amount so added shall be paid by the delinquent corporation, joint stock company, or association, or insurance company, immediately upon notice given by the collector. All assessments shall be made, and the several corporations, joint stock companies or associations, or insurance companies, shall be notified of the amount for which they are respectively liable on or before the first day of June of each successive year, and said assessments shall be paid on or before the thirtieth day of June, except in cases of refusal or neglect to make such return, and in cases of false or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as above provided for, and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such corporation, joint stock company or association, or insurance company, immediately upon notification of the amount of such assessment; and to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and Delinquent demand thereof by the collector, there shall be added the sum of five per Taxes centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due. Reports Public Sixth. When the assessment shall be made, as provided in this section, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the office of the Commissioner Records of Internal Revenue and shall constitute public records and be open to inspection as such. Divulged Seventh. It shall be unlawful for any collector, deputy collector, agent, Information clerk, or other officer or employee of the United States to divulge or make Not to Be known in any manner whatever not provided by law to any person any information obtained by him in the discharge of his official duty, or to divulge or make known in any manner not provided by law any document received, evidence taken, or report made under this section except upon the special direction of the President; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding one thousand dollars, or by imprisonment not exceeding one year, or both, at the discretion of the court. Eighth. If any of the corporations, joint stock companies or associations, or insurance companies, aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, or shall render a false or fraudulent return, such corporation, joint stock company or association, or insurance company, shall be liable to a penalty of not less than one thousand dollars and not exceeding ten thousand dollars. Any person authorized by law to make, render, sign, or verify any return, who makes any false or fraudulent return, or statement, with intent to defeat or evade the assessment required by this section to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding one thousand dollars or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. Penalty for Return Internal Revenue Laws United States District Courts All laws relating to the collection, remission, and refund of internal revenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section. Jurisdiction is hereby conferred upon the circuit and district courts of the United States for the district within which any person summoned Have Jurisdic- under this section to appear to testify or to produce books, as aforesaid, shall reside, to compel such attendance, production of books, and testimony by appropriate process. tion As soon as the text of the bill was made known some of the leading accounting firms, recognizing the impracticability of the bill as drafted, prepared a letter which was sent to each member of Congress and to the Attorney General. Although the letter and resultant correspondence have previously been published, it is necessary to a clear understanding of the case that they should be given here. The letter was signed by twelve accounting firms in New York. DEAR SIR: NEW YORK CITY, July 8, 1909. On reading the text of the proposed corporation tax law, as reported in the Commercial and Financial Chronicle of July 3, 1909, we have formed the opinion that some of its provisions are absolutely impossible of application, and others violate all the accepted principles of sound accounting. ascer Under the third clause it is provided "that there shall be deducted from the amount of the net income of each of such corporations, tained as provided in the foregoing paragraphs of this section, the sum of $5,000, and said tax shall be computed upon the remainder of said net income of such corporation . . . for the year ending December 31, 1909, and for each year thereafter, and on or before the 1st day of March, 1910, and the 1st day of March of each year thereafter, a true and accurate return under oath or affirmation of its president," etc., etc. In connection with this clause we would call attention to the fact that, as you are no doubt aware, the fiscal year of a number of corporations is not, and for business reasons cannot be, the calendar year, and consequently, having in mind that in such cases an inventory was not taken at the beginning of the calendar year 1909, it is and will be quite impossible for any business, corporation, or institution, whose fiscal year does not terminate with the calendar year, to make a true return of its profits as required by the proposed law. Under clause I the tax is to be charged upon the "entire net income," and the net income is to be "ascertained by deducting from the gross amount of the income . . . from all sources," (1) "Expenses actually paid," (2) "Losses actually sustained,” (3) "Interest actually paid," in each case "within the year." The words "actually paid" convey, and it is to be presumed are intended to convey, actual disbursements out of the treasury. The proper deductions should be: (1) Expenses actually incurred because the payment is not necessarily made in the year in which the expense is incurred; (2) Losses actually ascertained because losses may be incurred and the amount not be ascertained until a subsequent period; (3) Interest actually accrued because interest is never paid until the end of the period during which it accrues, and the interest accrued is the proper charge against income. In clause the bill refers to "net income received"; in clause 2 it refers to "gross income" without the addition of word "received"; in clause 3, paragraph 3, it refers to "gross income received." There is here a complete confusion between income and income received, which can only lead to endless complication. Two methods may be adopted for taxation purposes, either (1) To tax the difference between actual cash receipts on revenue account and actual cash payments on revenue account, which difference will seldom if ever represent the profits of a manufacturing concern; or (2) To tax profits made up in the ordinary commercial way, namely, to ascertain the gross income earned, whether received or not, and to deduct therefrom 1. Expenses actually incurred during the year, whether paid or not; 2. Losses actually ascertained and written off during the year whenever incurred; 3. Interest accrued during the year, whether paid or not; 4. A reasonable allowance for depreciation of property; and 5. Taxes. As accountants actively engaged in the audit and examination of a number of varied businesses and enterprises, we unhesitatingly say that the law as framed is absolutely impossible of application, and would suggest that in the said clauses 1, 2, and 3 of paragraph 2, the words "actually paid" and "actually sustained" be changed to read "actually incurred" and "actually ascertained," and that the third clause be changed to read so that the return will be based on the last completed fiscal year prior to December 31st in cases where the fiscal year of a corporation is not the calendar year. Yours very truly, (Signed by twelve firms of accountants.) The Attorney General replied as follows: GENTLEMEN: WASHINGTON, D. C., July 12, 1909. I am in receipt of the letter signed by your firm and a number of others with respect to the proposed corporation tax law, in which you advise me that you have formed the opinion that some of its provisions are absolutely impossible of application and others violate all the accepted principles of sound accounting. You first call my attention to the fact that "the fiscal year of a number of corporations is not, and for business reasons cannot be, the calendar year, and consequently, having in mind that in such cases an inventory was not taken at the beginning of the calendar year 1909, it is and will be quite impossible for any business, corporation or institution, whose fiscal year does not terminate with the calendar year, to make a true return of its profits as required by the proposed law." I beg to call your attention, in the first place, to the fact that the proposed law does not impose a tax upon "profits," but upon "the entire net income over and above five thousand dollars received by" the corporation, joint stock company or association, or insurance company, subject to the law, from "all sources during such year." It has been the uniform practice of the Government in framing revenue bills to require the tax to be paid as of a fixed date, and, so far as I have been able to ascertain, in every instance the tax is imposed for the calendar year ending December 31st. Such was the income tax law of 1894. It may be inconvenient, but it is certainly not impossible for any corporation which keeps just and true books of account to make up a return such as that required by the proposed law, particularly as the return requires statements of actual receipts and payments, and not, as you recommend in your communication, of expenses "incurred," interest "accrued," and losses "ascertained." 2. You next object that the proposed law authorizes the deductions of "expenses actually paid," and you contend that this should be changed to read “expenses actually incurred.” The bill was purposely framed to deal with receipts and disbursements made within the year for which the tax was to be imposed, and the words "actually paid" were employed advisedly. The same may be said with respect to losses actually sustained and interest actually paid. The theory of the framers of the bill in this respect differs from that which you advocate. 3. You then object that in Clause I the bill refers to "net income received"; in Clause 2 it refers to "gross income" without the addition of the word "received"; and in Clause 3, Paragraph 3, it refers to "gross income received," and you comment: "There is here a complete confusion between income and income received, which can only lead to endless complication." I cannot agree that there is any confusion whatever in this respect. "Gross income" in Clause 2 obviously and necessarily means "gross income received." The tax is imposed by Clause 1 upon the entire net income above five thousand dollars received from all sources during the year. By Clause 2 "such net income" is to be ascertained by deducting from the gross amount of the income from all sources the specified items; and if anybody could question whether that meant "gross income received," his doubt would be removed by the provisions in Paragraph 3 of Clause 3. Your further statement that "as accountants actively engaged in the audit and examination of a number of varied businesses and enterprises, we unhesitatingly say that the law as framed is absolutely impossible of application," causes me very great surprise. My personal acquaintance with you and a number of the other signers of the letter leads me to the belief that you have underestimated your capacity. Certainly the statement of objections made in your letter is entirely insufficient to support the conclusion which you express. I am, respectfully yours, (Signed) GEORGE W. WICKERSHAM, The following reply, stating in more detail the reasons why the law as framed was impossible of application, was sent to the Attorney General: DEAR SIR: NEW YORK, July 21, 1909. We have to acknowledge receipt of your letter of July 12th, replying to ours of July 8th. Our only object in addressing you was to be of assistance in a matter of practical accounting which enters into the proposed law, as to which we believe that our experience specially qualifies us to speak. We have purposely refrained from any reference to the policy involved in the law, with which we, as accountants, are not concerned. The views expressed in your letter of the 12th instant would seem to indicate that you have not fully appreciated the difficulties which will be met with in carrying into effect the provisions of the proposed law as amplified and explained in your letter; and we therefore feel that, in justice to ourselves, we must refer at greater length to some matters which were only briefly touched upon in our letter of July 8th. We are glad to have your clear expression as to the intention of the law to deal with Receipts and Disbursements only (presumably on Income Account) and not with Income Earned (or Profits) and Expenditures Incurred. Under these circumstances it would seem better to use the term "Receipts on Income Account" and "Disbursements on Income Account" rather than "Income" and "Expense," as the latter terms are more commonly defined and used in relation to Income Earned and Expenses Incurred. In any case, if in Clause 2 "Gross Income" means, as you state it is intended to mean, "Gross Income Received," it would certainly be better to say so and thus remove any possible ambiguity. We note that you refer to the precedent of the Income Tax Law of 1894. We believe that this law was declared unconstitutional before there had been time to experience the difficulties and uncertainties which any attempt to enforce it, if drawn on the lines of the present bill, would have involved. In this connection we may perhaps point to the precedent of the English Income Tax Law, which has stood the test of over half a century. In this case the tax is on Profits, which in this country are frequently termed "Net Income"; and the accounts of corporations prepared in the regular course of business for their respective fiscal years are and |