to answer every question which the invention or ingenuity of the inquirer may devise without neglecting the fundamental duty of determining tax liability upon the basis of actual happenings. Under these circumstances, the administrative necessity is obvious of giving precedence over abstract or prospective cases to actual cases in which the taxpayer desires to know what are his immediate liabilities under the law.

It will be the policy of the Bureau not to answer any inquiry except under the following circumstances:

(a) The transaction must be completed and not merely proposed or planned.

(b) The complete facts relating to the transaction, together with abstracts from contracts, or other documents, necessary to present the complete facts, must be given.

(c) The names of all the real parties interested (not "dummies" used in the transaction) must be stated, regardless of who presents the question, whether attorney, accountant, tax service, or other representative.

(d) A request for a ruling must be signed by the taxpayer, or in case he is represented by an attorney or agent, the request must be accompanied by properly executed power of attorney. Banks, however, will not be required to furnish powers of attorney with respect to inquiries affecting their depositors.

(e) A copy of a ruling addressed to a taxpayer will not be furnished to his attorney or agent unless the Bureau is specifically authorized to do so by the taxpayer. (C. B. III-1, page 425; Mim. 3176.)

Although this ruling refers only to the 1918 and 1921 laws, the Bureau's policy is the same in regard to the 1924 law.

Administrative efficiency-evasion.-There is no entirely trustworthy information concerning the completeness of the income tax assessment. Some attempts to prove evasion, such as those in which comparisons are made between the number of returns and the number of automobiles in the various states,34 are interesting but inconclusive. Obviously it is a tax which can be evaded, at least for a time, by those who are willing to perjure themselves, but in spite of this the author believes that upon the whole the law is well observed.

34 See Annalist, December 13, 1920.

A very careful study of income has been made by the staff of the National Bureau of Economic Research (Income in the United States, Harcourt, Brace and Company, 1921). According to their best estimates (page 136), there were in 1918 no less than 5,290,649 persons in receipt of incomes in excess of $2,000. In contrast, there were less than three million income tax returns filed in that year. However, it is not to be concluded that the evasion is as great as might be inferred by these bare figures. "Income" as used in this study was not "taxable net income." It is significant also that 3,065,024 of the 5,290,649 persons, who were in receipt of incomes over $2,000, fell within the group of $2,000 to $3,000. The evasions are probably very largely those of persons just within the income tax paying class.

Out of millions of returns there are sure to be some which are fraudulent. The Treasury should be unremitting in its efforts to punish the offenders. All reputable accountants and lawyers should lend their aid. If it be found that taxpayers have been advised how they can evade the law, the advisors should be indicted and punished as conspirators. The 1924 Act attempts for the first time to punish such offenses.35

There are, of course, thousands of cases in which there have been differences of opinion as to what is and what is not taxable and as to what is and what is not deductible. The Treasury reverses its own decisions so often that procedure which is allowable one day results in technical "evasion" the next. Moreover, from a rather extensive knowledge of the facts, the author has come to the conclusion that in more than half the cases where additional sums were collected by assessments based on examinations, the taxpayers made no mistakes whatever in their returns, the original assessments being changed by incompetent revenue agents. The additional taxes, which would be classified as evasions, are paid in many cases without protest, solely because of the expense and annoyance of bringing suit.

The great difficulties under which the Treasury labors in securing competent assistants are, of course, apparent. Improvement in the quality of the administration, however, should be made steadily as the law becomes more clearly understood and more fully adjudicated. There is imperative need for better administration if widespread evasion is to be avoided.

LEGAL EFFECT OF CHANGES IN FORM OF ORGANIZATION WHICH ARE MADE TO REDUCE TAXATION.-The owners of the stock of a corporation dissolved the corporation and formed themselves into a partnership or trust, apparently in order to avoid paying excess profits tax on a contemplated sale of assets. The Treasury held that the tax nevertheless might be assessed against the corporation on the ground that the transaction was an attempt to evade a tax.

RULING. A change of form from that of a corporation or association to that of a trust or partnership accompanied by a transfer of capital assets to trustees for the benefit of shareholders followed by a sale of such assets at a price in excess of the cost thereof to the corporation or association, and the distribution of proceeds to the beneficiaries (shareholders), such change being made for the main purpose of avoiding the tax which would accrue to the corporation had the sale been made by it, should be disregarded as a mere sham to avoid assessment See Section 1017 (c).

of tax against the corporation or association upon the profit derived from such sale, and the corporation or association should be required to return as income any profit derived as though the sale had been made by it directly. (C. B. 2, page 203; S. 1385.)

The taxpayer against whom the foregoing case was decided, appealed to the courts and the opinion of the Solicitor was reversed.36

37

DECISION. It is insisted in the opinion of the solicitor for the Bureau of Internal Revenue that this change is a sham and a subterfuge and is ineffective. This same opinion admits the right of an individual or corporation to regulate or change its business with a view of reducing or avoiding taxation in the future, but in contradiction with this admission holds that the parties involved in this transaction could not do so. Supporting this view there are several cited cases, most of them by state courts. The case of Pollard v. Bank, 47 Kans. 406, 28 Pac. 202, cited by the solicitor, is directly opposed to his contention.

Bearing in mind the rule of construction which the Supreme Court announced in the case of Gould v. Gould, 245 U. S. 151, 38 Sup. Ct. 53, 62 L. Ed. 211, and numerous other cases, to the effect that the provisions of the taxing statutes are not to be extended by implication beyond the clear import of.the language used, and that they are to be construed most strongly against the government and in favor of the taxpayer, it is the opinion of this court that the right to change the status of an organization, or to dissolve an organization in any legal manner, is not made ineffectual because the motive impelling the change is to reduce or avoid taxation in the future. The right so to do is an incidental right, inseparably connected with an individual's right to own and control his property. It is practically identical with the sale by a citizen of taxburdened securities and the investment of the proceeds thereof in taxexempt ones, for the purpose of reducing or avoiding taxation.

It is not unnatural that any thoughtful business man take such steps. It is altogether different from tax dodging, the hiding of taxable property. or the doing of some unlawful or illegal thing in order to avoid taxation. . .

Solicitor's opinion 149 38 reversed Solicitor's memorandum 1385; but no mention was made of the above court decision.

The position taken in the court decision above quoted is identical with that expressed by the author in his Income Tax Procedure, 1921, page 444. Weeks v. Sibley, 269 Fed. 155.

38 C. B. II-1, page 20; Sol. Op. 149.

CHAPTER XI

PREPARATION AND PRESENTATION OF CASES BEFORE THE UNITED STATES BOARD OF

Section 900 of the Revenue Act of 1924 creates the United States Board of Tax Appeals and establishes a new policy in the administration of the system of Federal internal revenue taxation. For the first time in the history of the Federal Government a taxpayer is given the right to have a proposed assessment of internal revenue taxes reviewed prior to assesment by an executive agency independent of the Treasury Department.

The Board has made an excellent beginning. The appointces are of a high type, most of whom have had experience in technical tax matters. The Board was organized very promptly after the members were appointed by the President. Clear and concise rules of practice were issued almost immediately. Only a few decisions have

been issued, but in each instance the subject matter has been handled with intelligence and dignity. In all of its undertakings, the Board has manifested a serious desire to establish an expert body before which both the taxpayer and the Government can have an impartial bearing.

It will be natural for the Board to make a few mistakes. Taxpayers should be patient and considerate, for the Board is pioneering in a new field. The Board welcomes suggestions and constructive criticisms.

Previous organizations for appeals and review. In the early days of the administration of the complicated 1917 and 1918 Revenue Acts it became apparent to both Treasury officials and taxpayers that some sort of a review or advisory body was necessary for a just administration of the laws. There were first appointed by the Commissioner the "Tax Advisors," consisting of prominent business men, lawyers, accountants and tax experts who assisted in the formulation of the regulations under which the 1917 law was administered. A similar body made up largely of the original "Advisors" was organized as the "Excess Profits Reviewers" to deal with the difficult cases which arose in the course of the administration of the law.

1

ADVISORY TAX BOARD.-By the Revenue Act of 1918 an agency known as the Advisory Tax Board was established within the Bureau of Internal Revenue. The duties of this Board were to pass upon questions of income and profits tax interpretation and administration submitted by the Commissioner of Internal Revenue upon his own motion or at the request of a taxpayer. The Board was composed of six members appointed by the Commissioner with the approval of the Secretary of Treasury. The law gave the Board an official life of two years subject to the authority of the Commissioner to abolish it at any time with the approval of the Secretary of the Treasury. The Board was established March 14, 1919 and was abolished October 1, 1919. The members of the Advisory Board were in close touch with the framers of the 1918 law and much misunderstanding would have been saved if they had recorded and published all of their interpretations and decisions.

1 Section 1301 (d-1).