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retary, attaches a legal sanction to the requirement that adequate books and records be maintained. One aspect of the section should be noted, however. It is limited in its application to deductions under section 23 (a) arising from the operation of a business or from the production of income; such a limitation would appear to give rise to problems of determining the extent of substantiation which can be required for deductions under other subsections of section 23. It is suggested that a saving clause be included in the provision which will show clearly that the proposed rule does not in any way diminish any authority to require substantiation which the Treasury now has under other provisions of the code.

It is also suggested that the rule proposed by the bill be extended to wagering losses under section 23 (h). This is a particularly difficult area, comparable to travel and entertainment expenses under section 23 (a), in which a requirement of substantiation prior to allowance would be most helpful.

The next section of the bill commented upon in some detail in the report is section 102.

Section 102, loans to political committees, amends the provision of the code allowing a deduction for losses on bad debts, to prohibit a deduction for those bad-debt losses resulting from a loan to a political committee. It would not be applicable to bank loans.

This provision is comparable to the provision now in the code, section 24 (b), which disallows all losses between family members from sales or exchanges of property. The Treasury Department has no objection to the provision since its enactment would eliminate the administrative determination as to the tax treatment of such transactions.

The next section is 104, which would amend section 147 of the code

Mr. REED. Mr. Lynch, is that all you are going to say in regard to section 103 ?

Mr. LYNCH. That is commented upon in the appendix. Perhaps I should have explained at the outset that the report takes up

Mr. REED. I just want to reserve the right to ask some questions on that section later on when

you
do
comment upon

it. Mr. LYNCH. That will be covered after this first group of sections, as I explained in the introductory statement of our repart.

Mr. KEAN. Mr. Chairman, I understand that we will have the opportunity later to ask questions on all these sections ?

The CHAIRMAN. That is correct. Mr. KEAN. I have some questions that I want to ask about section 102, to which Mr. Lynch has just referred.

Mr. CURTIS. Mr. Chairman, reference has been made to the report. Is that something which we shall receive later?

Mr. LYNCH. I am prepared to submit it now.

Mr. CURTIS. Are there copies available for the member of the committee

Mr. LYNCH. I am sorry, there are not sufficient copies for each member of the committee. There has not been time enough to have this report mimeographed.

Mr. Kean. I think it would be helpful if we could each have a copy, so we could follow you as you go along.

Mr. REED. How long would it take for you to send copies up?

Mr. LYNCH. I should like to suggest that we might get that under way immediately and get them here just as soon as possible.

Mr. COOPER. Mr. Chairman, just so that we may have a clear understanding of this, you have commented on the section of the bill as they appear therein, up to section 103. And you state that you will comment on that later on?

Mr. LYNCH. That is correct.
Mr. COOPER. Now, you are about to proceed to discuss section 104?
Mr. Lynch. That is correct, if I may.

Mr. COOPER. I suggest, as you come to sections of the bill on which you are going to comment later that you tell us that as you go along, so that we may keep up with the bill.

Mr. LYNCH. I shall do that, sir.

Mr. JENKINS. Mr. Chairman, I should like to ask a question or two at this point. You are now coming to section 104?

Mr. LYNCH. That is correct.
Mr. JENKINS. Section 104 of the bill states:

Section 147 is hereby amended by striking out subsection (c) and inserting in lieu thereof the following new subsections

Here is what I want to know: What is section 104? It may have 10 or 15 subsections in it. How can we fit it into your comments if we do not have in front of us a copy of the laws to which these amendments are pertinent? Could you provide us with that as you go along?

Mr. Lynch. We should be happy to do that, Mr. Jenkins.

Mr. JENKINS. I should not want you to do that if it is too big a job, but you see the point that I am driving at. There may be language in that section which you are proposing to amend. Unless we have that section in front of us, how do we know how that fits in with the statute as it is now?

Mr. LYNCH. I thought perhaps it would be a convenience if we supplied you with a copy which shows the language of the statute as it is now, and then the language of the proposed amendments.

Mr. JENKINS. That is my point.
Mr. LYNCH, I agree, Mr. Jenkins.

Mr. COOPER. Mr. Chairman, with reference to Mr. Jenkins' suggestion, which would be helpful to us in following the bill, I concur because, as he mentioned, the bill says:

Section 147 is hereby amended by striking out subsection (c)— and so forth. We should know what subsection (c) is in order to follow intelligently what you suggest.

Mr. JENKINS. That is my point exactly. I cannot follow you at all in your statement because I do not know what you are referring to in the law itself.

Mr. LYNCH. I understand.
The CHAIRMAN. Proceed.

Mr. LYNCH. Section 104 would amend section 147 of the code to permit the Secretary to require, to the extent and in the manner prescribed in regulations, information returns of any taxpayer making payments of money or property or making available any service or facility to or for the benefit of its officers, employees, partners, or shareholders. No return with respect to any individual could be required if the aggregate value of payments or services during the year is less than $200.

**

There appears to be a growing practice of businesses assisting their officers, employees, and shareholders in maintaining higher and more luxurious standards of personal living, not by direct cash payments, but by making available for personal use such things as houses,

hotel rooms, and apartments, automobiles, airplanes, and yachts, expensive free vacations and the like. Information as to the form, the amount, and the recipients of such benefits is deemed necessary in order that such items as may properly constitute personal income to the recipients may be traced into such recipients' returns and in order that the payor of such items may be permitted to deduct only such of these items as constitute allowable business deductions. In addition, the development of such information is essential in connection with the studies being made to determine the extent to which additional administrative or legislative action may be necessary. The $200 limitation is intended as a floor to eliminate the necessity for reporting incidental and customary benefits granted to employees.

It is likely that under existing law, sections 54 and 147 permit such a requirement being imposed by regulations, but it is believed desirable for Congress to emphasize the desirability of such a requirement by clearly granting to the Secretary the power to require such information at the source regardless of whether such items may constitute s'salaries, wages, premiums, annuities, compensations, remunerations, emoluments

*" within the meaning of section 147 (a) of the Code.

Mr. JENKINS. May I ask a question there, Mr. Chairman? Let me see if this would be the result of your program. For instance, if we pass

this bill, each one of these amendments will fit somewhere into the present structure of the law?

Mr. LYNCH. That is correct.

Mr. JENKINS. Practically speaking, you are not proposing any new basic law?

Mr. Lynch. That is true. This section last mentioned, 104, which proposes to amend section 147—the purpose of that amendment is to make it clear that there is authority to ask for information, this class of information.

Mr. JENKINS. So that, if this bill is passed, we shall pass it before the next tax-paying time comes around. Then new instructions will go out and explain these changes ?

Mr. LYNCH. That is correct.

Mr. JENKINS. That will give everybody a chance to know that next year things will be different than they are this year.

Mr. LYNCH. That is correct. For instance, section 104 will amend section 147 and that will require regulations and those regulations would in due course be followed by specific instructions.

Mr. JENKINS. Thank you.

Mr. LYNCH. Section 105, addition to tax for failure to disclose information as to gross income, would provide an addition to the tax of 5 percent on the amount of gross income, the nature and source of which is not disclosed upon inquiry. The taxpayer who either willfully refuses to divulge his true gross income and its nature and sources or because of willful neglect is unable to do so greatly hinders and makes more expensive the proper auditing of tax returns. This section will provide a practicable sanction to offset the added expenses of the Bureau in developing facts which are usually made available

by the majority of honest and careful taxpayers and to induce every taxpayer to keep adequate records as to the nature and source of his income.

The CHAIRMAN. I do not see exactly how you differentiate that case from a case of fraud. Where do you draw the line between neglect and fraud ?

Mr. LYNCH. This is directed at those cases which have come to the attention of the subcommittee, as explained I believe in their statement, where the taxpayers give only the most general statement as to sources of income, which makes it difficult for a proper audit, or to verify the source of the income. It may not be a fraud case. More generally it is directed to a situation where there is only the most general statement as to the source of the income and therefore it is all the more difficult, sometimes impossible for the Bureau by its audit procedures, to discover a violation, or to decide whether or not the return is a correct return.

The CHAIRMAN. I am not sure that I understand it yet. It is presumed that the taxpayer knows more about his income than anybody else so that the responsibility to report is upon him. If it is necessary to search out information concerning a taxpayer's income where there has been a failure to report income and where he refuses to furnish the information upon request with a resultant waste of time and money to locate the source of that unreported income then I do not see how you differentiate that from a fraud case.

Mr. LYNCH. That is correct, Mr. Chairman. That is to say, if we found other sources of income that were not reported. But this is directed toward a situation where a person does not report the nature or source of his income and in order to make an audit of his return, we seek to learn the nature and source of his income. He refuses to divulge the information or, for some reason or other, he says that he has not kept books, or that he has lost the books that he had, something of that sort, so that we do not get the information as to the nature and sources of his income. On that basis alone, that would permit the imposition of this 5 percent addition to the tax.

The CHAIRMAN. I suppose this proposed provision is offered as a result of the experience that you have had in this type of case. Is this a provision that was proposed by the Bureau of Internal Revenue or by the Treasury, or is this proposed by the subcommittee? I infer from what you say that it is the result of experience that the Bureau has had in such cases?

Mr. LYNCH. The Bureau has had such experience and, in addition to that, I think the subcommittee of course, it would be preferable for the subcommittee to speak for itself rather than for me to speak for it; but it is my understanding that situations of this kind came conspicuously to the attention of the subcommittee, and that is why it is proposed that they be dealt with in this way.

Mr. BYRNES. Mr. Chairman, I think one of the specific cases which is in our record, is the case of Mr. Grunewald, whom we had before us on a number of occasions, and who simply reported his gross income as fees and commissions, in a round figure. There was no way of

determining exactly what the source of his income was and whether he was really reporting all of his gross income. The only way to get at that information was to require the source of the income, instead of having it reported in such a general statement as fees and commissions.

There is no way of knowing whether fraud has been committed unless the man is compelled to specify the actual source of the income reported.

Mr. COOPER. Mr. Chairman, I am inclined to favor proper provisions that will improve the administration of the revenue laws and protect the revenue of the Government. It was not my privilege to be a member of the subcommittee. I should like to ask a question for information as to whether a legal question might possibly be involved here. I am hoping that you might be able to give me some assistance on that or might be prepared to clear up any questions that might be raised by others in that connection.

The Constitution guarantees to each individual the right to refuse to incriminate himself. That is correct; is it not?

Mr. LYNCH. That is correct.

Mr. COOPER. Is it not true that the Supreme Court has held that while a taxpayer may be required to state accurately the full amount of his gross income, he may not be compelled to disclose the source of any item of income if he claims that such disclosure would tend to incriminate him?

Do you think this proposed penalty may be imposed constitutionally upon a taxpayer who claims his constitutional privilege against selfincrimination? What have you to say to us on that?

Mr. Lynch. I would like to say this. I would not presume to try to answer the question. There is the further question whether any claim of violation would be directed to the whole statute itself, to the face of the statute, or whether the statute would be interpreted so that if a person claimed the privilege, then the additional 5 percent could not be imposed against him.

I try to make this distinction as to whether or not the statute might be said on its face to be violative of that provision, or whether or not the statute might be interpreted so that if one claimed that he was not disclosing information on the ground that to disclose it might tend to incriminate him, then he would continue to have that right, if he so made that assertion on the face of his return. So I would rather not try to answer that question. There is, of course, as you know, a question before the courts now with respect to the gambling tax as to whether or not the requirement for the disclosure of information in connection with the registration provisions is a violation of that privilege against self-incrimination. That is pending in the courts now.

Mr. COOPER. I am sure you will agree that we all want to try to make whatever we do here as sound legally as it is posible to make it. I was just wondering whether you, as a lawyer, with wide experience in tax matters, would think that there was any reasonable question that could be raised in this connection. I am. just asking the question for information.

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