of the amount properly due, in cases where the taxpayer was unwilling to file a waiver of the statute. It is recognized that undoubtedly in many cases the amount of the deficiency asserted by the bureau in such cases was more than probably would have been determined to be due if the determination had not been hastened by the approaching expiration of the statute. The magnitude of the task confronting the bureau has been pointed out. The interests of the Government had to be protected. Indeed, if the bureau had permitted the statutory period to expire without protecting the Government's interests, it would have subjected itself to severe and proper criticism. With quite the contrary true, the Treasury believes that the bureau is to be complimented on being able to protect the Government's interests. The present status of the Bureau to-day, however, presents a very different picture from the burden confronting it two, three, or four years ago. The fact that the bureau is practically current for all nonexcess profits tax years means that the number of deficiency letters mailed in the future in order to prevent the tolling of the statute of limitations will be negligible. (g) Personnel. The Treasury is confident that the biggest problem in the administration of the revenue laws now confronting it is the problem of personnel. Unless personnel of the proper caliber can be obtained and unless the experienced and capable personnel now employed by the bureau can be retained, the bureau can not be expected to function smoothly, efficiently, and rapidly. The personnel problem is discussed in detail hereinafter. (h) Change in attitude toward settlement of cases. The recommendation that tax cases should be settled by administrative action, rather than through litigation, and the abandonment of the policy that all cases must be decided upon the basis of absolute accuracy, have been discussed. It is believed that the adoption of these recommendations is vital. (i) Further changes in administration. Suggested changes for the improvement and simplification of the administration are being studied constantly. It is believed that those already adopted, which have been discussed in detail hereinbefore, have contributed substantially to the present condition of the administrative work of the bureau. Undoubtedly, further changes will be adopted as consideration and experimentation proves them feasible. One very important step toward simplification is now being made, for example, in depreciation studies, conducted in cooperation with basic industries. As a result of the studies, and whenever practicable, maximum and minimum depreciation rates will be established. Any taxpayer may in the future claim a deduction for depreciation within the rates so prescribed and the deduction will be allowed by the commissioner. If he claims a depreciation rate, however, the burden will be upon him to prove the propriety of the allowance. It is appreciated fully that production in the bureau is not the ultimate goal. Production must be accompanied by quality of the work. Efficiency ratings of the personnel must continue to be based upon the character of work, as well as upon the amount of work, performed. (j) The special advisory committee. The special advisory committee should be able to render material assistance in the reduction in the volume of petitions filed with the Board of Tax Appeals in the future. For example, its advice may be sought prior to the mailing of the deficiency letter upon important questions of policy, with better determinations of deficiencies resulting, and taxpayers who have received deficiency letters will, in proper have access to it in order to effect a proper settlement without the necessity of filing petitions. cases, The committee has not been operating during a sufficient period of time to permit an accurate prediction based upon its production record. The final settlements effected by it (averaging about 260 a month) have resulted in a rather substantial reduction in the number of petitions which would otherwise have required decisions by the board. As its experience and personnel permits effective functioning, the number of cases finally settled without action by the board should approximate 500 a month. CHAPTER V. OFFICE OF THE GENERAL COUNSEL The foregoing analysis of the condition of work in the bureau shows that marked progress has been made in the disposition of cases. The Bureau of Internal Revenue, as stated above, is practically current in its work at the present time. The pressing problem of the Bureau of Internal Revenue several years ago was in the Income Tax Unit. It is now in the office of the general counsel. This is due to the fact that about 19,000 cases are pending before the Board of Tax Appeals, and the general counsel's office must defend the bureau's position before that tribunal. The problem existing in the general counsel's office can be understood and appreciated only with a thorough knowledge of the tremendous volume of work pending in the office as related to the personnel, the complexities and difficulties of the cases, and the amount of work and time which a single case may require. Such a thorough analysis of the work of the general counsel's office is absolutely necessary before any recommendations toward remedying the situation. can be made. In the following pages a detailed analysis is made of the work of each division as a whole, of the work of some of the attorneys for one month, and of specific cases. THE GENERAL COUNSEL The activities of the general counsel's office may be said to embrace the whole field of Federal taxation in connection with cases in suit (criminal and civil); appeals to the Board of Tax Appeals; income and profits tax cases specially referred by the commissioner on appeal or otherwise; cases of a similar character received directly from the Income Tax Unit; estate, capital stock, and sales tax questions; documentary, public utilities, insurance, occupational, beverage, luxury, tobacco, oleomargerine, and special taxes; accounts, supplies, and equipment; and the consideration, preparation, and revision of Treasury decisions and regulations, mimeographs, and other formal compilations. The office is divided into six divisions, viz, Interpretative I, Interpretative II, penal, civil, appeals, and administrative. The only income and profits tax cases required by existing_procedure to be referred to the office of the general counsel by the Income Tax Unit for review on protests by taxpayers prior to final determination of deficiencies are those involving proposed assertions of penalties. Cases are referred by the Income Tax Unit to the office of the general counsel, however, without restriction if the consideration or opinion of the office is desired. Cases involving net refunds of $50,000 or more and all cases involving proposed allowances including interest for any year or years aggregating $75,000 where there is a net refund in any amount are referred to the office of the general counsel for review. In respect of cases involving an allowance of $75,000 or more, the office of the general counsel prepares a statement of fact to be submitted to the Joint Committee on Internal Revenue Taxation. All compromise cases and all cases in which claims are filed by collectors in bankruptcy and receivership proceedings and claims against the estates of insolvent persons are referred to the office of the general counsel. Representatives of the office of the general counsel are assigned to the various audit divisions of the Income Tax Unit and are at hand to advise promptly in matters covered by established precedents; where there is any doubt as to the law in any particular case or where a new proposition of law is advanced, the question is referred to the general counsel for decision. The office is the commissioner's representative in all proceedings before the Board of Tax Appeals. When an appeal is filed with the board a copy of the petition is served upon the general counsel, who then makes a requisition upon the Income Tax Unit for the administrative file and thereafter handles the appealed case to a conclusion before the board. In cooperation with the Department of Justice the general counsel handles all civil internal revenue cases in the Federal courts. The cases include the prosecution of suits by the United States to recover unpaid taxes and the defense of suits brought by taxpayers against collectors of internal revenue or the United States to recover taxes alleged to have been erroneously collected, and appeals to the circuit courts of appeals or to the Court of Appeals of the District of Columbia from decisions of the Board of Tax Appeals. The office also prepares indictments and assists in the prosecution of criminal cases arising under the income tax laws. INTERPRETATIVE DIVISION I This division considers questions relating to the income and excessprofits tax provisions of the several revenue acts as well as those questions of procedure (particularly in connection with liens and distraints) which arise in connection with the administration of the internal revenue laws. It also passes finally upon all rulings proposed for publication in the weekly Internal Revenue Bulletin. In general practice specific questions are submitted for opinion by other branches of the Bureau of Internal Revenue. Letters, proposed mimeographs, and memoranda prepared elsewhere in the bureau are often submitted for review and comment. While it is impossible to give in detail a summary of the many classes of questions considered during the fiscal year ended June 30, 1927, it may be said among the most important have been with reference to amortization, bases for determining gains and losses in particular cases, depletion and depreciation, distinction between associations and trusts and associations and partnerships, credits and refunds and interest thereon, installment and deferred payment sales, status of requisition charters under act of June 15, 1917, and Executive order of July 11, 1917, invested capital, capital net gains, compensation to State officers or employees, deductibility of various forms of State and local taxes, donations, development of practice under section 280 of the revenue act of 1926 and limitations thereunder as to assessment of transferees, execution of waivers by fiduciaries, placing and releasing of liens for internal-revenue taxes, waivers for assessment and collection, right of dower as exempt from Government's claim for tax against deceased spouse, liability to distraint of tenancies by the entireties, and limitations, particularly with reference to assessment and collection in the light of the decision of the Supreme Court of the United States in the case of New York and Albany Lighterage Co. et al. v. Bowers, 273 U. S. 346. On June 30, 1927, there were pending in the interpretative and penal divisions of the office 808 income and profits tax cases, involving 1,840 tax years, including claims, but exclusive of bankruptcy and receivership cases, insolvent, interest, and delinquency penalty compromise cases. The appeals division was charged with 18,481 appeals to the Board of Tax Appeals, covering approximately 32,000 tax years and 48 appeals to the circuit courts. The civil division was charged with 2,282 cases in suit and 255 cases for suit involving approximately 4,323 tax years. The cases pending before the division June 30, 1927, were classified by years and amounts as follows: Actual number of jacketed cases represented in the above compilation.. Making the total of jacketed cases on hand June 30, 1927.. 191 125 316 The following comparative figures indicate the volume of work (without regard to tax years) handled by the division during the past three years: As illustrative of the activities of the division reports on typical cases have been obtained from three of the attorneys in the division. ATTORNEY A This report shows the various issues and the difficulties encountered in five of the cases considered and disposed of by me in and about the month of June, 1927. Case I.-Issue: What portion of British income taxes, supertaxes, and taxes withheld at the source paid by a British subject in Great Britain during a British financial year (where part of those taxes are paid by reason of income from United States sources) are deductible under United States revenue laws in computing the British subject's net taxable United States income where he files his United States return on (a) a calendar-year basis and (b), a fiscalyear basis? The British income-tax system is materially different from the American system, and the answer to the foregoing question required an extensive study of the British system (viz, the British income tax act of 1918 and the succeeding annual finance acts, 1919 to 1926, inclusive); tax cases adjudicated by the British courts; and taxpayers' conferences. Case II-Issues: (1) The income-tax status of sums of money (a) realized from the seizure and sale of enemy-owned assets by the Alien Property Custodian and converted into the United States Treasury, and (b) impounded and converted into the United States Treasury under licensing agreements granted under the authority of the trading with the enemy act, passed October 6, 1917, as amended from time to time; and (2) what portions of the foregoing sums of money were taxable as income, to whom taxable, and for what years taxable. The disposition of this case required a careful study of foreign forms of organization and of doing business; and of foreign laws relative to the devolution of property. It required an intensive study of the provisions of the trading with the enemy act of October 6, 1917, together with its numerous amendments; examination of Supreme Court decisions and of various court records; and conferences with the taxpayers' representatives, the Alien Property Custodian's office, the Department of Justice, and the United States Treasurer's office. The facts were inadequate, and it was necessary to assemble them and to piece them together from a great variety of sources. The determination of issue (2) involved a study of the income tax and estate tax provisions of the revenue acts of 1916, 1917, 1918, |