Amended returns for years prior to 1914.—

RULING. Receipt is acknowledged of your letter of September 8, 1919, with reference to the question of refund in the case of your client, . . . . whose invested capital has been reduced in order to provide for depreciation which had not been deducted during the years 1909 to 1917, inclusive. You state that a letter addressed to the company by the revenue agent in charge, on August 15, contained the following paragraph:

"On account of the limitation contained in the Revenue Act of 1918, no refund is allowable for any year prior to 1914. For this reason it will be useless for you to file amended returns for years prior to 1914."

You question the statement made therein and refer to sections 3220 and 3228 of the Revised Statutes in support of your contention that the company should be entitled to file amended returns for 1909 and all subsequent years.

In reply, you are advised that the statement of the revenue agent is erroneous. The five-year limitation on assessment and suit contained in section 250 (d) applies only to taxes due under the Revenue Act of 1918. Section 252 does not operate so as to take away the rights which a taxpayer has under section 3228, Revised Statutes, to file a claim for refund within two years after the time the cause of action accrued.

The five-year limitation in section 252 does not apply to claims for abatement. (Letter to Ernst & Ernst, signed by Commissioner Roper, dated October 9, 1919.)

Tax adjustment when amended returns for 1913-1916 are filed. When the filing of amended returns results in a refund from or an additional payment to the government, the matter is not finally settled if the returns are for 1916 or prior years. Until December 31, 1916, federal income taxes paid or accrued were an allowable deduction. If net income during 1916 or prior years was greater or less than that shown by the returns, and the tax thereon is readjusted, there will be required a corresponding adjustment of net income in the succeeding year equal to the refund received or additional payment made. If a refund is received, the tax for the following year will be increased. If an additional payment is made, the tax for the following year will be decreased.

Amended returns necessary for corporations reporting on fiscal year basis in 1917.

REGULATION. Under the act of September 8, 1916, as originally passed, corporations were entitled to take as a deduction all taxes paid. Under the same act as amended by the act of October 3, 1917, they are not entitled to any deduction for income tax paid, but are entitled to a credit of the amount of excess profits tax for which they are liable. They are also liable for the war income tax of 4% imposed by the act of October 3, 1917.

It follows, therefore, that a corporation which has filed return for a fiscal year ended on the last day of some month during the year 1917, or a "final" return for a period ended during such year showing its liability computed under the act of September 8, 1916, as originally passed, must make an amended return showing additional net income (in an amount equal at least to the amount of income tax deducted in its original return). It will also take credit for the amount of excess profits tax, if any, for which it is liable. This will ordinarily result in showing an overpayment of income tax at the 2% rate, and the amount of such overpayment may be credited against the war income tax of 4% for which liable, to ascertain the total amount of income tax due. In no case will a credit for overpayment of income tax be taken against the excess profits tax due.

The adjustment should be made under items 12 to 15, inclusive, and the exact amount of tax due from the corporation must be shown under item 16 of return, form 1031, revised. (T. D. 2663, March 8, 1918.)

CRITICISM OF REGULATION.-The effect of the foregoing regulation was that, when a corporation had filed a return for a taxable year ending in 1917 and in that return deducted its federal income taxes, an amended return was required showing "additional net income in an amount equal at least to the amount of income tax deducted in its original return." This decision is in direct conflict with other decisions under which the accrual basis has been definitely established. T. D. 2663 should have been specifically limited to corporations which did not accrue their income taxes on their books. Corporations which kept their books on the accrual basis were entitled to deduct the federal income taxes accrued to December 31, 1916. This is fully supported by T. D. 2433 (January 8, 1917), which held that reserves sufficient to meet

fixed charges ("provided such accruals approximate as nearly as possible the actual liabilities for which the accruals are made") could be treated as allowable deductions in the year during which the accruals were made.

It is unjust that a corporation, which reported as of December 31, 1916, could and did take credit for accrued 1916 income taxes for the entire year 1916, while a corporation which reported as of January 31, 1917, which kept its books on an accrual basis should be deprived of the right to deduct the 1916 taxes accrued to December 31, 1916 (eleven months). The discrimination against the latter would be so entirely at variance with equitable taxation or a square deal that the courts could not be expected to sustain it.

Any corporation which was not permitted to deduct accrued income taxes for 1916 should apply for a refund of the amount paid in respect thereof.

Examinations to Ascertain Correctness of Returns

Treasury officers have full power to examine books and records and to require attendance of the necessary persons in the course of examinations to establish the accuracy of income tax returns.

LAW. Section 1305.

The Commissioner, for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made, is hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papers, records or memoranda bearing upon the matters required to be included in the return, and may require the attendance of the person rendering the return or of any officer or employee of such person, or the attendance of any other person having knowledge in the premises, and may take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons.

LAW. Section 1318. That if any person is summoned under this Act to appear, to testify, or to produce books, papers or other data, the district court of the United States for the district in which such person resides shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, or other data.

The district courts of the United States at the instance of the United States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief together, as may be necessary or appropriate for the enforcement of the provisions of this Act. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such provisions.

It should be noted that the plenary power of examination extends also to persons other than the taxpayer who have knowledge of his income."

The author has frequently been asked by taxpayers: "What shall we do when an inspector calls?" Perhaps taxpayers will have a better understanding of their own obligations if acquainted with the duties of income tax inspectors, as set forth in the regulations. These are, in part, as follows:

REGULATION. The duties of officers of this class are to ascertain and report the names of persons who in their opinion are liable to the income tax and who have failed to make return as required by law; to inquire into income tax returns where there is any suspicion that the return made is erroneous; to examine the books and accounts of persons who have made returns, for the purpose of ascertaining and reporting as to whether the law has been complied with. . . . .

In the discharge of their official duties officers of this class, as well as all officers of the Internal Revenue Bureau, in making inquiries and investigations are expected to exercise sound discretion, treat all persons with due courtesy, and, while acting firmly and courageously, to avoid all contention or controversy that would give just ground for complaint. (T. D. 1932, January 13, 1914.)

Inspectors usually call upon individual taxpayers without notice. In the case of business concerns appointments convenient to both are made over the telephone. While the right of inspectors to examine the books and accounts of all taxpayers is unquestioned, the author does not know of an instance when an immediate examination has been insisted upon

'In re Chadwick, 5 Fed. 2570, held that a corporation was not compelled to produce its books upon an inquiry into the income of its stockholders.

to the inconvenience of the taxpayer. There should be no trouble in arranging a convenient time.

Taxpayers should furnish the inspector with all information called for, and, by placing at his disposal the original data supporting the returns, the examination will be expedited. In case of doubt, too much rather than too little information should be tendered.

Publicity of Returns and Disclosure of Information Inspection of returns by outsiders.

LAW. Section 257. That returns upon which the tax has been determined by the Commissioner shall constitute public records; but they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary and approved by the President: . . . .

Persons or corporations desiring copies of their own returns may secure them. Access as a right is permitted to corporation returns by stockholders and receivers and by state officers under carefully restricted conditions. Copies of returns are furnished the proper officers and employees of the Treasury, and to the proper officers of a court for use in a trial of any case to which both the United States and the person rendering the return are parties. Otherwise returns are considered "inviolably confidential."

Acting under a similar provision in the 1913 law, the President, by an executive order, dated July 28, 1914, directed that returns of income should be subject to inspection under regulations prescribed by the Secretary of the Treasury. These regulations, together with those issued by the Commissioner, are set forth in the following paragraphs:

REGULATION.

No provision is made in the law for furnishing a copy of any return to any person or corporation, and no copy

See page 119.

See page 120.

Income Tax Primer, 1918, question 142.

A similar provision of the 1909 law was declared unconstitutional. (Flint v. Stone Tracy Co., 220 U. S. 107.)