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STATEMENT SUBMITTED BY A. G. QUAREMBA, CHAIRMAN, CONFERENCE COMMITTEE OF THE COMMITTEE OF BANKING INSTITUTIONS ON TAXATION, NEW YORK, N. Y., ON H. R. 7893, THE REVENUE ENFORCEMENT AND ADMINISTRATION ACT OF 1952
This committee approves the purpose of H. R. 7893, which is to strengthen the Bureau in its operations under, and administration of, the Internal Revenue Code. However, there are certain provisions of the bill which appear to impose undue hardship and one matter has not been covered which we are informed the Bureau of Internal Revenue believes would be of substantial benefit to it. These matters will be discussed separately below.
DIBALLOWANCE OF UNSUBSTANTIATED DEDUCTIONS
Section 101 of the bill amends the code to provide for the disallowance of expenses otherwise deductible under section 23 (a) if they are not substantiated in accordance with regulations prescribed by the Secretary. The section appears applicable not only to future years, but to all years which may be open under the statute of limitations. The amendment thus would substantially change the rules under which taxpayers have operated in the past.
In Cohan v. Commissioner (39 F. (20) 540) it was held that expenses are deductible under section 23 (a) to the extent that the facts reasonably show that such expenses were incurred, even though the taxpayer is unable to produce substantiating vouchers or records. The rule of the Cohan case has been given wide application by the courts and it is submitted that it should not be abrogated retrospectively. The rule of the amendment should not be applied without giving taxpayers a reasonable opportunity to keep such records as may be necessary to substantiate their deductions under the Secretary's regulations.
EXTENSION OF TIME TO FILE INDIVIDUAL INCOME TAX RETURNS AND DECLARATIONS
It is respectfully submitted that the bill should be broadened to embody the amendments proposed in H. R. 7599, introduced by Representative Simpson on April 25, 1952. Under that bill the time for filing individual income tax returns and declarations of estimated tax would be extended to the 15th day of the 4th month following the close of the taxable year.
Under the pay-as-you-go system a major portion of the tax shown to be due on individual income-tax returns has been paid prior to the filing of the return, either by withholding of tax or by payments on declarations of estimated tax. Accordingly the taxes paid by individuals upon their final returns no longer have as much significance from the standpoint of revenue collections as they formerly did.
If such an extension is to be granted for returns, practical considerations make it necessary that the time for filing declarations of estimated tax be similarly extended. This may result in some delay in the collection of the first installment of the estimated taxes shown to be due on declarations. However, such taxes are being paid in advance and in any event the first and second installments thereof will fall into the same fiscal year as at present. In view of the heavy load now encountered by collectors it is often impossible to process all remittances until considerable time has elapsed so that the actual delay in the collection of the first installment of estimated tax will not be as great as might appear.
The present law permits taxpayers who receive most of their income from salaries or wages to file with the collector a simple return (Form 1040A) to which is attached the employer's statement of tax withheld at the source. The collector then computes the tax due and sends a statement to the taxpayer of any balance of tax which is payable or any refund which is due. The tax is payable within 30 days from the date of the statement and any refund may be paid without incurring interest up to 30 days after the due date of the tax. Approximately 40,000,000 of these simplified returns are filed with the collectors each year and approximately $1,600,000,000 is refunded each year to this class of taxpayers.
The requirement of the present law that all individual income-tax returns and declarations be filed by the 15th day of the third month after the close of the taxable year, places a very heavy burden on the collector's staff. The work of
processing such returns, getting out statements with respect to the returns on Form 1040A and making refunds within the prescribed time limits, comes to a peak in a very short time with the result that it is physically impossible to carefully audit many small returns which on their face show a refund to be due. As a result inaccuracies made in the preparation of returns are never caught and considerable revenue is lost. Surveys made by the Bureau indicate that inaccuracies are particularly prevalent where the tax is computed under the tables.
No taxpayer compliance problem is involved, since the time for filing the returns is being extended rather than shortened. Obviously, taxpayers whose returns reflect a refund will continue to file them early just as they now do. Many other taxpayers whose returns show tax to be payable will continue their present practice of filing their returns as soon as they are ready.
An extension of time to the 15th day of the fourth month following the close of the taxable year would thus tend to level out the work in the collector's cffice, make for more efficient operation, permit better auditing of returns where refunds are shown, and obviate a considerable portion of the interest now incurred due to the inability to process refunds before the present deadline.
It is understood that the Bureau of Internal Revenue feels that such an extension would be highly beneficial to it in eliminating some of its operating problems. Such an extension also would be of great assistance in relieving the heavy physical and mental burdens which the present deadline imposes upon the staff of tax departments of banks, accountants, and lawyers who prepare large numbers of individual income-tax returns for others.
ASSISTANCE IN CONNECTION WITH THE PREPARATION OF RETURNS
Section 107 of the bill adds a new section to the code with respect to assistance in connection with the preparation of returns. The first senten'e of the section appears unobjectionable since it merely requires a person who, for compensation, prepares a return, to state his name and address upon the return. The second sentence of the amendment, however, provides that a taxpayer who pays compensation to any person for the preparation of, or assistance in the preparation of, any return, to state the name and address of such person on the return unless such person himself has made such a statement upon the return. The phrase "assistance in the preparation of any return” apparently would require the taxpayer to report the names and addresses of all persons on the stafi of its counsel or auditor who may have given advice in connection with a matter covered in the return, no matter how informally such advice was given or how unimportant such advice was, as well as all salaried employees who compiled information entering into the return. The provision thus seenis unreasonably broad.
SUITS FOR REFUND
Section 207 of the bill amends the code to provide that suit may be brought for refund, even though the claim has not been formally rejected, without waiting for the expiration of the 6-month period now required, if the amount claimed as refundable had been paid by the taxpayer pursuant to a written notice of deficiency. It should be noted that in practice taxpayers often waive the restrictions upon the assessment of the deficiency so that it is unnecessary for the Commissioner to issue a written notice of deficiency. No reason is apparent for drawing any distinction between such cases and so long as there has been consideration by the Bureau of the subject matter of the claim the taxpayer should be permitted to bring suit immediately.
LAW OFFICES OF ALVORD & ALVORD,
Washington 6, D. C., May 27, 1952. Hon. ROBERT L. DOUGHTON, Chairman, Committee on Ways and Jeans,
House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: Since I will be out of town, I will not have an opportunity to appear before your committee during its hearings on H. R. 7893, the bill introduced by Mr. King to provide for improved enforcement and administration of the revenue laws. I do have, however, some comments to offer which I believe may be of value to your committee in its consideration of the bill.
LOANS TO POLITICAL COMMITTEES
Section 102 of the bill would deny a deduction for a loss resulting from a loan to a political committee. The technique employed by the bill is to provide that section 23 (k) shall not apply to such a loss, except in the case of a bank.
A taxpayer could probably get around the objective of the amendment by taking another route-by selling his note to a third party at a loss instead of claiming that the note is worthless. The loss on the sale would be a capital loss (short-term, if the note were held for not more than 6 months) and a deduction would be allowed to the extent provided by section 117 of the code. Thus, the taxpayer would claim his loss not under section 23 (k), which the bill amends, but under other provisions of the code.
In Levy v. Commissioner (131 F. (20) 544 (1942)), the court held that a loss sustained by a taxpayer who sold an account receivable was not deductible as a bad debt under section 23 (k), but was to be treated as a loss from the sale of a capital asset and deductible as provided in section 117.
The amendment does not, and should not, apply to loans made prior to the date of the enactment of the bill, since a deduction will be denied under the amendment even though the taxpayer proves a bone fide loan. However, it should be made clear in the committee report, or by the amendment itself, that no inference should be drawn that a reduction is allowable with respect to any so-called loan made in the past which in fact was not a loan but merely window dressing for a gift or contribution to a political committee.
DISALLOWANCE OF UNSUBSTANTIATED DEDUCTIONS
Section 101 of the bill would disallow deductions of ordinary and necessary expenses paid or incurred in the carrying on of trade or business, unless the deductions ore substantiated in accordance with the regulations prescribed under section 54 of the code.
Apparently the amendment is intended to cast aside the sensible rule adopted in Cohan v. Commissioner of Internal Revenue (39 F. (20) 510 (1930)). In that case George M. Cohan was obliged to spend substantial sums for entertainment and travel in connection with his business of producing plays. Since he kept no account of the expenses, the Commissioner denied any deduction at all. In speaking for the Second Circuit Court of Appeals, Judge Learned Hand stated that it would be wrong to refuse any deduction where it was clear that deductible expenses had been incurred. The court directed the Board of Tax Appeals to make as close an approximation as it could of the expenses, bearing heavily upon the taxpayer whose lack of records made it impossible to determine the precise amount deductible.
Under the Cohan rule, the taxpayer, and not the Government, suffers from a lack of records. The courts are prone in such cases to allow as a deduction only the minimum amount which in all certainty was spent by the taxpayer. Certainly such a rule is better than the strait-jacket proposed by the bill which allows no room for getting the right result.
The amendment is not limited to travel and entertainment expenses. If a taxpayer fails to keep such record of a business expense as may be required by the regulations, the amendment denies the deduction even though the taxpayer can prove beyond any doubt the precise nature and amount of the expenditure. Such proof, for example, might be available from records kept by the person to whom the payment was made by the taxpayer.
It can be expected that many taxpayers, with no thought of evading taxes, would surely fail to keep the records and other information required by the regulations. Certainly, if the revenue agent or the court is satisfied that a certain expense was paid, the statute should not flatly require the Bureau or the court to disallow the deduction for failure of the taxpayer to keep a record or receipt covering the expense involved.
DELINQUENT TAXES OF EMPLOYEES
Under present law the Bureau has 6 years in which to collect an income tax after it has been assessed unless the taxpayer has agreed to extend the period of time. Section 108 (c) of the bill provides that if the Bureau within the 6-year period should make one levy upon the salary of a person (whether privately employed or working for the Government), the Bureau can, after the 6 years has run, continue to attach the salary of that person until the tax is fully paid.
Statutes of limitation against the collection of stale debts, including taxes, constitute good public policy. It is highly questionable that this policy should be abandoned to any extent in the case of persons who are dependent upon salaries or wages for their living.
There can be no quarrel with the general purpose of section 301 of the bill. Since the section provides that an offense against this provision is punishable by a fine or imprisonment, or both, the language should be reasonably clear as to what constitutes the offense. Among my difficulties in reading the section are the following:
(1) It is not clear whether the language with respect to the use of personal influence, duress, threats, etc., is intended to apply only in the case of affecting decisions of an official or employee of the Treasury Department or whether the language also applies as to the manner of obtaining information concerning matters before the Treasury Department.
(2) It is not clear whether the parenthetical clause “(other than by ordinary professional representation)" appearing on page 26, line 9, is intended to apply as an exception to the prohibition against obtaining information with respect to matters before the Treasury Department.
(3) The phrase commencing on line 13 "other than information which is made available by proper authority” is highly ambiguous. Any clarification of what is meant by proper authority would certainly be helpful.
It would be highly desirable if the committee, in dealing with the problem of influence peddling, would also concern itself with the other side of the coinattempts to shake down taxpayers made by the bad apple who occasionally gets into the revenue service. It may be possible to bring these attempts to light by offering some inducement or advantage to the taxpayer to make disclosure of the extortion attempt by the agent.
While any solution presents difficulties, it may be feasible to expand section 4047 (e) of the code, which now provides a limited reward to an informer of illegal acts of an agent, so that a taxpayer whose disclosure of an attempted extortion results in a conviction will receive as an award some percentage of relief from the tax liability for the year to which the attempted extortion related.
It might also make sense to provide that a taxpayer, upon claiming that an agent has attempted extortion, is entitled to have his tax returns audited in a different agent's office. Taxpayers may have been reluctant in the past to inake disclosures because of the fear that if the evidence available fails to prove the case beyond reasonable doubt, the agent's office would thereafter go out of its way to make life miserable for the taxpayer. Respectfully yours,
ELLSWORTH C. ALVORD. (Whereupon, at 3:30 p. m., the hearing was recessed until 10 a. m., May 28, 1951.)
ENFORCEMENT AND ADMINISTRATION OF THE
INTERNAL REVENUE LAWS
WEDNESDAY, MAY 28, 1952
HOUSE OF REPRESENTATIVES,
Washington, D.C. The committee met at 10 a. m., pursuant to recess, in the committee room, New House Office Building, Hon. Jere Cooper presiding.
Mr. COOPER. The committee will be in order.
The first witness will be Mr. William Herbert Danne. Please give your name and address to the reporter and the capacity in which you appear.
STATEMENTS OF WILLIAM HERBERT DANNE, CERTIFIED PUBLIC
ACCOUNTANT, DISTRICT OF COLUMBIA, CHAIRMAN, SUBCOMMITTEE ON TAX ADMINISTRATION, COMMITTEE ON FEDERAL TAXATION, AMERICAN INSTITUTE OF ACCOUNTANTS; AND WALLACE M. JENSEN, CERTIFIED PUBLIC ACCOUNTANT, CHAIRMAN, SUBCOMMITTEE ON TAX LEGISLATION, COMMITTEE ON FEDERAL TAXATION, AMERICAN INSTITUTE OF ACCOUNTANTS
Mr. DANNE. My name is William Herbert Danne. I am a certified public accountant of the District of Columbia, and chairman of the Subcommittee on Tax Administration of the Committee on Federal Taxation of the American Institute of Accountants, which is the national professional society of certified public accountants.
I am accompanied by Mr. Wallace M. Jensen, also a certified public accountant from Detroit, Mich. He is chairman of another subcommittee on tax legislation of that same committee.
My statement was prepared after consultation with several members of the committee, and it is consistent with positions previously taken by the American Institute, but we have not had an opportunity to obtain formal action on the statement by the full committee.
As representatives of an organization which has many members enrolled to practice before the Treasury, with long experience in the administration of tax laws, we are entirely in sympathy with the general purposes of the bill under consideration to strengthen tax administration procedures, and to close some loopholes which may now exist in the Internal Revenue Code. What I shall have to say is, therefore, not in opposition to the bill, but rather to raise some questions about the possible interpretation and effects of certain sections. I shall confine my remarks to those sections which affect aspects of tax