Mr. HADLEY. Has the California Legislature now enacted a statute which vests the title upon acquisition?

Mr. PETERSON. It was supposed to vest the property in the wife at the time of marriage. However, the California Legislature, in enacting the community property law as an amendment to the original law, did think that the law was so worded as to the wife's vested interest as to give her more interest than a mere heir would have, and the weight of the decisions of the State courts has been to that effect. However, there have been some decisions to the contrary. In the Federal courts first came the Blum case, in 1920, which gave the wife a vested interest, and then in 1926 came the Robbins case which overturned the Blum case. After the decision in the Blum case, the Bureau of Internal Revenue refunded the estate tax paid on one-half of the community property and under the decision in the Robbins case the Government is trying to get it back again.

Mr. HADLEY. In most of the States that have community property laws, so far as I have knowledge, the title vests under the statute, but there has been some question raised through these decisions, with which I am not thoroughly familiar. Does your statute now provide that the property is vested?

Mr. PETERSON. Yes, sir; that is true now, and it was believed to be so before. The weight of the State court decisions was that the title did vest in the wife upon marriage.

Mr. CHINDBLOM. Does the constitution of California contain any provision on this subject of community property?

Mr. PETERSON. No, sir; it is a part of the Civil Code.

Mr. CHINDBLOM. I have understood that some States provide for it in their constitutions.

Mr. HADLEY. The statute has been in existence in Washington for nearly 50 years. It was enacted under the territorial régime.

Mr. PETERSON. Reading further from Mr. Curry's statement

The trials of the California taxpayers are not confined to those who filed separate income-tax returns on their community property income. This year, executors and administrators of estates in California, many of which have been distributed and the bonds of the executors or administrators discharged, have been notified of an assessment against them of a tax amounting to the refund given these same estates by the Bureau of Internal Revenue after the Blum decision. While these executors and administrators may theoretically secure relief from the heirs, such action on their part is practically impossible and the executors, who acted in good faith administering the estates intrusted to them, now find themselves in the unenviable position of being liable personally for a tax which many of them had already paid to the bureau and then had refunded to them by the Bureau of Internal Revenue.

I am not sure as to what amendment to the revenue laws can cover this situation, but it appears to me as thought these executors who have acted in good faith should not be made to again pay a tax which had been refunded to their estates. Possibly, a provision exempting executors and administrators from tax liability on taxes already paid but refunded to estates may cover the situation.

I sincerely hope the committee will consider the California situation very carefully. It is peculiar unto itself and the taxpayers in the State have no way of ascertaining definitely the amount of their tax liability under the California community property law.

I have been unable to ascertain the total amount of taxes involved in the California community property tax cases, but those affected are all comparatively large taxpayers. However, the question of amount of tax does not enter into the matter at all. It is the principle of just and equitable taxation in which I am interested, and I am sure that the committee also wishes to see that the Federal revenue laws are administered justly and free from inequalities.

That was Mr. Curry's statement, Mr. Chairman, that he asked me to read for him.

The CHAIRMAN. That is a very good statement of the situation. The committee, as a rule, has been very reluctant to interfere with the statute of limitations, but it is possible that this matter might be fixed without meddling with the statute of limitations, at least where the tax has been paid twice. It looks to me as if we might provide that where the tax has been paid by the wrong party, and is subsequently paid by the party against whom it should have been assessed, the Government should refund the amount paid by the party against whom it was wrongfully assessed without any new application.

Mr. HULL. We might get the Treasury to sign a waiver in that sort of a case.

Mr. CHINDBLOM. We could provide for allowing proper credits. Mr. GARNER. Is the Treasury authorized, Mr. Hull, to sign a waiver of the statute of limitations?

Mr. HULL. They sign them on the other side.

Mr. GARNER. I just wondered whether the law authorized them to do that.

The CHAIRMAN. I can not see why the Treasury, after it has collected it from the right party, should not simply refund without any application at all.

Mr. GARNER. Mr. Chairman, the trouble about that is this: If the statute of limitations has run against a tax, I doubt if the Treasury Department in its discretion could pay a refund that the statute of limitations has already barred.

The CHAIRMAN. It could not do that unless we passed an act giving them that authority. We will have to discuss that in the committee. Mr. CRISP. An act authorizing the Treasury to waive the statute? Mr. GARNER. That would be giving them a good deal of discretion. Mr. CHINDBLOM. We could provide for credit to be made to the proper party who should have paid the tax, with the consent of the party who had erroneously paid it, and then put other parties in the same status by subsequent language.

The CHAIRMAN. I think you are right about that, Mr. Chindblom; but we will discuss it later.

Mr. PETERSON. The Board of Tax Appeals three weeks ago, October 7, held that the amount of the wife's tax could not be credited to the husband's tax.

Mr. CHINDBLOM. Oh, I do not think it can be done under the present law; but I am talking about what might be done.

BRIEF SUBMITTED BY HOTEL LAFAYETTE, WASHINGTON, D. C.

IN RE SECTION 204 (B), REVENUE ACT OF 1918

Section 204 (b) of the revenue act of 1918 provides as follows:

66

'If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year." (Italics ours.) Section 204 (a) of the same act defines the term "net loss" as follows: "That as used in this section the term 'net loss' refers only to net losses resulting from either (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment, or other facilities constructed, installed, or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) of subdivision (a) of section 234) over the sum of the gross income plus any interest received free from taxation both under this title and under Title III.”

The term "taxable year" is defined by the same revenue act in section 200 as follows:

"That when used in this title the term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term 'fiscal year' means an accounting period of 12 months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1918, shall be the calendar year 1918 or any fiscal year ending during the calendar year 1918;

PURPOSE OF NET LOSS LEGISLATION

The revenue act of 1918 was approved February 24, 1919 (40 Stat. 1057), after the signing of the armistice, and when Congress was fully aware that great losses would be sustained by business in general due to the closing of the war. Congress was also aware that immense profits had been realized by business in general during the taxable year 1918. In the enactment of the net-loss provision provided for in the sections above quoted, it was admittedly the intention of Congress to allow taxpayers, who might be able to establish to the satisfaction of the Commissioner of Internal Revenue that they had suffered net losses in the taxable year 1919, to deduct said net losses from their taxable net income for the preceding taxable year, namely, 1918.

Congress, however, in the enactment of this legislation limited the period within which the net loss for the year 1919 should accrue, namely, the "taxable year" beginning after October 31, 1918, and ending prior to January 1, 1920.

ADMINISTRATION OF SECTIONS BY THE BUREAU OF INTERNAL REVENUE

- The Bureau of Internal Revenue has interpreted section 204 (b) so as to exclude from the benefits thereof any taxpayers having a fiscal year closing subsequent to January 1, 1920, although substantial portions of the fiscal year 1919 of the taxpayers fell within the period from October 31, 1918, and January 1. 1920. A concrete case in which the bureau has so applied the provisions is as follows: A taxpayer operating a business that had been regularly carried on by it prior to the war filed its returns on a fiscal-year basis, the fiscal year beginning on February 1 and ending January 31 of the succeeding year. In its re

turn filed for the year ending January 31, 1919, a net income of approximately $50,000 was shown. In its return filed for the year ending January 31. 1920, a net loss was disclosed of approximately $30,000. It will be seen that eleventwelfths of the taxable year in which it reported a net loss fell within the period October 31, 1918, to January 1, 1920. In other words, the taxable year of the taxpayer ended 30 days subsequent to January 1, 1920.

The taxpayer, in the belief that section 204 (b) so authorized, undertook to deduct eleven-twelfths of the net loss for the year ended January 31, 1920, from the net income of the taxpayer for the preceding taxable year. This the Bureau of Internal Revenue refused to permit it to do, holding that since the taxable period in which the net loss was sustained closed subsequent to January 1, 1920, the taxpayer was not entitled to deduct any portion of the loss sustained in that taxable year.

INTENT OF CONGRESS

It is the position of the bureau that Congress has tied its hands in such a situation by the definition of "taxable year," as set out above in section 200 of the revenue act of 1918, and that any relief afforded taxpayers from the injustice wrought by such interpretation must come by legislation.

The construction placed upon the foregoing section may or may not be, strictly speaking, warranted by the language of the section. So far as the writer is informed, the provisions of the sections in issue have not received interpretation by the courts. However, it is inconceivable that it was the intent of Congress to discriminate against taxpayers having portions of fiscal years within the period stated by the statute so as to not allow them to deduct the portion of the net loss sustained within the period set out in the statute. No good reason can be seen for such discrimination, because it was evidently the intention of Congress to afford relief to all taxpayers having a full taxable year falling within the statutory period, or a portion of a taxable year falling within the statutory period.

The writer is not informed as to whether or not this glaring injustice has been heretofore called to the attention of your committee. However, since the committee has now under consideration drafting of a new revenue act. or amendments to the present act, it is felt that it is proper that your committee should be advised of the interpretation placed upon the foregoing sections by the bureau and the resulting injustice to taxpayers by reason thereof.

REMEDY SUGGESTED

To the end that the injustice hereinbefore pointed out may be remedied, it is suggested that in the drafting of the new revenue act that section 204 (b) be amended so as to permit taxpayers having a fiscal year beginning the calendar year 1919 and closing subsequent to January 1, 1920, to deduct from the income of the preceding fiscal year that portion of the net loss sustained by it in the fiscal year, a portion of which fell within the period immediately preceding January 1, 1920. We feel that the mere statement of this situation will instantly bring to your attention the injustice suffered by certain taxpayers because of the date of the closing of their fiscal year.

Respectfully submitted.

HOTEL LAFAYETTE, Washington, D. C.

ESTATE TAX

[Secs. 300 to 325]

STATEMENT OF HON. PARK TRAMMELL, A SENATOR FROM THE STATE OF FLORIDA

Senator TRAMMELL. Mr. Chairman, I wish to thank the committee for its courtesy in permitting me to appear before them on this very important subject.

I am fully appreciative of the limit of time and also the fact that Florida has here others to speak upon this question. Due to these considerations, I am only going to occupy a very few moments of the committee's time. I have reduced to writing a few remarks on this subject and will read them in the interest of brevity.

Briefly, I am for a return to the old policy of no interference by Congress with the policy of the States on the question of taxation, which policy had prevailed without a break from the day our American Congress first assembled until 1926, when provisions of the present revenue law appertaining to the taxation of estates were enacted. A return to the old policy would give to the States the free exercise of their rights and would retain in Congress all of the powers of taxation granted to it under the Federal Constitution. What more could be desired? The prerogatives of the National Government in its proper field of legislation are sacred and should not be invaded. by the States, and likewise the Federal Government should never encroach upon the rights of the States. In this policy I believe in the observance of the spirit as well as the letter of the law.

Entertaining these views, I have a strong conviction that the 80 per cent rebate clause of the estate-tax provision of the present revenue act is in spirit if not in the letter violative of that well known and recognized policy that it is solely for the State to say whether or not it will levy or not levy a particular tax. Congress has no right to fix or levy in any form a State tax, nor to direct the field of taxation in which the States shall enter or from which they shall refrain, nor to attempt to force any sovereign State to impose any particular tax because some other State or any number of other States levy that particular tax. Yet I respectfully submit that we find in the provisions of the existing law which allow a refund of as much as 80 per cent of the Federal estate tax on account of payments made for estate taxes levied by the States an effort to accomplish by indirection that which the Federal Government is without authority to do by direct legislation. It is but an effort to force the States to levy a uniform estate tax, and if allowed to stand marks a beginning that will end we know not where. In such policy we are treading upon dangerous ground, and I fear if we do not repeal at the approaching session of Congress the clause of the law in question that the policy it sanctions will rise to plague us in the future. Every State is the best judge of the sources from which it should derive its revenue. Local conditions are largely controlling as to the taxing policy of the respective States, and any action that upsets or