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

CHAPTER 15

MISCELLANEOUS TAX UNIT 1. Mission

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.

1. 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, 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 formulated 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.

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

(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

2 39 Stat. 777 (Comp. St. $ 633612a et seq.).

CHAPTER 14

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INCOME TAX UNIT 1. Mission

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. 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.6

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, 88 49–51 (12 Stat. 309).

2 Act July 1, 1862, 88 89–114 (12 Stat. 473); Act June 30, 1864, c. 73, $8 116–150 (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, 88 6-17 (16 Stat. 257).

3 Act Aug. 27, 1891, c. 312, 88 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.

6 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. 19171), 414, Ann. Cas. 1917B, 713. 8 Act Oct. 3, 1913, c. 16, $ 2 (38 Stat. 166).

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sustained as constitutional, and not void for retroactivity, as applied to returns rendered in 1914, based upon individual income for a definite preceding period, even though partially prior to the date of the enactment. The Underwood Act was repealed in part in 1916 10 with the enactment of a new income tax. An additional tax and surtax were imposed in 1917,11 and the personal exemption provision was amended.

This act has been followed by the Revenue Acts of 1919 12 and 1921,13 and amendments of March 4, 1923.14 The Revenue Act of 1924,15 generally ameliorating the tax burden, repealed title II (Income Tax) of the Revenue Act of 1921 13 as of January 1, 1924.16

3. Activities and Description of Organization 1. Deputy Commissioner

The Deputy Commissioner, head of the unit, is directly responsible to the Commissioner of Internal Revenue for the Administration of the Income Tax Unit, and has in his office an Assistant Deputy Commissioner and such other personnel as is required to assist in handling all matters requiring the personal attention of the Deputy Commissioner, and to follow up and secure the accomplishment of all action directed by that official.

II. The Assistant Deputy Commissioner

The Assistant Deputy Commissioner assists and advises the Deputy Commissioner in the general supervision, control, and efficient co-ordination of all operations of the unit.

(1) The Rules and Regulations Section.—The duties of this section, which is directly under the office of the Deputy Commissioner, are:

(a) Originate and prepare regulations for the administration of the income and profits tax laws;

(b) Furnish on the request of taxpayers or their representatives rulings and information relating to the law and regulations;

(c) Answer general correspondence, involving rulings or interpretations of the law and regulations;

(d) Prepare all office decisions;

(e) Prepare the Monthly Bulletins of Income Tax Rulings, the Semiannual Digests, the Annual Cumulative Bulletin, and special bulletins relating to income and profits taxes;

(f) Review proposed publications relating to income tax and war profits and excess profits taxes prepared in other divisions of the Income Tax Unit, or in

9 Edwards v. Keith (D. C.) 224 F. 585. 10 Act Sept. 8, 1916 (39 Stat. 756 [Comp. St. § 6336a et seq.]). 11 Act Oct. 3, 1917, tit. 1 (40 Stat. 300). 12 Act Feb. 24, 1919, c. 18 (40 Stat. 1057 [Comp. St. Ann. Supp. 1919, $ 633643a et seq.]). 13 Act Nov 23, 1921 (42 Stat. 227 [Comp. St. Ann. Supp. 1923, 8 633648a]). 14 Chapters 280 and 294 (42 Stat. 1507, 1560). 15 Act June 2, 1924, title 2 (43 Stat. 254). 16 43 Stat. 352.

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