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for the lien, the taxpayer could raise money to pay the tax by mortgaging or selling the property subject to lien, he ought to be given this opportunity of paying. The Government is amply secured by the bond required to be given. It is thought that the fixing of the bond should be left to the commissioner, who should have the right to delegate his duties in this respect to proper field officers.
Restricting lien to particular property.—The present form of section 3186 of the Revised Statutes makes it plain that the lien attaches to all property, real and personal, and to all rights in property. This is unnecessarily broad. A taxpayer may own five separate parcels of real estate, each worth more than $5,000, and the tax may be $2,000. It ought to be possible to file the lien against any one tract, if it affords ample security. A lien not filed against specific property should cover all property and property rights.
Certificate of release.—The commissioner is specifically empowered by statute in estate-tax cases on the release of a lien to issue an appropriate certificate to that effect. While the commissioner doubtless has the same power as to income-tax cases, it seems desirable to provide specifically therefor by statute. The certificate is convenient in proof of title and provision should be made authorizing its issuance on the release of a lien for income taxes.
TRANSFEREES OF PROPERTY
If a taxpayer has transferred his property under such circumstances as to give rise to liability on the part of the transferee it may become necessary to proceed against the transferee for payment of the tax. Prior to the 1926 act suit was brought against the transferee in the lower Federal courts. This was the exclusive remedy where a tax lien had not attached to the property prior to the transfer. Section 280 does not purport to affect the transferee's liability, but it does substitute another method of collection. In substance, it subjects him to the same proceedings as though he were the taxpayer. Å deficiency letter is sent to him; he may appeal to the Board of Tax Appeals; if he does not appeal, the tax may be collected by distraint and he is subject to jeopardy assessments. There have been numerous complaints about the operation of the section on the ground that it deprives transferees of important rights and advantages and that it is an unnecessarily harsh method of enforcing liability, especially in the case of a transfer in the ordinary liquidation of a corporation or distribution of an estate. In Owensboro Ditcher and Grader Co. v. Lucas, 18 Fed. (2d) –, a Federal district court in Kentucky held section 280 unconstitutional.
RECOMMENDATIONS 1. Proposals have been received to eliminate section 280 from the next revenue act. After considerable study, it appears that though the section is capable of harsh application it serves a useful purpose when properly employed, particularly in cases of colorable transfers, and should not be stricken from the statute. Consideration should be given to the question whether the commis
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sioner should not have the alternative right to proceed by suit in the courts.
2. The transferee should have the same rights as the transferor with respect to bureau hearings, copies of returns, protests, and other documents and general administrative procedure. Legislation should be provided if necessary to assure these rights.
3. A transferee who has appealed to the board should have the right by subpoena or other process, to compel the transferor or other custodian of the transferor's books and records to produce such evidence for his inspection prior to the trial. This right should be conditioned on satisfying the board that the evidence is necessary and that it would not be an undue burden to the transferor, or other custodian to produce it at the time and place designated.
4. Careful consideration should be given to the matter of more nearly approximating under section 280 the benefits of Federal equity procedure, particularly as to parties, orders, and other remedial measures appropriate to the determination of primary and secondary liabilities and rights to contribution and reimbursement. A study of several proposed methods of doing this is being made and the results will be submitted in a supplementary report.
5. At present, no change is recommended as to limitation periods respecting enforcement of the_transferee's liability, except that the liability of an executor under Revised Statute 3467 should be assessable prior to the last of the following two dates: (1) One year after the liability arose, or (2) the expiration of the period for collecting the additional tax.
DISCUSSION OF RECOMMENDATIONS
The enforcement of transferee liability presents varied and difficult problems. The transfers range from bona fide corporate liquidations or distributions of estates made at a time when taxes were thought to be settled, to colorable transfers made for the purpose of evading payment of the tax. One transferee or a hundred or more may be involved in a single case. Some may be out of the jurisdiction, bankrupt, deceased, or for other reasons unable to respond, or not subject to suit or proceedings under section 280. The liability ordinarily sought to be enforced is a somewhat indefinite common-law liability. Moreover, most cases may ultimately involve questions of secondary liabilities, contribution, reimbursement, and the like. This is the kind of a controversy for an equity court; and the transferee's liability as a rule was enforced by equity proceedings prior to the 1926 act.
On the other hand, equity suits proved inadequate where there were successive transfers, delay was great, and the amount decreed often could not be collected; the efficient cooperation of several governmental agencies was necessary in the prosecution of the suit, and as a net result comparatively little tax was actually collected from transferees. The ideal solution, of course, would be to combine, as far as possible, the flexibility of the equity suit with the advantages to the Government of section 280.
Complaints have been received about the operation of section 280 and suggestions for its elimination from the act. It may be employed with unfortunate, harsh results to transferees. Wisely employed, it can be made to facilitate collection without undue hardship and it should not be stricken from the law. The commissioner to-day, however, has no choice but to proceed under section 280. It may appear advisable to restore procedure by suit as an alternative, to be used in cases where collection is not jeopardized thereby, and where the application of section 280 would clearly prejudice the transferee. This would enable the commissioner to lessen somewhat the hardships of section 280 by electing in appropriate cases to bring suit. The suggestion may be particularly desirable if the constitutionality of the section is not free from doubt.
Benefits of bureau procedure.—Until recently the transferee was not given the same opportunity as the taxpayer of presenting his case before the bureau. He was proceeded against by distraint or 60-day letter without an opportunity to show that the transfer was made under circumstances such as not to make him liable for the tax and he had no opportunity to show that the tax was not due him from his transferor. The transferee was not given copies of returns, protests, or other papers which would be available to the transferor. It appears desirable to give the transferee the same rights as the transferor in these particulars. The bureau now accords to the transferee most of these rights. If legislation is necessary to assure all the rights specified, its enactment is recommended.
Preliminary examination of transferer's books and records.—There is no provision in existing law whereby the transferee, prior to the hearing before the board, may have access to the books of the transferor, though this evidence may be essential to his case. Ordinarily the facts as to tax liability are not within his control. The transferer has the evidence on the question. If the case is to be properly presented, the transferee must prepare in advance of the trial. The board 'should be authorized to order a preliminary inspection at a time and place convenient to the parties. The order might be enforcible as a subpæna. The transferee should first show that the evidence is necessary to his defense; that it is not available except by an order and that an examination can be had without hardship to the transferor or other custodian.
Flexibility in proceedings under section 280.—It is desirable to find means of minimizing litigation on issues of reimbursement, contribution, etc., where one transferee is made to pay more than his share of the transferor's tax. The Federal court has a marked advantage over the Board of Tax Appeals in the flexibility of equity pro edure, which permits the settlement of claims involving primary and secondary liabilities in a single proceeding. Since the board is not a court, it may not be possible or desirable to give it general equity powers with respect to parties and orders in transferee cases. It does seem desirable to take such steps as may be practicable in this direction, as far as transferee cases are concerned. The matter is under study, and a supplemental report on it will be made.
Limitation periods.—Revised Statutes 3467 provides that if an executor or administrator pays any debt before he satisfies Federal taxes, he incurs thereby a personal liability for the tax. The liability may not arise until after the period of limitations on assessments against him has expired. An amendment is suggested which extends the period for assessment against the executor under such circumstances.
MATTERS AS TO WHICH NO RECOMMENDATIONS FOR LEGISLATION ARE MADE
Lien for taxes.-Under existing law the tax, together with all interest, penalties, and other additional amounts, becomes a lien on the real and personal property of the taxpayer when the assessment list is received by the collector. This lien is valid against transferee except mortgagees, purchasers, or judgment creditors. Where a lien is perfected prior to the transfer, the Government is amply secured. Where there is a lien, assessments ought to be prorated among the transferees in proportion to the property received by each, and jeopardy assessments should not ordinarily be made unless the security is plainly inadequate. It seems clear that some hardship under section 280 may be alleviated if the commissioner will take full advantage of liens attaching to the property prior to the transfer. This does not appear to call for legislation.
Jeopardy assessments against a transferee. There has been much criticism with respect to the commissioner's right to make jeopardy assessments against a transferee. The right to do so was given in the Revenue Act of 1926. The indiscriminate use of jeopardy assessments may produce intolerable hardships. On the other hand, the jeopardy assessment ought to be available in some cases-for instance, where property is the subject of successive transfers to evade tax and thus gives rise to actual jeopardy. It is not believed
prac. ticable by legislation to limit jeopardy assessments to cases of tax evasion and actual jeopardy.
Statutory definition of liability.-In certain aspects it might be beneficial to incorporate a provision in the law defining the kinds of transfers which create liability under section 280. It is not, however, believed to be desirable as a practical matter. Procedure under section 280 should be available where property is transferred to evade tax. If evasion by itself were the test, it would make the jurisdiction of the board depend on proof of that fact, and the section would become unworkable.
Sicty-day letters.-The form of the 60-day letter can do much to assist the transferee in preparing a petition. It should be sufficiently complete within itself so as to show the amount of tax originally paid by the transferor and each adjustment which gives rise to the deficiency. It is important in transferee cases that the letter be made sufficiently definite to inform the transferee what has been done in the case and what is the reason for the deficiency. This appears to be a matter primarily for administrative action.
THE BAR OF THE STATUTE OF LIMITATIONS
In a broad sense the statute of limitations may be said to present two problems: First, what effect should be given to the expiration of a limitation period; second, what periods of limitation ought to be imposed on the assessment and collection of taxes and the making of refunds or credits to the taxpayer?
(1) Any payment of internal revenue tax should be considered as an overpayment if the assessment was made after the period of limitations had run on assessments, or if it was paid after the period of limitations for collection by distraint or proceeding in court had expired. The rule should be applied regardless of the manner of collection and whether payment was under duress or threat, on demand or voluntary. An exception to the above general rule should be made in the case of amounts collected under judgment of a court or under a final decision of the Board of Tax Appeals, or an amount paid under a section 1106(b) agreement. Claims and suits for refund or credit of the overpayment (as above defined) should be filed within the applicable period of limitations. The rules above stated should be applied in the case of all such overpayments made after February 25, 1926, and any credit or refund coming within these rules which has been disallowed by the commissioner or the Board of Tax Appeals or any court between the date of the 1926 Act and the new act on account of section 1106(a) of the 1926 Act, should be promptly allowed.
(2) Any refund to the taxpayer after the period for filing claims should be recovered by the United States unless claim for refund was filed by the taxpayer before the expiration of the period of limitation for filing claims. Any amount refunded after the expiration of the period for filing sụit therefor by the taxpayer, should be recovered by the United States if suit was not brought within the period. An exception to the general rule above stated should be made in the case of amounts refunded as a result of a judgment of a court or on a final decision of the Board of Tax Appeals, or of an agreement made under section 1106(b). The right of recovery should be exercised by suit to be filed within two years after the making of such refund.
(3). As to amounts paid by the taxpayer before the expiration of the period of limitations on collections by the Government, no refund or credit should be allowed unless the amount paid is in excess of the correct tax. If the taxpayer within the proper period brings suit for a refund, the Government should have the right, if it can prove that a deficiency is owing for the taxable year or years in question, to obtain judgment therefor.
(4) The United States should not collect any deficiency unless the amount already paid is less than the correct tax. In any proceedings before the board or in the courts by the Government to collect additional taxes, the taxpayer should be permitted to obtain a judgment or order for any refund or credit in his favor.
DISCUSSION OF RECOMMENDATIONS
Payments by taxpayer after limitation period.—The purpose of the statute of limitations does not relate to the determination of a case on its merits. The purpose is to put an end to controversy. It is, in other words, a statute of repose. In recent revenue laws various time limits have been placed on the assessment and collection of taxes by the Government. Prior to the enactment of the 1926 act there was some doubt as to the effect of the expiration of these time limits on assessment or collection. Section 1106 (a) of the Revenue Act of 1926, which deals with the subject, has not completely resolved these doubts. Further legislation seems necessary. .
The problem may be illustrated by a concrete case. Assume that a taxpayer has filed