any of the reviews or investigations, evidence indicating malfeasance of a criminal nature by an employee is discovered, the investigation which follows is made with the object of supporting a criminal prosecution if the facts warrant it. During the fiscal year 1952, 174 employees were dismissed for misconduct; some of them were criminally prosecuted. Of those dismissed, 109 were revenue agents or collector agents (Delinquent Accounts and Returns Branch). T h e most numerous offenses were acceptance of bribes, 53; personal misconduct unrelated to tax cases, 45; embezzlement of public money, 24; and failure to pay their own proper tax, 21. In addition, 25 employees were suspended from the Service for various periods, 4 were reduced in grade, and 73 reprimanded. At the National Office periodic reports on management and operations are prepared for the Commissioner and the Secretary of the Treasury; training courses are given for the inspection personnel, and an instruction manual for their guidance is issued and from time to time revised.

THE

ASSISTANT COMMISSIONER

(ADMINISTRATION)

T h e Assistant Commissioner (Administration) is concerned with the planning, coordination, and evaluation of the administrative activities of the Service. He is responsible for the development, installation, and execution of broad policies, procedures, and standards governing the management programs in budget administration, organization, personnel and its proper utilization; in public rela-

222

THE

NATIONAL

OFFICE

tions, financial management, the use of facilities, and the like. I n the discharge of these duties he operates through five divisions. THE FISCAL MANAGEMENT DIVISION

T h i s division develops and coordinates the policies and programs for the management and use of funds made available for operation of the Internal Revenue Service by annual appropriations of Congress. It formulates and carries out the budget policies, exercises control over expenditures, and prepares fiscal reports on a national scale. THE OPERATING FACILITIES DIVISION

T h e procurement of supplies and equipment, printing and binding, the purchase and lease of offices and other buildings, the providing of telephone and telegraph services, and other essential administrative services are provided by this division. It will not be described in detail, but the magnitude of its operations is illustrated by the purchase of 750 million printed forms in 1952 at a cost of over two million dollars. THE PERSONNEL DIVISION

T h i s division develops and coordinates the personnel policies and program of the Service, and carries them out at the National Office. It is concerned with the determination of the n u m b e r and qualifications of personnel, their recruitment and assignment to duties, and their effective utilization. It further determines and supervises the execution of policies in the performance rating of employees, of incentives for stimulating them to effort, and of the maintenance of proper discipline. A t the National Office the division operates through three branches. T h e Position Classification Branch is con-

T H E NATIONAL

OFFICE

223

cerned with the character of work required in each type of position in the Service and with a determination of the civil service g r a d e — a n d hence the m i n i m u m and m a x i m u m sala r y — w h i c h should be assigned to that position. In classifying positions it is guided by a Classification A c t of Congress and Regulations with regard to it, which were issued by the C i v i l Service Commission. T h e A c t and Regulations, of course, relate to Federal employees generally, not

spe-

cifically to those of the Internal Revenue Service, and in the formulation of standards of classification for Service positions, account must be taken of the degree of responsibility, the training, skill, and other qualifications required of an incumbent so that the classification assigned to the position will conform to the Classification Act. A description is prepared of the duties of every position in the Service by the officer in charge of the work performed by the holder (or to be performed, in the case of newly created positions). O n the basis of this description, the classification is made by the Personnel Branch of a Regional C o m missioner's Office or in the National Office by the Departmental Branch of the Personnel Division. For a position carrying an annual salary of $7,000 or more, initial classification is made by the Treasury upon the division's recommendation. A l l classifications are subject to review and possible change by the Civil Service Commission. As duties change, positions may be reclassified, or without change, proposals may be made by the incumbent or his superior officer for a reclassification on the ground that the position was not correctly classified previously. It is the function of the Position Classification Branch of the National Office to insure uniformity in the classifications, and for this purpose it maintains reference guides, issues instructions, and provides advisory services for all classifying offices. It also makes studies to appraise the cor-

224

THE NATIONAL

OFFICE

rectness of local offices' classifications and the effectiveness of the national program. T h e Placement Branch of the National Office is concerned with policies and programs relating to the employee as distinguished from the position. His employment, examination, promotion, or transfer to another position, the appraisal of his work and competence, the disciplinary measures which should be applied, his vacation, sick leave and retirement, his grievances, and his general conduct are the subjects on which it formulates policies, issues instructions, and offers advisory services to other offices. It makes surveys of their actions: appraises their adherence to prescribed rules, and in certain types of action, e.g., discipline, grievances, acceptance by the employee of outside employment, or retirement, it reviews and controls the action of the local office. T o accept any outside employment, such as teaching a night course at a college, the employee must receive specific authorization. T o engage in outside activities without permission subjects him to disciplinary action. Authorization is not granted if the employment may interfere with his work, result in relations with taxpayers which might influence him in official actions, or in any way embarrass the Service. Acceptance of compensation for giving aid or advice in tax matters is a serious offense. T h e Departmental Personnel Branch of the division performs for the National Office employees the functions which the personnel branches of local offices perform for the local employees. Besides the three branches the division also has an Incentive Awards Unit which promotes and coordinates the encouragement given employees to make suggestions for improvements in administration. An employee may propose a change in procedure, forms, or any phase of work by transmitting his suggestion with supporting views on the

THE NATIONAL OFFICE

225

advantage of its adoption to the Suggestion Committee of his office. This committee will refer it for examination and comment to the official in charge of the work to which it relates. Promising suggestions are thereafter channeled to others concerned with administrative planning. Many are adopted, and an appropriate award is given to the employee. This award may be a promotion, a cash payment, and in all cases a published commendation. Many thousands of the employees of the Internal Revenue Service make of their work a life career, and some account will here be given of their employment, compensation, status, and rights. Of the 55,000 employees on the rolls in 1953, approximately 3,000 are stationed at the National Office in Washington, D.C. This number comprises approximately 1,000 chiefs, supervisors, and technical officers, 200 lawyers, 650 stenographers and typists, 1,200 clerks. Of the 52,000 employees in other cities about 17,000 are revenue agents, 1,225 a r e special agents of the Intelligence Division, 3,300 are office auditors, 1,000 are returns examiners, and 2,600 are alcohol tax inspectors, investigators, or storekeeper-gaugers. There are also some 200 lawyers and 2,200 technical personnel, about 7,000 stenographers and typists, and over 15,000 clerks in offices throughout the country. T h e salaries of District Directors of Internal Revenue average about $12,000 a year; of revenue agents over $5,500 (the range is $4,200 to $9,360); and of special agents somewhat over $6,000. T h e salaries of administrative assistants, secretaries, stenographers, and clerks range from approximately $2,760 to $5,000 in the upper positions. Most of the latter positions are held by women. A large number of auditors and returns examiners are women, and women are also represented in the technical and legal personnel. Small increases in salary for employees performing satisfactory work are generally made every year in the lower grades and

226

THE

NATIONAL

OFFICE

every eighteen months in the upper grades. But for outstanding service, advances in grade and salary may be more rapid. Every employee having fifteen years or more of service, is entitled to an annual vacation with pay of twenty-six working days, and in addition, to sick leave of thirteen days a year. Those with less service are entitled to less vacation, the minimum being thirteen days a year. If one claims sick leave in excess of three days, he must substantiate his sickness by a physician's statement. All employees are entitled to retirement pensions after a service of at least five years. T o determine the pension the number of years' service is multiplied by one and a half. T h e employee's average salary for his best five consecutive years is then calculated, and one and a half times his years of service is the percentage of that average salary which will be paid to him for life as a pension. Thus, an employee who had earned an average salary of $6,000 and had worked in the Service—or any other Federal department or agency—for thirty years would be entitled to an annual life pension of 45 percent of $6,000 or $2,700. If he had worked forty years, the pension would be $3,600. For retirement, 6 percent of salary is deducted from each pay check and deposited in a trust fund of the Civil Service Commission. No one may retire at full pension before reaching sixty years of age. Retirement is permitted after fifty-five years of age, but the pension is reduced by 3 percent for each year less than sixty. If an employee leaves Federal employment before reaching fifty-five, he still gets a reduced pension, but payments begin only at age sixty-two. If a person is discharged for misconduct, he loses his right to the pension, but all money which he has contributed to the retirement fund by salary deductions is repaid him with interest.

THE NATIONAL

OFFICE

227

THE TRAINING DIVISION

The Training Division plans, coordinates, and supervises the instruction of personnel in their duties, and prepares and gives regular training courses in the various taxes, accounting, and law, and also holds stenographic and typing classes. It will be recalled that an agent or auditor accepted for employment has already passed a civil service examination preliminary to his entry on the roll of eligible applicants for appointment. But since taxes are a specialized field, he requires additional training, and soon after employment by the Service he will be detailed to a course or courses in the tax or other work for which he was employed. This course is usually for two months, and he devotes his full time to the classes. Examinations are given at the conclusion. The division also offers a large number of courses in tax law, tax accounting, executive and supervisory functions, and in correspondence, typing, and clerical work. For selected professional and technical personnel, lectures, seminars, and internship programs are also arranged. In the field of tax law one or more specialized courses are offered on the individual income tax, the corporation income tax, the excess profits tax, the estate and gift taxes, business and commercial law, and evidence and procedure. The accounting courses include fundamental accounting, constructive accounting, corporation accounting, analytical accounting, cost accounting, and consolidated accounting. There are also courses on public relations, English usage, the writing of letters and reports, and stenography and other secretarial and clerical skills. Employees may be assigned to take more than one course of the Training Division, and for promotions or transfer to other work many apply to take additional courses. These courses are given in formal classes at the principal offices as

228

THE

NATIONAL

OFFICE

need arises, and they are also given by correspondence. During the year 1952 about thirty thousand employees took courses of the T r a i n i n g Division. A f t e r successfully passing the examinations, a newly employed revenue agent is assigned to work with an experienced agent. O n l y after displaying competence and tact in meeting the taxpayer is he permitted to work alone. For stenography, typing, and secretarial work courses are offered after w o r k i n g hours. T h e s e may be taken free by file clerks or others in lower grades w h o thereby prepare themselves for promotions to better positions. THE PUBLIC INFORMATION

DIVISION

T h i s division has charge of relations with the press and public. T h e Director and his staff prepare press releases for publication in newspapers and receive reporters and answer their questions about tax matters of public interest. In the event of important policy decisions, explanations of official action, and changes in procedures w h i c h affect taxpayers, it has been found advantageous to give a full and accurate account to the press. T h e Commissioner and other Service officials frequently are called u p o n to make speeches to organizations such as bar associations, chambers of commerce, universities, and the like. T h e y may contribute articles and reviews to magazines. A l l such compositions are first submitted to the Public Information Division which offers advice and guidance on the text and insures that confidential matter or indiscreet remarks are eliminated. In furtherance of a c o n t i n u i n g program to educate and advise taxpayers regarding their rights and obligations, the Public Information Division uses various media. For the mass dissemination of information it prepares and distributes in great volume posters and placards r e m i n d i n g the taxpayers of the date on which taxes are due the Govern-

THE

NATIONAL

OFFICE

229

ment. T h e s e are conspicuously displayed in public places. It is experimenting with new methods of stimulating voluntary compliance with the tax laws, and sends lecturers to schools to interest the students in lessons on how to prepare a tax return, and to distribute educational texts on taxes among them. T h e division's function, in short, is to place before the public the role which the Internal Revenue Service plays in Government.

THE

ASSISTANT COMMISSIONER

(PLANNING)

T h e Assistant Commissioner (Planning) acts in an advisory capacity to the Commissioner in the formulation of operational changes required by new tax legislation, economic and scientific developments of bearing on tax administration, and appraisal of work programs. H e is charged with attention to requests of Congressional committees and Treasury officials for studies and reports, relations with State tax administrations for cooperative measures, for special legislative drafting, and numerous other problems that may arise, particularly if policy is involved. He determines the scope of an annual report which the Commissioner publishes on the work of the Service, giving abundant tax statistics, and the content of the Monthly Activity Report which is circulated among all higher personnel to keep them currently informed of work progress and problems. H e prepares or reviews major public addresses or statements of the Commissioner. H e is also the Commissioner's principal liaison with committees and members of Congress. THE STATISTICAL DIVISION

T h i s division compiles the annual reports of collections by type of tax, returns filed, and other data reflecting the

23O

T H E NATIONAL

OFFICE

operation of the Service. A f t e r the end of the year this can be done by use of reports sent in by the various offices. But its activities extend beyond this. "Samples" of income tax returns filed are also elaborately analyzed for fiscal and economic data. These "samples" are chosen by arbitrarily designated account numbers. T w o in every thousand individual income tax returns on which less than $10,000 adjusted gross income is reported may be used; five out of every hundred showing such income between $10,000 and $30,000; twenty-five out of every hundred showing such income between $30,000 and $50,000, and all showing such income of $50,000 or more. In like manner sample returns of corporations, partnerships and fiduciaries are selected. A l l returns in the income ranges indicated and bearing the designated account numbers are sent by the Directors to the National Office where this division transcribes data on them to punch cards; the income of each segregation is totaled, and the totals are increased by the appropriate multiplier to reflect a probable total for each group. Thus, the multiplier for that of incomes below $10,000 is 500; between $10,000 and $30,000, 20, and so on. T h e division classifies reported incomes by size and character, such as dividends, or interest, and profits by categories of business activity. In the case of corporations, extensive fiscal and economic data are transcribed to the cards, and the principal items of income, deductions, assets, and liabilities are correlated. By the use of machines the data on these cards can be tabulated into geographic, economic, and other statistical segregations for fiscal reports, and numerous reports, based on sample data and on collection data, are prepared here for the T a x Advisory Staff of the Treasury, J o i n t Committee on Internal Revenue Taxation of Congress and other agencies, governmental and nongovernmental. T h e division also compiles and publishes

T H E NATIONAL

OFFICE

231

annually Statistics of Income with a supplemental "Source Book," which provides extensive fiscal and economic information for interested officials and the public. Its compilations and studies are of great use in planning fiscal legislation.

THE

CHIEF

COUNSEL'S

OFFICE

For legal advice and representation before the T a x C o u r t the services of a large staff of attorneys are available to the National and field offices of the Service. T h e s e attorneys are under the direction of a Chief Counsel to the Commissioner, and form part of the office of General Counsel of the Treasury Department. T h e group is organized along functional lines, and like the administrative personnel, is divided into divisions and sections. T h e several divisions are under five Assistant Chief Counsel, and the work of these divisions is wholly integrated with that of the administrative offices, as will appear from the description of their functions. For a logical presentation the counsel attached to the field offices will be described first. THE FIELD

OFFICES

In each R e g i o n (which, it will be recalled, consists of four or more contiguous Directors' Districts) a Regional Counsel and his staff serve as the principal legal advisor to the Regional Commissioner and have supervision of the performance of all legal functions within the Region. Under the Regional Counsel are four assistants who direct staffs that specialize in various types of legal work, as indicated by their titles: Civil Advisory Counsel, Attorney in Charge (Alcohol and T o b a c c o T a x ) , Enforcement Counsel, and Appellate Counsel. W h i l e all are attached to the Regional Commissioner's Office, members of their staffs are available

232

THE

NATIONAL

OFFICE

to all important offices for consultation. It should be stressed, furthermore, that the employment of attorneys by taxpayers in disputes with the Service is frequent, and tax practice has b e c o m e a very lucrative branch of the legal profession. Perhaps in no other country have tax controversies played so p r o m i n e n t a role in the legal field, or occasioned such a great v o l u m e of litigation as in the United States. A s a consequence, the need of administrative officers for legal advice is correspondingly great. T h e Office of Civil Advisory Counsel renders legal advice in connection with such problems as collection and protection of the Government's right and priority in its claims for taxes in bankruptcy proceedings, assignments to creditors, receiverships, insolvencies, mortgage foreclosures, corporate reorganizations, and liquidations. W h i l e civil suits for taxes and penalties are brought by attorneys of the Department of Justice, the staff of the Civil Advisory Counsel may be called u p o n to assist. T h e Office of Enforcement Counsel handles legal matters connected with criminal cases. These are referred for prosecution, however, to the Department of Justice, but on request the Enforcement Counsel assists in the prosecution. T h e Attorney in Charge (Alcohol and Tobacco Tax) and his staff render similar services in respect of legal questions involving those taxes. Claims for refund, abatement, and drawback may be referred to them for opinion. T h e y prepare recommendations for libel actions (for example, forfeiture of the property of infractors, or citations to revoke or suspend permits) and give advice, when asked, to enforcement personnel. T h e Appellate Counsel represents the Commissioner in cases in w h i c h the taxpayer has filed a petition for review by the T a x Court. Proceedings before the T a x Court are conducted with the same formalities as are proceedings be-

THE

NATIONAL

OFFICE

233

fore other Federal courts, and the Commissioner is simply one of the parties litigant. Since the sixteen T a x Court judges travel from city to city hearing cases, the Appellate Counsel is responsible for cases tried in many parts of the country. As the notice of deficiency (the 90-day letter) must set forth the grounds for the official determination of additional tax, the Appellate Counsel's Office may be consulted about its preparation. T h e field staffs of Chief Counsel's Office are branches of the staffs of the several Assistant Chief Counsels, but the functions performed at the National Office are somewhat more extensive, and will now be described. THE NATIONAL OFFICE

T h e Assistant Chief Counsel (Litigation) supervises the tax litigation of the Service—principally before the T a x Court—and is liaison officer with the Department of Justice, which acts for the Service in litigation before other courts. He is in charge of the Appellate Division and the Civil Division. T h e Appellate Division has charge of the defense of all cases brought by taxpayers before the T a x Court, and supervision over the preparation of records on review when either the taxpayer or the Commissioner appeals from the T a x Court's decision to a Court of Appeals. O n appeal, however, the case is handled by an attorney of the Department of Justice. A large staff of attorneys is required for this work. During the fiscal year 1951 the T a x Court rendered decisions in nearly fifty-five hundred cases either after trial or on stipulation, and the Commissioner won slightly over half. T h e cases involved over $200 million in taxes. T h e Civil Division determines the legal position of the Service in suits by taxpayers for refunds and by the Government against taxpayers for collection. While the actual trial

234

T H E

NATIONAL

OFFICE

is conducted by the Department of Justice, this division assembles the evidence, obtains witnesses, handles subpoenas and other Court processes, and assists at the trials if requested. T h e Assistant Chief Counsel (Enforcement) is in charge of the Enforcement Division, which post-reviews recommendations of the field Enforcement Counsel for or against criminal prosecutions, prepares recommendations to the Department of Justice regarding prosecutions, and gives legal opinions on the application of criminal penalties. When requested, he also advises the Intelligence Division on legal matters arising in the course of a fraud investigation. T h e Alcohol and Tobacco T a x Legal Division is subject to his supervision. T h e Assistant Chief Counsel (Administration) is responsible for the management of the entire Office of the Chief Counsel and general office administration. T h e Assistant Chief Counsel (Technical) is in charge of the Legislation and Regulations Division and the Interpretative Division, both of which serve to make available to the public detailed technical knowledge of Service policy in application of the Code. T h e Legislation and Regulations Division has two distinct functions: It studies and considers suggestions for amendments and modifications of the Internal Revenue Code; participates in the drafting of proposed new legislation; keeps in touch with the Legal Advisory Staff of Treasury and the committees of Congress; and makes reports on proposals of new legislation to the Commissioner and General Counsel of Treasury. Its second function is the preparation of regulations for the various taxes imposed by the Code. These regulations are in part explanatory and interpretative of the text of the various Code sections, containing examples of their prac-

THE NATIONAL

OFFICE

235

tical application, and in part they supplement and complete the law. In the latter case they never change or expand it in the sense of new legislation, but because sections are brief, the Code itself provides repeatedly that its provisions shall be carried out "under rules and regulations prescribed by the Commissioner with the approval of the Secretary." A n example is section 23(111) which permits a taxpayer to deduct "a reasonable allowance for depletion" of natural deposits such as mineral ores. Congress did not attempt to define "reasonable" or even to provide a measure for each type of natural deposit; instead, Congress placed it within the power of the Commissioner, with the Secretary's approval, to prescribe the rules by which the taxpayer should be guided in arriving at a "reasonable" amount. Insofar as they carry out the Code provisions, these regulations have the force and effect of law. But if they go beyond the discretion granted, a court may hold them invalid—and courts have done so on some occasions. T h e Interpretative Division is concerned with questions arising in specific cases. It will be recalled that an administrative officer or a taxpayer may submit to the Technical Rulings Division for solution a tax problem with which he is confronted. If a difficult legal question is involved, the query will be referred for advice to the Interpretative Division. If a ruling has been prepared in which a doubtful legal question is involved, the director of the division or the Assistant Commissioner (Technical) may route it to the Interpretative Division for approval before the ruling is issued. Obviously the doubtful, difficult, and controversial questions in current tax administration are channeled here with the result that the Digest Section of the division, which maintains a file of the rulings and de-

236

THE

NATIONAL

OFFICE

cisions readily available for research and reference, comprises the essence of current interpretation. It will be recalled that the Bulletin and Analysis Branc h of the Special Technical Services Division selects and edits for publication in the Internal Revenue Bulletin the various rulings and directives of the Service for official guidance and public information. Because of the legal consequences which these rulings usually involve, it is important that the wording of the published condensation and the propriety of the insertions as a matter of policy be carefully reviewed from a legal angle. This review is a function of the Interpretative Division, which attempts to insure that all facts relevant to the conclusion reached are set forth and also that publication will not hinder or embarrass the Service's position on related questions which are or may be the subject of controversy or litigation. The division also reviews closing agreements and, when requested, briefs (that is, written arguments) in cases before the T a x Court. It participates in work of the Forms Committee. The work of the Assistant Chief Counsel (Claims) is divided between two divisions. The Review Division is responsible for the review of overpayments in income, estate, and gift taxes and overassessments of unpaid tax or reductions in tax under certain adjustments as scheduled by Directors' Offices if the abatement, credit, or refund exceeds $200,000. By Section 3777 of the Code the Commissioner is required to submit a report on each such action proposed to the Joint Committee of Congress on Internal Revenue Taxation, and no refund or credit may be made until thirty days after this report has been furnished. The committee reports annually to Congress the names of all recipients.* • See section 46 of Supplement.

T H E NATIONAL OFFICE

237

The Claims Division has three functions, each of which relates to the protection of the tax revenues. If a taxpayer is involved in a bankruptcy or receivership, or is undergoing corporate reorganization, or in any other way is undergoing a change of status, the Claims Division attorneys are watchful to protect the Government's interests. The division also handles all cases in which tax liens must be placed on a taxpayer's property or in which mortgages must be foreclosed. Finally, when all else fails and the taxpayer cannot, or will not, pay his tax, the Claims Division reviews the taxpayer's offer to compromise his tax liability.

APPENDICES

Appendix

A

THE INTERNAL REVENUE SERVICE An Outline of Its

Organization

T H E N A T I O N A L OFFICE, W A S H I N G T O N , D.C. THE THE

COMMISSIONER

DEPUTY

OF

COMMISSIONER

INTERNAL OF

REVENUE

INTERNAL

REVENUE

THE

ASSISTANT C O M M I S S I O N E R

(OPERATIONS)

THE

ASSISTANT

COMMISSIONER

(TECHNICAL)

THE

ASSISTANT C O M M I S S I O N E R

(INSPECTION)

THE

ASSISTANT C O M M I S S I O N E R

THE

ASSISTANT C O M M I S S I O N E R

U N D E R T H E ASSISTANT C O M M I S S I O N E R COLLECTION

(ADMINISTRATION)

DIVISION

(PLANNING)

(OPERATIONS)

Collection Accounting Branch Stamp Section Revenue Accounts Section Collection Accounts Auditing Unit Refund Accounts Auditing Unit Statistical Unit Control Section Assessment Unit Overassessment Unit Readjustment Unit Compromise Unit Collection Procedures Branch Methods and Procedure Section Electronic Accounting and Calculating Procedures Section Delinquent Accounts and Returns Branch

242

APPENDIX

AUDIT DIVISION

Planning and Procedures Branch Audit Procedures Section Forms and Manuals Section Uniform Audit Branch Corporation Audit Section Individual Audit Section Estate and Gift Audit Section Wage and Excise Audit Section Alien Returns Section Audit Services Branch Files Section Returns Inspection and Bankruptcy Section Stenographic and Typing Section ALCOHOL AND TOBACCO TAX DIVISION

Permissive Branch Plant Section Laboratory Section Planning and Procedure Section Field Section Basic Permit and Trade Practice Branch Permit and Label Section Advertising Section Trade Practice Section Enforcement Branch Examining and Coordination Section Raw Materials Section Technical Laboratory Tobacco T a x Branch Technical Bonds and Claims Section Capital Stock Section INTELLIGENCE DIVISION

T a x Fraud Branch Special Investigations Branch APPELLATE DIVISION

Settlement Review Branch Special Services Branch Compromise Branch * • See section 43 of Supplement.

A

APPENDIX

A

UNDER THE ASSISTANT COMMISSIONER

(TECHNICAL)

INTERNATIONAL T A X RELATIONS DIVISION TECHNICAL PLANNING DIVISION

Technical Program Branch Technical Analysis Branch TECHNICAL RULINGS DIVISION

#

Income T a x Ruling Branch f Corporation T a x Ruling Branch f Estate and Gift T a x Ruling Branch f Employment T a x Ruling Branch f Excise T a x Ruling Branch f Exempt Organizations Branch Pension Trust Branch Reorganization and Dividend Branch SPECIAL T E C H N I C A L SERVICES DIVISION

Engineering and Valuation Branch Natural Resources Section Public Utilities Section Appraisal Section Estate and Gift T a x Valuation Section Court Defense Section Bulletin and Ruling Analysis Branch UNDER THE ASSISTANT COMMISSIONER (INSPECTION) INTERNAL AUDIT DIVISION INTERNAL SECURITY

DIVISION

UNDER THE ASSISTANT COMMISSIONER

(ADMINISTRATION)

FISCAL M A N A G E M E N T DIVISION OPERATING FACILITIES DIVISION

Printing and Reproduction Branch Supplies and Equipment Branch Communications Branch Space Procurement and Utilization Branch PERSONNEL DIVISION

Position Classification Branch Classification Section Classification Standards Section Placement Branch Placement Program Section • See section 45 of Supplement, t Subdivided into specializing sections.

244

APPENDIX A Placement Operations Section Departmental Branch Classification Section Placement Section

TRAINING

DIVISION

Program Development Branch Field Supervision and Coordination Branch Departmental Instruction Branch PUBLIC INFORMATION

DIVISION

U N D E R T H E ASSISTANT COMMISSIONER

(PLANNING)

STATISTICAL DIVISION

Coding Branch Card Punch and Verifying Branch Research and Compilation Branch Production Statistics Branch OFFICE OF T H E CHIEF COUNSEL THE THE

ASSISTANT C H I E F

APPELLATE CIVIL THE

CHIEF

COUNSEL

COUNSEL

(LITIGATION)

COUNSEL

(ENFORCEMENT)

DIVISION

DIVISION

ASSISTANT C H I E F

ENFORCEMENT

DIVISION

A L C O H O L AND TOBACCO T A X

DIVISION

THE

ASSISTANT C H I E F C O U N S E L

(ADMINISTRATION)

THE

ASSISTANT C H I E F

(TECHNICAL)

COUNSEL

L E G I S L A T I O N AND REGULATIONS INTERPRETATIVE THE

ASSISTANT C H I E F

REVIEW

DIVISION

CLAIMS

DIVISION

DIVISION

DIVISION COUNSEL

(CLAIMS)

OFFICE OF T H E REGIONAL COMMISSIONER THE ASSISTANT R E G I O N A L

REGIONAL

COMMISSIONER

COMMISSIONER

Budget and Fiscal Branch

(ADMINISTRATION)

APPENDIX A

Personnel Branch Operating Facilities Branch ASSISTANT R E G I O N A L COMMISSIONER

(COLLECTION)

ASSISTANT R E G I O N A L COMMISSIONER

(AUDIT)

ASSISTANT R E G I O N A L COMMISSIONER

(INTELLIGENCE)

ASSISTANT R E G I O N A L COMMISSIONER ( A L C O H O L AND TOBACCO

TAX)

Permissive Branch Inspection Section Bonded Accounts Section Laboratory Section Enforcement Branch Special Investigative Section ASSISTANT R E G I O N A L COMMISSIONER R E G I O N A L INSPECTOR

(APPELLATE)

(INSPECTION)

Internal Audit Division Internal Security Division

R E G I O N A L C O U N S E L ( C H I E F COUNSEL'S

OFFICE)

Civil Advisory Counsel Enforcement Counsel Appellate Counsel Attorney in Charge, Alcohol and Tobacco T a x T H E D I S T R I C T DIRECTOR'S OFFICE THE THE

DISTRICT

DIRECTOR

ASSISTANT DISTRICT

ADMINISTRATIVE DIVISION

Budget and Finance Branch Personnel Branch Miscellaneous Service Branch

COLLECTION

DIVISION

Cashier Branch Receipts and Deposits Section Mail Unit Receiving and Clearing Unit Deposits Unit Window and Stamp Tellers

* Some m i n o r subdivisions are not shown.

DIRECTOR

246

APPENDIX

A

Returns Processing Branch Computation, Verification and Matching Section Computation, Verification and Matching Unit Calculating Machine Unit Stenographic and Typing Unit Returns Index and Service Section Returns Files Unit Card Index Unit Miscellaneous Service Unit Accounting Branch Accounts Section Control Unit Listing Unit Bookkeeping Unit Account Card Unit Bills and Warrants Unit Suspense Accounts Unit Adjustments Unit Claims Section Delinquent Accounts and Returns Branch Delinquent Accounts and Returns Section Special Procedures Section Alien Tax Section AUDIT DIVISION

Office Audit Branch Individual and Corporation Tax Section Wage and Excise T a x Section Field Audit Branch Individual and Corporation Tax Section Wage and Excise T a x Section Estate and Gift T a x Section INTELLIGENCE DIVISION

Tax Fraud Branch Special Investigations Branch A L C O H O L AND TOBACCO TAXES (REGIONAL A P P E L L A T E DIVISION (REGIONAL ATTORNEYS O F C H I E F

BRANCH)

BRANCH)

COUNSEL'S OFFICE

(REGIONAL

PERSONNEL)

Appendix

B

THE LEGISLATIVE PROCESS

T h e Internal Revenue Code, which embodies all federal tax laws with the exception of customs duties and a very few others, is normally amended by general or special revenue acts one or more times a year. A proposed law (bill) must be introduced in the House of Representatives for this purpose, passed by a majority of the votes of the House, then passed by a majority of the votes of the Senate, and then sent to the President for signature. Within ten days of its receipt the President may sign it or may do nothing; in either event it becomes law. T h e President may also veto the bill. If he does so, the House and Senate may again vote on it, and if two thirds of the votes of each Chamber are in favor, the bill becomes law despite the President's veto. A general revenue bill contains a number of major amendments and modifications of the Code. It is developed to a large extent by studies in the analysis staff and legal advisory staff of the Treasury, both of which work closely with the Legislation and Regulations Division of the Chief Counsel's Office and the Technical Planning Division of the Internal Revenue Service. T h e Treasury staffs also exchange views with the staff of the J o i n t Committee on Internal Revenue Taxation, a standing committee of the Congress, which considers fiscal and administrative problems. Its staff is a body of experts who advise the committees of Congress on technical matters. T h e groups concerned with legislation hold numerous conferences with representatives of industrialists, banks, manufacturers, labor unions, and any other group of taxpayers interested in some phase of tax legislation. A tax program to accord with the views of the Administration is formulated, and this program in outline is normally incorpo-

248

APPENDIX

B

rated in the budget message which the President delivers to Congress in January of each year. In this message he suggests measures which he wishes the Congress to enact into law, and if occasion arises, he may also propose tax legislation by special messages at other times. Thereafter, the Secretary of the Treasury or his representative appears before the Ways and Means Committee of the House to present the tax proposals in detail. A bill is introduced for their enactment, and the Committee proceeds to hold public hearings at which taxpayers' representatives may give their views. T h e printed reports of these views often fill hundreds of pages and are carefully considered. After the public hearings the Ways and Means Committee, which consists of congressmen specializing in government finance matters, enters executive session, that is, a closed session in which it makes a detailed study of the bill, the criticisms urged against it, its probable economic and social consequences, its administrative aspects, and so on. In this study the experts on the staff of the Joint Committee assist, and when requested, the Treasury Department sends experts to explain the bill's provisions. T h e Treasury, as a part of the Administration, is, of course, defending its own proposals; the staff of the Joint Committee has a more critical approach. T h e executive sessions of the Committee are secret, but conclusions reached concerning specific provisions are sometimes published in the Congressional Record. T h e Committee may and usually does make numerous changes in bills so that parts of them have to be redrafted. T h e redrafting is done by the Office of Legislative Counsel of the House. This is a function which requires the greatest circumspection to avoid unintended results, and Treasury representatives may be called in to assist. When the Committee is satisfied with the draft, the bill is "reported" to the House, that is, the Committee places it before the House for discussion and vote with recommendation of passage. It gives its reasons for favoring passage in a printed report. Usually all members of the Committee are not in agreement; the minority also has a report printed with reasons why the bill should not be passed. In due course, debate on the bill by the members of the House begins. It may be that one or more provisions or omissions are harshly criticized, but under present rules no amendment can

APPENDIX B

249

be m a d e except by direction of the C o m m i t t e e . W h e n debate ends, the members vote and if a majority favor enactment, the bill is said to be "passed," and is t h e r e u p o n referred to the Senate. T h e Senate Finance C o m m i t t e e , w h i c h in 1951 consisted of seven senators of the majority party a n d six of the minority party, then begins a study and analysis similar to that of the W a y s a n d Means C o m m i t t e e , utilizing the services of the staff of the Joint C o m m i t t e e . T h e Secretary of the T r e a s u r y or his representative appears before it to present the views of his department and thereafter public hearings are again held. W h e n these are ended, the C o m m i t t e e enters executive session; changes are usually made; redrafting done by Legislative C o u n s e l of the Senate, and finally the bill so altered is " r e p o r t e d " to the Senate. Reports of the majority and minority views of the Finance C o m mittee are also published. It is not amiss to add that remarks in the congressional reports may be recognized as evidentiary of the m e a n i n g that Congress intended for provisions w h i c h may be unclear in some respects. D e b a t e on the bill follows in the Senate. U n d e r Senate rules any senator may propose a change in the bill as reported; debate and vote on a m e n d m e n t s are allowed, a n d if the vote is favorable, the bill is accordingly modified. W h e n debate has ended, vote is taken on the bill as amended. If the vote is against enactment, there is an end of the proposed legislation. If the vote is for enactment, the bill passed differs from the House bill passed. T o eliminate these differences, a conference is held between designated members of each C h a m b e r . T h e y proceed to " i r o n o u t , " that is, compromise, their differences w i t h o u t otherwise c h a n g i n g the two bills. T h i s procedure involves more study a n d redrafting, a n d after r e a c h i n g agreement on a single text, the conferees " r e p o r t " the final bill to their respective C h a m b e r s . If a p p r o v e d in identical form by both Chambers, the bill is sent to the President for his action, as described above. In addition to the general bills any m e m b e r of the House of Representatives (but not of the Senate) may introduce a special bill of limited scope for a change or a m e n d m e n t in the C o d e . T h e i n t r o d u c i n g congressman may act at the instigation of T r e a s u r y in so doing. His bill is referred to the W a y s a n d Means

250

APPENDIX B

Committee, which asks Treasury's views on it, and Treasury normally transmits it to the Internal Revenue Service for study and comment. For the most part, the procedure followed thereafter is the same as that used for a general bill, although it depends on how important the measure is. For the less important special bills, public hearings and executive sessions may be omitted.

SUPPLEMENT

SUPPLEMENT P R I N C I P A L C H A N G E S M A D E BY THE INTERNAL REVENUE

CODE

OF 1954

1. (Page 3) On August 16, 1954, the President approved the Internal Revenue Code of 1954 (Public Law No. 5 9 1 , 83rd Congress, 2d Session), which had been passed by Congress and became law upon his approval. Unlike other revenue laws enacted since 1939, this law did not amend the prior Code but replaced it. By the Code of 1954, however, the substance of the provisions of the prior Code was reenacted with some modifications of detail and minor additions. T h e principal changes are indicated below. 2. (Page 13) T h e distinction between normal tax and surtax on the income of an individual, while recognized, is not reflected in two rates. Instead the same mathematical result is achieved by a credit against tax equal to 3 percent of partially exempt interest on certain bonds of the Federal Government and its agencies (Section 35). A single table of tax rates beginning at 20 percent on the first $2,000 of taxable income gradually increases to 91 percent on the portion in excess of $200,000; for the head of a household the rates are lower in accordance with the tables shown below, but in no event shall the tax exceed 87 percent of total taxable income (Sections 1, 2). 3. (Pages 14, 44) For taxable years beginning after April 1, 1955, the normal tax on a corporation's income is fixed at 25 percent and the surtax at 22 percent (Section 1 1 ) .

254

SUPPLEMENT R A T E S FOR AN INDIVIDUAL O T H E R T H A N H E A D OF A H O U S E H O L D

If the taxable income is:

The tax is:

N o t over $2,000

20% of the taxable income

Over $2,000 b u t not over $4,000 6,000 4,000 8,000 6,000 8.000 10,000 " 10,000 12,000 14,000 12,000 " 16,000 14,000 16,000 18,000 20,000 18.000 " 20,000 " 22,000 26,000 22,000 26,000 32,000 " 32,000 38,000 " 38,000 44,000 " 44,000 50,000 60,000 50,000 60,000 70,000 70,000 80,000 80,000 90,000 " go,000 100,000 150,000 " 100,000 150,000 200,000 Over 200,000

$400 plus 2 2 % of the excess over $2,000 840 " 2 6 % 4,000 1,360 " 30% 6,000 1,960 " 3 4 % 8,000 2,640 " 3 8 % 10,000 12,000 3,4°° " 4 3 % 4,260 " 4 7 % 14,000 5,200 " 5 0 % 16,000 6,200 " 5 3 % 18,000 7.260 " 5 6 % 20,000 8,380 " 5 9 % 22,000 10,740 " 6 2 % 26,000 14,460 " 6 5 % 32,000 18,360 " 6 9 % 38,000 22,500 " 7 2 % 44,000 26,820 " 7 5 % 50,000 60,000 34.320 " 78% 42,120 " 8 1 % 70,000 50,220 " 8 4 % 80,000 58,620 " 8 7 % 90,000 67,320 " 89% 100,000 111,820 " 90% 150,000 156,820 " 9 1 % 200,000

R A T E S FOR HEAD OF A HOUSEHOLD If the taxable income is:

The tax is:

Not over $2,000

20% of the taxable income

Over

$2,000 but not over $4,000 4,000 6,000 6,000 8,000 10,000 8,000 12,000 10,000 14.000 12,000 14,000 16,000 16,000 18,000 18,000 20,000 20,000 22,000 22,000 24,000 28,000 24,000

S400 plus 2 1 % of the excess over 820 24 % 1,300 ' 26% 1,820 ' 3 ° % 2,420 ' 3 2 % 3,060 36% 3.780 ' 39% 4,560 42% 5,400 43% 6,260 47% 7,200 ' 4 9 % 8,180 52%

$2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,OOO 24,000

SUPPLEMENT

»55

R A T E S FOR HEAD OF A H O U S E H O L D Jf the taxable income is:

The tax is:

000 Over 28,000 but not over 32,000 38,000 44,000 38,000 50,000 44,000 " 50,000 " 60,000 " 60,000 " 70,000 " 70,000 " 80,000 " 80,000 " 90,000 " go,000 " 100,000 150,000 " 100,000 " 200,000 150,000 " 200,000 " 300,000 Over 300,000

10,260 plus 12420 " > 5-9«> " 19,620 " 23.580 " So.S 80 " 3748O " 44,880 " 52480 " 60480 " 101,980 " 145480 " 235480 "

(Continued)

5 4 % of the excess over 28,000 32,000 58% 38,000 62% 44,000 66% 50,000 68% 60,000 7»% 70,000 74% 80,000 76% 90,000 80% 100,000 83% 150,000 87% 200,000 90% 300,000 91%

4. (Page 16) In mitigation of the double tax on corporate profits distributed as dividends, the shareholder is permitted to deduct from his individual income $50 of dividends of domestic corporations and to credit against his income tax an amount equal to 4 percent of his dividends in excess of $50. T h e credit may not exceed in amount 4 percent of taxable income or the total amount of tax which would be payable if the credit were not taken. T h e deduction and credit may not be taken by nonresident aliens unless they are engaged in trade or business or employed in the United States (Sections 34, 116). 5. (Page 17) Expressly included in gross income are prizes and awards received by the taxpayer except those granted as scholarships or fellowships at educational institutions or for research and the like and those received without solicitation in recognition of past achievements of a religious, charitable, scientific, educational, artistic, literary, or civic nature (Sections 75, 117). 6. (Page 18) A deduction of expenses incurred in connection with the determination, collection, or refund of any tax is authorized (Section 212). 7. (Page 19) In addition to the deduction of charitable

256

SUPPLEMENT

contributions aggregating 20 percent of adjusted gross income, an individual may deduct up to 10 percent more if the contributions claimed were made to a church, a taxexempt hospital, or tax-exempt educational organization. T h e limitation on the amount of contributions deductible is entirely removed in the case of an individual who in the taxable year and in eight of the preceding ten years made charitable contributions which, together with his income taxes, exceeded 90 percent of his income (Section 170). A corporation's deductions for charitable contributions remain limited to 5 percent of taxable income, but the excess may serve as a deduction for two succeeding years within the same percentage limitation. Medical expenses may be deducted by persons under 65 years of age to the extent that they exceed 3 percent of adjusted gross income and by persons over 65 years without the 3 percent exclusion, but such expenses incurred for the purchase of medicine and drugs are taken into account only to the extent that they exceed 1 percent of adjusted gross income. T h e maximum deduction is limited to $2,500 for a taxpayer without dependents for whom he is granted exemptions; to $5,000 for a taxpayer who has dependents, but is single and not the head of a household or is married but files a separate return. For the head of a household or a married taxpayer with dependents who files a joint return, the maximum deduction is $10,000. A new deduction is granted for the care of a child necessitated by the parent's employment. Expenses up to $600 paid for the care of a dependent child or stepchild under 12 years of age or physically incapacitated may be deducted by a woman or a widower who incurred the expense because employed. T o obtain the deduction a married woman must file a joint return with her husband. If the joint income,

SUPPLEMENT

257

however, exceeds $4,500, the excess reduces the deduction so that it vanishes if the joint income reaches $5,100. T h e number of children is not taken into account. 8. (Page 21) For the computation of depletion the following percentages of gross income from the mineral property (exclusive of rents or royalties paid for its use) are prescribed, but in an amount not exceeding 50 percent of the taxpayer's taxable income from the property: 27Y2 percent: oil and gas wells; 23 percent: sulphur and uranium; if from domestic deposits: anorthosite (to the extent used for extractions of aluminum), asbestos, bauxite, beryl, celestite, chromite, corundum, fluorspar, graphite, ilmenite, kyanite, mica, olivine, quartz crystals (radio grade), rutile, block steatite, talc, zircon, and ores of antimony, bismuth, cadmium, cobalt, columbium, lead, lithium, manganese, mercury, nickel, platinum, tantalum, thorium, tin, tatanium, tungsten, vanadium, and zinc; 15 per cent: ball clay, bentonite, china clay, sagger clay, rock asphalt, vermiculite, and all other metal mines not covered above and also all other minerals, except that the rate is 5 percent on the other minerals when used or sold for road material, ballast, and like uses; 10 percent: asbestos (not domestic), brucite, coal, lignite, perlite, sodium chloride, and wollastonite; 5 percent: brick and tile clay, gravel, mollusk shells, peat, pumice, sand, scoria, shale, and stone; also bromine, calcium chloride, and magnesium chloride extracted from brine walls (Section 613). T h e deduction may be taken by the mineowner or operator for the depletion of deposits of waste or residue of mines from which ores or minerals are extracted (Section 6 1 1 ) . 9. (Page 22) T h e definition of dependent is expanded to include cousins and any individual whose principal place

258

SUPPLEMENT

of abode during the taxable year was the taxpayer's home and who was a member of the taxpayer's household, or a dependent, otherwise qualified, who is kept by the taxpayer in an institution because of mental or physical disability. If several persons support a dependent but no one contributes over half the support, the group may designate one of their number, who provided at least 10 percent of the support, to take the deduction. A child who is under 19 years of age or who attends school at least five months of the taxable year is qualified as a dependent even if he earns $600 or more during the year (Section 152). 10. (Pages 23, 25) T h e final filing date for the income tax return of an individual or partnership prepared on the basis of a calendar year is April 15; for the return of a corporation, March 15. An individual or partnership reporting on the basis of a fiscal year must file on or before the fifteenth day of the fourth month following the close of the fiscal year; a corporation, on or before the fifteenth day of the third month. T h e return of a nonresident alien or nonresident foreign corporation is due on June 15 or six months after the close of its fiscal year (Section 6072). The individual must also file his declaration of estimated tax and pay the first installment by April 15; the due dates for payment of the subsequent installments are June 15, September 15, and January 15 (Section 6153). 1 1 . (Page 25) A declaration of estimated tax is required of any citizen or resident who expects to receive over $100 of gross income other than wages or salary (on which tax is withheld) and a total gross income exceeding §400 plus the product of his exemptions multiplied by $600. If gross income is expected to consist of wages or salary and less than $100 additional, a single individual (other than the head of a household) or a married individual not entitled to file a joint return with his spouse is required to file a declaration

SUPPLEMENT

259

of estimated tax only if anticipated gross income will exceed $5,000. A married individual who is entitled to file a joint return must file the declaration if he anticipates a separate gross income of $5,000 and a joint gross income of over $10,000; the head of a household, if he anticipates a gross income of over $10,000 (Section 6015). N o individual over 65 years of age is required to file any return if his gross income does not exceed $1,200 (Section 6012). 12. (Page 27) T h e transfer of all substantial rights to a patent by the inventor or a person who acquired the patent for a purchase price before the invention was put to use is classed as the sale or exchange of a capital asset held for more than six months, even although periodical payments or royalties contingent on use or productivity were received as price for the transfer (Section 1235). 13. (Page 43) A net operating loss may be carried back for two preceding years and forward for five succeeding years (Section 172). T h e capitalization or deduction of expenditures for experiment or research connected with the taxpayer's business is authorized. If the latter is elected, the taxpayer may treat the expenditures as deferred expenses and deduct them ratably over a period of his choice, but not less than 60 months (Section 174). A corporation may similarly treat the expenses of its organization and deduct them ratably over a period of not less than 60 months (Section 248). 14. (Page 44) T h e final filing date for the corporation's income tax return prepared on the basis of a calendar year remains March 15 and for the return prepared on the basis of a fiscal year, the fifteenth day of the third month after the close of the fiscal year (Section 6072). Payment of tax is due when the return is filed, but half may be paid three months later (Sections 6151-2).

26O

SUPPLEMENT

A new requirement is that a corporation which anticipates a tax in excess of $100,000 file a declaration of estimated tax for years ending on or after December 3 1 , 1955, on the fifteenth day of the ninth month of its taxable year. T h e "estimated tax" for this purpose means probable tax in excess of $100,000 plus tax credits. A payment of 5 percent of the estimated tax must be made when the declaration is filed and a like payment by the fifteenth day of the twelfth month, or a total advance payment of 10 percent. T h e amount of the installments automatically increases each year after 1955, reaching 25 percent by 1959, or 50 percent for both installments (Sections 6016, 6074, 6154). T h e Secretary is authorized to require of a corporation an information return, showing each payment of interest and each payment of $600 or more made by it in the course of business as dividends, salaries, wages, rents, premiums, annuities, or other income, indicating the name and address of the payee (Section 6041). T h e latter requirement applies also to anyone in trade or business. 15. (Page 54) Transactions between a partner and his partnership which do not involve the partner's capacity as a member of the firm are treated for tax purposes as though the partner were not a member of the firm (Section 707). In other respects a partnership is to be regarded as a conduit through which income and loss items are transferred directly to partners (Sections 7 0 1 - 7 7 1 ) . A partnership of less than 50 members and any individual proprietor or proprietors, less than 50 in number, who own a business of which at least 50 percent of the income is derived from sales of real property, stocks, securities, or commodities, or in which capital is an income-producing factor, may elect to be taxed as a corporation. This election, once made, is irrevocable. It is not available for businesses owned in whole or in part by a nonresident alien (Section 1361).

SUPPLEMENT

26l

16. (Page 58) T h e definition of a personal holding company is modified: the first condition is that 80 percent of gross income for years subsequent to the first consist of the types designated as personal holding company income, and not 70 percent as heretofore. A company which individually qualifies as a personal holding company is not so classed if it is the member of an affiliated group which files a consolidated return and the group as a whole does not qualify (Section 542). Rents and mineral, oil, and gas royalties are treated as personal holding company income unless they constitute 50 percent or more of gross income; but rents paid to a shareholder who owned 25 percent of the stock during the taxable year are so treated only if 10 percent or more of the company's other income was of a personal holding company character (Section 543). T h e second return, Form 1120H, is no longer required, but a schedule must accompany Form 1120, showing the information necessary for a determination of whether or not the taxpayer qualifies as a personal holding company (Section 6501). 17. (Page 60) Income from United States sources taxable to a nonresident alien or foreign corporation not engaged in trade or business in the United States comprises a payment made through an employees' trust on account of the alien's separation from the employer's service, proceeds from sales of timber and coal in which the seller retained some economic interest, and income from the sale of patent rights (Section 871). 18. (Page 65) For the former method of computing the element of income in an annuity payment there is substituted a method whereby the annual payment received is reduced by an amount which bears the same ratio to the annual payments as the total prospective payments over the years bear to the cost of the contract. T h e prospective annual payments can be accurately computed if they are to

262

SUPPLEMENT

be made for a fixed period. If they are to be made for the life of the annuitant, the prospective total is the product of the annual payment multiplied by the years of the annuitant's life expectancy as indicated by actuarial tables at the time when the payments began. A person who receives taxable "retirement income" after earning income for at least 10 years is entitled to credit 20 percent of it against income tax up to a maximum credit of $240. Retirement income is defined as pensions and annuities paid under a public retirement system in the case of a taxpayer under 65 years of age, and as pensions, annuities, rents, interest, and dividends in the case of one over 65 years of age. Tax-exempt receipts such as social security benefits, however, reduce retirement income for credit purposes. A taxpayer under 75 years of age must also exclude from retirement income his earnings in excess of $900 a year. T h i s credit may not be taken by a nonresident alien (Section 27). 19. (Page 68) T o be subject to the penalizing tax for excessive accumulation of profits, a corporation's surplus must exceed a minimum $60,000 credit and must exceed the "reasonably anticipated" needs of its business. In a proceeding before the T a x Court which involves a determination that accumulated profits are excessive, the burden of proof is placed on the Commissioner (Sections 531—537). 20. (Page 69) T h e 95 percent ownership required for right to file a consolidated return is reduced to 80 percent (Section 1504). 21. (Page 71) T h e computation of the estate tax is simplified by elimination of the basic tax and the substitution of a credit up to specified maxima for any succession tax paid to a State. T h e exemption of $60,000 is retained. 22. (Page 73) Life insurance proceeds are includible in gross estate if the decedent owned the policy or held inci-

SUPPLEMENT

263

dents of ownership or a reversionary interest exceeding 5 percent of the policy's value as computed by actuarial tables. The premium payment test has been removed (Section 2042). The value of property gratuitously transferred during life is likewise includible in gross estate only if the decedent's reversionary interest exceeds 5 percent of its value at his death (Section 2037). 23. (Page 76) The benefits obtained under prior law by the deduction of the value of property previously subjected to tax are provided by the new Code in the form of a credit for the amount of tax paid on the value of property of a second decedent which is included in gross estate. The credit is for the full amount of tax if the second decedent died within two years before or after the death of the decedent whose estate is being taxed, but is decreased by 20 percent for each additional two years if the second decedent died first, so that no credit is allowed if the period between deaths was ten years or more. 24. (Page 77) The stock of a foreign corporation is no longer regarded as situated in the United States even if the certificate is held there (Section 2104). 25. (Page 78) A nonresident alien who is not engaged in trade or business in the United States is not subject to tax on gifts of intangible property situated in the United States (Section 2501). 26. (Page 78) The final filing date for a gift tax return is April 15, not March 15 (Section 6075). 27. (Page 82) The rate of FICA tax is 4 percent: 2 percent payable by the employee and 2 percent payable by the employer (Sections 3101, 3 1 1 1 ) . 28. (Page 87) The rate of self-employment tax is 3 percent of self-employment income (Section 1401). 29. (Page 92) After April 1, 1955, the tax on distilled spirits is $9 a proof gallon. The reporting and payment of

SUPPLEMENT

264

taxes on alcoholic products by the use of returns instead of by stamps is authorized under regulations to be prescribed (Sections 5008, 5061). 30. (Page 93) N o charge is prescribed for bottle stamps indicating quantity and tax payment of liquors and wines (Section 5008). 31. (Page 94) T a x rates on each gallon of still wine after A p r i l 1, 1955: Y 2 % but not over 14% alcohol Over 14% but not over 21 % alcohol Over 21 % but not over 24% alcohol

$.15 .60 2.00

T a x rates on each gallon of champagne, sparkling wines, and artificially carbonated wines and liqueurs, after April 1, >955: Champagne and sparkling wines Artificially carbonated wines Liqueurs, cordials, and the like

$3.00 2.00 1.60

T h e tax on beer after April 1, 1955 is S8 a barrel (Sections 5001, 5022, 5041, 5051). 32. (Page 95) Because of the reduction of tax on alcoholic products April 1, 1955, a refund of tax paid on floor stocks above the reduced rates is authorized (Section 5063). 33. (Pages 98, 99) O n April 1, 1955, the tax rates on cigarettes are (Section 5701): Classification

Cigarettes weighing 3 pounds or less per 1,000 Cigarettes weighing over 3 pounds per 1,000

Unit

1,000 1,000

Tax

$3.50 8.40

34. (Page 98) T h e reporting and payment of taxes on tobacco and tobacco products by the use of returns instead of by stamps is authorized under regulations to be prescribed by the Secretary (Section 5703). 35. (Pages 98, 101) Manufacturers of tobacco products

265

SUPPLEMENT

and dealers in tobacco materials (including dealers in leaf tobacco) are required to procure a permit to do business and to give bond for compliance with requirements' of the Internal R e v e n u e Code under regulations to be prescribed by the Secretary. Registration is not required. A dealer in leaf tobacco, n o w termed "dealer in tobacco materials," is authorized to deal in all tobacco materials (Sections 36. (Page 113) T h e following excise tax rates are in effect: Electric, gas, and oil appliances Electric light bulbs Household refrigerators Photographic equipment: cameras, film Household picture projectors Cigarette lighters, mechanical pencils Sporting goods Pistols and revolvers Other firearms, shells, and cartridges

5% 10% 5% 10% 5% 10% 10% 10% n'/c

of of of of of of of of of

price price price price price price price price price

T h e f o l l o w i n g excise tax rates are effective from April 1,

>955: Gasoline Motor trucks and busses Passenger automobiles and motorcycles Automobile accessories and parts

1 y , cents per gallon 5 % of price 7 % of price 5 % of price

37. (Page 115) T h e following excise tax rates are in effect: Jewelry Timepieces Furs Cosmetics and toilet articles Luggage

10% 10% 10% 10% 10%

of of of of of

price price price price price

38. (Page 123) T h e tax on communication by telephone and telegraph, including local telephone service, is 10 per-

266

SUPPLEMENT

cent of the cost of the service, with the exception of leased wire and equipment service which remains taxable at 8 percent (Section 4251). 39. (Page 124) T h e tax on the transportation of persons within the United States by rail, motor vehicle, or water and within or without the United States by air is 10 percent of the amount paid in the United States for the transportation. A tax of 10 percent is also imposed on transportation which begins and ends in the United States if the payment for it was made without the United States (Section 4261). 40. (Page 125) T h e tax on admission to a place of amusement is one cent on each 10 cents of the price except to horse and dog races for which the admission tax remains one cent on each 5 cents of price. A tax of 10 percent (or for race tickets 20 percent) is imposed on the excess above established price on tickets not sold at the box office. T h e cabaret tax remains 20 percent of the price paid for admission and refreshment (Section 4231). 41. (Page 130) In the case of alcohol and other taxes, the penalty is computed on the basis of the tax reduced by payments made or credits available against the tax due (Section 6651). 42. (Page 189) Taxpayer is now permitted to pay the deficiency without losing his right of review by the T a x Court. He may wish to do so in order to avoid the payment of interest on the deficiency if the Court's decision is unfavorable to him (Section 6213). 43. (Page 210) T h e Compromise Branch has been transferred to the Audit Division. 44. (Page 211) Income and estate tax conventions with Greece and an estate tax convention with Belgium are in effect in 1954; an income tax convention with the Federal Republic of Western Germany is ratified by the United States and tax conventions with Japan are signed.

SUPPLEMENT

267

45. (Page z 1 1 ) The Technical Rulings Division is now known as the T a x Rulings Division. 46. (Page 236) Proposed credits and refunds of $100,000 or more must now be reported to the Joint Committee on Internal Revenue Taxation (Section 6405).

INDEX

INDEX

Abatement of tax assessed, claim for, 164; review of claim, 204; when referred to Joint Committee, 236, «47, 267 Accountants, admitted to represent taxpayer in tax controversy only after investigation, 179, 181; admitted to practice before T a x Court by examination, 189 Account Card Unit, Director's Office: functions of, 162 Accounting Branch, Director's Office: organization and functions, 150, 153, 160-65 Accounting methods, farmers and livestock raisers, 29; permissible methods, 63; accrual basis and cash basis described, 64 Accounting period for income tax, «4. 54 Accounts of taxpayers, bear a number, 149; kept in Bookkeeping Unit, 161; card records for reference, 162 Accounts Section, Director's Office: functions of, 160 Accrual basis of accounting, defined, 64 Adjusted gross income, defined, 18, 19 Adjustments Unit, Director's Office: adjusts tax according to final determination, 163; compromise remittances received by, 163; taxpayers' inquiries attended, 164 Administrative Division, Director's Office: functions of, 146-47 Administrator of estate, defined, 70 Admission to place of entertainment,

excise tax on, 125, 266; incidence of tax, 126 Agent distinguished from trustee, 5* Agricultural employees, wages subject to FICA tax, 85 Air conditioning units, excise tax on, 113 Air transportation, excise tax on, 124, 266 Alcohol and Tobacco T a x , Assistant Regional Commissioner: functions of office, 198-201 Alcohol and Tobacco T a x Division, National Office: functions of, 2089 Alcohols, liquors, and wines: taxes of states on, 6 tab.; taxes on, go ff., 263, 264; manufacture regulated, 91, 198 ff.; bottled in bond, 93; occupational tax on manufacturers and dealers, 96; taxes collected and production statistics, 97 tab.; regulation and tax administration for industry, 182, 200; stamps for tax sold by Director, 182, 265 Ale, tax on, go, 94 Alien, required to file income tax return before leaving country, 62: see also Nonresident alien Alien T a x Section, Director's Office: functions of, 170 Alimony, deductible by husband, 66; taxed to divorced wife, 66 Amusement equipment, special tax on operator of, 123 Amusements, taxed by states, 6 tab. Annuity, computation of income in, 65, 261-62

272 Annuity contract, stamp tax on, 109 Appellate Counsel, Chief Counsel's Office: represents Commissioner before T a x Court, 231 if. Appellate Division, Chief Counsel's Office: represents Commissioner before T a x Court, 233 Appellate Division, National Office: authority to settle contested tax determinations, 210; review of Director's decisions, 210 Appellate Division, Regional Commissioner's Office: procedure for review of tax determination, 176, 183, 201; authorized to enter into closing agreements of tax liability with taxpayer, 184 Assessment of tax, defined, 178 Assessment Unit, National Office: prepares assessment list of additional tax due, 204 Assistant Chief Counsel (Administration), functions of, 234 Assistant Chief Counsel (Claims), functions and organization of office, 236; Review Division, 236; Claims Division, 237 Assistant Chief Counsel (Enforcement), reviews recommendations of and advises Enforcement Counsel and Attorney in Charge, Alcohol and Tobacco T a x , 234 Assistant Chief Counsel (Litigation), functions and organization of office, 233; Appellate Division, 233; Civil Division, 233 Assistant Chief Counsel (Technical), functions and organization of office, 234; Legislation and Regulations Division, 234, 247; Interpretative Division, 235 Assistant Commissioner of Internal Revenue (Administration), functions and organization of office, 221-29 Assistant Commissioner of Internal Revenue (Inspection), functions and organization of office, 218-21; Internal Audit Division, 219, 220;

INDEX Internal Security Division, 220, 221 Assistant Commissioner of Internal Revenue (Operations), functions and organization of office, 201; Collection Division, 202 ff.; Audit Division, 205 ff.; Alcohol and Tobacco T a x Division, 208; Intelligence Division, 209; Appellate Division, 210 Assistant Commissioner of Internal Revenue (Planning), functions of, 229; Statistical Division, 229-30 Assistant Commissioner of Internal Revenue (Technical), functions and organization of office, 210 ff.; International T a x Relations Division, 2 1 1 ; Technical Planning Division, 2 1 1 ; Technical (Tax) Rulings Division, 211 ff.; Special Technical Services Division, 215 ff. Assistant Regional Commissioner (Administration), functions and organization of office, 196 ff.; Fiscal Management Division, 222; Operating Facilities Division, 222; Personnel Division, 222; Training Division, 227-28; Public Information Division, 228-29 Assistant Regional Commissioner (Alcohol and Tobacco Tax), regulatory and administrative functions, 182, 198 Assistant Regional Commissioner (Appellate), reviews tax determinations of Audit Division, 176; procedure on review, 183, 201 Assistant Regional Commissioner (Audit), functions of, 197 Assistant Regional Commissioner (Collection), functions of, 197 Assistant Regional Commissioner (Intelligence), functions of, ig8 Attorney in Charge (Alcohol and Tobacco Tax), Chief Counsel's Office: advises and represents Regional Commissioner in legal matters affecting alcohol and tobacco, 231-32

INDEX Attorney of taxpayer, see Counsel to taxpayer A u d i t Division, Director's Office: reviews tax returns filed, 170 ft.; investigation of taxpayers, 171, 174; determination of tax due, 175; entertains taxpayer's protest, 176; Review Staff, 176 A u d i t Division, National Office: functions of, 205-8 A u d i t of returns, District Director's Office, 171, 174 ff.; post-review of, 197, 206, 207; procedure prescribed by National Office, 205, 206 A u d i t Procedure Section, National Office: functions of, 206 A u d i t Services Branch, National Office: functions of, 207 Australia, tax conventions with, 211 Automobile accessories and parts, excise tax on, 113, 265 Automobiles, excise tax on, 113, 265 Awards Unit, National Office: recognizes adopted administrative suggestion of employee with citation and award, 224

Bad debts as deductions from gross income, 18; methods of deduction, 42; recoveries on those deducted taxed as income, 42 Base period income, method of comp u t i n g excess profits, 45; adjustments made to eliminate abnormal elements, 46 ff.; equity capital as factor of computation, 48-49 Beer, tax on, go, 94, 264; manufacture regulated, 91; tax collection and production statistics, 97 tab. Belgium, tax conventions with, 211, 266 Beneficiary, defined, 52; taxed 011 distributed trust income, 52; transferor as beneficiary, tax consequences, 52; liable for unpaid estate tax, 70 Betting, winnings as element of income, 18; tax on, 126, 128

2 73 Billiard tables, special tax on, 113 Bills and Warrants Unit, Director's Office: sends notice of unpaid tax, 162; prepares distraint warrants for enforced collection, 162; prepares bills for additional tax assessed, 204 Blind taxpayer entitled to extra income tax exemption, 22 Board of T a x Appeals, former name of T a x Court, 191 Bonded Accounts Section, Regional Commissioner's Office: checks records of liquor and tobacco taxpayers, 200; determines additional tax and penalties, 200 Bonds, stamp tax on issuance and transfer, 107 Bonus from employer as income, 17 Bookkeeping Unit, Director's Office: accounts of taxpayers kept by, 161 Bowling alleys, special tax on, 123 Branch offices of Director's Office, functions of, 151 Budget and Finance Branch, Director's Office: functions of, 146 Budget and Fiscal Branch, Regional Commissioner's Office: functions of, 196 Budget of Internal Revenue Service, allotment of funds to offices, 196 Bulletin, Internal Revenue, see Internal Revenue Bulletin Bulletin and Ruling Analysis Branch, National Office: edits Internal Revenue Bulletin, 216; prepares digests of court decisions and rulings, 216; Bulletin material reviewed by Chief Counsel's Office, 235 Burden of proof in T a x Court proceeding, 190, 262 Business machines, excise tax on, 113 Butter, adulterated and renovated, excise tax on, 117-18 Cabaret entertainment, on, 125

excise

tax

274 Calculating Machine Unit, Director's Office: functions of, 155; electronic calculator, 155 Cameras and photographic equipment, excise tax on, 113, 265 Canada, tax conventions with, 211 Capital gain or loss, defined, 17, 259; reported on Schedule D of income tax return, 26; computation of, 27, 259; income tax on, 44 Card Index Unit, Director's Office: functions of, 158 "Carry back," a net operating loss deductible in a prior year, 43 "Carry over," a net operating loss deductible in subsequent year, 43 Cartridges, excise tax on, 113, 265 Cash basis of accounting, defined, 64 Cashier Branch, Director's Office: functions of, 148 ff. Cemetery companies, certain types exempt from income tax, 55 Chambers of commerce, exempt from income tax, 55 Charitable contributions as deductions from gross income, 19, 43, 255-56; charitable bequests as deductions from taxable estate, 75; charitable gifts exempt from gift tax, 78 Charitable organization, income exempt from tax, 55; bequest to, deductible from gross estate; gift to, exempt from gift tax, 78 Chart of Internal Revenue Service, 241 ff. Check against bank account, payment of tax by, 150, 155 Cheese, filled, excise tax on, 118 Chief Counsel to Commissioner of Internal Revenue, functions and organization of office, 142, 231 ff.; under General Counsel of Treasury Department, 231; field offices, 231 ff.; Assistant Chief Counsel (Litigation), 233; Assistant Chief Counsel (Enforcement), 234; Assistant Chief Counsel (Administration), 234; Assistant Chief

INDEX Counsel (Technical), 234; Assistant Chief Counsel (Claims), 236 Child care, limited deduction from gross income of expense of, 256 Cigarette lighters, excise tax on, 113, 265 Cigarette paper and tubes, tax on, 98, 99; manufacture regulated, 98, 100, 102; tax collection and production statistics, 105 tab. Cigarettes, tax on, 98, 99, 264; manufacture regulated, 98, 100; tax exempt if exported, 103; tax collection and production statistics, 105 tab. Cigars, tax on, 98, 99, 264; manufacture regulated, 98, 100; tax exempt if exported, 103; tax collection and production statistics, 105 tab. Civil Advisory Counsel, Chief Counsel's Office: advises Director in protection of revenue, 232 Civil Division, Chief Counsel's Office: assists in litigation involving taxes in courts other than T a x Court, 233 Civil Service Commission, role in appointment of Service employees, 146, 197, 229; regulates classification of Service positions, 223 Claims Division, Chief Counsel's Office: protects revenue by filing tax claims, liens, etc., in bankruptcy and other cases, 237; reviews proposed action on offers in compromise, 237 Claims Section, Director's Office: claims for abatement or refund of tax received by, 164 Clocks, excise tax on, 115, 265 Closing Agreement, defined, 184; effective as settlement of tax liability, 185; referred to National Office, 186; review by Chief Counsel's Office, 235 C l u b dues, excise tax on, 125-26 Coconut oil, excise tax on, 119 Code, see Internal Revenue Code

INDEX Collection Accounting Branch, National Office: functions of, 203 Collection Accounts Auditing Unit, National Office: functions of, 203 Collection Division, Director's Office: organization and functions of, 148; Cashier Branch, 148; Returns Processing Branch, 152-60; Accounting Branch, 160; Delinquent Accounts and Returns Branch, 165 Collection Division, National Office: authority over collection operations, 202; reports required and control exercised, 203 ff. Collection Procedures Branch, National Office: functions of, 204-5 Collections of tax, cost of, 4; deposit of, 150; accounting for, 150; notice and wairant for unpaid bill, 162; means of enforcing, 165 ff.; when enforceable, 179; additional tax assessed, 204 Commissioner of Internal Revenue, role in narcotic control, 1 2 1 ; responsible for Federal tax administration, 141; authority to compromise tax liability, 187; party to tax litigation, 189; delegation of authority, 195; organization of National Office, 202; authority to issue regulations under Code, 212; compliance with court decisions, 217 Communications, excise taxes on, 123, 265-66 Compensation for services, taxed as income, 17; computation, 17; limitation on deduction of corporate salaries, 42; specially taxed if derived from services performed in other years under long-term contract, 66 Compromise Branch, National Office: functions of, 210, 266 Compromise of tax due, processing of remittance offered, 164; procedure in making offer, 186; reasons for accepting compromise,

275 187; offers referred to National Office, 187 Computation, Verification, and Machine Section, Director's Office: role in processing of returns, 152 Computation, Verification, and Matching Unit: functions of, 152 Congress, relations with Internal Revenue Service, 229; introduction and passage of tax legislation by, 247 ff. Consent dividend, defined, 58 Consolidated returns of affiliated corporations, 69, 262 Constructive receipt of income, defined, 65 Control over property, defined for inclusion in estate subject to estate tax, 73 Control Section, National Office: prepares certificates for action by operating offices, 203 Control Unit, Director's Office: functions of, 160 Cooperative marketing organization, exempt from income tax, 54 Cordials, excise tax on, 90, 93, 94 Corporate organization expense, treatment of for income tax, 259 Corporation Audit Section, National Office: reviews selected audit reports of Directors, 206 Corporations, domestic: income from all sources taxed, 13; excess profits formerly taxed, 14, 44-51; rates of income tax, 14, 44, 253; treated as taxpayer distinct from shareholder, 16; defined, 4 1 ; computation of income, 41, 42, 259; filing of return and payment of tax, 4 1 , 259-60; personal holding company, 57-58; reorganization, merger, and consolidation, 67; excessive surplus, surtax on, 68, 262: estimated tax declaration required, 259-60; information returns required, 259-60 Corporations, foreign: income from sources in United States subject to

276 Corporations, foreign (Continued) tax, 13, 261; methods of computing income and tax, 14, 43, 6162; foreign personal holding company, 58; domestic transactions, stamp tax on, 109 Corpus, defined, 52 Cosmetics, excise tax on, 115, 116, 265 Cost of goods sold, 26, 29 Counsel to taxpayer, requisites for representation, 179; fitness investigated, 179, 181; representation before T a x Court, 189; volume of litigation, 232 County taxes, see Taxes, State, County, Municipal Court of Appeals, United States: appeal from T a x Court decision entertained by, 191 Court of Claims, suit for refund of tax entertained by, 188, 192 Credits against tax, income tax, 22, 23, 253, 255, 261-62; estate tax, 76, 262, 263 Criminal activities, income derived from them subject to tax, 16 Customs duties, not imposed by Internal Revenue Code, 3; amount collected, 4

Dance halls, tax on admission to certain, 125 Death-duty treaty, 76; see also T a x conventions Debentures, stamp tax on, 107 Debts, see Bad debts Deductions from gross estate, 74, 75, 79- 2 6 3 Deductions from gross income, depreciation, 18, 19; interest, 18-19; depletion, 18, 20, 43, 257; bad debts, 18, 42; business expenses, 18, 42-43; compensation for services, 18, 42; taxes, 18, 42; losses, 18, 43, 259; producing income, expense of, 18, 43; charitable contributions, 19, 43, 255-56; medical

INDEX expenses, 19, 256; obsolescence, 20; standard deduction, 20; farm expenses, 28; stock raiser's expenses, 28; amortization, 43; distributed income of trust, estate, 52; dividend, domestic, 255; tax liability, expense of contesting, 255; corporate organization, cost of, 259; experimental expenditures, 259; research expenditures, 259 "Deficiency" in tax, defined, 178; assessment of, 204 "Deficiency notice" of additional tax determined due, gives right of appeal to T a x Court, 176, 178, 180 Delinquent Accounts and Returns Branch, Director's Office: charged with collection of unpaid bills, 165; powers of investigation and enforcement, 166 ft. Delinquent Accounts and Returns Branch, National Office: functions of, 205 Delinquent Accounts and Returns Section, Director's Office: receives unpaid bills for enforced collection, 165; investigates taxpayer's property, 166; may issue summons to disclose assets, 166; powers of enforcement, 167 ff. Denmark, tax convention with, 211 Department of Justice, prosecutions for tax evasion conducted by, 136, 181; civil actions conducted by, 232; appeals from T a x Court decisions handled by, 233 Dependent defined for income tax exemption, 22, 257-58 Depletion of natural deposits, deductible from gross income, 18; computation of, 20, 43, 257 Depositary receipts for tax payments, 40 Depreciation of property, deduction from gross income, 18, 39; standard depreciation rates, 20-21 Deputy Commissioner of Internal Revenue, duties of, 141

INDEX Diesel fuel, excise tax on, 119 Director of Internal Revenue, see District Director of Internal Revenue Distilled spirits and alcohol, taxes on, go, 92, 263-64; manufacture, importation, and possession regulated, g i , 92; tax exempt if exported, 94; occupational taxes on manufacturers and dealers, 96; tax collcction and production statistics, 97 Distiller, operations regulated, go-gi; occupational tax, 96; statistics, 97 Distilling apparatus, registration required, 90; tax on manufacturer, 96 Distraint of property for unpaid tax, 162 District Court, Federal: suit for ref u n d of tax entertained by, 188, 192 District Director of Internal Revenue, organization of office, 143; Administrative Division, 146-47; Collection Division, 148-70; Audit Division, 170-80; Intelligence Division, 180-82; legal advice provided to, 231 Dividends, taxed in income of stockholder, 16; credit for domestic dividends against corporate shareholder's income, 43; paid out of capital, not taxed as income, 68, 215; liquidating dividend treated as return of capital, 69, 215; limited deduction and credit for individual income tax, 255 Documentary stamps, 107 Domestic servants, wages subject to F I C A tax, 84 Drugs, see Narcotics Educational organization, exempt from income tax, 55 Electric appliances, excise tax on, 113, 265 Electric light bulbs, excise tax on, 113, 265

277 Electronic Accounting and Procedures Section, functions of, 205 Electronic calculator, use of, 15556 Employees, optional income tax return form, 24; income tax withheld from wages, 30; F I C A and Railroad Retirement taxes withheld from wages, 81, 82; Social Security Account, 82; domestic, 84; agricultural, 85 Employees' beneficial associations, exempt from income tax, 55 Employees of Internal Revenue Service, see Internal Revenue employees Employer, required to withhold income tax from employees' wages, 30; defined for FICA tax, 82; required to pay half FICA tax and withhold half from employees' wages, 82, 86; required to register for employment tax payments, 82 Employment taxes (Social Security), Railroad Retirement T a x Act, 81; Federal Insurance Contributions Act, 82; Federal Unemployment T a x Act, 86; Self-employment tax, 87; collection statistics, 89; master lists of employers, 153; processing of returns, 155; audit of returns, 173; rulings on by National Office, 213 Enforcement Branch, Regional Commissioner's Office: charged with detection of violations of laws relating to liquor, tobacco, firearms, and other regulated businesses, 200 Enforcement Counsel, Chief Counsel's Office: assists in civil suits and prosecutions of taxpayers, 232 Engineering and Valuation Branch, National Office: provides experts in engineering and appraisals for tax purposes, 215 Equity capital in excess profits tax computation, 48-49

«78 Estate and Gift T a x Audit Section, National Office: reviews selected audit reports of Directors, 207 Estate and Gift T a x Section, Director's Office: audits and investigates returns, 176 Estate of deceased person, subject to income tax, 52; distributed income deductible, 52; subject to estate tax, 70 Estate tax, imposed on transfer of property by death, 70; returns, 71, 72; exemptions, 71, 75; rates, 71, 262; basic and additional tax, 71, 262; computation of, 75, 262, 263; credit for state or foreign inheritance tax, 76, 207, 262; nonresident alien's estate, 77; statistics, 77; rulings by National Office, 213 Estimated income tax, declaration of, 25, 258, 259-60; form, 39 Excess profits net income, computation of, 46 ff.; credit against income, 49 Excess profits of corporation subjected to tax, 44; computation of excess profits, 45 ff. Excess profits tax, imposed on excess profits of corporation, 14, 44; methods of computing excess profits, 45; computation of tax, 46; relief from in special cases, 50 Excess Profits T a x Council, 210 Exchanges of property, tax free under certain circumstances, 66-67 Excise taxes, manufacturers', 1 1 2 , 265; retailers', 1 1 5 , 265; butter, adulterated and renovated, 117; filled cheese, 118; diesel fuel, 119; sugar, 119; vegetable oils, 119; narcotics, 120; firearms, 120; wagers, 1 2 1 ; communications, 123, 265-66; transportation, 124, 266; admissions, 125, 266; tax as percentage of retail price, 127; taxpayers, master list of, 153; audit of returns, 173; tax rulings on, 212-14 Executor of estate, defined, 52, 70;

INDEX duties in satisfying estate tax, 70 ff. Exemptions, income tax, 14, 22, 25758; estate tax, 71; gift tax, 79; see also Tax-exempt organizations and under specific tax Exempt Organization Branch, National Office: functions of, 214 Exempt organizations, see Taxexempt organizations Expenditures, Federal: costs of departments and agencies, 6, 7 tab.; for years 1947-51, 8 tab. Expenses paid in production of income deductible, 18, 43 Experimental expenditures, treatment for income tax computation, 259 Farmers' cooperatives exempt from income tax, 54-55 Federal Depositary Receipt, used in payment of tax, 83 Federal Insurance Contributions Act (FICA), imposes tax on wages of employees, 82; computation of tax and rates, 82, 263; returns required of employer, 83, 85, 86; exempt wages, 84; wages of domestic servants and agricultural employees, 84, 85; check of returns, >53 Federal revenue, revenue other than taxes, 5-6; statistics of receipts, I 947~5'> 8 tab.; see also Taxes, Federal Federal taxes, see Taxes, Federal Federal Unemployment T a x Act (FUTA), imposes tax on employers of eight or more persons, 82, 86; computation of tax and rates, 86; proceeds devoted to unemployment trust fund, 86; credit for State unemployment tax, 87; return required, 87 Fermented liquors, tax on, go, g4; occupational taxes on manufacturers and dealers, 96; tax collec-

INDEX tion and production statistics, 97 tab. F I C A , see Federal Insurance Contributions Act Fidelity bond, issuance subject to stamp tax, log Fiduciary, defined, 51; treated as taxpayer, 51 Field A u d i t Branch, Director's Office: returns audited by, 174 ff. Field Clerical Force, Director's Office: functions of, 169 Film for photographs, excise tax on, 113. * 6 5 Fines and forfeitures, examples of, •35 Finland, tax convention with, 211 Firearms, excise tax on, 113, 120, 265 Fiscal Management Division, National Office: functions of, 222 Fishing equipment, excise tax on, "3 Floor stocks tax, on liquors, 95, 264; collection statistics, 97 tab.; on tobacco products, 99 Foreign income tax, credit or deduction granted against Federal income tax, 22-23, 44 Foreign personal holding company, defined, 58; stockholders taxed on undistributed income, 59 Forms and Manuals Section, National Office: functions of, 206 Forms Committee, drafts return forms, 212 France, tax conventions with, 211 Fraud Branch, National Office: functions of, 209 Fraud in reporting tax, penalties, 151; determination of, 132; means of investigating, 135-36, 166 ff., 176, 181; prosecution for, 136; procedure on suspicion of, 176; investigated by Intelligence Division, 180 Furs, excise tax on, 116, 265 F U T A , see Federal Unemployment T a x Act

279 G a m b l i n g devices, special tax on, 123 Gas appliances, excise tax on, 113, 265 Gasoline tax, imposed by states, 6; Federal excise tax, 113, 265 Germany, tax convention with, 266 Gift, not taxed as income, 17; certain gifts included in giver's estate subject to estate tax, 73 G i f t tax, imposed on transfer of property by gift, 78; exclusion of $3,000 value, 78; rates, 78; gift bynonresident alien, 78, 263; exemptions, 78, 79; return, 79, 263; collection statistics, 80 Great Britain, tax conventions with, 211 Greece, tax conventions with, 266 Gross estate of decedent, defined, 70; valuation date, 72; computation, 72 ff.; property includible in, 72 ff., 262, 263; deduction of property previously taxed, 74, 262, 263; situs of property, 76, 263 Gross income, elements and nature of, 16 ff., 64, 255 Gross profit of business or profession, defined,26 Gross receipts, distinguished from gross income, 17 Head of a household, defined, 22; rates of income tax, 253, 254 Holding company, see Personal holding company and Foreign personal holding company Husband and wife, right to file joint income tax return, 22; computation of tax on joint income, 22; marital deduction from gross estate subject to estate tax, 75 Income of groups, statistics prepared from sample returns, 158 Income tax, Federal and state, 3, 6. compared, 8; incidence of, 13 ff.; computation of, 13 ft., 153; source

28O Income tax (Continued) by income categories, 15; statistics of collection, 15; exemptions, si; individual's return, 21 if., 31; returns, 21 ff., 31 ff., 258, 259-60; credits against, 22, 42, 44, 253, 255, 261-62; payment, 23, 25, 258, 259; estimated tax, 25, 39, 258, 259-60; w i t h h o l d i n g required, 30, 39, 40, 60-63, 83; corporation, 41-44; taxpayers in special classes, 51-63; partnership income not taxed, 53; e x e m p t organizations, 54; personal h o l d i n g company, 57; surtax on excessive corporate profits, 68, 262; determination on basis of increase in net wealth, 131; rulings by National Office, 212-14; rate table, 254; election to be taxed as corporation, 260 Indemnity bond, issuance subject to stamp tax, 109 I n d i v i d u a l and Corporation T a x Section, Director's Office: audits and investigates returns, 174 ff. I n d i v i d u a l A u d i t Section, N a t i o n a l Office: reviews selected a u d i t reports of Directors, 207 Industrial alcohol: tax exempt; m a n u f a c t u r e regulated, 95 Informers on tax evaders, use of, 181, 209 Inheritance, not taxed as income, 17 Inheritance tax, imposed by states, 6; state inheritance tax as credit against Federal estate tax, 91, 207, 262 Inspection of administrative offices, 219 ft. Inspection Section, R e g i o n a l Commissioner's Office: inspects liquor and tobacco taxpayers' premises a n d operations, 199 Installment sales, computation of profit from, 65 Instruction m a n u a l f o r personnel, m a n u a l f o r agents of Intelligence Division, 209; m a n u a l for inspectors of service operations, 221;

INDEX see also Internal R e v e n u e M a n u a l Instrumentalities of government e x e m p t from income tax, 55 Insurance companies other than life, tax on income, 56 Insurance policy, stamp tax imposed on issuance by certain foreign companies, 107 Insurance proceeds, not taxed as income under life and health policies, 17; part includible in gross estate subject to estate tax, 73, 26263 Intelligence Division, Director's Office: investigates cases of suspected fraud, 180; use of informers, 181; assists United States Attorney in prosecutions, 181 Intelligence Division, National Office: functions of, 209 Intelligence M a n u a l , 209 Interest, deductible f r o m gross income, 18 Interest as addition to tax, when added, 130; where computed, 153 Internal A u d i t Division, National Office: examines and appraises administrative operations, 219; reports on administrative effectiveness, 220 Internal R e v e n u e Bulletin, purpose a n d character, 213, 216; subscription price, 217; contents reviewed by Chief Counsel's Office, 235 Internal R e v e n u e Code, Federal taxes imposed by, 3; enacted in '939> 3- " - 1 3 9 ; c o d e o £ '954, 853" 67 Internal R e v e n u e employees, number, 3, 225; Civil Service status, 141, 223, 227; appointment of, 146, 227; dismissal, 147, 221; proinstruction motion, 147, 223; manuals, 205, 209, 221; Bulletin issued for guidance, 213, 216; investigation of, 220; training, 221, 227; positions classified, 223, 225; awards for suggestions, 224; employment outside Service requires

INDEX approval, 224; salaries, 225; vacation and sick leave, 226; retirement, 226; pensions, 226 Internal R e v e n u e Manual, 205, 206 Internal R e v e n u e Service, bureau of Treasury Department, 3; cost of operation, 3; offices and employees, 3; geographical divisions, 140 map, 1 4 1 , 144; organization, 141 if., 241 ff.; appropriation of operating expenses for, 222 Internal Security Division, National Office: surveys and reports on use of personnel, 220; investigates conduct of employees, 221 International T a x Relations Division, maintains contact with foreign tax officials. 2 1 1 ; participates in negotiation of tax conventions, 211 Interpretative Division, Chief Counsel's Office: reviews tax rulings, 218, 235; reviews material to be published in Bulletin, 236; reviews closing agreements, 236 Inventories, how valued, 26; L I F O method, 26; of farmers and stock raisers, 29 Invested capital method of computing excess profits, 45, 50 Investigation of taxpayer, official powers for, 135-36, 1C6 ff., 176; office interviews and correspondence, 1 7 1 ; when f r a u d is suspected, 180-82 Ireland, tax conventions with, 2 1 1

J e o p a r d y assessment, defined, 173; when made, 179; proceeding in T a x Court not barred by, 189 Jewelry, excise tax on, 1 1 5 , 265 J o i n t Committee on Internal Revenue T a x a t i o n , receives reports of proposed refunds and abatements of tax, 236, 247, 267; role in tax legislation, 247 ff. Judicial review of tax determinations, 188 ff.

281 Laboratory Section, Regional Commissioner's Office: analyzes liquors and drugs, 200 "Last-in, first-out" method of keeping inventory, 26 Leaf tobacco, dealer in, subject to regulation, 101 Legislation and Regulations Division, participates in proposing legislation and in preparation of regulations, 234, 247 Legislative process, 247-50 L e v y on property of taxpayer to enforce collcction, 1C6, 167 L i e n on property for payment of tax due, 168 L i f e insurance company, computation of income subject to tax, 56 L I F O method of cost determination on inventory, 26 I.iquors, see Alcohols, liquors, and wines Listing Unit, Director's Office: prepares tax bills, 161; distributes returns and claims to proper offices, 161 Literary organization, exempt from income tax, 55 Livestock raisers, income of, 28 Long-term employment contract, taxation of income from, 66 Lottery winnings, taxed as income, 16, 18; wagering tax on, 126, 128 L u b r i c a t i n g oils, excise tax on, 1 1 3 Luggage, excise tax on, 1 1 6 , 265 Machine guns, excise tax on and regulation, 1 2 1 Mail Unit, Director's Office: functions of, 148; use of machines, 157 Malt liquors, see Beer Manufacturers' excise taxes, imposed upon sale or lease of manufactured articles, 1 1 2 ; exported articles exempt, 1 1 2 ; taxed articles and rates, 1 1 3 , 265; collection statistics, 1 1 4 M a r i h u a n a , excise tax on, 1 2 1 ; control of traffic in, 1 2 1

282 Marital deduction, from gross estate, 75; from gifts subject to gift tax, 78 Matches, excise tax on, 113 Medical expenses as deductions from gross income, 19, 256 Methods and Procedures Section, National Office: functions of, 205 Microfilms of files of past years, 159 Miscellaneous Service Branch, Director's Office: functions of, 147 Miscellaneous Service Unit, Director's Office: functions of, 158 Monthly Activity Report of Internal Revenue Service, 229 Motorcycles, excise tax on, 113, 265 Motor transportation, excise tax on, 124 Municipal taxes, see Taxes, State, County, Municipal Musical instruments, excise tax on, " 3 . '23 Mutual credit unions exempt from income tax, 55 Mutual insurance associations exempt from income tax, 55 Mutual insurance companies, income tax on, 59

Narcotics, excise tax on, 120; control of traffic in, 121; special taxes on manufacturers, dealers, and importers, 122; taxes on sale, importation, and transfer, 122 National income, compared with tax burden, 5, 8 National Office of Internal Revenue Service, role in Service activities, 141; direction of operations, 20111; rulings and technical decisions, 211-18; inspection of administration and personnel, 218-20; administration of organization, employment, training, and discipline of personnel, 222-27; public relations, 228; planning and policy, 229; statistical publications, 229 ff.; organizational chart, 244, 246

INDEX Negligence penalty, for faulty tax return, 130 ff. Netherlands, tax convention with, 211 Net income, defined, 18, 43 Net estate of decedent, defined, 71; computation by deductions from gross estate, 74 Net operating loss, deductible from income of other years, 43, 259; readjustment reviewed by National Office, 204 Net profit of business or profession, defined, 26 New Zealand, tax convention with, 211 "90-day letter" proposed tax determination, 176, 178, 180, 183 Nonresident alien, income from United States sources subject to tax, 13, 261, 262; computation of income, 14, 60; does not qualify as dependent, 22; tax on capital gains of, 61; subject to estate tax, 71-79; credits against estate tax, 76; subject to gift tax on gift of property situated in United States, 78, 263; subject to stamp tax on domestic transactions, 109 Normal-tax net income, defined, 44 Norway, tax convention with, 211

Obsolescence of property as deduction from gross income, 20 Occupational taxes: liquor manufacturers, importers, and dealers, 96, 97; adulterated butter manufacturers and dealers, 117; filled cheese manufacturers, 118; firearms manufacturers, importers, and dealers, 121; narcotics manufacturers, importers, and dealers, 122, 123; amusement equipment, operators of, 122, 123 Office A u d i t Branch, Director's Office: examines returns, 171; makes investigations by office conference and letter, 171

INDEX Oil, transportation of by pipeline, excise tax on, 124 O i l appliances, excise tax on, 113, 265 Oils, lubricating, excise tax on, 113 Oleomargarine, excise tax on imported, 118 Operating Facilities Branch, Regional Commissioner's Office: functions of, 197 Operating Facilities Division, National Office: functions of, 222 Operating loss carry-back and carryover, see Net operating loss O p i u m , excise tax on, 120; tax on sale, importation, and transfer, 123 Overassessment Unit, National Office: reviews Director's determination of excessive tax paid, 204 Partner, share of profits subject to income tax, 53; transaction with partnership, 260 Partnership, defined, 53; not subject to income tax but files return, 53; transactions with partners, 260; election to be taxed as corporation, 260 Payment of tax, by withholding agent, 30, 40; by purchase of stamps (alcohol, tobacco, stamp taxes, and others) from Director, 90-100, 117, 118, 121; by cash or check to Director, 148, 150, 155 Peddler of tobacco subject to regulation, 102 Penalties, civil: negligence in preparing return, 130; tardy filing of return, 130; fraud in reporting tax, 130, 266; may be contested in T a x Court, 132; examples of, 133, 266; where computed, 153 Penalties, criminal: examples of, 133. 134; fines and prison sentences, 136; statistics of prosecutions, 137; recommended by Intelligence Division, 181; prosecutions by United States Attorney, 181

283 Pencils, mechanical, excise tax on, 113. 265 Pension, computation of income in, 65, 262 Pension T r u s t Branch, National Office: functions of, 215 Pension trust for employees, payment to trust by corporation deductible, 43 Permissive Branch, Regional Commissioner's Office: supervises, regulates, and controls liquor and tobacco taxpayers, 199 Personal exemption of income from income tax, 22 Personal holding company, defined, 57, 261; additional income tax on undistributed income, 57; computation of income, 58 Personnel Branch, Director's Office: functions of, 146 Personnel Branch, Regional Commissioner's Office: functions of, 196 Personnel Division, National Office: functions and organization of, 222 if. Personnel of Internal Revenue Service, see Internal Revenue employees Phonographs and records, excise tax on, 113 Photographic equipment, excise tax on, 113, 265 Pistols and revolvers, excise tax on, 113, 121, 265 Placement Branch, National Office: surveys and appraises personnel policy, 224; prescribes rules for conduct, outside employment, and disciplinary action for personnel, 224 Planning and Procedure Branch, National Office: prescribes audit methods, 206 Playing cards, manufacture and importation of: stamp tax on, 107, 110; manufacturers required to register, 110

284 Pool tables, special tax on, 123 Position Classification Branch, National Office: fixes grade of positions in Service, 223; classifies positions under regulation of Civil Service Commission, 223 Positions in Internal Revenue Service, classified according to Act of Congress, 223; classification made pursuant to regulation of Civil Service Commission, 223; types of positions and salaries, 225; training for position, 227 Possessions of United States, income from sources in, 59 Power of appointment, defined, 74; property subject to, as element of gross estate, 74 President of United States, role in tax legislation, 247 Press and public, relations with, 228 Prizes and awards, includible in gross income, 255 Processing Branch, National Office: compares data on returns as check, 154. 159 Procurement of supplies for Internal Revenue Service, 197 Profits from farming and stockraising, reported on Form 1040F, 28; computation of, 28 Profits of business or profession, computed on Schedule C of income tax return, 25-26, 34 Property, tax on: imposed by states, 6 Prosecution for tax evasion, conducted by United States Attorney, Department of Justice, 182; see also Penalties, criminal Publications and addresses on taxes by Service employees, require review by Public Information Division, 228 Public Debt, Federal: amount, 7; classes of investors, 9 Public Information Division, National Office: functions of, 228

INDEX Public relations, Internal Revenue Service, 228 Radio message, excise tax on, 123 Radios, tubes and parts, excise tax on, 113 Railroad Retirement T a x Act, imposes tax on railroads, employees, unions, and union representatives, 81; rates and income taxed, 81; proceeds held in trust fund for retirement pensions, 81 Railway transportation, excise tax on, 124, 266 Readjustment Unit, National Office: reviews Director's determinations of tax adjustment for carry-backs, special relief, etc., 204 Real estate, stamp tax imposed on conveyance of, 107, 109 Receipts and Deposits Section, Director's Office: functions of, 148 Receipts and expenditures, Federal, 6, 8 Receiving and Clearing Unit, Director's Office: functions of, 148 Recreational clubs exempt from income tax, 55 Rectification of liquors, tax on, 92, 93 Rectifiers of liquors, operations regulated, 91; occupational tax, 96 Refrigerators, excise tax on, 113, 265 R e f u n d Accounts Auditing Unit, National Office: functions of, 203 R e f u n d of taxes, automatic refund of income tax, 23; claim for, 164, 192; suit in Federal court after rejection of claim, 188, 192; audit of, at National Office, 203; report of, to Joint Committee on Internal Revenue Taxation, 236, 267 Regional Commissioner of Internal Revenue, authority and functions, 142, 195; Assistant Regional Commissioner (Appellate), 176, 183, 201; Assistant Regional Commissioner (Alcohol and Tobacco T a x ) , 182, 198; Assistant Regional

INDEX Commissioners under, ig6 ff.; Assistant Regional Commissioner (Administration), 196; Assistant Regional Commissioner (Audit), 197; Assistant Regional Commissioner (Collection), 197: Assistant Regional Commissioner (Intelligence), 198; legal advice by Chief Counsel's Office, 232 Regional Counsel, Chief Counsel's Office: legal adviser to Regional Commissioner and Directors, 231 Regional Inspector, functions of, 219 Regulated investment companies, income tax on, 59 Regulations under Code, preparation and issuance of, 212, 235; legal effect, 212, 217 Religious organization, exempt from income tax, 55 Reorganization and Dividend Branch, National Office: functions of, 2 1 5 Reorganization of corporations, taxfree sales and exchanges in course of, 66, 215 Representative of taxpayer in tax controversy, requisites for recognition, 179; fitness investigated, 179, 181; counsel before T a x Court, 189; volume of litigation, 232 Research expenditures, treatment for income tax computation, 259 Residence, occupied by owner, annual rental value not included in taxable income, 17 Retailers' excise taxes, incidence and rates on articles taxed, 115; collection statistics, 116 Retirement income, defined, 262; credit against income tax, limited, 262 Return forms, preparation of, 206, 212 Returns: individual's income tax, 21-30; facsimiles of forms, 31 ff., 60; corporation, 41; excess profits tax. 43; fiduciary, 52; partnership.

285 53; insurance companies, 58; personal holding companies, 58-59; nonresident aliens and foreign corporations, 60-61, 258; information, 62, 83, 86, 260; consolidated, 69, 262; estate tax, 70, 72; gift tax, 78, 263; FICA, 83; F U T A , 87; tobacco tax, 99; manufacturers' excise tax, 114; tax on adulterated butter, 117; tax on filled cheese, 118; diesel fuel tax, 119; vegetable oils tax, 119; sugar tax, 120; transportation tax, 124; communications tax, 124; admissions tax, 126; tax on wagering, 128; audit of, 131 ff., 197, 205, 206; failure to file, consequences, 131-32, 169; processing of in Director's Office. 148 ff.; mathematical check of, 154: file index of, 157; samples used for statistics on income, 158; mailing of forms to taxpayers, 158-59; microfilming, 159; official assistance to taxpayer in preparing, 174; text prepared by National Office, 206, 212; copies of, when furnished, 208 Returns Index and Service Section, functions of, 157 Returns Inspection and Bankruptcy Section, National Office: attends to requests for copies of returns, etc., 208 Returns Processing Branch, Director's Office: organization and functions of, 148, 152-60 Revenue agents, appointment and training, 146, 227; review of returns and investigations by, 174(1.; number and salary, 225 Revenue bill, see Legislative process Revenue, Federal, sources of, 5 Review Division, Chief Counsel's Office: reviews proposed refunds and overasscssment of tax, 236; reports credits and refunds exceeding $100,000 to Joint Committee on Internal Revenue Taxation, 236, 247 Review of tax determination, by Review Staff, Audit Division, 176,

286 Review tax determination (Cont.) 178; procedure for referring to Appellate Division, 176, 183; powers of Appellate Division, 184; by Assistant Regional Commissioner (Audit), 197 Review Staff, Director's Office: entertains taxpayer's protest of agent's determination, 176; may revise agent's determination, 177; determination of tax and notice, 178 Roof garden entertainment, excise tax on, 125 " R u l i n g , " publication of, 212; defined, 213; issuance of, 213; legal effect of, 217; review of, 218, 235

Safe deposit box, excise tax on rent of, 124 Salaries of Internal Revenue employees, 225 Sale of taxpayer's property to satisfy tax, 167 Sales, profit from sales tax free under certain circumstances, 66 Sales tax, imposed by States, 6 Scientific organization, exempt from income tax, 55 SECA, see Self-Employment Contributions Act Secretary of Treasury, co-trustee of social security funds, 88; tax regulations approved by, 212; testifies before Congressional committee on proposed tax legislation, 248 Seizure of taxpayer's property to satisfy tax, 134, 167 Self-Employment Contributions Act (SECA), 82 Self-employment tax, reported with income tax, 23, 26, 35, 88; incidence and rates, 82, 87, 88, 263 Senate Finance Committee, role in tax legislation, 249 Shares of stock, issue and transfer subject to stamp tax, 107; sale subject to stamp tax, 108 Shells, excise tax on, 113, 265

INDEX Ship passage, excise tax on, 124, 266 Silver bullion, stamp tax on transfer of, 107, 111 Situs of property, 76, 263 Slot machines, special tax on, 123 Social Security Account Number, given to employee by Social Security Administration, 82 Social Security Administration, relation to employment taxes, 81 Social security taxes, see Employment taxes South Africa, tax convention with, 211 Special agent, investigator of Intelligence Division, 180, 209 Special Investigation Branch, Director's Office: specializes in investigation of "racketeers" and of "gangs," 182 Special Investigations Branch, National Office: functions of, 209 Special Procedures Section, Director's Office: handles tax obligations complicated by litigation, 169; files claims for tax of deceased persons, 170 Special Technical Services Division, National Office: functions of, 21518 Sporting goods, excise tax on, 113, 265 Stamp Section, National Office: procures tax stamps from Bureau of Engraving and Printing, 203; distribution and control of stamps, 203 Stamps used in payment of alcohol, tobacco, and other taxes, 90-100, 117, 118, 121 Stamp taxes, bonds, 107; insurance policies, 107; shares of stock, 108; deeds of real estate, log; playing cards, 110; silver bullion, 111; collection statistics, 111 Standard deduction from gross income, defined, 21 Statement of T a x Due, bill prepared in Bills and Warrants Unit, Direc-

INDEX tor's Office, 148, 162; sent for additional tax assessed, 204 State taxes, see Taxes, State, County, Municipal Statistical Division, National Office: use of machines, 157; sample returns used for income statistics, 158; compiles statistics on income by businesses, amounts, regions, 229 ff.; publishes Statistics of Income, 230 Statistical Unit, National Office: prepares reports on current collections, 203 Stenographic and T y p i n g Unit, Director's Office: functions of, 157 Still, see Distilling apparatus Stockbrokers required to register, 110 Stockholder in corporation, taxable on dividend income, 16 Storekeeper-gauger, duties, 91, g2, 199 Sugar, excise tax on, 119 Supreme Court of the United States, review of tax decisions, 191, 193 Surety bond, issuance subject to stamp tax, 109 Surplus, surtax on excessive accumulation by corporation, 68, 262 Surtax net income, defined, 44 Suspense Accounts Unit, Collector's Office: functions of, 163 Switzerland, tax conventions with, 211 T a x a b l e income, determination of, 15 ff. T a x burden, as percentage of national income, 5, 8 T a x conventions with foreign countries, 811, 266 T a x Court of the United States: petition form, content and filing, 177, 189; jurisdiction of, 178, 188, 212, 266; admission to practice before, 189; pleadings, 189; procedure, 190; burden of proof in tax case, 190; reports published.

287 190, 191; review of decision, 19091; appeal from decision of, 191; record of case a public document, 191; judges of, appointment and tenure, 192; decision, effect of, 217; Appellate Counsel represents Commissioner before, 232-33; number of decision, 233 Taxes, Federal, collected by Internal Revenue Service, 3; imposed by Internal Revenue Code, 3; collection statistics, 4; cost of collection, 4; taxes of states compared with, 4, 8; sources of, 5; types of taxes, 13 ff. Taxes, State, County, Municipal: amount collected as compared with Federal, 4, 8; types of taxes, 4; sources, statistical table, 6 T a x e s as deductions from gross income, 18, 42 Tax-exempt organizations, qualifications, 54, 213; types, 55; subject to income tax on certain income, 60; processing of exemption claim, 155, 213; rulings on by National Office, 213 T a x Fraud Branch, Director's Office: investigates cases of suspected fraud, 180; use of informers, 181 Tax-free sales and exchanges, 66 Taxpayer, official assistance in preparing return, 164, 174, 177; right to review of agent's determination, 176, 178; may request review by Appellate Division, 176; right to counsel in tax controversy, 179, 181, 184, 189; may subscribe to Internal Revenue Bulletin of rulings and guide materials, 212; may procure official ruling on tax question, 213; public information, 228; right to express views on proposed tax legislation, 247 ff. T a x p a y e r over 65 years of age, entitled to extra income tax exemption, 22 Teachers' retirement associations, exempt from income tax, 55

288 T e c h n i c a l Analysis B r a n c h , National Office: analyzes effectiveness of administrative procedure, 212 T e c h n i c a l Planning Division, National Office: functions a n d organization of, 2 1 1 , 247 T e c h n i c a l ( T a x ) R u l i n g s Division, National Office: functions and organization of, 2 1 2 ff., 235, 267 T e l e g r a p h service, excise tax on, 123, 265-66 T e l e p h o n e service, excise tax on, 123, 265-66 Television sets, tubes and parts, excise tax on, 1 1 3 T e l l e r s , Director's Office: window tellers accept returns and tax payments, 1 5 1 ; stamp tellers sell stamps, 1 5 1 T h e a t e r tickcts, excise tax on, 125, 266 "30-day letter," proposed tax determination, 176, 178 T i r e s and tubes, excise tax on, 1 '3 T o b a c c o products, taxes on, 98 If., 264; manufacture regulated, 98, 198 ff., 264-65; tax on imported products, 1 0 1 ; tax exempt if exported, 103; tax collection and production statistics, 105, 264 T o b a c c o taxes, rates, 99, 264; collection and regulation of manufacturers and dealers, 99-105, 200, 264; collection statistics, 105 T o b a c c o warehouses, bonded, 104 T o i l e t preparations, excise tax on, 1 1 6 , 265 T r a i n i n g courses f o r Service personnel, 2 2 1 , 227 T r a i n i n g Division, National Office: offers required and voluntary training, 227; subjects of courses, 227 T r a n s f e r of property without adeq u a t e consideration: Value included in transferor's estate subject to estate tax, 74, 262-63

INDEX Transportation, excise tax on, 124, 266 T r e a s u r y , Department of, approves tax regulations, 212, 217; decisions issued as T r e a s u r y Decisions, 2 1 7 , 2 1 8 ; approval required for higher positions of Service, 223; statistical requirements for tax planning, 230; General Counsel's Office, 2 3 1 ; proposal of tax legislation by, 234, 247; advises Congressional committees on tax proposals, 248 Treasury Decision, nature and legal effect, 2 1 7 - 1 8 T r u c k s and busses, excise tax on, 1 1 3 , 265 T r u s t , defined, 51-52; treated as taxpayer, 52; when taxable as corporation, 52-53 Trustee, defined, 52 T r u s t for employees, exempt from income tax, 55 T r u s t funds f o r social security, 88 Uniform Audit Branch, National Office: reviews selected audit reports of Directors, 206 United States, geographically defined for tax purposes, 41 Vegetable oils, excise tax on, 1 1 9 Vermouth, tax on, 90, 93, 94 Wage and Excise Audit Section, National Office: reviews selected audit reports of Directors, 207 Wage and Excise T a x Sections, Director's Office: audit of returns, •73. >77 WTagers, excise tax on, 126 Warehouses, bonded, 104 Wines, taxes on, 90, 93; manufacture regulated, 91; tax collection and production statistics, 97 Withholding of income tax, required of employers on payment of wages, 30, 83; return form, 39; returns required, 40; income of nonresident aliens, 60, 6 1 , 63; income of foreign corporation, 63