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THE PERIODS OF LIMITATION
Under the present law it not infrequently happens that a given case is barred as to a refund or credit, though open for additional assessments or, conversely, that it is barred as to additional assessments but open for a refund or credit. It is recommended that if a case is before the Board of Tax Appeals for the determination of a deficiency (the assessment of which, if found to be due, is not barred by limitation) the taxpayer ought not to be barred from any refund or credit determined by the board in place of the proposed deficiency. Similarly, if the taxpayer, after paying the tax, brings suit in court within the limitation per od for a refund, the commissioner ought to be able, as an offset, to obtain judgment for any deficiency proved
Section 277 (a) (4) permits an executor or administrator to file a request for the determination of income taxes based on income received by the decedent during his life, and that the final determination of such taxes must be made within one year after the request was filed. The same privilege should be extended to the determination of taxes on income of the estate. Moreover, it is recommended that a similar privilege be extended to the principal classes of transferees within the meaning of sect.on 280, particularly corporations about to dissolve. Much of the harshness of that section would be eliminated if the transferor's tax liability were definitely determinable one year after a request to that effect.
Section 1106 (a) of the 1926 Act, as well as that section as proposed herein to be amended, raises certain questions with respect to the effect to be given to waivers executed after the running of the limitation periods on assessment or collection. It is recommended that such waivers be not effective if executed after the running of such limitation periods.
BASIS FOR GAIN OR LOSS ON SALES BY AN EXECUTOR Until recently gain or loss on an executor's sale was measured by the value at the decedent's death of what was sold. As a result of the decision by the Court of Claims in McKinney v. United States, and the denial of certiorari by the United States Supreme Court, the rule was changed so as to provide that gain or loss on such a sale would be measured as though the decedent had sold the property during his life.
The rule of the McKinney case is inconvenient, for it is often impossible to determine the decedent's cost or other basis. Moreover, as a practical matter, it results in taxing the value of bequests, devises, and inheritances as income. The old rule seems preferable, and it is recommended that it be set forth in the statute.
Section 204(a) (5) prescribes the basis when the beneficiary sells the property as the value at the time of " acquisition.” Some doubt has arisen as to what is meant by the date of acquisition. The date of death” is recommended to make the basis certain and definite.
INTEREST ON OVERPAYMENTS AND UNDERPAYMENTS
Prior to the Revenue Act of 1921 no interest was paid on overpayments and none was collected on underpayments, except in the
nature of a penalty. Provisions for compensatory interest are found in the last three revenue acts. The Revenue Act of 1921 was retroactive with respect to interest on overpayments. The Revenue Act of 1926 was the first to make provision for interest on underpayments relating to years prior to 1921 (even in this case to run only from the date of the enactment of the Revenue Act of 1926).
Many controversies over the interest provisions have arisen from the dependence of the interest period upon circumstances which have no natural association with it. If there are provisions in the law which should be subject to definite and exact mathematical computation, the interest provisions should come within that classification. This has been the primary object of the investigation made of this subject.
The trend of internal-revenue legislation has been toward the payment of interest on an overpayment for the period the overpayment actually existed. The existing act ends the interest period on an overpayment refunded at the date of allowance; on an overpayment credited (unless credited against an additional assessment made under one of the last three revenue acts) the interest period is terminated with the due date of the amount against which the credit is taken.
It is recommended that the date to which interest is to run on a refund be a date determined by the date of repayment rather than the date of allowance. For reasons of Government bookkeeping and accounting, it is recommended that the Government be permitted to stop interest on a refund 30 days (but not more) prior to the date of the refund check. It is believed that this is more certain and more equitable than the present method. In some cases taxpayers now lose interest on refunds for as much as eight months.
CONGESTION AND DELAY IN SETTLEMENT OF CASES
Notwithstanding the efforts of the bureau to which reference has already been made, there still remains a substantial number of cases for the earlier years, as indicated below:
Income Tax Unit and field cases on hand October 7, 1927
There is a relatively more serious accumulation of cases on the docket of the Board of Tax Appeals. Of 29,625 cases docketed prior to June 30, 1927, 16,761 were undisposed of on that date. Appeals are coming to the board at the average rate of about 100 a month, the average rate of disposal being not much in excess of 350 appeals per month and the average number of opinions promulgated about 75 a month. The board does not have it within its power to dispose of 600 cases a month. The remedy lies in settling more cases within the bureau.
The good effect of the bureau's accomplishments in bringing the work of more recent years up to date, as already referred to, is largely impaired in the eyes of the public by the existence of the accumulation of old and important cases. This is a problem which we are convinced can be satisfactorily disposed of only by a special effort of a thoroughly competent group created preferably from within, but, if necessary, from without, the bureau.
The essentials to the effectiveness of such a group are:
1. That some of the ablest of the personnel of the bureau should be members of it or at its disposal.
2. That it should approach the cases with a desire to put an end to disputes rather than with a disposition to decide all doubtful points in favor of the Government, even though it is probable that many such decisions would be reversed on appeal.
3. If the group is to be within the bureau, it must be assured of the fullest support of the administrative officers and of Congress.
There is every reason to believe that delay in final disposition of cases results on balance in substantial loss to the Government and that, therefore, the Government would gain by a prompt disposition of pending cases and the avoidance of the delay, expense, and uncertainty of litigation. The same considerations of delay, expense, and uncertainty are powerful incentives to induce taxpayers to accept a reasonable disposition of cases. We believe, therefore, that a competent body acting in the spirit we have indicated could successfully dispose of a large proportion of the pending cases without any sacrifice of revenue and with great advantage to the tax administration as a whole. In this connection it may be pointed out that there is added reason for the Government endeavoring to settle cases without litigation where it is reasonably possible to do so, since the collection of tax is postponed while cases are pending before the Board of Tax Appeals.
A special advisory committee has recently been created within the bureau to deal with these problems, but it has not been operating long enough to enable judgment to be reached on its effectiveness. It is clearly preferable that the emergency should be met by the bureau and every assistance in the form of ablest personnel and otherwise and every encouragement should be given to the committee. With such support the committee should be able to deal with the situation effectively, and no necessity should arise for the creation of an outside “clean up" commission such as has frequently been suggested.
Section 1106 (b) provides for the definite closing of tax cases by the execution of a written agreement making a given tax determina tion final and conclusive, except on a showing of fraud, malfeasance, or material misrepresentation of fact. The making of these closing agreements is hampered by'a requirement in the statute that any
additional tax found to be due must be assessed and paid, and any abatement, credit, or refund must be formally accepted before the agreement can be executed. The actual settlement is often reached in conference with the bureau and these formal steps require considerable additional time. As a practical result this delay tends to prevent the execution of the agreement.
The fullest possible use of closing agreements constitutes an important means of terminating tax disputes. It is recommended that the commissioner, with the approval of the Secretary, be authorized to execute the agreement as soon as the settlement is actually reached with the taxpayer, without awaiting the formal steps above mentioned. It would then be possible to establish a system by which agreements would be reached in the field, subject to proper confirmation or rejection by the commissioner, with the approval of the Secretary, within a specified or limited time. Another factor in preventing the execution of these agreements in the past has been a feeling on the part of taxpayers, which perhaps has been justified, that cases were subjected to intensive reaudit when closing agreements were requested. Practically every tax case contains certain elements which can be made the subject of difference of opinion on an intensive reexamination. The raising of fresh controversy was not, of course, a purpose of section 1106 (b) and the practice no longer of course, a purpose of section 1106(b) and the department has stated that the practice no longer obtains in the bureau.
DEDUCTIBILITY OF ESTATE AND INHERITANCE TAXES
A State inheritance tax is deductible under existing law only by the beneficiary and an estate tax only by the executor or administrator. The distinction is troublesome and has no compensating merit. State taxes of either kind should be deductible only by the executor, except where the beneficiary can show that he has actually paid the tax from his own funds, in which case the deduction should be allowed to the beneficiary. The policy of this deduction has not been considered.
EXTENSION OF TIME FOR PAYMENT OF DEFICIENCIES
Section 274(k) authorizes the commissioner, with the approval of the Secretary, to extend the time for payment of any deficiency for a period not in excess of 18 months. The above limitation creates hardship in occasional cases and the commissioner should be given discretion with the approval of the Secretary to grant further extensions of time not to exceed one year.
EXPENSE OF TRANSFERS IN THE FIELD SERVICE
Under a construction of existing law the commissioner is denied the right, in some circumstances, to pay the expenses of transferring employees of the field service from one locality to another. Such transfers are desirable when congestion of work exists at a particular locality, and adequate provision should be made for necessary expenses.
PART II. SIMPLIFICATION
1. A rearrangement of the act (as shown in Volume II hereof) is recommended, whereby all provisions of general application and interest appear in 16 pages at the beginning of the act. More liberal use should be made of catchwords, headlines, different types, indentations, and other typographical improvements in printing the act. In this connection attention also is invited to the rearranged act in Volume II. Provisions relating solely to taxes under preceding acts are no longer necessary in each revenue law and should be omitted in the interest of simplification. The preceding act should remain in force for the purpose of administering the small number of cases pending for earlier years. It should be retained in force, subject to appropriate amendments, for the imposition and administration of the estate tax and other internal-revenue taxes and these titles should be omitted in the new law.
2. It is desirable to compile a code of Federal tax administration, to contain all statutory provisions defining the powers and duties of administrative officials and general administrative procedure. At the present time some of these provisions are in the revenue acts and some in the general statutes.
3. The root of complexity, however, is in the substance of the law. Simpler basic principles are needed. Simpler administration also is vitaily necessary. Provision should be made for adequate study of both of these vital problems.
DISCUSSION OF SIMPLIFICATION RECOMMENDATIONS
GENERAL SURVEY OF THE PROBLEM
The problem of simplification is to eliminate complications without creating uncertainty or hardship. It is only just to those responsible for the existing law to recognize that its complexities are due largely to efforts to meet states of fact previously unforeseen, to remove inequities, or to resolve doubts as to the intent of the law.
What the committee is required by section 1203 to do, is to consider methods and measures for simplification of the income tax. This includes more than attempting to simplify the statute. If the act must be supplemented by complicated regulations, or if as practical matter administration is slow and technical, little is accomplished by a simple law. Moreover, it is self-evident that a simple law may not mean simple returns. Simplification includes all these elements of tax determination.
THE NATURE OF THE PROBLEM
The income tax presents two essentially different problems. The first is the collection of tax from a large number of taxpayers whose