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payable to the beneficiaries. The income of any part of each sharefrom the time it was by will distributable to the beneficiaries was distributable to such beneficiaries, and this portion of the net income was accordingly taxable in each case to the beneficiary. As to the income upon the portion of the corpus of the trust estate which had not become distributable there was another question. The Income Tax Unit had considered that the entire income of all the parts of each child's share which had not become distributable as to the corpus was taxable as one entity. It was no doubt right that the net income of these portions of the corpus which had not become distributable was taxable either as one single trust entity apart from the individual beneficiary or that the net income of these undistributable portions of the corpus was taxable as income of separate trusts as to these undistributable portions of the corpus as to each beneficiary. The case was adjusted so that all of those undistributable portions were taxable as one trust estate. This holding was most favorable to the Government, and since it was doubtful that any other holding would be correct the case was finally approved upon that basis.

The foregoing will indicate to some extent the complicated nature of the will by which B bequeathed his estate to his heirs. There were many provisions in the will, some of which would become effective in case of the happening of certain contingencies and other of which would become effective in case of the happening of other contingencies. It was extremely difficult to analyze the will so as to comprehend what portions were effective under the circumstances which actually transpired. It was extremely difficult to analyze the will so as to correctly interpret it so as to give effect to all of its provisions.. The will was one of the very long wills of one of the very wealthy men of the United States. After consideration of all the circumstances which actually transpired and all the provisions of the will. relating to the creation of the various trusts, it was necessary to correctly apply the provisions of section 219 of the act of 1918 and the similar provisions of the act of 1921, and to study and interpret themany decisions of the Bureau of Internal Revenue relating to said. section 219 so as to arrive at the proper result with regard to the taxability of the income from the various portions of the estate as between beneficiaries and trust estate. There were an unusual number of provisions regarding the trusts created.

There was also considered in this case a loss incurred by C. C became a stockholder in the F Company. The F Company published the and this publication did not prove to be a paying venture. The corporation was dissolved and discontinued business and C'took over the publication as an individual. The loss she incurred was large and it was necessary to consider the time or the year within which she should be allowed a deduction for the loss.

It was in this case necessary to consider an analysis of surplus of the M Company relating to distributions made to stockholders of the M Company. It was material to correctly analyze or understand the surplus of M Company as the surplus was at March 1, 1913,. and as it had been accumulated as of March 1, 1913, up to the taxable years. The taxpayer claimed that large distributions which were made by M Company in the taxable years were distributions from earnings which had been accumulated prior to March 1, 1913, and that the accumulations prior to March 1, 1913, were accordingly

not taxable. The analysis of surplus was involved and lengthy and contained a number of adjustments to the surplus which had to be carefully analyzed so as to understand their effect upon the statement of earnings accumulated after March 1, 1913. The taxpayer and the revenue agent had presented considerable data regarding the accumulation of earnings prior to and after March 1, 1913, which data required considerable time for examination.

Case VII.-Issues:

(1) Interpretation of the will of P.
(2) Deductibility of State transfer taxes.

Overassessment_

AMOUNT INVOLVED

r dollars

The will of P was the will of a wealthy man and devised a large amount of property to his heirs and was rather complicated, although not of the same character as the will of B above discussed in Case VI. In consideration of this will it was also necessary to analyze the will so as to comprehend the effect of the various provisions and the creation of rights in beneficiaries so as to properly apply to the income in the case of this estate and beneficiaries the provisions relating to estates and trustees of the act of 1916 as amended by the act of 1917.

The principal issue involved in the case, however, was the allowance of a deduction of transfer tax in the amount of a dollars. This case had been under consideration at various times before the United States Supreme Court had rendered a decision which was final regarding the right to deduction by estates of New York transfer taxes. In such considerations prior to that decision of the United States Supreme Court it had been necessary to consider the large number of decisions of the bureau relating to the deduction of transfer taxes and also a number of decisions of the State of New York relating to the character of the New York transfer tax, and also various Federal court decisions which had considered the New York transfer tax. The right to a deduction of this transfer tax paid to the State of New York did not become free from doubt until the decision of the United States Supreme Court in Keith v. Johnson. In accordance with the decision of the United States Supreme Court therein the transfer tax paid to the State of New York was allowed.

IN GENERAL

In the above discussion of the various cases considered during a month in the claims review the principal issues which were involved in the cases were outlined. It should be noted, however, that in the consideration of these claims cases it is generally uncertain what are the issues which should be especially considered until the case has been carefully studied and until all evidence in the file of the case, including all revenue agent's reports and taxpayer's briefs have been carefully studied. The taxpayer's briefs may and may not present the real issue. In the claims review cases it is necessary to discover

if possible what may be the errors, if any, which have been made in the case, whatever those errors may be. The examination of the case for the purpose of discovery of such errors as there may be, particularly such errors as may result unfavorably to the Government, is of great importance and is the initial procedure in each case which is undertaken. After the case has been so examined for the purpose of discovery of any errors which there might be, such issues as may have been raised by the taxpayer or the unit, or such new issues as may have been discovered, must then be considered, first with regard to the facts which have been established and, second, with regard to the provisions of the law relating to the facts and the decisions of the bureau and the decisions of the courts and the Board of Tax Appeals relating to such facts or issues. The evidence presented and accumulated in the progress of the audit of the case of the nature of those which are involved is usually very voluminous and requires considerable time for examination for the purposes which are above indicated.

PENAL DIVISION

The work of this division may be described as follows:

(1) Preparation of opinions advising the commissioner and the heads of the various units of the bureau as to liability for fraud, negligence, or delinquency penalties in cases where protests have been filed by taxpayers against proposed assessment of penalties by one of the accounting units or where an opinion as to assertion of penalties has been requested by any officer or unit of the bureau; (2) preparation for reference to United States attorneys for the purpose of prosecution of criminal cases arising under the internalrevenue laws or applicable provisions of the criminal laws of the United States; (3) assisting in such criminal prosecutions by furnishing evidence for grand jury and court proceedings, preparing indictments and briefs, and participating in arguments, trials, and appeals at the request of the Department of Justice or the United States attorneys; (4) preparation of opinions, letters of instructions, and answers to inquiries from local and field officers of the bureau regarding conduct of tax examinations, special investigations, and general matters relating to violations by taxpayers of Federal penal statutes; (5) recommending acceptance or rejection by the commissioner of offers in compromise made by taxpayers charged with civil penalties or violations of Federal penal statutes; and (6) consideration of claims for reward under section 3463 of the Revised Statutes.

When taxpayers protest against the proposed assertion of penalties, of whatever nature, it is the practice of the division to grant the taxpayers and their qualified representatives hearings, at which they are entitled to present evidence and arguments with briefs in support thereof. Written opinions are then prepared, in which are stated the pertinent facts, the law involved, and the conclusions reached, with the reasons therefor. These opinions, over the general counsel's signature, are sent to the appropriate bureau officer. If no hearing is requested or desired, cases are considered and decided upon the evidence in the respective files.

There were 679 cases (without regard to tax years) pending in the division on June 30, 1927. These cases are classified for reference as (1) "interpretative cases" and (2) "law cases." These classifications are in turn grouped as (1) "income-tax cases" and (2) "miscellaneous tax cases." The "interpretative cases" are those referred to the office of the general counsel by the unit for recommendation as to percentage penalties, for consideration as to whether criminal proceedings should be instituted, and for rulings on questions of law. "Law cases" are those pending for consideration of compromise offers where penalties are involved, and cases in suit-that is, pending in the courts on indictments or otherwise. The "miscellaneous tax cases" are those involving special taxes, other than income taxes, such as estate taxes, gift taxes, tobacco taxes, admission and excise taxes. The following table shows the "interpretative incometax cases" for the years 1917 to 1926, inclusive, pending in the penal division June 30, 1927, classified by tax years, amounts, and questions involved:

"Interpretative" income-tax cases pending in penal division on June 30, 1927

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The larger part of the "interpretative income-tax cases" pending in the penal division were referred by the unit under the provisions of T. D. 3867 for recommendation as to whether 60-day letters should notify taxpayers the percentage penalty for fraud, negligence, or delinquency had been incurred. The rest of the cases, under the caption "Questions other than penalties," consist chiefly of cases referred for consideration of pure questions of law, or as to whether criminal proceedings should be instituted.

The following table shows the volume of work handled in the division during the past four fiscal years. The number of cases given are without regard to tax years or classification:

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ATTORNEY A

At this time I have on hand 34 cases, involving $13,766,101.14, which may be classified as follows:

Criminal cases awaiting trial---

Criminal case awaiting hearing on defendant's plea of immunity.

Case pending court's decision___.

Cases for presentation to court for order to produce books for examination_ Cases for consideration of criminal prosecution_-_

For collection of taxes and penalties after conviction in a criminal prosecution

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$13, 766, 101. 14

The years and the number of case-years involved are as follows:

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The questions involved in the foregoing classification of cases, and the nature of the work in connection therewith, may be stated generally as follows:

Criminal cases awaiting trial (4).-In the four cases under this classification consideration was originally given to the advisability of instituting criminal proceedings. This involved a consideration of all the facts and circumstances in each case, the weight and admissibility of evidence available to the Government, the probability of successful prosecution, whether or not conviction of the taxpayers would have a salutary effect in their respective communities, and the general preliminary questions to be determined in connection with any criminal prosecution. Indictments were prepared and forwarded to the respective United States atttorneys, with letters outlining the issues, the law, and such further information as was deemed necessary to bring to the special attention of the United States attorney. The examining agents were instructed to submit to the United States attorneys the evidence they had developed and to cooperate in the preparation of the cases for trial by interviewing such additional witnesses as the United States attorneys deemed necessary, securing additional evidence, and to hold themselves in readiness to testify at the trial. Certified photostat copies of all documentary evidence were prepared and forwarded to the United States attorneys for use before the grand jury and at the trial. Since the indictments were returned, offers in compromise of both civil and criminal liabilities have been submitted by the defendants in each of the four cases. of such offers has been considered and rejected, while the other three are still pending. Consideration of the acceptance or rejection of offers in compromise in this class of cases usually involves a reconsideration of the advisability of proceeding with the prosecution in

Three offers pending in criminal cases awaiting trial not included here.

One

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