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agency is illegal and that a Federal official may only appear in open court when the case has reached the trial or appellate stage.



Washington, D. C., May 26, 1952. MY DEAR MR. DOUGHTON : On May 16, 1952, I introduced H. R. 7893 entitled the "Revenue Administration and Enforcement Act of 1952.” I am most sorry that the forthcoining primary elections in California prevent my being present at the hearings on the bill. In my absence I would deeply appreciate your making this letter a part of the record at the beginning of the Committee hearings and also a summary statement of the provisions of the bill which I am enclosing.

The holding of hearings by the Committee on Ways and Means will serve the purpose of giving our Subcommittee members the benefit of the testimony and at the same time facilitate an early formulation of views by the entire committee in the interest of expediting action on the bill.

The Subcommittee on the Administration of the Internal Revenue Laws of the Committee on Ways and Menas, of which you asked me to serve as Chairman, has been investigating many aspects of the administration of the revenue laws in order to determine whether the laws already enacted have been properly administered and to develop such new legislation as might be needed. The introduction of H. R. 7893 constitutes an interim action based on the Subcommittee's activity to date.

The provisions of the bill are primarily the outgrowth of the public and executive session hearings held by the subcommittee and particularly of the public hearings held from January 22 to 25 of this year, during which a number of specific inquiries were put to the Commissioner of Internal Revenue for recommendations concerning most of the problems with which this bill now undertakes to deal. (See proposals for strengthening tax administration, hearings before a subcommittee of the Committee on Ways and Means, 82d Cong., 2d sess., on Adminisration of the Internal Revenue Laws, pp. 98–100.)

The bill does not encompass all of the legislative recommendations which may issue from the subcommittee's investigation, but I believe it was important to introduce H. R. 7893 as a basis for early hearings because of the urgency of many of the problems with which it proposes to deal and because final action on many of the provisions should be taken only after giving an opportunity to be heard to Government witnesses and persons representing taxpayers and tax practitioners.

The sections in title I are designed primarily to correct weaknesses in present enforcement provisions, some of them of serious proportions. These provisions should not require prolonged debate or discussion. Their policy objectives areclear and the difficulties of legislative drafting are not great once the policies involved are endorsed.

The provisions of title II pertain more to routine administration than to enforcement. With minor exceptions, if any, they relate to entirely noncontroversial amendments which would aid both the Bureau of Internal Revenue and taxpayers by promoting smoother, more efficient administration. There should be little difficulty over these provisions it would seem to me. While some, taken alone, are of minor significance, in the aggregate they would make a sizable contribution to tax administration.

Title III deals with a number of unrelated matters. Sections 301 and 302 require separate mention below because of the special problems they present. Section 303 would insure that the existing right to a jury trial in suits for tax. refunds is not affected by the Reorganization Plan No. 1 of 1952 and would also extend the right to jury trial in suits against the United States in which it does not now exist. Section 304 would simply clarify beyond any doubt the present scope of section 281 of the Criminal Code relating to practice before Federal departments by United States officials, officers and employees.

I believe enactment of the provisions of titles I, II, and III that I have already described with such technical and otherwise improving amendments as

might appear desirable in the light of the hearings being held, would represent a significant contribution to revenue administration by the Eighty-second Congress. These provisions of H. R. 7893 would provide the Bureau with some of the additional tools necessary to administer properly the revenue laws, primarily by requiring taxpayers to keep the records which they need to have in order to prepare an accurate return of tax. It would give the Treasury the civil sanctions adequate to deter the carelessness in reporting which leads to poor administration and collection, but which is most often not of a criminal nature.

The task of tax collection is to collect the revenue needed to run the Government on as nearly voluntary a basis as possible. In cases where this compliance completely breaks down it becomes necessary to resort to criminal sanctions, but in the overwhelming number of cases, civil money sanctions to promote and enforce the law are more appropriate, fairer and more effective than the threat of criminal prosecution. The average taxpayer will be aided in accurate voluntary reporting by requiring adequate records and careful preparation of returns. Exaggeration of deductions and failures to report income result mainly from poor records and carelessness. I do not believe that there are many American citizens who with accurate records before them, deliberately cheat or falsify. Those who do stoop to do this must be dealt with firmly and the bill improves criminal and other enforcement measures by extending the statutes of limita. tion on certain offenses to 6 years and by giving additional authority to examine records, etc.

Sections 301 and 302 of title III require separate discussion. They are included, not so much from conviction that the provisions in their present form are the perfect answer to these questions, but because I and the subcommittee as a whole felt that there has been much laxness in this area and that some adequate answer must be found to these problems. It can be done through the combined efforts of the legislative and executive branches of Government and the responsible organized elements in the legal and the accounting professions who are properly concerned with maintaining high standards of integrity in tax administration.

The problems giving rise to sections 301 and 302, i. e., the intrusion of gangsters, racketeers, influence peddlers, and other unauthorized and undesirable persons into revenue administration are of major significance in tax enforcement. The best answer to these problems is a strong and vigilant administration by Government administrators of the highest integrity and ability. Ultimately there is no substitute for these qualities. But there may also be need for legislative assistance through making Federal crimes of some of these malicious rackets. These sections are extremely difficult to put into language broad enough to reach the reprehensible conduct and yet precise enough not to inhibit or threaten legitimate conduct. I do not underestimate these very real problems. Sections 301 and 302 are included in the bill to present the problem to the subcommittee, the whole committee and ultimately the entire Congress for consideration and discussion. To some extent the Committee on the Judiciary may have particular interest in these two sections. I have no particular brief for the language which is used or any particular approach, but the problem is one which I believe should be faced and which deserves our most careful attention.

In closing, I desire to acknowledge gratefully the suggestions and willing assistance received in preparing the bill from Mr. Stam, chief of staff of the joint committee, Mr. Kirby of the Treasury Department, the representatives of the Commissioner of Internal Revenue, and the chief counsel for the Bureau of Internal Revenue and the House legislative counsel. Sincerely yours,

CECIL R. KING. The CHAIRMAN. This bill is quite lengthy and it has occurred to the chairman that perhaps we could save time and still accomplish our objective by having the witness summarize the bill rather than having a full reading thereof. Therefore, subject to objection, we shall omit the reading of the bill and have the first witness, the Honorable Thomas J. Lynch, summarize the bill and explain the provisions of it.



The CHAIRMAN. The first witness on our calendar this morning is Mr. Thomas J. Lynch, General Counsel of the Treasury Department. Mr. Lynch, would you prefer to make your principal statement without interruption, or answer questions as you go along?

Mr. LYNCH. Either way, whichever suits the convenience of the committee. Mr. Chairman, we have a report on the bill and I thought it would be helpful if I first read the report which summarizes the more important provisions.

The CHAIRMAN. You may proceed.

Mr. LYNCH. Mr. Chairman, there is a press release of May 16, 1952, by the Subcommittee on Administration of the Internal Revenue Laws, by its chairman, Representative Cecil R. King, which provides some explanation of the bill and I thought it might be helpful if that were made a part of the record at this time.

The CHAIRMAN. Without objection, it is so ordered.
(The matter referred to is as follows:)


Washington, D. C., May 16, 1952. Press release. For immediate release.

Representative Cecil R. King, chairman of the King subcommittee investigating the administration of the internal-revenue laws, today introduced a bill in the House of Representatives aimed at correcting many of the evils which the King subcommittee has found in the course of its tax investigation. Mr. King made the following statement concerning the bill :

“This bill (H. R. 7893) contains many provisions which would make a substantial contribution to improving tax enforcement and administration. · While I am personally introducing the bill, its provisions have been considered by the subcommittee and thore is complete agreement on the importance of introducing a bill of this kind at the present time and urging its prompt passage. There is also substantial agreement in the subcommittee on the objectives of the bill, but I and the other members of the subcommittee will withhold final decisions on specific details and provisions until we have had the benefit of public hearings, which it is contemplated will begin on Thursday, May 22, 1952. In the initial consideration of the bill, the subcommittee has had the assistance not only of its counsel and staff, but also of Mr. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation; Mr. Kirby, the Treasury tax legislative counsel; and representatives of the office of Commissioner of Internal Revenue John B. Dunlap.

“The bill will stiffen income tax record-keeping requirements and will impose civil and criminal sanctions for willful failures to comply with these requirements (secs. 101, 103, 105). One of the most flagrant sources of inequity and of corruption has been found in the inadequacies of existing record-keeping requirements and enforcement of these requirements. While the subcommittee will not sanction unreasonable requirements of record keeping, particularly in the case of millions of small taxpayers, it has become clear from our investigations that under present law exorbitant unsubstantiated deductions have frequently been claimed for such items of business expense as entertainment and promotion. Without the power to enforce adequate record keeping, the Bureau of Internal Revenue has been required to allow such deductions on an estimated basis. This, coupled with poor enforcement, has provided perhaps the most fertile field for the corruption of Bureau employees by unprincipled taxpayers and their representatives, and has also provided opportunities for extortion by unscrupulous agents. Under the bill the Bureau of Internal Revenue would require records to explain both sources of income and to sub

stantiate claimed deductions, and could impose money penalties as well as penal sanctions for willful failure to comply.

“The bill would also extend enforcement powers in tax fraud cases, principally by extending the statutes of limitation which apply in criminal prosecutions for willful failure to file returns or keep records and for making knowingly false statements to the Government (sec. 110). At the present time many of these offenses are covered by a 3-year statute of limitations which has effectively prevented many prosecutions.

The bill also undertakes to deal with another most serious and difficult problem, namely, that of 'influence peddling (sec. 301). The bill imposes criminal penalties against persons who receive compensation in exchange for agreements to use or attempt to use improper influence in the disposition of tax cases, whether criminal or civil. The bill penalizes persons who hold themselves out as able to wield improper influence and protects legitimate practitioners.

“The bill would also exact a greater responsibility from taxpayers' representatives who prepare tax returns and represent taxpayers in examinations of returns by internal-revenue agents (sec. 107). Under the bill persons who, for fees, prepare tax returns, would be required under specific sanctions to state their names and addresses on the returns and taxpayers would be required to disclose on the returns the names of persons to whom they have paid fees for assistance in the preparation of returns. The present return form calls for this information, but there is noncompliance among irresponsible persons and the Bureau is without the enforcement sanction this provision would provide. This provision will create more direct control over the ethics and standards of persons in the business of preparing tax returns.

"The bill would also clarify beyond further argument the alleged ambiguity in the statutory prohibitions forbidding Members of Congress and other Federal officials from receiving fees for handling matters pending in executive departments (sec. 304). The present law on this subject appears clear, but it apparently has not been adequately enforced and it would be beneficial to have the matter restated so that it may be completely clear to everybody that officials of the United States may not improperly use the influence of their office to affect the disposition of matters in the executive departments.

“The bill would also authorize the Bureau of Internal Revenue to obtain information as to the extent of the property and facilities made available by businesses to employees, officers, and stockholders (sec. 104). The committee has seen enough of the abuses that are possible to know that some businesses are contributing to the personal and living expenses of their officers, employees, and stockholders through making available such things as country club memberships, domestic help, hotel and apartment suites, airplanes, and other expensive luxuries. Without such a provision as this, the Bureau does not have nearly enough information to determine to what extent these business outlays do not in fact represent legitimate business expenses but instead an effort by officials to live tax-free.

"The bill would also apply specific penalties to persons who engage in unau. thorized practice before the Treasury Department (sec. 302). In the course of the committee's investigation case after case came to its attention of persons not admitted to practice before the Department who made appearances in apparent attempts to influence cases. In some instances it is claimed that such appearances are made without the knowledge or authority of the taxpayers involved. It is important to the Bureau and to honest and competent tax practitioners that persons who are not professionally qualified and are not specifically authorized to represent taxpayers will not interfere in the handling of tax cases before the Department.

"The bill would disallow a bad-debt deduction for any loan made to a political committee by anyone other than a bank or lending institution.

“The bill also contains a number of technical administrative provisions designed to improve enforcement and administration (title II).. These provisions have been incorporated in the bill based upon Bureau of Internal Revenue experience in these matters. While some of the provisions are of a technical nature and limited application, in the aggregate, they will make an important contribution to improved administration. A subcommittee such as ours should be responsive to the needs of the Bureau of Internal Revenue for constructive technical improvements of this kind.

“Finally, the bill (sec. 303) also contains provisions which would guarantee the preservation of the right to trial by jury in suits for refunds against the person who is responsible for the collection of taxes and which would extend the

right to trial by jury to suits against the United States. Until now the right to a trial by jury has been confined to suits brought against the individual tax collector. The provisions of the bill would constitute a consent by the United States to a jury trial in suits brought directly against the Government. This is a desirable provision in connection with the Bureau reorganization plan.

"The subcommitte hopes that in the forthcoming hearings all persons and groups interested in revenue administration will make known their comments and suggestions as to the enforcement and administration problems dealt with in this bill. The Secretary of the Treasury and the Commissioner of Internal Revenue have been invited to express their views on these matters as the first witnesses at the public hearings.

“Upon completion of the hearings on H. R. 7893, the subcommittee will hold additional hearings to receive a status report on the Bureau's activity under. Reorganization Plan No. 1 of 1952 and will also hear reports of the Bureau's analysis of the administrative procedure and problems which the subcommittee requested in its January hearings on revenue-improvement measures."

Mr. Lynch. Mr. Chairman, I have here a report on the bill by the Acting Secretary of the Treasury, which is addressed to you as chairman of the Committee on Ways and Means.

Reference is made to the bill H. R. 7893, a bill to provide for improved enforcement and administration of the revenue laws, and for other purposes and to your request, under date of May 19, 1952, for the views of this Department thereon.

As indicated by Representative King, the sponsor of this bill, and the chairman of the subcommittee of the Ways and Means Committee to investigate the administration of the internal revenue laws, the general purpose of this legislation is to provide remedies for certain situations and conditions which came to the attention of the subcommittee in the course of its recent investigation. These problems are dealt with in sections 101, 102, 105, 107, 209, 301, 302, and 304, which I shall discuss in some detail in this report. The bill also contains certain other provisions of a technical nature which are designed to improve the efficiency of tax administration and ease taxpayer compliance. These provisions are found in sections 103, 104, 106, 108, 109, 110, 111; sections 201 through 208 and section 303. These sections were incorporated in the bili largely at the request of the Treasury Department. Two of these sections, sections 104 and 303, are of more general interest and I will discuss them in some detail in this report. Provisions of the bill not considered in the report are described fully in the attached appendix, which will be a part of this report.

Now, coming to the more important sections, I first take up section 101, which is as page 3, line 4, of the bill.

Section 101, disallowance of certain deductions, would allow as deductions only those expenses incurred in connection with a trade or business or for the production of income, otherwise proper, which are substantiated in accordance with regulations prescribed by the Secretary.

At the present time many courts have been following the doctrine laid down in the Cohan decision (39 F. (2d) 540), under which they will approximate an amount allowable as a deduction, where it is reasonable to suppose that some expenses were incurred, even though the amount claimed is based on estimates unsupported by any voucher or record entries of any kind. This places the Department in the difficult position of making estimates of allowable deductions, and the courts in the position of reviewing such estimates.

Enactment of the propoal, which disallows expenses which are not substantiated in accordance with regulations prescribed by the Sec

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