CHAPTER II. CONCLUSIONS AND RECOMMENDATIONS

PART 1. SUMMARY OF OUTSTANDING FACTS

(1) For the first time since the war it can now be said that the auditing work of the Bureau of Internal Revenue is practically

current.

(2) Of the number of old cases still pending in the bureau, an almost negligible number are awaiting original audit. To a very large extent they are cases that have been reopened by taxpayers through the filing of claims for refund.

(3) More than 19,000 undecided cases are pending before the Board of Tax Appeals, involving aggregate deficiencies of approximately $550,000,000. The petitions being filed with the Board of Tax Appeals exceed the number disposed of by more than 200 per month.

(4) The office of the general counsel is literally swamped with work.

(5) Although the nature of the problems remains substantially the same, the burden has been transferred from the Bureau of Internal Revenue to the general counsel's office and the Board of Tax Appeals.

(6) In cases before the Board of Tax Appeals involving amounts of $10,000 or more, the Government has succeeded in sustaining only about 50 per cent of the deficiencies asserted.

(7) The period of delay between the date of the bureau's action and the final decision of the Board of Tax Appeals prevents the decision from becoming a precedent for the action of the bureau upon similar points. Taxpayers not involved in the proceedings before the board can protect their interests. The bureau can protect the Government's interests in doubtful cases only by deciding against the taxpayer or, after obtaining waivers, by failing to decide.

(8) There are only eleven attorneys in the office of the general counsel who have served in the office more than six years. Since July, 1924, 52 attorneys have resigned from the general counsel's office. There have been in the Income Tax Unit alone 4,727 resignations of professional and technical officials during the last seven years.

PART 2. SUMMARY OF OUTSTANDING CONCLUSIONS

(1) An opportunity to retain trained, experienced, and competent personnel is essential.

(2) The burden has been transferred to the Board of Tax Appeals and the general counsel's office, and this burden must be relieved if their true functions are to be performed properly.

(3) The Government is handicapped in litigation. It can well afford to settle many more cases without resort to litigation.

(4) Cases must be closed fairly and finally by the bureau. The shifting of responsibility to the general counsel's office and to the board and the constant reopening of cases, as a result of decisions of the courts or the Board of Tax Appeals or a change in regulations, should be brought to an end.

(5) The Treasury is cognizant of its fair share of responsibility. (6) Taxpayers should cooperate. They are by no means blameless for existing difficulties.

In order to present the situation in broad outline, the above conclusions must be supplemented by three truisms—

(1) At root, the major ploblem is one of personnel.

(2) All tax cases can not be closed upon a basis of absolute accuracy. To attempt to do so is to sacrifice accomplishment to unattainable ideal. Prompt and final settlement is often more important than meticulous accuracy.

(3) The collection of revenues is primarily an administrative and not a judicial problem. As far as the Federal income tax is concerned, a field of administration has been turned into a legal battle field.

PART 3. SUMMARY OF CAUSES CONTRIBUTING TO CONGESTION

(1) The size of the job.

Over $35,000,000,000 were collected and more than 62,000,000 returns were filed for the years 1917 to 1926, inclusive. Little real progress toward administrative organization could be made during the war years. Government officials, as well as taxpayers, were confronted with problems never before presented. The intricate facts surrounding practically every transaction of importance occurring during this period required ascertainment and analysis and their legal consequences determined. Principles for the valuation of most of the assets of the country had to be evolved and the valuation made. The books of the largest corporations in the world had to be audited. Methods of accounting adaptable to the determination of tax liability had to be installed. The Government had to develop a system in the offices of collectors competent to handle a business in tax collections ten times as large as during any previous period of its existence. The amounts contingent upon intangible theories are staggering. It is not surprising that attempted solutions have provoked delays and litigation.

(2) Personnel.

It has been impossible to build up and retain an adequate personnel. The Government and the public have a right to demand that the personnel charged with the administration of the internal revenue laws possess extensive experience, ability, unquestionable integrity, and sound judgment. Persons capable of holding important positions have been developed by the Treasury, but in many cases it has been impossible to retain them. The turnover has been and is devitalizing. Each resignation imposes delay and immediate real loss to the taxpayer and the Government, for a knowledge of the cases must be acquired by the successor. But the resulting delay to individual cases is relatively of minor consequence. The individual who resigns can not leave with his successor his experience, background, ability, and judgment.

Ability alone is insufficient. An individual must have had the necessary experience, that only time can give, to have an adequate insight into the effect of the decisions he is called upon to make. New men can not be trained rapidly enough to assume the positions of

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those who resign. The field from which persons competent to carry on the work can be selected has been and probably always will be decidedly limited. It is only by the retention of persons capable of holding positions of importance that an adequate personnel will be obtained.

The bureau loses regularly a large proportion of its ablest employees because it can not meet the terms offered by others. A certain amount of this leakage is inevitable. But the present turnover is excessive. Surely the bureau should be able to compete for the services of efficient employees whom it desires to retain with State tax commissions and business concerns of moderate size. The bureau should not remain indefinitely a training school in which young men and women of talent educate themselves and then resign to find a permanent career outside. The Government should find means in higher salaries and more attractive tenure to induce a larger porportion of its ablest employees to stay and find dignified careers in the public service. If this can not be done, it will be the body of taxpayers and the Treasury-not the employees of the bureau-who will suffer most.

The Government can well afford to retain a substantial portion of the personnel it has developed.

(3) The policy to decide upon a basis of absolute accuracy.

The difficulty in the past in closing big cases and in settling cases without litigation has arisen largely as a result of the attempt of the bureau to settle with mathematical accuracy and with pure logic questions which by their nature are not susceptible of mathematical or logical determination. The bureau in the past has attempted to determine such questions as the valuation of natural resources, the valuation of intangibles such as patents, the determination of the amortization of war facilities, and the computation of depreciation by the use of formulae and with mathematical accuracy. By far the majority of the questions arising in disputed cases can not be solved with exact precision, but should be settled by administrative action within the bureau on the basis of the best judgment of competent officials.

Important questions of law must, of course, be decided finally by judicial tribunals. But the best interests of the Government and of the taxpayer will be promoted if the great majority of the disputed questions involving no important principle are settled by administrative action within the bureau. Even a casual analysis of the history within the bureau and through the courts of various cases set out in this report will demonstrate that both the Government and the taxpayer will benefit by such action.

The nature of the problems involved in many classes of cases makes their solution adaptable to administrative and not judicial action. It is impossible to predict the decision of a judicial body upon such questions of fact as valuations of natural resources, patents, or good will; upon questions presented in an amortization determination; upon a case involving contemplation of death; upon the propriety of depreciation allowances; or upon similar questions.

Furthermore, the bureau is not as well prepared as the taxpayer to litigate with any success these questions of fact and of opinion. It does not have, and so far has not been able to secure, sufficient