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which fluctuate in price from year to year. These variations often turn the profits of one year into losses of the next.

There is some agitation in England in favor of abandoning the plan of imposing the tax on the basis of averages and there is a strong probability that the law will be changed so as to restrict the use of this method to a narrower field. The reasons for the contemplated change, however, cannot for the most part be fairly urged against an average system as such. For example, the present English practice is to determine tax liability for the present year on the basis of an average of the results of the trading of previous years, thus discriminating against the Treasury when a large profit is made during the final year of a business undertaking. Many people, moreover, are in favor of a change now because they expect that it will result in lower assessments for them personally in the years immediately ahead, which will probably be less prosperous than the years of the recent past.

Retroactive Taxation Under a strict definition of the word, any increase in rates applicable to income accrued prior to the enactment of a tax bill would be retroactive.

Congress has shown an increasing disposition to take advantage of the fact that retroactive income tax laws are legal.31 Taxpayers who are seriously inconvenienced can justly complain that the business interests of the country deserve more attention in this respect than has been given to them. It is true that retroactive laws can be enforced, but there is some limit to the patience of taxpayers. In the absence of any overwhelming emergency, radical changes in the burden or procedure should not be left until after the close or even near the close of the tax period. The situation that existed in the early months of 1919 as a result of the delay in passing the 1918 law should never again be permitted to arise. It would be intolerable both for the taxpayer and for the Treasury.

31“It is clearly constitutional as well as expedient, in levying a tax on profits or income, to take as the measure of taxation the profits or income of the preceding year. To tax is legal, and to assume as a standard the transactions immediately prior is certainly not unreasonable, particularly when we find it adopted in exactly similar cases." (Drexel v. Common

For a full discussion as to the extent to which the laws of 1913 to 1918 were retroactive, see Income Tax Procedure, 1919, pages 30-32.

The Plan of the Book As has been already pointed out, the scope of this volume differs from that of previous editions, first, in the elimination of material dealing with excess profits taxation and, second, in the insertion of a new section dealing with procedure under the income tax statutes of the state of New York. The general outline and plan of organization, however, remain the same.

The New York procedure may be looked upon as more than a local issue, not only because corporations and individuals of other states do business in, or derive income from, New York State, but also because the success or failure of the New York laws may be expected to affect similar legislation in other states. Therefore, the author has discussed at some length the subject of what constitutes "doing business” in one state by a resident of another.

Two features should perhaps be emphasized. One is the policy of quoting exactly from law and regulations all material of importance in passing on questions connected with the preparation of returns. Since the construction often turns upon a single word, it seems to the author important to make the precise official language available in convenient and easily recognizable form. The source of all material quoted in the text is plainly indicated, the excerpt being labeled "law," "regulation," "decision,” etc., as the case may be. It should be noted that regulations quoted in the text are taken from official Regulations 4532 unless otherwise specified. A quoted

"The revised edition of Regulations 45, approved April 17, 1919, has been used except in the few cases in which articles of those regulations were replaced by new versions issued before December 15, 1919.

regulation bearing as a reference merely an article number is to be considered as coming from this source..

The second feature to which attention should be drawn is the treatment of former procedure. Last year it was felt that; because of the large number of returns for previous years which were as yet unaudited by the authorities, it would be desirable to include in the book the important changes in law and procedure so that it might serve as a guide when questions arose in regard to old returns. This plan was so favorably received that it has been carried over into this edition.

PART I

APPLICATION AND ADMINISTRATION

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