Mr. JENSEN. It did seem that way. In other words, if we had only. a part of the proof of one specific item but not every bit of proof, that it could be disallowed.

Mr. KEAN. I did not have any intention of that being in the bill. My thought was that if he could substantiate 75 percent, that the 75 percent would be allowed and if he could not substantiate the other 25 percent, the other 25 percent would be disallowed.

Mr. JENSEN. It, to us, seemed to mean that it required perfect proof as distinguished from substantially adequate proof. I appreciate that is maybe the extreme interpretation on it, but it opens the door to that.

Mr. KEAN (reading):

No deduction shall be allowed under this subsection unless it is substantiated in accordance with regulations

That is the provision.

Mr. JENSEN. Yes, sir.

Mr. KEAN. If 75 percent were substantiated, it would be allowed, if 25 percent were not substantiated, it would not be allowed.

Mr. JENSEN. If carried to the extreme in traveling expenses it would require obtaining a receipt for every taxi fare. I appreciate that depends on the final regulations, yes, sir, and in the discretion followed in administering the regulation.

Mr. KEAN. I do not think there was any thought that the 100 percent would be disallowed if they could not prove the whole 100 percent. Mr. MASON. Would the gentleman yield there? But perhaps the substantiation even of the 75 percent would be under question if the regulations required certain things that could not be allowed, but on the whole it should be substantiated if the regulations had gone too far. I think that is your theory, is it not?

Mr. JENSEN. Exactly, sir.

Mr. BYRNES. In this whole area are you not forced to rely on a certain reasonableness as far as the Bureau is concerned and as far as the regulation is concerned? It is just impossible to draft legislation which will not depend to a large extent upon the reasonableness of enforcement and reasonableness of administration.

Mr. DANNE. That is a laudable approach, and I hope that is what it means. As we point out here, it is impossible as a practical matter to spell out in complete detail in regulations exactly what the record should be required in connection with every type of deduction.

Mr. BYRNES. It would be all the more difficult to spell it out in legislation.

Mr. DANNE. I agree with you, sir.

Mr. BYRNES. So in enacting statutory changes, we have to rely upon the reasonableness of the Bureau itself.

Mr. DANNE. I agree with you there. The thing we are concerned about, sir, is whether this provision will require that an agent making an examination of a return must see a voucher for every single transaction involved in the financial arrangement that made that return and in the absence of seeing the voucher that will be disallowed.

Mr. BYRNES. I do not think that was the intention of the subcommittee.

Mr. DANNE. That was our concern.

Mr. KEANE. I do not think it was the intention of the committee if a man, for instance, say in business, took 10 trips to New York, that every time he left he would have to show the stub of his railroad ticket. If it were a trip to San Francisco, it might be different.

Mr. SIMPSON. How would you do it?

Mr. KEAN. I think the answer would be the reasonableness of the regulations in the fact that the agent looking it over could say the man could substantiate he made 10 trips to New York, the fare to New York is $10 or $8 from here, that that would be allowed. Mr. COOPER. Mr. Forand, of Rhode Island, will inquire.

Mr. FORAND. Mr. Chairman, I was interested in the colloquy relative to the reasonableness to be exercised in the administration of this particular section that we have been discussing. I cannot let the opportunity pass without calling attention to the fact that with all of this investigating business going on I am very fearful that the employees of the Bureau of Internal Revenue are not going to be able to be reasonable; they are going to be so scared that they are going to lean over backward, and the poor taxpayer will be at the mercy of these collectors.

Mr. JENSEN. Would it be proper, Mr. Chairman, if these folks would make a recommendation as to how you would change this language? You are experts now. I would like to know how you would remedy this language so as to cover your objections.

Mr. DANNE. We would be glad to take it under consideration. We are not experts in draftsmanship.

Mr. JENSEN. You are smart fellows; you have a good field. I would like the benefit of what you think about it.

Mr. DANNE. We would be glad to take it under advisement and furnish the committee with some views which can be the basis for drafting.

Mr. REED. I ask unanimous consent that that be made a part of the record.

Mr. COOPER. Whatever you prepare you can submit it to the clerk of the commiuttee for use of the committee.

Mr. REED. Could it not be made a part of the record?

Mr. COOPER. If he gets it ready in time to include it in the printed record.

Mr. DANNE. We will try to do that, sir. (The information referred to follows:)

AMERICAN INSTITUTE OF ACCOUNTANTS, INC.,
Washington 5, D. C., May 29, 1952.

H. R. 7893

Hon. ROBERT L. DOUGHTON,

Chairman, Committee on Ways and Means,

House of Representatives, Washington, D. C.

DEAR MR. DOUGHTON: Pursuant to your committee's request on the occasion of my appearance on May 28, 1952, when I presented a statement on behalf of the American Institute of Accountants on the above bill, I submit herewith a supplemental statement concerning section 101 in title I of the bill.

At the outset, permit me to reemphasize our original statement to the effect that we are entirely in sympathy with the general purposes of the bill insofar as it is intended to strengthen tax administration procedures and close some loopholes which may now exist in the Internal Revenue Code. Accordingly, the principal purpose of my testimony was to place before the committee certain questions regarding the scope and interpretation of some of the provisions of the bill.

* * *""

Referring specifically to section 101 in title I regarding disallowance of unsubstantiated deductions, we recognize that the provision as now drawn requires that deductions in order to be allowed must be substantial "in accordance with regulations prescribed by the Secretary We also recognize that in the summary statement concerning the provisions of H. R. 7893, it is stated that this section is intended to apply only to business expenses such as travel and entertainment expenses.

However, there is no such limitation in the specific language of section 101, and it is for this reason that we are concerned as to the interpretation which may be placed upon it. As we pointed out in our prepared statement to the committee, a 100-percent verification of any series of transactions is seldom practicable and often impossible, leaving an area in which properly exercised judgment must play an important part in determining the fairness and reasonableness of their financial result. Substantiation, from an auditing point of

view, involves a number of factors, including:

(1) Establishment of the fact of a transaction (i. e. did it actually occur?). (2) Determination of the character of a transaction (i. e. business or personal; capital or revenue item; etc.).

(3) Ascertainment of the financial consideration involved (i. e. amount and manner of payment or of obligation incurred).

It would seem that if the fact and the character of a particular transaction can be satisfactorily proved, a reasonable degree of discretion could be exercised in judging the reasonableness of the financial consideration involved. It appears to us therefore that the basic solution to the situation at which section 101 appears to be principally directed is the proper exercise of discretion by qualified examiners who should employ accepted auditing standards and techniques. This solution lies within the existing powers of the Commissioner of Internal Revenue.

As I indicated in my testimony, we do not feel that we may impute to ourselves qualifications as legislative draítsmen but we appreciate that even the most expert draftsman would have difficulty in expressing in statutory language the stated objective of section 101. We desire, however, to offer our fullest cooperation to your committee and submit the following suggestions:

(1) That the language of the section, if it be retained, be reworded to require "reasonable substantiation" in the circumstances.

(2) Alternatively, that section 101 be eliminated from the bill and that the solution to the problem be left with the Secretary and the Commissioner to be dealt with by amendment of regulations under section 54 (a).

If the latter course should be adopted, we would be glad to give any help we can in the preparation of amended regulations, which should take into account generally accepted auditing standards.

Our committee continues to stand ready to be of assistance.
Yours very truly,

W. HERBERT DANNE.

Mr. REED. Under the present law, am I correct that the Internal Revenue Bureau can examine the records of a taxpayer once a year? Mr. DANNE. That is true, one examination.

Mr. REED. Under this bill they can examine them twice, is that right?

Mr. DANNE. That is quite true.

Mr. REED. What comment would you have on that? The second time would be to see if they are keeping proper records.

Mr. DANNE. Well, it seems to me that the purpose of the original provision in the law to protect a taxpayer from unnecessary harassment is being challenged by this provision. Now, if it was the original intention of Congress that the taxpayer not be subject to that harassment, I do not know whether this is an intention to change that. Mr. COOPER. Any further questions?

Mr. SIMPSON. Would this require actually having on hand the receipt for lunches and things of that sort?

Mr. DANNE. As I say, I do not know what these regulations are going to provide but I think that is one interpretation.

Mr. SIMPSON. Do you think that is contemplated?

Mr. DANNE. As I rode back to the airport from New York City yesterday one of the passengers asked the bus driver for a receipt. Mr. SIMPSON. That borders on being unreasonable, yet it is contemplated as you interpret it.

Mr. DANNE. As we interpret it, that is the interpretation that has been placed on it.

Mr. SIMPSON. Could you word it any other way to accomplish that purpose without being unduly unreasonable? Do you recommend any change in the present practice?

Mr. DANNE. No, sir. I think the Commissioner should be allowed to rely on the skill and experience of his agents and their knowledge of auditing techniques.

Mr. SIMPSON. You would take the word, presently at least, of the taxpayer?

Mr. DANNE. Yes, sir.

Mr. COOPER. We thank you for your appearance and the information given the committee.

Mr. DANNE. Thank you, Mr. Chairman.

STATEMENT OF JOHN J. CURRANS, CHAIRMAN, COMMITTEE ON COOPERATION WITH UNITED STATES TREASURY DEPARTMENT, NATIONAL SOCIETY OF PUBLIC ACCOUNTANTS, NEW HAVEN, CONN.

Mr. COOPER. The next witness is Mr. John J. Currans.

Please give your name and address and capacity in which you appear for the record.

Mr. CURRANS. My name is John J. Currans. I am the chairman of the committee on cooperation with United States Treasury Department, National Society of Public Accountants.

Mr. REED. May I ask a question, Mr. Chairman? Do we have his statement?

Mr. COOPER. I do not see any here. Have you presented copies of your statement to the committee?

Mr. CURRANS. No, gentlemen; due to the fact that we have received less than 24 hours' notice to appear to this hearing our committee has not had sufficient time to carefully study the bill and prepare a fair and equitable report. Therefore we thank you to give us more time to prepare a statement properly reflecting our viewpoint on H. R. 7893. Mr. COOPER. You may proceed with your statement.

Mr. JENKINS. Just a minute. Let me ask him about his qualifications.

You state you are chairman of the committee on cooperation with the United States Treasury Department?

Mr. CURRANS. Representing the National Society of Public Accountants.

Mr. JENKINS. How do you cooperate? Does the Treasury invite you to cooperate?

Mr. CURRANS. We have frequent conferences on the matter of proposed legislation, on regulations governing the practice of the preparation of income-tax returns for a fee, and have visited Washington on the average of once or twice a month since last fall discussing the

problem with various department heads in the hope of finding a solution to this complex problem.

Too often the public accountants who are neither certified nor enrolled in the practice before the Treasury have to bear the brunt of the tax levied upon honorable and honest practitioners who have rendered the Government a valuable service in the preparation of income-tax returns and in representing their clients before the Treasury below the level of the conference section.

Mr. JENKINS. Your cooperation has been cordial and friendly. In other words, you do not get any pay from the Government?

Mr. CURRANS. No; this is all voluntary work. We receive no pay either from the Government or from the national society. We do this. voluntarily, mostly on our own expense.

Mr. JENKINS. Is your work cordial and cooperative or do you have any trouble? Have you been in court on one side or the other?

Mr. CURRANS. No, sir. We just hold informal conferences and. sometimes official conferences. Two weeks ago we met with the committee on practice to discuss this very problem. We are always exploring ways and means of trying to control this practice.

Mr. JENKINS. That is all right. Thank you.

Mr. COOPER. Let me ask one question for information, sir. The previous witness appeared as representing the American Institute of Accountants. You are listed as appearing for the National Society of Public Accountants. Are they two organizations of accountants? Mr. CURRANS. Yes, sir.

Mr. COOPER. All right, go ahead with your statement.

Mr. CURRANS. The American Institute of Accountants is a group consisting of certified public accountants. The National Society of Public Accountants is another group representing public accountants who are not certified.

Mr. COOPER. All right, go ahead with your statement.

Mr. CURRANS. I have no further statement to present.

Mr. COOPER. Does that complete your statement?

Mr. CURRANS. Yes, sir. I wish to have time to present a statement in the near future. As I say, we had less than 48 hours' notice, in fact it was night before last, quarter of 6, that I was told about this hearing. Our committee consists of men scattered all over the country from coast to coast. We have not had an opportunity to meet on such short notice.

Mr. COOPER. We thank you for your appearance.

Mr. REED. May I ask unanimous consent that he have reasonable length of time to prepare his statement and have it made a part of the record.

Mr. COOPER. The committee will have to decide how long the hearing will run and when it will close.

Mr. REED. Yes, but we should give an opportunity to a great organization to present a statement based on opportunity to consult. Mr. FORAND. How much time would you need?

Mr. COOPER. The clerk advises that you were notified on May 20. Mr. CURRANS. The letter was misdirected and it went to St. Louis instead of coming to New Haven, Conn., and the notice did not give any time. It merely said, if I remember correctly, to read the newspapers, you might see the notice there. Mr. Irving called me up night