(11) Statistical Division.-The Head of the Statistical Division selects, compiles, and analyzes data, and prepares statistical tabulations, schedules, and other statements thereof, with appropriate textual discussions, and supervises and is responsible for the operation of the following sections:

(a) The Edit and Code Section secures returns of net income from another division, edits and codes these returns for statistical purposes and for the records of the Records Division, and verifies the correctness of the punched cards. (b) The Card Punch Section transcribes data from the returns of net income by means of card punch machines.

(c) The Special Tables Section transcribes and assembles special income and tax data from the returns of net income, for tabulation of special compilations.

(d) The Research Section selects returns of representative taxpayers for use in the administration of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918, and prepares such special statistical information as may be required for administrative and other purposes.

(e) The Tabulation and Sort Section sorts and tabulates punched cards according to prescribed classifications, by means of tabulating and sorting machines. (f) The Comptometer Section performs all mechanical computations necessary in connection with the preparation of all statistical tabulations, schedules, and other statements compiled by the Statistical Division.

4. Organization

Lines of organizational control and responsibility are graphically shown on the chart.

17 Income Tax Unit Circular 1185, Revision of March 27, 1923.

1. Mission

CHAPTER 15

MISCELLANEOUS TAX UNIT

The Miscellaneous Tax Unit is the branch of the Internal Revenue Bureau charged with the administration of all taxes other than income tax and certain taxes under the jurisdiction of the Prohibition Commissioner

2. Activities

The policy of the bureau of affording every taxpayer, upon protest of its findings, an opportunity to place before it, by correspondence or in person, additional information or evidence that may support the protest or claim, requires much of the time of the Deputy Commissioner and staff and the review committees of the respective divisions in conferences accorded taxpayers.

I. Review Section

The committee heretofore known as the "Committee on Review and Appeals" has been designated "Review Section." This section is directly attached to the office of the Deputy Commissioner in charge of the Miscellaneous Tax Unit.

The establishment of a Board of Tax Appeals to hear and determine appeals filed under sections 308 and 312 of the Revenue Act of 1924, necessitated a change in procedure as to the method of conducting hearings. The Review Section grants hearings on all formal claims for abatement filed in connection with jeopardy assessments, on claims for refund, and on all protests filed by taxpayers against the tentative determinations of the Estate Tax Division.

II. Capital Stock Tax Division

The Capital Stock Tax Division of the Bureau of Internal Revenue concerns itself with the administration of the special excise tax known as the capital stock tax on corporations,1 associations, and joint-stock companies, imposed for the privilege of doing business in a corporate or organized capacity.

As the tax is imposed on only those organizations which are engaged in business within the meaning of the law, and as the amount of the tax is measured by the fair average value of the outstanding capital stock, the question arises whether a corporation is engaged in business, and, if so, the valuation of its capital stock.

(a) When is a Corporation Engaged in Business? The legal question of what activities or combination of activities constitute engaging in business has been before the courts on many occasions and for many purposes, and the perplexing problems involved are apparent, in that the courts have not attempted to lay down any broad principles or fixed rules, but have confined themselves to a consideration of the facts in a particular case, and have established the status of that case only. However, the bureau has during the past seven years formu

1 Revenue Act June 2, 1924, title 7, § 700 (43 Stat. 325)

lated a policy, and has acquainted the public with the reasoning involved therein, so that little difficulty is now encountered in satisfactorily handling this question. The bureau and the taxpayer seldom fail to reach a common conclusion.

(b) Valuation of Capital Stock.-More difficulty is experienced in attempting to reach a "meeting of the minds" in evaluating the capital stock.

The value desired for capital stock tax purposes is that of the entire outstanding capital stock to the corporation considered as a going concern. This necessarily takes into consideration many factors, among which may be enumerated earning capacity, past and prospective, dividends disbursed, market value of the shares, nature and location of the business, hazards involved, efficient or inefficient management, whether assets are carried at sound, inflated, or understated values, and if the company possesses intangible assets not set up on the books.

The bureau's view is that the proper test is "an amount which a willing seller would take for the entire property, or the entire outstanding capital stock," and "an amount which a willing buyer, thoroughly conversant with all the facts, could reasonably be expected to give." "Such a value, if reported on the return, will be seldom questioned." The law intends that an estimated value shall be used, not one that can be computed and proven with mathematical precision.

The principle is accepted that the officers of a corporation, or its management, are more thoroughly familiar with its financial condition and fair value than the representatives of the bureau can hope to become. However, the auditor within the bureau has the advantage of a greater familiarity with the law, regulations, and interpretations; also a more important advantage, in that he may examine returns of all corporations in a particular industry, and ascertain the composite viewpoint of the management of an entire industry upon a particular subject.

"It should be appreciated that the auditor within the bureau is dependent almost entirely upon information submitted on the return and supplemental evidence submitted. If a taxpayer is confronted with abnormal conditions, unprofitable branches, or unfair competition, he may not desire that the public or his competitor shall be informed of these conditions. On the other hand, he cannot expect that equitable values will be established, unless he submits such information for the consideration of the auditor in reviewing his case. This information is always considered strictly confidential, and with the number of cases handled the auditor considers such data as a mere incident in the day's work, to be forgotten as soon as the case is closed. Furthermore, he is under heavy penalty, should he violate this confidence."

In a large majority of cases the audit is made and the case closed before the end of the taxable period for which the tax is paid.

III. Estate Tax Division

On September 8, 1916, there became effective a tax by the federal government on the transfer of estates of persons dying subsequent to that date. This tax is imposed upon the transfer of the net estate, and is not laid upon any particular

239 Stat. 777 (Comp. St. § 63362a et seq.).

The Income Tax Unit is the agency of the Bureau of Internal Revenue for administering the income and profits tax laws. Its duties are:

(a) To prepare regulations for the administration of laws relating to taxes on income and profits;

(b) To conduct correspondence relating to the subject-matter of income and profits taxes;

(c) To receive from collectors of internal revenue all returns covering taxes on income and profits;

(d) To audit and verify returns and consider and dispose of all reports relating to returns or questions appertaining thereto;

(e) To assess all original and additional income and profits taxes;

(f) To assemble and audit certificates of ownership;

(g) To review and dispose of claims for abatement and refund of income and profits taxes;

(h) To compile statistics relating to income and profit taxes; and

(i) To control and operate all field forces verifying income and profits tax

returns.

2. History

An income tax was provided for in 1861,1 which was amended, continued, or superseded during the period from 1862 to 1870.2

The income tax law of 18943 was declared unconstitutional by the Supreme Court, as levying a direct tax not apportioned among the several states as required by the Constitution.5 The Secretary of the Treasury was directed to destroy all income tax returns and all statements and records relating thereto in the possession of the Treasury Department.

The Sixteenth Amendment to the Constitution relieved all income taxes from the rule of apportionment."

The income tax law included in the Underwood Tariff Act of, 19138 was

1 Act Aug. 5, 1861, c. 45, §§ 49-51 (12 Stat. 309).

2 Act July 1, 1862, §§ 89-114 (12 Stat. 473); Act June 30, 1864, c. 73, §§ 116-150 (13 Stat. 281); Act March 3, 1865, c. 78, § 1 (13 Stat. 469); Act July 13, 1866, c. 184, § 9 (14) Stat. 137); Act March 2, 1867, c. 169, § 13 (14 Stat. 480); Act July 14, 1870, c. 255, §§ 6-17 (16 Stat. 257).

3 Act Aug. 27, 1894, c. 342, §§ 27-37 (28 Stat. 553). See, also, Res. Feb. 21, 1895 (28 Stat. 971).

4 Income Tax Cases, 157 U. S. 429, 15 S. Ct. 673, 39 L. Ed. 759; 158 U. S. 601, 15 S. Ct. 912, 39 L. Ed. 1108.

5 Const. U. S. article 1, § 2, cl. 3, and section 9, cl. 4.

6 Res. April 6, 1896, No. 42 (29 Stat. 470).

7 Brushaber v. Union Pac. R. Co., 240 U. S. 1, 36 S. Ct. 236, 60 L. Ed. 493, L. R. A. 1917D, 414, Ann. Cas. 1917B, 713.

8 Act Oct. 3, 1913, c. 16, § 2 (38 Stat. 166).