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There are few problems which deserve more thoughtful consideration in connection with the improvement of income-tax administration to-day than the outstanding problem of personnel in the general counsel's office. The several aspects of this problem may be noted briefly: In the first place, the general counsel is forced to compete with law firms and other organizations for the retention of qualified lawyers in his office. Often the salaries offered are greatly in excess of the amount which the general counsel is authorized to pay. The result is that the general counsel loses a disproportionately large percentage of the attorneys who have been trained and qualified to do the work of the office. The office should be something more than a training ground.

Another difficulty arises from the fact that the work to be done is specialized and requires a high order of legal ability. A considerable period of time, often more than a year, is required for a new attorney to become reasonably familiar with the legal principles with which he has to deal and the organization and procedure of the bureau and of the Treasury Department. Consequently, immediate relief could not be expected, even if it were possible to secure on short notice the services of a number of qualified lawyers on the outside.

The answer appears to be to select carefully new lawyers for the office and to find means of retaining those in the office who have proved their ability to do the work required.

Bringing bureau work to a current basis.—The vast accumulation of returns and cases arising under the war revenue acts were not touched until months after the war. The organization of the Bureau of Internal Revenue necessarily occupied considerable time. Since 1921 the bureau has directed every effort to the disposition of accumulated cases for earlier years, as well as to the auditing and closing out of current returns. The table below shows the status of cases at the end of the last fiscal year (June 30, 1927), not including cases pending in the general counsel's office or before the board.

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1 This tabulation does not include the total returns filed for the year 1926, since many of them had not on June 30, 1927, been received in the Income Tax Unit.

The bureau is approximating a current status. As the work becomes more current the volume of board cases may diminish. The board's docket may be as congested now as it will be at any time in the future. It should be said, however, that there is no tangible evidence as yet to show that this factor is operating to decrease appeals.

The major element in relieving congestion is an adequate recognition by the bureau and the general counsel's office of their duties in this connection, and the exertion of vigorous efforts by both to accomplish the reduction of congestion. That the Treasury is fully aware of the situation will be apparent from the data submitted in Volume III. Without whole-hearted cooperation between the bureau, the general counsel's office, and the board, the task will be difficult. By itself the board is powerless either to diminish incoming appeals cr greatly to increase the present rates of production while maintaining the quality of its decisions.

Key cases. It often happens that several cases within the bureau and before the board rest ultimately on a single proposition of law which is the subject of dispute between the department and several taxpayers. There were recently more than 1,000 cases on the board's docket, all resting primarily and some wholly on a single issue. There should be a way in which to secure a speedy hearing on a typical case so that others will not continue to encumber the docket, and so that the bureau may dispose of those in its hands without issuing deficiency letters. A motion to advance might accomplish the result. It is felt that there can be no doubt of the board's right under existing law to entertain such a motion, and its use under circumstances of this kind is suggested.

Improved form of 60-day letters. It is the experience of board members that the taxpayer and the bureau do not always know the points of difference between them. This is inexcusable. In part it is due to the bureau's failure to tell the taxpayer at conferences the position which it has taken with respect to his case, the exact point at issue, and the particular details which give rise to difference of opinion. He may be told that the evidence is “insufficient," when in fact it is sufficient if understood and rightly interpreted by the conferee. Some bureau letters are vague, simply stating that the taxpayer's contentions can not be accepted. The taxpayer should at all times know in what particular the bureau does not agree with his views of the case. If during the progress of each case through the bureau both parties knew exactly the contentions of the other party, more adjustments would be reached and there would be fewer 60-day letters. The 60-day letter ought to show completely on its face the cause of the deficiency. It should not merely incorporate prior letters.

The bureau has under consideration means of improving the form of the 60-day letter in these respects.

Plea in the nature of a demurrer.-The suggestion has been made that the Board of Tax Appeals can not consider questions of law in advance of questions of fact. It is believed that the act does not restrict the board in this respect. There is ample authority to make rules for the disposition of law questions at preliminary hearings. It is suggested that the board make suitable provision by rules to take care of such cases.

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CLOSING AGREEMENTS

Section 1106 (b)

RECOMMENDATION

It is recommended that section 1106 (b) be modified so as to permit the execution of agreements thereunder as soon as the settlements in a given case has been reached between the Government and the taxpayer, without waiting for the assessment and collection of the amount of tax due (if any), the actual making of an abatement, refund, or credit, or the determination in detail of interest or penalties. The making of the agreement under section 1106 (b) should not be restricted to years for which original or additional taxes are determined to be due and unpaid.

DISCUSSION OF RECOMMENDATIONS

A frequent criticism in connection with the administration of income taxes has been the reopening of closed cases. Taxpayers complain when cases once thought to be settled are reopened by the Government. On the other hand, the bureau points out the circumstance, that one of the chief obstacles to bringing its work to a current basis is the reopening of old cases by taxpayers on claims for refund or credit. In both instances the moving party (taxpayer or

. Government) is raising for fresh consideration a case which theretofore has been considered adjusted and closed.

An effective way of attaining the desired end of preventing the reopening of cases is by agreements between the Government and the taxpayer to regard a given decision as final. The execution of such an agreement is authorized by section 1106 (b) of the Revenue Act of 1926. There were somewhat similar provisions in the acts of 1924 and 1921.

Facilities should be provided for executing such agreements more promptly and more generally that has been done in the past. A case should not be subjected to an intensive reaudit on the taxpayer's application for such an agreement. This, though formerly the practice, appears to have been abandoned. It is true of many tax cases that one bureau employee may decide the case one way and another employee, equally honest and competent but disposed to the a different view of the facts or the law, may review the same case and reach a different answer. This process may go on indefinitely. Is is of utmost importance that this be discouraged. Once a case has been considered and a fair adjustment has been reached the disposition should be final.

One difficulty in the way of executing agreements under section 1106 (b) is the wording of that section, which requires that the tax or penalty be not only determined but that it also be assessed and paid before the agreement can be signed. As a practical matter this is too cumbersome. The effectiveness of the section is lost. The taxpayer or his representative has conferred with a representative of the Government. The facts have been developed and an agreement has been reached at or shortly after the conference. It should be possible to execute an agreement when the settlement is reached, without waiting for assessment and payment of the tax or determining the liability for interest or penalties. If advisable, these items may be specifically excepted from the agreement. The same is true as to the making of an abatement, refund, or credit determined to be proper for that year. These matters can follow in usual course. Neither the Government nor the taxpayer has anything to lose by executing the agreement without delay and both have much to gain.

Applications for 1106 (b) agreements have been made where no tax is due either because all amounts have previously been paid or because for the year in question the taxpayer had a loss, or because the particular individual or corporation was exempt from tax. The present wording of the section may be construed impliedly to prohibit closing such cases by agreement. It does not seem desirable to distinguish these cases from other cases so far as closing agreements are concerned. The desirability of putting an end to controversy about a particular tax year is just as strong as in ordinary cases. While the agreement should not bind the Government or the taxpayer as to any year not included in it, the execution of the agreement should be open to the parties.

In no case should the agreement be entered into prior to the expiration of the taxable period to which it relates.

The execution of agreements under section 1106 (b) in tax cases generally is strongly recommended.

MISCELLANEOUS SUBJECTS Deductions of estate and inheritance taxes.-Estate, succession, legacy, or inheritance taxes are deductible from gross income in computing net income. In some States the tax is imposed on the right. to transmit property at death, while in others it is a tax on the right to receive property on the death of another person. Difficulties have been encountered in deciding who is entitled to deduct taxes of the nature above mentioned. Under the present regulations the deduction is taken by an estate or by the beneficiary, accordingly as it is imposed on the right to transmit or on the right to receive. The distinction is almost unworkable and much too technical. To provide a definite and uniform rule, it is suggested that the estate be allowed the deduction in all cases unless the beneficiary can show that he actually paid the tax and that he was under liability to make such payment.

Extensions of time for payment of deficiencies.-Section 274 (k) of the Revenue Act of 1926 provides that the commissioner may extend the time for payment of a deficiency in cases where payment on the date prescribed for payment thereof would result in undue hardship to the taxpayer, but the extension can not be made for a period of more than 18 months. Experience has shown that under certain circumstances this period of time is inadequate to permit the taxpayer to liquidate his assets sufficiently to make payment of the tax. In cases where the taxpayer is unable to pay after an extension of 18 months, it may happen that to force payment would put the taxpayer in bankruptcy and the Government would recover less than the amount of the tax. Frequently the full amount can be collected by forbearance for a slightly longer period. Accordingly it is recommended that in exceptional cases the commissioner be permitted to extend the time for a further period of 12 months.

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