Suppose corporation A acquires 95 per cent of the stock of corporation B in 1918 at a price of $1,000,000. It sells the stock in 1925 at the price of $2,000,000. Corporation A is not taxed on the profit of $1,000,000.

The consolidated provision was necessary during the war period in order to prevent tax avoidance and the injustice which would have resulted to many taxpayers. The elimination of the excessprofits tax removed for the most part the reasons for this provision. The insertion of the net loss provisions further lessened the injustice that would have resulted in a tax law which did not recognize affiliation.

It appears that under present conditions, sufficient relief would be granted affiliated corporations if the operating loss of one company could be offset against the gain of another for the same taxable year. This can be done in a manner which will recognize the separate entities of the corporations and eliminate many of the present difficulties of interpretation and administration.

Method of affiliation recommended. The method of affiliation proposed for the elimination of the difficulties already outlined may be described as follows:

1. The consolidated return, as such, should be abolished.

2. An affiliated group is a group of corporations which are connected through a stock ownership of not less than 95 per cent.

3. The operating loss of any member of such a group may be offset against the net income of one or more members of the group if they mutually agree thereto.

The treatment of the corporations as separate corporate entities in the above manner appears to eliminate the most troublesome features of the present law, and at the same time retain what would appear to be the meritorious principle, namely, the right to offset operating losses in the case of companies operated as a business unit.

FEDERAL TAX LIENS

RECOMMENDATIONS

(1) The commissioner should be authorized to release a tax lien on the giving of a bond with satisfactory sureties, to be approved by the commissioner, in an amount not more than double the amount of the

tax.

(2) The commissioner should be authorized to place a lien upon specific property where the security is ample. The law to-day extends the lien to all the taxpayer's property and rights to property, (3) The commissioner should be authorized, on the release or discharge of an income-tax lien, to issue a certificate to that effect.

DISCUSSION OF RECOMMENDATIONS

Release on giving of bond.-If the taxpayer has no resources from which to pay the tax other than the property to which the lien has attached, payment can be made only by sale or mortgage of that property, or by sale on distraint, or by proceedings under Revised Statutes 3207 (sec. 1127 of the 1926 Act). The two methods last named are slow and harsh. Where there is reason to believe that, but

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

(Section 280)

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. A 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 commis60481-27-VOL I-6

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 subpoena. 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 practicable 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.

Sixty-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?

RECOMMENDATIONS

(1) Any payment of internal revenue tax should be considered as an overpayment if the assessment was made after the period of