The CHAIRMAN. Of course, that looks hard, under the circumstances, but you are aware of the fact that if the principle was put into general practice over the United States, it would debar the statute of limitation in every State in the Union. There would not be a single one that would be allowed a refund in similar circumstances.

Mr. GANDY. I am sure I do not know as to the other States, but I do have a very definite feeling on this proposition, and we have submitted language of a proposed amendment here in our brief, for which I beg the consideration of this committee.

Mr. MCLAUGHLIN. It often happens that the Supreme Court in a State, say, will reverse itself after a lapse of time. Your idea would be that all cases that have been previously decided should be reopened and reconsidered by the court. It seems to me your suggestion would carry the proposition that far.

Mr. GANDY. I will read the latter part of the amendment that we have suggested.

Mr. CHINDBLOM. Where does that come in?

Mr. GANDY. This is in section 284.. This is a suggested new paragraph, paragraph (i), and the latter part of the paragraph reads as follows:

Provided claim is filed within a period of one year following the date of the decision of the court, or the date upon which the commissioner acquiesced in the determination of the Board of Tax Appeals, or the date upon which the commissioner revised or reversed his own interpretation of the law, or the date of the passage of this act, whichever date is applicable.

Mr. MCLAUGHLIN. That is, one year from the time the Supreme Court, we will say, renders a new decision, regardless of the length of time which had lapsed between that and the settlement of the case in the bureau?

Mr. GANDY. That is the suggestion, sir.

Mr. Chairman, there are some other recommendations that we suggest in connection with the income tax law and some at the end of the brief with relation to the Board of Tax Appeals.

The CHAIRMAN. We will be glad to hear you in reference to those. Mr. GANDY. We think, with relation to the Board of Tax Appeals, that if a specific pleading were inaugurated before the board it would very greatly expedite the hearing of cases and very greatly relieve the burden of the taxpayer.

The general pleading practice prevails. The taxpayer must come prepared to prove all questions involved in the case, notwithstanding the fact that the great majority of them may not be in litigation. The CHAIRMAN. That is, you think the Treasury ought to set up all the grounds it expects to allege?

Mr. GANDY. Yes.

Mr. CHINDBLOM. You want to narrow the issue?
Mr. GANDY. To special pleading.

The CHAIRMAN. I think that is the rule, except that the Treasury has a pretty general rule about amendments on both sides, and from what I have heard the taxpayer himself is inclined to want pretty liberal amendments. Of course, if you allow him the privilege of amending as the case proceeds you will have to give the same privilege to the Treasury, would you not?

Mr. GANDY. I think so; the same rule can apply, and it has been our belief that the cases there could be very greatly expedited with specific pleading.

The CHAIRMAN. There is no doubt you are right about that. That is one thing which causes the Tax Board a great deal of trouble, neither side coming in with specific pleadings.

I remember one party writing me complaining of the delay in his case before the Board of Tax Appeals. I wrote him that I would see the board unofficially and see if they could not expedite the case in some kind of way, simply to have an earlier hearing, as there seemed to be a special necessity for it.

I went to the board, and they said the party asking for this relief had just filed an amended petition and asked for additional time to take evidence. Therefore they thought it was not best to set the case in advance.

The fact of the matter is, as we investigate these delays before the Board of Tax Appeals, we find that in the great majority of cases, contrary to the general opinion, and contrary to the opinion of the committee before we made the investigation, the majority of the delays were caused by the taxpayers themselves wanting to have more time to take additional evidence, or do something like that.

Mr. GANDY. Of course, I can understand how they might want to take additional evidence, but if the issues could be narrowed by way of demurrer, it seems to me it would be very helpful.

The CHAIRMAN. It would be.

Mr. GANDY. Then another way in which it seems to us the situation might be expedited would be to shorten the term within which the commissioner may acquiesce or give notice of appeal in the case of a decision by the Board of Tax Appeals.

It is my understanding that three months is the time in the Supreme Court of the United States in which a motion for review may be made. The commissioner has six months either to acquiesce or appeal, within which time doubtless there may be hundreds of cases awaiting a final determination of the case at issue.

The CHAIRMAN. I am inclined to think you are right about that. Mr. GANDY. I desire to thank the committee on behalf of the bituminous operators and myself personally for this opportunity and the patient hearing you have given me.

Mr. CHINDBLOM. Mr. Gandy, we have been receiving some statements as to the size of the organizations, the number of members, and the methods of organization of bodies appearing here through representatives.

Mr. GANDY. The National Coal Association is composed of both local member associations and individual members, members in every bituminous field in the United States, both commercial and otherwise. It does not represent 100 per cent membership, which would be, perhaps, too much to hope for.

Mr. CHINDBLOM. But it represents a very substantial part of the industry?

Mr. GANDY. Yes, sir.

Mr. CHINDBLOM. And it is maintained by voluntary contributions? Mr. GANDY. It is maintained by voluntary contributions of 1 mill per ton on tonnage produced.

BRIEF SUBMITTED BY MR. GANDY ON BEHALF OF THE NATIONAL COAL ASSOCIATION

To the Honorable Members of the Committee on Ways and Means of the House of Representatives:

Gentlemen, on behalf of the National Coal Association, the bituminous coalmine operators' national organization, I have taken advantage of this opportunity to appear before you in order to present a number of suggestions with reference to the drafting of the new internal revenue bill, all of which are of special importance to the members of our organization, and some of much more general interest. These suggestions all affect the income tax of corporations and are thus appropriate to the day set aside for the consideration of that tax. But many provisions of the act affect alike the individual and the corporate taxpayer, and to some of those provisions I shall have occasion to refer. I will ask you to bear it in mind that I am considering them from the corporate point of view.

The immediate necessity for large revenues at the time of the entry of the United States into the World War led to the enactment of an income tax law in 1917 with high rates of taxation, under circumstances which made a careful consideration of the meanings of its terms or the effects of its provisions practically impossible. It is not strange that there were many ambiguities and some inconsistencies in that act, leading to an enormous number of contested

cases.

Every internal revenue act enacted since that date has embodied many changes both in substantive features and in administrative procedure, but because each new act was constructed by introducing modifications into the act preceding, the enactment of each act has raised a large additional number of doubtful questions which have led to prolonged contest and have required interpretation by the Board of Tax Appeals or the courts.

The indefiniteness and ambiguity of some of the provisions of these acts have entailed upon the corporate taxpayer losses and expenses in many cases in excess of the amount of the tax, through the necessity of employing accountants and tax experts to secure its rights and through hardship often imposed by long delays in settling its income tax acount.

Its effects are also to be seen in the condition now existing with respect to unsettled tax cases. That condition is so well known to everyone that it is necessary to do no more than refer to the statistical fact that on June 30, 1927, there were 474,535 unsettled cases pending in the bureau, no less than 622 of which related to tax returns for the year 1917. The Board of Tax Appeals, created at least partly with the hope that it would expedite the settlement of disputed cases, is now far behind in its work, having more than 18,000 cases before it awaiting determination.

No argument is necessary to prove the deplorableness of this situation. In fact, the Congress itself showed its own realization of the seriousness of this unfortunate condition by creating last year the joint congressional committee on internal revenue taxation, with instructions, among other things, "to investigate measures and methods for the simplification of such taxes, particularly the income tax."

Reference has been made to this congested condition of the Income Tax Bureau and the Board of Tax Appeals not in any critical or fault-finding spirit but as the basis for a recommendation which comes first both logically and in the order of its importance. That recommendation is that the forthcoming internal revenue act be entirely redrafted, with the purpose in view of giving both the tax collector and the taxpayer the benefit of the utmost attainable clearness and definiteness in its definitions and administrative provisions, retaining where possible such definitions and phrases as have already received judicial interpretation or have otherwise acquired a generally understood and generally accepted meaning.

GENERAL SUGGESTIONS

In carrying out this suggested program of drafting de novo the next income tax act advantage should be taken of the opportunity to embody in the act a number of important general improvements, of which a few are herewith presented.

SUGGESTION 1-Separation of substantive provisions and rules of procedure.— There should be a more complete separation than is found in the act of 1926

between the substantive provisions which have an immediate bearing upon the amount of revenue to be raised by the tax and the administrative and other provisions which would not be affected by changes in the amount of revenue desired. If that separation were carried out completely, it would be possible to phrase the administrative portion of the act so clearly and definitely that it would remain practically unchanged year after year. In that way the many new uncertainties and ambiguities introduced into each law by the present method of constantly modifying and qualifying the administrative provisions of earlier acts could be avoided. The goal might well be that attained by the British Government, where income-tax revenues are increased or decreased at need by the simple process of adding to the rate or taking from it so many pence in the pound.

SUGGESTION 2-Elimination of cross references. In this thorough revision of the income tax law provisions relating to each phase of any subject should, so far as possible, be brought together in one place, and the present almost universal practice of introducing cross references from one section to one or more other sections of the act should be reduced to a minimum. It would be well worth while to adopt this form even at the expense of considerable repetition in different parts of the act. Under the present interlocking method of presentation it is practically impossible for a taxpayer who is not an expert to follow the labyrinthine windings of the act and arrive at a determination of his taxable income under it. The suggested change would be of great assistance both to the taxpayer and to the officers administering the act.

SUGGESTION 3-Date of application.-The practice hitherto followed of making a new income tax law apply to the business of a year wholly or partly elapsed before the date of the enactment of the law frequently imposes upon the taxpayer unjustifiable trouble and loss which could have been avoided if he had known in advance what his tax requirements would be. This condition has met with comparatively little opposition in the past, because since the end of the war these retroactive acts have usually embodied reductions in the rate of the tax. Future income tax laws should be so planned that their provisions affecting the determination of income would first apply to a tax year beginning after the enactment of the act. This would enable corporate taxpayers to make adequate provision in advance for meeting their tax obligations by adopting a suitable financial and accounting procedure.

SUBSTANTIVE PROVISIONS

The three suggestions offered above are very general in their character. Those which follow relate to specific provisions of the act, some of which affect directly or indirectly the amount of the taxpayer's liability under the act, while others relate solely to questions of procedure. The former group will be the first considered.

The total amount of yield to be sought from a particular revenue act depends upon the financial needs of the Government and is comparatively easy to determine. To provide a method of determining the tax liability of a particular corporation that will be sufficiently clear and definite to be fairly easy to apply and at the same time will assure an equitable distribution of the tax burden among all corporations in the same or different lines of business is by no means easy.

The amount of the tax liability of a particular corporation under the Federal income tax law is the product of its taxable net income multipled by the corporate tax rate. Therefore the first step in the ascertainment of such tax liability is the determination of the amount of the taxable net income of the corporation. It is this particular phase of tax determination that gives rise to the largest number of contested cases.

SUGGESTION 4-Net income.-The method to be followed in ascertaining the amount of the net income of a corporation should be made much more clear, definite, and precise than it is in the present act. If it is imposs.ble to embody in the act a definition of net income, it should be possible to enumerate and describe the allowable deductions by which net income is derived from aggregate gross income in such clear terms that in the great majority of cases the taxpayer would have no difficulty in applying the act. The next eight suggestions have to do with allowable deductions.

SUGGESTION 5-“ Ordinary and necessary expenses."-Section 234(a) (1) of the revenue act of 1926 specifies as an allowable deduction "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."

Тах

The interpretation of this expression “ordinary and necessary expenses” has been the subject of many conflicts between tax collector and taxpayer. officials should be slow to challenge the propriety of the expenditures of corporations when such expenditures are duly authorized by the proper officials of the corporation, in view of the fact that these officials are primarily responsible to their own stockholders. In many contested cases, not coming up for settlement until several years after the disputed expenditure was made, no full statement of the reason for the item appears in the records of the company, although it was incurred with the full approval of the proper officers of the corporation. Finally, the attempt to limit deductions to expenses that are both ordinary and necessary can not be justified. While it is to be assumed that all ordinary expenses are necessary, it can not be questioned that a coalmining company may in a particular year be subjected to absolutely necessary expenses which are yet for the particular company extraordinary, although they are ordinary for the industry as a whole. For example, the flooding of a mine through an unexpected break in its roof might subject its owner to a large expense, of whose legitimacy there could be no doubt, which would be clearly deductible, although it would not, it is to be hoped, be an ordinary expense for the individual mine. This situation could be met by inserting the phrase “ordinary or necessary expenses" in lieu of the phrase "ordinary and necessary expenses."

SUGGESTION 6—“In carrying on."-The phrase "in carrying on any trade or business," used in the section of the act quoted above, under the strict interpretation that tax officials are disposed to give it, denies the corporation the right to deduct legitimate "necessary" expenses sometimes incurred by it, viz, such expenditures as it may have to make for the maintenance, as distinct from the operation, of its business. Those expenses should be allowed, and would be if the words "in the maintenance or operation of" were inserted in lieu of the words “in carrying on."

Section 234 (a) (1), with amendments suggested, would read:

"SEC. 234 (a) (1). All the ordinary or necessary expenses paid or incurred during the taxable year in the maintenance or operation of any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken, or is not taking title, or in which it has no equity."

SUGGESTION 7-Contributions to quasi-public organizations.-The logical and ethical test of the deductibility of any expense incurred by a corporation is the purpose of the expenditure. If in the judgment of ordinarily prudent officers or directors an expenditure is likely to bring a direct or indirect return to the corporation making it, such expenditure, for whatever purpose incurred, should be deductible, provided, of course, that that purpose is not illegal. One such legitimate expenditure now disallowed to corporations consists of contributions to quasi-public organizations.

If a corporation maintains its own hospital, school, playground, or research laboratory, expenditures for any of these forms of activity are allowable deductions. If the community in which the place of business of a corporation is located maintains any of these activities out of public taxes, the share of such tax paid by the corporation is an allowable deduction. But if the corporation finds it to its economic advantage to contribute to the cost of such facilities for the benefit of its employees when they are furnished by an independent private organization, such contributions are not deductible even though the organization furnishing the facilities is organized not for profit. A similar condition prevails with respect to appropriations by corporations in payment of research carried on, for example, in educational institutions, as contrasted with payments for similar work carried on in their own organization. Such inconsistency clearly involves unfair discrimination between individual corporations. There should be inserted in section 234 a new subsection listing contributions or gifts from which the company expects to derive economic gain as an a lowable deduction, with proper safeguards against the abuse of this provision.

SUGGESTION 8-Insurance reserves.--Insurance premiums paid by corporations to independent insurance companies are allowable deductions, whatever the nature of the casualty against which insurance is taken out. On the other hand, corporations carrying their own insurance are not permitted to make annual deductions in the amounts carried in their books to insurance reserves. This