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Do not deface book» by mark* and writing: Cornell University Library HJ4652 .W17 The Income tax law of '''f,,,|y|Ij|i|?|?,|,|^||Mif® 3 1924 032 553 939 olin The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924032553939 v^\ THE [IMCOIVIE TAX LAW OF , ' THE UNITED STATES OF AMERICA ANALYZED AND CLARIFIED BY ALBERT H. WALKER AUTHOR OF WALKER ON PATENTS, AND THE HISTORY OP THE SHERMAN LAW. PUBLISHED AT THE LAW OFFICES OF THE AUTHOR : Floor lO, PARK ROW BUILDING, NEW YORK CITY. THE PRICE IS A DOLLAR E.Vv COPYRIGHT, 19 r 3 BY ALBERT H. WALKER PREFACE. The income tax law of the United States is Section II, of the Act to reduce tariff duties, and provide revenue for the Government, and for other purposes, which was ap- proved by President Wilson, October 3; 1913. The in- come tax section of that Act has ten thousand words, which are printed in thirty-three paragraphs. Those par- agraphs are arranged in fourteen groups, the first par- agraph of each of which groups is prefixed by a capital letter, and all of which groups are arranged in alphabeti- cal order, from A to N, inclusive, and are designated as ' ' subsections ' ' in the statute and in this pamphlet. Sub- section A comprises two paragraphs, which are desig- nated at their respective heads, as Subdivision 1, and Subdivision 2, respectively. None of the other sub- sections contains any designations of the paragraphs of which it is composed ; except Subsection G and Sub- section I. The first three paragraphs of Subsection G are designated by the letters a, b and c, respectively; while its fifth paragraph is designated by the letter d; and its fourth paragraph, and its sixth and last para- graph, are undesignated by any letter or number. Sub- section I comprises five paragraphs, the first of which is undesignated, except by the letter I, which refers to them all; while its second, third, fourth and fifth par- agraphs are designated as "Sec. 3167, Sec. 3172, Sec. 3173, and Sec. 3176, respectively. Each of sixteen of the thirty-three paragraphs is composed partly of affirm- ative sentences, and partly of one or more of forty "Pro- visos," which are scattered through those sixteen para- graphs. This division of the ten thousand words of statutory language into subsections, subdivisions, paragraphs and provisos, is partly reasonable and partly arbitrary and partly fortuitous. Most of the sentences into which those ten thousand words are divided, are very long and ex- tremely complicated, and many of them are also hetero- geneous. Moreover, those provisions of the statute which relate to any one subject, are generally scattered so wide- ly and promiscuously through its subsections, subdivi- sions, paragraphs and provisos, that nobody can reliably learn all the enactments of the statute, relevant to any particular subject, without a long study of the entire statute, made either by himself or by some other person. Such a study made by any man for himself, would take all his time and energy for several days, even if he aimed to learn the statute upon only one subject; and no man, by unaided study of the statute, can learn in a month, all the law which it enacts. Indeed, that study of the statute which was made and was necessary in pro- ducing this pamphlet, took much more than a month of the hard and constant mental labor of its long experienced author. Though the text of the statute is generally ambiguous in its sentences, and often heterogeneous in the sequences of its provisions; it is also true that those provisions, when clearly restated and logically rearranged, con- stitute a nearly complete system of enacted law. That law, being founded upon the recently ratified sixteenth amendment to the Constitution of the United States, and having been lately enacted by the Congress of the United States and signed by the President, is entitled to the willing obedience of every citizen of any of those States, and of every alien who resides or conducts business in our country. But no law can be reliably obeyed without being reliably known. And it is the intended function of this pamphlet to inform every attentive reader of its pages, precisely how the law applies to him, or to any other person, or to any organization anywhere. Albeet H. Walkee. Park Eow Building, Manhattan, New York, October 16, 1913. TABLE OF CONTENTS. CHAPTER I. PAGES. Eelevant to Natural Persons 1-28 Section 1, Introduction 1-3 Section 2, The Normal Income Tax on Particular Persons 3-7 Section 3, The Normal Income Tax on Non-resi- dent Aliens 8-11 Section 4, The Rate of the Normal Income Tax . 12 Section 5, Income Taxes Collected at their Sources 12-21 Section 6, The Additional Income Tax 22-24 Section 7, The Bates of the Additional Income Tax 24-25 Section 8, Examples of Income Taxes in Vari- ous Cases 26-28 Section 9, Partnerships 28 CHAPTER H. Corporations and Other Organizations 29-39 Section 1, Exempt Organizations 29-30 Section 2, Non-exempt Organizations 30-31 Section 3, Non-exempt American Organizations. 31-33 Section 4, Non-exempt Foreign Organizations . . 33-35 Section 5, Multiple Corporate Taxation 36-39 CHAPTER HI. Income Tax Returns 40-45 Section 1, Personal Income Tax Returns 40-41 Section 2, Corporate Income Tax Returns 42-45 CHAPTER IV. PAGE Income Tax Assessments 46-53 Section 1, Collecting Data for Assessments 46-50 Section 2, Making Assessments of Income Taxes 50-53 CHAPTER V. Teeeitoeial Scope of the Statute 53-55 CHAPTER VI. Administeative Peovisions 56-57 Section 1, Eelevant to Collections at Sources .... 56 Section 2, Eelevant to General Administration . . 57 CHAPTER VII. The Coepobation Tax Law of 1909 58-59 INSERTION. A Ceiticism of the Speee Pamphlet 62-74 APPENDIX. The Official Text of the Income Tax Statute. .101-132 ANALYSIS of THE UNITED STATES INCOME TAX LAW. CHAPTER I. RELEVANT TO NATURAL PERSONS. Section 1. Intkoduction. The first paragraph of the statute purports to specify three classes of persons as subjected thereto : First, all citizens of the United States : Second, all aliens residing in the United States: and Third, all persons residing elsewhere, who derive incomes from sources in the United States. That paragraph also provides that every person, belonging to the first or to the second of these classes, shall pay an income tax upon his entire net income, arising from all sources; but its only provision relevant to the third class of persons is that every per- son belonging to that class, shall pay an income tax upon his entire net income, derived from sources in the United States. A serious ambiguity in this paragraph arises from the fact that all citizens of the United States who reside in foreign countries belong to the first class, and also belong to the third class of persons which the paragraph purports to tax; and in the fact that it purports to tax every person belonging to the first class on his entire net income, whUe purporting to tax every person belonging to the third class, on only that portion of his entire net income which he derives from sources in the United States. Inasmuch as the paragraph clearly purports to tax the incomes which aliens, residing in this country, derive from sources in foreign countries; it appears to be probable that Congress also intended to tax the in- comes which citizens of the United States, residing in foreign countries, derive from sources in foreign coun- tries. And that is the clear purport of the first part of the paragraph. But the last part of the paragraph appears to exempt citizens of the United States residing in foreign countries, from all income taxes upon incomes derived from foreign sources. This inconsistency be- tween the two parts of the first paragraph of the stat- ute, is not plainly removed anywhere in the statute. But it is probable that the Commissioner of Internal Rev- enue, and also whatever courts are called upon to con- strue the statute on this point, will hold that it applies to all citizens of the United States alike, and that it taxes every one of them upon his entire net income whether that income is derived from sources in the United States, or from sources in one or more foreign countries, or from both those classes of sources. The first paragraph of the statute provides that every net income subjected thereto, is thereby made liable to the "normal income tax" of one per cent per annum, whatever the amount of that net income may be ascer- tained to be; and subsequent parts of the statute pre- scribe the method of ascertainment of the amount of a net income, for the purpose of the assessment of the normal tax. The second paragraph of the statute provides for an "additional income tax" upon the net income of some, but not all, of the persons whose incomes are subjected, by the first paragraph, to the normal income tax. Later parts of the statute prescribe how the amount of a net income is to be ascertained, for the purpose of the assess- ment of the additional income tax; and that method of assessment is substantially different from the method prescribed by the statute for the ascertainment of the amount of a net income for the purpose of the assessment of the normal income tax. It is the plan of this chapter of this pamphlet, to first explain the provisions of the statute which relate to assessment upon persons, of the normal income tax ; and afterward to explain in a separate section, the provisions of the statute which relate to the assessment of the addi- tional income tax ; which latter is imposed by the statute upon persons only; and not upon corporations or other organizations. Section 2. The Normal Income Tax on Particular Persons. The method of the assessment of the normal income tax on citizens of the United States, and on aliens resid- ing in the United States, is as follows : All items of income derived from any source, are added together; except any interest, received upon any obligation of the United States or any of its posses- sions, or of any State or any political sub-division thereof; and except the value of property acquired by gift, bequest, devise or descent; and except proceeds of life insurance policies paid upon the death of the in- sured; and except repayments made to holders of life 4 insurance, endowment or annuity contracts, upon the maturity or surrender of such contracts. In this pam- phlet, the sum of this addition is designated as the "per- sonal gross income," and the much smaller amount upon which the normal income tax is calculated by percentage arithmetic, is designated in this pamphlet, as the "per-, sonal tasable income." The personal taxable income is ascertained by deduct- ing, from the personal gross income, the following items : FiEST : All necessary expenses, actually paid in carry- ing on any business, not including personal, living or fam- ily expenses. Second: All interest paid on indebtedness. Thied: All national, State, county, school and muni- cipal paid taxes ; except assessments for local benefits. Fourth : All losses incurred in trade, or arising from fire, storm or shipwreck; and not compensated by insur- ance or otherwise. Fifth: "Worthless debts, charged off within the year. Sixth: Keasonable allowance for depreciation of property, arising from its employment; not exceeding, in case of a mine, five per cent of the gross value at the mine, of its annual output; but no deduction shall be made on account of expense incurred in undoing any depreciation of property, in addition to the reasonable allowance for that depreciation. Seventh: All dividends received upon corporate stock, Elnd all other amounts received from the net earn- ings of any corporation, or joint stock company, or asso- ciation, or insurance company, which is taxable upon its net income, under this statute. Eighth : Any income, exceeding $3,000, the income tax upon which has been paid or withheld for payment at its source, as prescribed by the statute. Ninth: In the case of President Wilson, Ms com- pensation during Ms present term; and in the cases of all United States judges who were in office at the date of the enactment of the law, their compensations; and in the cases of all officers and all employees of any State or political subdivision thereof, their compensations, except when such a compensation is paid by the United States. Tenth: In the case of any person, not living with a wife or a husband, $3,000. EliEventh: In the case of a man and his wife living together, $4,000. Comments on the Foregoing Pabts of Section 2. Though the value of property acquired by gift, be- quest, devise or descent, is not included among the items which are added together to constitute the personal gross income, all income from any such property is included' among those items. The first deduction which the statute prescribes from the personal gross income, when ascertaining the per- sonal taxable income, is therein designated by the word "expenses." In the case of a merchant, this word in- cludes the cost of the merchandise which he buys and sells, as well as the expenses which he incurs in buying and in selling that merchandise. In the case of a manu- facturer, the word includes the cost of the materials which he buys to transform, as well as the wages of the workmen, and all the other expenses which he incurs in the transformation, which Ms manufacturing c'onstitutes. In the case of an importer, the word includes the duties he pays on his imports, as well as the cost in foreign countries, of the imported merchandise, and the cost of transportation thereof, from thence to the United States. And in the cases of distillers and other persons, who pay imposts and excises upon alcohol and other liquors, or upon tobacco in some of its forms, or upon other commodities, the manufacture or sale of which is subject to imposts or excises; the word "expenses" includes those imposts and excises, as well as the cost of making or the cost of buying the commodities upoD -ro^hich they are respectively imposed. The third deduction which the statute prescribes from the personal gross income, when ascertaining the personal taxable income of a natural person, appears to include all national taxes. But that deduction can not include any of those forms of national taxes which are designated in the Constitution of the United States as "duties, imposts and excises"; for those items, being included among the "expenses" which constitute the first deduction, can not rightly be included agaiji, among the third class of deductions, under the name of "taxes." The phrase "national taxes" in the statutory designa- tion of the third class of deductions, will doubtless be held to be limited to whatever national taxes are really burdensome to the persons taxed, and therefore to exclude whatever duties, imposts or excises or other taxes, are shifted by those who originally paid them, to the pur- chasers of the commodities upon which they are respec- tively levied. This fourth deduction which the statute prescribes from the personal gross income, when ascertaining the personal taxable income, is limited to losses incurred in trade, or arising from fire, storm or shipwreck. This limitation is unjust, for it does not apply to any non- resident alien, nor to any corporation ; and losses caused by robbery or other crime, or involved in railroad wreck, or inflicted through earthquake or flood, are as worthy of sympathetic consideration as are losses arising from fire, storm or shipwreck. But it is impossible, to find in tlie statute any foundation, upon which losses arising from loss of property, otherwise than in trade or by ship- wreck, storm or fire, can be included in this fourth deduc- tion. The seventh deduction which the statute prescribes from the personal gross income, when ascertaining the personal taxable income of a person, is based upon the theory that the net earnings of the corporations, joint stock companies, associations and insurance companies, with which that seventh deduction deals, have already been reduced to the extent of the normal income tax thereon, before being made the basis of dividends, or other payments, distributed among the stockholders or other proprietors of such corporations, joint stock com- panies, associations or insurance companies; and upon the fact that, in the absence of that deduction, those stockholders, or other proprietors, would practically be paying the normal income tax twice upon the same earn- ings. The eighth deduction which the statute prescribes from the personal gross income, when ascertaining the personal taxable income of a person, refers to a subse- quent and highly complicated portion of the statute, which is explained in Section 5 of this Chapter. The ninth deduction which the statute prescribes from personal gross income, when ascertaining personal tax- able income, was necessary in the case of President "Wil- son, and in the cases of all United States judges who were in office at the date of the enactment of the law; because the Constitution of the United States prohibits any diminution of the salary of the president "during the period for which he shall have been elected," and pro- hibits any diminution of the salary of any United States judge "during his continuance in office;" and because an income tax, on any salary, would diminish it. Section 3. The NoKMAii Income Tax on Non-Eesident Aliens. The provisions of the statute, relevant to persons re- siding in foreign countries, but deriving incomes from property owned, or from business, trade or profession conducted in the United States are ambiguous pro- visions. The second paragraph of Section 1 of Chapter 1 of this pamphlet explains the ambiguity which attends the question, whether those provisions, such as they are, apply to citizens of the United States residing else- where. In that Section and paragraph, the opinion is expressed that those provisions apply only to aliens re- siding in foreign countries, and deriving incomes from sources in the United States ; and it is certain that those are the only provisions in the statute which do apply to such aliens. But whether those provisions apply only to such aliens, or apply also to citizens of the United States residing in foreign countries, they are ambiguously ex- pressed in the statute, as the following analysis of the subject will show. The fifth paragraph of the statute reads as follows: "The net income from property owned and business carried on in the United States, by persons residing else- where, shall be computed upon the basis prescribed in this paragraph, and in that part of paragraph G, of this Section relating to the computation of the net income of corporations, joint stock and insurance companies organ- ized, created or existing under the laws of foreign coun- tries, in so far as applicable." How far those provisions of paragraph Gr, which re- late to foreign corporations, joint stock companies and insurance companies, are applicable to alien persons re- siding in foreign countries, is a question of construction of the statute. So also, in construing the statute, atten- tion must be given to the phrase "this paragraph," where it occurs in the paragraph above quoted. In order to give that phrase any effect, it must be construed to refer to those four paragraphs, of which it is the third, and which appear to be segregated from the other para- graphs of the statute, by the letter B, which is prefixed to the first of them. The theory that Congress intended by the phrase "this paragraph" to include the group of four paragraphs which are printed between the letter B and the letter C, is supported by the fact that the third of those paragraphs speaks of "paragraph Gr" as being composed of parts, and by the fact that the "part" there- in particularly referred to, comprises many elaborate provisions which are printed in the latter part of the third paragraph, of the group of paragraphs which are preceded by the letter G. These circumstances indicate that the word "paragraph" is used in the statute to des- ignate one or another of the groups of paragraphs which are respectively preceded by the first fourteen letters of the alphabet. It is only on this assumption, that anybody can learn from the statute, by what method any income tax is to be assessed against alien persons residing in for- eign countries, on account of incomes derived by them from sources in the United States. If this assumption is correct, that method appears to be as follows: All items of income accrued from business trans- acted or from capital invested in the United States are added together; except any interest received upon any obligation of the United States, or of any of its posses- 10 sions, or of any State or of any political subdivision thereof; and except the value of property acquired by gift, bequest, devise or descent; and except proceeds of life insurance policies paid upon the death of the in- sured; and except repayments made to holders of life insurance, endowment or annuity contracts, upon the maturity or surrender of such contracts. In this pam- phlet the sum of this addition is designated as "the per- sonal gross income, from the United States, of non- resident aliens," and the much smaller amount upon which the normal income tax against such non-resident aliens, is calculated by percentage arithmetic, is desig- nated in this pamphlet as the "personal taxable income of non-resident aliens." That personal taxable income is apparently to be ascertained, by deducting from that personal gross in- come, the following items. Fiest: All the ordinary and necessary expenses, actually paid out of earnings, in the maintenance and operation of the non-resident alien's business and prop- erty in the United States. Second: Such a proportion of the interest accrued and paid on the indebtedness of the non-resident alien, as the gross amount of his income from business trans- acted and capital invested in the United States, bears to the gross amount of his income, derived from all sources in the world. Third : All taxes collected upon the property or busi- ness of a non-resident alien in the United States, under the authority of the United States, or of any State or Territory thereof or the District of Columbia, not includ- ing assessments for local benefits. Fourth: All losses actually sustained by the non- resident alien, in business conducted within the United States, and not compensated by insurance or otherwise. u Fifth : Worthless debts, charged off during the year, from books of account of business in the United States. Sixth: Eeasonable allowance for depreciation of property, arising from its employment in the United States ; not exceeding, in the case of a mine, five per cent , of the gross value at the mine, of its annual output. Seventh: All dividends received upon corporate stock, and all amounts received from the net earnings of any corporation, joint stock company, association or in- surance company, which is taxable upon its net income, in the United States, under this statute. Eighth: Any income, exceeding $3,000, the income tax upon which has been paid or withheld for payment at its source in the United States, according to the statute. Ninth : In the case of a person not living with a "wife or a husband $3,000. Tenth: In the case of a man and his wife living together, $4,000. Comments on the Foeegoing Parts of Section 3. The comments which are inserted in this pamphlet as the latter part of Section 2, and which relate to the preceding part of that section are also substantially ap- plicable to the corresponding parts of this section, with the following exception: The fourth deduction from the personal gross income which may be made by a citizen of the United States or by an alien residing in the United States, is expressly limited to losses incurred in trade or arising from fire, storm or shipwreck, and not compensated by insurance or otherwise ; whereas the corresponding deduction which the statute permits to be made by a non-resident alien, appears to include all losses, which are not compensated by insurance or otherwise. 12 Section 4. the bate of the normal income tax. The "normal income tax" is one per cent of the "personal taxable income," in the case of a citizen of the United States, and in the case of an alien residing in the United States; as that personal taxable income is ascertained by the method which is explained in Sec- tion 2 of this chapter. And the normal income tax is •one per cent of the "personal taxable income of non- resident aliens", in the case of an alien residing in some foreign country, but deriving an income from prop- erty owned, or from business, trade or profession con- ducted in the United States; as that taxable income is ascertained by the method explained in Section 3. Section 5. personal normal income taxes collected at their SOURCES. The statute imposes certain vicarious duties upon every person or organization which accumulates, or other- wise receives, money for another, person, during any taxable year; where the amount of that money is fixed or determinable in annual or other periodical parts. The persons and organizations upon which these vi- carious duties are imposed by the statute, are therein designated as all persons, firms, copartnerships, com- panies, corporations, joint stock companies, associations, insurance companies, lessees, mortgagors, trustees, guardians, executors, administrators, agents, receivers, conservators, employers, and ofiicers and employees of the United States. But those vicarious duties are im- 13 posed upon such persons and organizations, only wlien and where they respectively have the control, receipt, custody, disposal, or payment, of interest, rent, salaries, wages, premiums, annuities, compensation, remunera- tion, emolument, or other 'fixed or determinable annual gains, profits and income of some other person or per- sons, and only under the circumstances stated in this section. The function of those provisions of the statute which relate to this subject, is to increase the efficiency and diminish the cost of the official work, which is involved in assessing and collecting personal normal income taxes ; while sometimes increasing, and sometimes not in- creasing, the burden of such a tax upon the persons out of whose incomes it is taken. That function is perform- ed by the statute, substantially as follows : The statute undertakes to compel every person and every organization, such as any of those mentioned in this Section 5, as having vicarious duties, to act as agents of the Grovernment, in respect of all fixed or determinable payments which will accrue, at any time after the end of October, 1913, to be made by those vicarious parties respectively, to the person or persons, for whom they shall have been respectively accumulated or otherwise received. In executing that agency, each vicarious party will begin by classifying the moneys due from him or it, to each person, who in the absence of this statute, would be entitled to receive any of those moneys. The first class of those moneys will include all items such as those which, according to the statute, are exempt from the normal income tax, when they are in the hands of the persons to whom they beneficially belong. Those items are the following: 14 Fikst: All interest, received upon any obligation of the United States or any of its possessions, or any State or any political subdivision thereof. Second: The value of any property, received by the vicarious party, by way of gift, bequest, devise, or de- scent, for the benefit of the person beneficially entitled thereto. Thied: All proceeds of life insurance policies, paid upon the death of the insured, and received by the vi- carious party on behalf of the respective beneficiaries of those life insurance policies. FoTJETH: All repayments, made for the benefit of any holder of any life insurance, endowment, or annuity contract, upon the maturity or surrender of any such contract. Fifth : All dividends-, received upon corporate stock, and all other amounts received from the net earnings of any corporation, joint stock company, association, or insurance company, which is taxable upon its net income under the statute. The statute does not, in respect of any item in this first class, put any reportorial or returning duty, upon the vicarious party which has the custody or control of that item. The second class of those moneys will include all items which, according to the statute, must be reported in full. Those items are the following : FmsT: All interest upon bonds, mortgages or deeds of trust, or other similar obligations of corporations, joint stock companies or associations, or insurance com- panies, whether payable annually or at shorter or longer periods. Second: Coupons, checks, or bills of exchange, for or in payment of any dividend upon any stock, or any interest upon any obligation of any foreign corporation. 15 association or insurance company, engaged in business in any foreign country. Thied: Coupons, checks or bills of exchange, for or in payment of interest, upon any bond of any foreign country, or upon any foreign mortgage or like obliga- tion, which is not payable in the United States. The statute requires the vicarious party who receives any money of this second class, to return to the col- lector of internal revenue, an itemized account of all such money, and to pay to the collector one per cent of its aggregate amount, instead of paying the whole of that money to the party which, in the absence of the statute, would be entitled to receive it all. The statute also provides that all persons, firms or corporations, undertaking as a matter of business or for profit, the collection of foreign payments of such in- terest or dividends, by means of coupons, checks, or bills of exchange, shall obtain a license from the Commis- sioner of Internal Eevenue, and shall be subject to such regulations as that officer, with the approval of the Sec- retary of the Treasury shall prescribe ; and that any per- son who undertakes to collect such payments without such a license, or without complying with such regula- tions, will be guilty of a misdemeanor; and for each offense will be fined not more than $5,000, or imprisoned not more than one year, or both, in the discretion of the Court. The third class of those moneys will include all items which do not belong to the first class or to the second class. Wbere this class of money aggregates not more than $3,000 in the case of a particular beneficiary, the statute does not put any reportorial duty upon the vi- carious party, which has the custody or control of that money. 16 But where this third class of moneys is fixed or de- terminable, and aggregates more than $3,000 in the case of a particular beneficiary of a particular vicarious party, the statute requires that party to return, to the collector of internal revenue, an itemized account of all those moneys, and to pay to the collector one per cent of their aggregate amount, instead of paying the whole to the beneficiary. The statute recognizes the probability that the fore- going plan for collecting some portion or portions, and in some cases the whole, of the income tax due from a particular person, at the source or sources of his income, would, unless modified for particular cases, operate to deprive that person of the benefit of one or more of the first nine deductions from the "personal gross income" which are specified in Section 2 of this chapter, as proper to be made, when ascertaining the "personal taxable in- come" of particular persons. To enable any person, thus likely to suffer from the plan, to avert such an injustice, the statute provides that such a person, not less than thirty days prior to the day on which personal incomes are returnable to the col- lector of internal revenue, may file with his vicarious party, a true and correct return of his annual gains, profits and income, from all other sources than that vi- carious party; together with a true and correct state- ment of such of the first nine deductions which are speci- fied in Section 2 of this chapter, as ought to be made from the "personal gross income" of the person filing the said true and correct return. Such a paper having been filed with the vicarious party; the statute provides that it shall become a part of the return to the collector of internal revenue, which is to be made by that party. But the statute does not provide that the vicarious party 17 may refrain, on account of having received such a paper, from diverting from its sender, to the collector of in- ternal revenue, the whole or any portion of the money which, in the absence of such a paper, he is required to divert. The statute also indicates, without elaborately pro- viding, that any person who might otherwise suffer in- justice from the plan of taxing personal incomes at their respective sources, may make an application to the col- lector of internal revenue, asking that any of the said nine deductions from his gross personal income may be subtracted therefrom, or he be somehow credited therewith. But the statute does not provide how any person can recover any money from the collector of in- ternal revenue, on account of any such credit or deduc- tion; even where it is plain that the plan of taxing personal incomes at their sources, has caused the col- lector of internal revenue to receive more money out of the gross personal income of a particular person, than he would have received if that income had been accounted for, in the hands of that person himself. That subject is apparently relegated to section 3220' of the Revised Statutes of the United States, which provides that the Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is authorized, on appeal to him made, to remit, refund and pay back all taxes that appear to have been unjustly Fissessed, or made excessive in amount, or to have been in any manner, wrongfully collected. To enable any person who might otherwise lose the benefit of the tenth or eleventh deduction specified in Section 2 of this chapter, as a result of the plan of tax- ing personal incomes at their sources; the statute pro- vides that such a person, not less than thirty days prior 18 to the day on which, personal incomes are returnable^ may file -with his vicarious party, a signed notice in writing, claiming the benefit of whichever of those deduc- tions he is entitled to have made from his gross personal income. And thereupon the statute provides that the vicarious party shall take that deduction into account, in making his return to the collector of internal rev- enue. To guard the Government against fraud on this point, the statute provides that any person who know- ingly makes any false or fraudulent representation in such a notice as is above specified in this paragraph,. shall be liable to a penalty of $300. In respect of any application, or other act, proper to be made or done to protect the payer of an income tax from excessive taxation, by reason of his income being taxed partly or wholly at its source or sources j the statute provides that if such a person is a minor, or is an insane person, or is absent from the United States, or is prevented by illness from personally at- tending to the business, that function may be performed for him, by his vicarious party; that party making oath that he has sufficient knowledge of the affairs and prop- erty of his beneficiary, to enable him to make a full and complete return for the latter, and that the papers pre- sented with that oath, are full and complete. In respect of this entire plan for collecting personal normal income taxes at their respective sources, the statute provides that it applies only to the normal tax imposed upon natural persons; and thus provides that it does not apply to the additional tax which is imposed upon wealthy natural persons, nor to any income tax which is imposed upon any corporation or other organi- zation. And the statute also provides that any person,, whose whole income reaches him from one or more vi- 19 various parties, which have made return and paid normal income tax for him, shall not be required to himself make any return to the collector of internal revenue. But if any person receives into his own hands, without Ihe intervention of any vicarious party, enough gross personal income, to leave a taxable personal income after all proper deductions are made therefrom, he must make to the collector of internal revenue, such a return as is prescribed by the statute, in respect of the gross ■personal income directly received by him. And whether the income return for a particular person, is made partly by himself, and partly by each of one or more vicarious parties on his behalf, or is made on his behalf by any number of vicarious parties, without any being made by himself; the statute does not allow any duplication of any deduction from gross personal income, in any pro- cess of ascertaining personal taxable income. A very important proAdsion of the statute, relevant to its plan for collecting' personal normal income taxes at their respective sources, resides in the fact that those vicarious parties who constitute those sources, are le- gally liable to pay to the collector of internal revenue, all the moneys which the statute requires them to divert from those persons to whom, in the absence of the stat- ute, those vicarious persons would be legally liable to pay those identical moneys. This provision makes it neces- sary for every such vicarious party to avoid every error which might result in diverting, from their respective beneficiaries, too much money or too little money. For if a vicarious party thus diverts too much, he or it will be burdened with a legal liability to also pay the excess to the beneficiary, after having paid it to the collector of internal revenue. And if such a vicarious party di- verts too little, and thereupon pays to the beneficiary whatever is left, he or it will be burdened with the legal 20 liability to also pay the difference to the collector of internal revenue, after having paid it to the beneficiary. Comments on the Foeegoing Provisions oe Section 5. The provisions of the statute on this subject are sub- stantially those which the tax bill contained, when it passed the House of Eepresentatives on May 8, 1913. But when the bill passed the Senate on September 9, 1913, it contained a number of important amendments to those parts of the House bill which related to this sub- ject. Among those amendments, were two important ones, which were discarded by the Committee of Confer- ence, during the twenty days of consideration by that committee of the Senate amendments. And those two amendments, thus discarded, were also discarded by both Houses, when they agreed to the report of the Commit- tee of Conference, and passed the bill in its final shape. The first of those discarded amendments, exempted tenants and lessees from all vicarious duties relevant to the incomes of landlords or lessors ; except when, in the cases of persons, trustees and other non-corporate own- ers, the leases executed by them, require the respective tenants to pay State and municipal taxes and assess- ments against the property. That amendment having been discarded by both Houses of Congress ; the statute now imposes a vicarious duty upon every tenant or les- see, who has promised to pay any personal landlord or lessor, more than $3,000 per annum, as rent on any leased property. That duty includes making a true return to the collector of internal revenue, stating the details of all such promised payments of rent, and thereafter divert- ing one per cent of the aggregate of those payments, from that landlord or lessor, and paying that diverted money to the collector of internal revenue. 21 The second of those discarded amendments provided that Avhere, under the terms of a contract, entered into before the act would take effect, the payment to be made by the vicarious party to his or its beneficiary, is requir- ed to be made without any deduction on account of any tax; the obligor should not be compelled to assimie or perform any such vicarious duty, in respect of that pay- ment as that imposed by the statute upon other vicarious parties. The omission of this amendment from the stat- ute as enacted, will undoubtedly operate to compel an obligor under such an old contract, to pay to the col- lector of internal revenue, one per cent upon the annual amount of his obligation under the contract; while not relieving him from his obligation to pay the full amount to his obligee. But the statute provides that no contract, made after its enactment, will be valid to shift the bur- den of an income tax, from the beneficiary of the income to some other party. This statutory plan of collecting personal normal in- come taxes, at the sources of the respective incomes, will impose a large uncompensated expense upon the vicari- ous parties who are required by the statute, to make returns to the collector of internal revenue, of the details and the amounts of those incomes. And those vicarious parties will also be compelled by the statute, to avoid at their peril, every substantial error in making up those vicarious returns. This vicarious scheme is perhaps violative of the Fifth Amendment to the Constitution of the United States. But no resulting invalidity will invalidate any other part of the law; for paragraph T, of Section IV, of the tax statute, of which the income tax law, is Section II, provides that no invalidity of any part of that statute, shall impair or invalidate any other part thereof. 22 Section 6. THE ADDITIOaSTALi INCOME TAX. The method of ascertaining the "personal taxable income" upon which the "additional income tax" is based, is the same as the method of ascertaining the per- sonal taxable income on which the normal income tax is based; except that the seventh and eighth deductions which are allowed in respect of the normal income tax, are not allowed in respect of the additional income tax; and except that one deduction of $20,000 is allowed in respect of the additional income tax, instead of the de- duction of $3,000, or the deduction of $4,000, one or the other of which is allowed in respect of the normal income tax. Instead of allowing the seventh deduction, when as- sessing the "additional income tax"; the statute pro- vides that every person subject to that tax, shall make a personal return of his total net income, corporate or otherwise, and that, for the purpose of that additional tax, his taxable income shall include his share of the gains and profits of all corporations, joint stock com- panies, or associations, whether those gains and profits have been divided or not, and particularly where such an organization has been formed or fraudulently availed of for the purpose of preventing the im- position of the additional income tax, through the medium of permitting its profits to accumulate, in- stead of being divided or distributed among the members of the organization. To guard against all such frauds, the statute provides that the fact that any such corporation, joint stock company or association, is a mere holding company, or the fact that its gains and profits are permitted to accumulate beyond the reason- able needs of the business, shall be prima facie evidence 23 of a fraudulent purpose to enable its stockholders to escape the "additional income tax" which they would have to pay if those gains and profits were distributed among them. But to guard against doing possible in- justice to persons in particular cases, the statute also provides that the mere fact that gains and profits are permitted to accumulate into a surplus, in the treasury of a corporation, joint stock company or association, shall not constitute evidence of a purpose to enable its stockholders to escape the "additional income tax"; unless the Secretary of the Treasury shall certify that, in his opinion, that particular accumulation is unreason- ably large for the purposes of the business. And to en- able the Secretary of the Treasury to form a correct opinion on this point, the statute provides that any cor- poration, joint stock company or association, shall fur- nish a correct statement of its accumulated profits, and of the names of the pers'ons who would be entitled to re- ceive them, if distributed, whenever the Commissioner of Internal Revenue, or any collector of internal rev- enue shall request such a statement. The fact that the eighth deduction from the "per- sonal gross income" which is allowed when ascertaining the "personal taxable income" which is subject to the normal tax, is not allowed when ascertaining the "per- sonal taxable income" which is subject to the additional tax, is a logical and proper fact. For that eighth deduc- tion refers to those complicated parts of the statute which relate to collecting the "normal income tax", which is due from particular persons, from those vi- carious parties who have the custody of the taxed in- comes at their respective sources. Inasmuch as those complicated parts of the statute are expressly confined to the "normal tax" upon the incomes of natural per- sons; the "additional income tax", is never collectable 24 at the source of the income upon which it is based, and is collectable only after that income reaches the hands of whoever is beneficially entitled thereto. And in order to impose the "additional income tax" upon that income in those hands; when ascertaining the "personal taxable income" for the purposes of the "additional income tax, " it is proper to ignore the eighth deduction from the "personal gross income" which is properly made when ascertaining the ' ' personal taxable income ' ' for the pur- pose of the "normal income tax." Section 7. the rates of the additional income tax. The "personal taxable income" upon which the "ad- ditional income tax" is based, having been ascertained by the method explained in Section 2, or by that of Sec- tion 3, of this Chapter; the "additional income tax" is assessed on the following scale : the first $30,000, or frac- tion thereof at one per cent; the next $25,000, or frac- tion thereof at two per cent; the next $25,000, or frac- tion thereof at three per cent ; the next $150,000, or frac- tion thereof at four per cent ; the next $250,000, or frac- tion thereof at five per cent; and all income above that $250,000, at six per cent. This method of stating the scale is a translation into other words and figures, of the exact words and figures in which the same scale is expressed in the statute, and which figures and words are as follows: "One per centum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000, and two per centum per annum upon the amount by which the total net income exceeds $50,000 and does not exceed $75,000, three per centum per annum 25 upon the amount by whicli the total net income exceeds $75,000 and does not exceed $100,000, four per centum per annum upon the amount by which the total net in- come exceeds $100,000 and does not exceed $250,000, five per centum per annum upon the amount by which the total net income exceeds $250,000, and does not ex- ceed $500,0-00, and six per centum per annum upon the amount by which the total net income exceeds $500,000." Section 8. examples of total income ta^xes in vakio'tjs cases. A single man or a single woman having a taxable in- come of $10,000, as ascertained to be the basis of the normal income tax in that case, will be taxed one per cent on $7,000 or $70. Any man having a taxable income of $40,000, as as- certained to be the basis of the additional income tax in his case, will, in addition to whatever tax is levied upon him as his normal income tax, pay an income tax of one per cent upon $20,000 or $200. Any man having a taxable income of $70,000, as as- certained to be the basis for the additional income tax in his case, will, in addition to whatever tax is levied upon him as his normal income tax, pay a tax of one per cent upon $30,000, and two per cent upon $20,000, or $700. Any man having a taxable income of $140,000, as as- certained to be the basis for his additional income tax, will, in addition to whatever tax is levied upon him as a normal income tax, pay a tax of one per cent upon $30,- 000, and two per cent upon $25,000, and three per cent upon $25,000, and four per cent upon $40,000, or $3,150 in all. 26 Any man having a taxable income of $250,000, as as- certained to be the basis for his additional income tax, will, in addition to whatever tax is levied upon him as the normal income tax, pay a tax of one per cent upon $30,000 and two per cent upon $25,000, and three per cent upon $25,000, and four per cent upon $150,000, or $7,550 in all. Any man having a taxable income of $500,000, as as- certained to be the basis for the additional income tax, will in addition to whatever tax is levied upon him as a normal income tax, pay a tax of one per cent upon $30,000, and two per cent upon $25,000, and three per cent upon $25,000, and four per cent upon $150,000, and five per cent upon $250,000, or $20,050 in all. And any man having a taxable income of more than $500,000, as ascertained to be the basis for the additional income tax, will, in addition to whatever tax is levied upon him as a normal income tax, pay a tax of $20,050, plus six per cent upon whatever amount that taxable in- come exceeds $500,000. For example, a man having such a taxable income of $40,000,000, will in addition to what- ever tax is levied upon him as a normal income tax, pay an additional income tax of $2,390,050. The amount of the normal tax in any of the foregoing cases, or in any other case, will partly depend upon the question whether the "gross personal income" in that case consists partly or wholly of dividends, or other amounts, received from the net earnings of corpora- tions ; or consists wholly or partly of money, derived di- rectly from its sources, by those beneficially entitled thereto, without the intervention of any corporation, or other organization, which is taxable upon its net income. For example, one man may have a net income of $3,- 003,000, which is wholly derived from rents on real estate owned by him ; and such a man will pay a normal income 27 tax of one per cent on $3,000,000, amounting to $30,000; and will pay an additional income tax on $2,983,000, amounting to $169,030 ; and will thus have to pay an ag- gregate income tax of $199,030. And another man may have a net income of $3,003,000 which is derived wholly from dividends on railroad stocks owned by him; and such a man will not have to pay any "normal income tax," but will have to pay the same amount of "addi- tional income tax" as the other man, namely $169,030. For another example, one man may have a net income of $20,000, which is wholly derived from the profits of a mercantile establishment owned by him ; and such a man if unmarried, will have to pay only a "normal income tax" of one per cent upon $17,000, amounting to $170. And another man may have a net income of $40,000, which is derived wholly from dividends on national bank stocks ; and such a man will not have to pay any "normal income tax," but will have to pay an "additional income tax" on one per cent on $20,000, amounting to $200. The foregoing differences between the proportionate burdens placed by the income tax law upon diffe.rent per- sons, and all other differences which will develop from the application of the double plan of the ' ' normal income tax" and the "additional income tax," are not unreason- able. Those differences all arise from the following ethi- cal views entertained by Congress : First, persons having net incomes of not more than $20,000, which are wholly derived as dividends upon corporate stocks, ought not to be compelled to pay any income tax; because the corpo- rate money which was divided between them, had already been subjected to an income tax, when it was in the treas- uries of the corporations which issued those stocks. Sec ond, persons having net incomes of more than $20,000, are wealthy persons, all of whom should be subjected to the ' ' additional income tax, ' ' whatever may be the source 28 or sources of their respective incomes; but those of them who derive their incomes from dividends on stocks, ought not to be subjected to the "normal income tax," because that tax has been practically paid by them, al- ready, out of the net earnings of the corporations which issued those stocks. Third, wealthy persons should be compelled and indeed should be willing to bear income taxes which increase in their percentages, as their wealth increases at various stages of advance. Thus a man hav- ing a net income of $1,000,000, derived from the profits of a great department store, is properly required by the statute, to pay an aggregate income tax thereon of $60,- 020 ; while a merchant who derives a net income of $100,- 000, from the profits of a small department store, is re- quired by the statute to pay an aggregate income tax of only $2,420; and a smaller merchant, who derives a net income o,f $30,000 from the profits of a still smaller mer- cantile establishment, is required by the statute to pay an aggregate income tax of only $370. Section 9. paktneeships. The only non-vicarious duty which the statute im- poses upon any partnership, consists in furnishing to the Commissioner of Internal Revenue, or to any col- lector of internal revenue, upon request, a correct state- ment of its profits, for the preceding calendar year, and a list of the names of the partners entitled to have those profits distributed among them. The statute makes each partner in any partnership, liable to all its provisions, relevant to his share of the partnership profits, in the same ways that he would be liable, if he had received those profits from a business conducted by himself alone. 29 CHAPTER II. CORPORATIONS AND OTHER ORGANIZATIONS. Section 1. exempt organizations. The income statute provides that no tax shall be levied under it, upon any income, derived from any pub- lic utility, or from the exercise of any essential govern- mental function, by any State or any political subdi- vision of a State. The statute also provides that no tax shall be levied under it, upon the income derived from the operation of any public utility, so far as its payment would impose a loss or burden upon any State, or any political sub- division of a State; where that public utility shall have been contracted for, prior to October 3, 1913, with any person or corporation, by such State, or political sub- division. But this provision will not relieve any such person or corporation, from the tax upon the part of any such income, to which such person or corporation is en- titled under such contract. The word "State" signifies not only each of the forty- eight States, but also, the District of Columbia, Alaska, Hawaii, Porto Eico, and the Philippine Islands; where- ever, in the statute, such signification is necessary to carry out its provisions. The statute also provides that nothing therein shall apply to any organization, in any of the following classes : Agricultural organizations. Business leagues or chambers of commerce or boards of trade, not organized for profit, or no part of the net 30 income of wMcli inures to the benefit of any private stockholder or individual. Cemetery companies, organized and operated ex- clusively for the mutual benefit of their members. Civic leagues or 'organizations, not organized for profit, but operated exclusively for the promotion of social welfare. Corporations or associations, organized and operated exclusively for religious, charitable, scientific or edu- cational purposes, no part of the net income of which inures to the benefit of any private stockholder or indi- vidual. Domestic building and loan associations. Fraternal beneficiary societies, orders, or associa- tions, operating under the lodge system and providing for the payment of life, sick, accident and other benefits to the members of such societies, orders or associations or dependents of such members. Horticultural organizations. Labor organizations. Mutual Savings Banks, not having capital stock rep- resented by shares. Section 2. non-exempt organizations. With the exceptions specified in Section 1, of this chapter; every corporation, joint stock company, insur- ance company and association, organized and existing in. the United States ; and every corporation, joint stock company, insurance company and association, organized and existing under the laws of any foreign country, and having capital invested or doing business in the United 31 States; is subject to the "normal income tax", but not to the "additional income tax", prescribed by the stat- ute. Section 3. non-exempt ameeioan organizations. The income tax levied upon each of such of the above mentioned non-exempt organizations as are organized in the United States, is ascertained by the following method : All items of income, received from any and all sources, are added together; except any interest, received upon any obligation of the United States, or any of its posses- sions, or of any State, or any political subdivision there- of. In this pamphlet the sum of this addition is desig- nated as the "corporate gross income"; and the much smaller amount upon which the corporate income tax is calculated, by percentage arithmetic, is designated in this pamphlet, as the "corporate taxable income". The "coi"porate taxable income" is ascertained by deducting from the "corporate gross income", the fol- lowing items: FtRST : All the ordinary and necessary expenses, paid in the maintenance and operation of the corporate prop- erties and business, including rentals or other payments required to be made, as a condition to the continued use or possession of property. SbcO'Nd: All losses, actually sustained, and not com- pensated by insurance or otherwise, including a reason- able allowance for depreciation by use or wear and tear of property ; and in the case of mines, a reasonable allow- ance for depletion of ores and other natural deposits, not to exceed five per cent of the gross value, at the respective mines, of their respective annual outputs. 32 Thikd: Interest, accrued and paid on the corporate indebtedness, to an amount not exceeding one-half of the sum of its interest-bearing debts and paid-up capital stock outstanding at the end of the year; or if there is no capital stock in a particular case, this deduction will not exceed interest upon the capital employed in the busi- ness at the end of the year. And in case a particular debt is wholly secured by some collateral, which is the subject of sale in the ordinary business of the organiza- tion owing that debt, the total interest secured and paid by that organization on that indebtedness, is deducted from the "corporate gross income" of that organization. Also in the case of a bank, banking association, loan com- pany or trust company, which pays interest on deposits, or on money received for investment and secured by interest bearing certificates of indebtedness, issued by such bank, banking association, loan company or trust company, all such interest is likewise deducted. But the statute prohibits the inclusion in the deducted interest, of any interest paid by any corporation, joint stock com- pany, or association, upon any bond, or other indebted- ness, which was issued with a guaranty that the interest payable thereon, should be free from taxation, in the hands of the creditor holding it. Fourth: Taxes, imposed under the authority of the United States, or of any State or Territory thereof, or imposed by the Government of any foreign country. Fifth : In the case of any insurance company, the net addition, if any, required by law to be made within the year to its reserve fund or funds, and all payments made within the year, other than dividends, on insurance con- tracts or on annuity contracts. Sixth : In the case of any mutual fire insurance com- pany, which requires its members to make premium de- posits to provide for losses and expenses ; whatever pre- 33 mium deposits liave been returned to its policy holders, and whatever portions are retained for the payment of losses and expenses, or for reinsurance reserves. Seventh: In the case of any life insurance company; the premium deposits actually returned to its policy hold- ers, or actually credited to its policy holders by being deducted from the premiums otherwise due to the com- pany. Eighth : In the case of any mutual marine insurance company; all amounts paid for reinsurance, and all amounts repaid to its policy holders oh account of pre- miums previously paid by them, plus whatever interest is paid upon any of said amounts, between the times of their ascertainment, and the times of their payment, re- spectively. SECTTOaST 4. NON-EXEMPT FO'BEIGN ORGANIZATIONS. The income tax levied upon each of such of the above mentioned non-exempt organizations, as are organized and existing under the laws of any foreign country, and have capital invested, or are doing business in the United States, is ascertained in respect of that business, by a somewhat different method, from that which is applicable to each of the corresponding organizations existing in the United States, in respect of its entire business. The differences between those two methods of ascer- tainment, are the following : I\iiST : An organization existing in the United States, is entitled, as its first deduction from its "corporate gross income", to subtract all its ordinary and necessary expenses, in the maintenance and operation of its busi- ness and property; whereas a foreign organization is 34 entitled to make that deduction, only so far as those ex- penses are paid out of earnings made by it in the United States. Second: An organization existing in the United States, is entitled, as its second deduction, to subtract from its "corporate gross income", certain classes of losses, actually sustained anywhere; whereas a foreign organization is entitled only to subtract the same classes of losses, when actually sustained in business conducted by it in the United States. Third : An organization existing in the United States, is entitled as its third deduction, to subtract from its "corporate gross income", interest accrued and paid on its indebtedness, to an amount of such indebtedness not exceeding one-half of the sum of its interest-bearing debts, and its paid up capital stock outstanding at the end of the year; or if it has no capital stock, this deduction will not exceed interest upon the capital employed in its business at the end of the year ; whereas a foreign organ- ization is entitled to make only such a proportion of this deduction, as the gross amount of its income from capital invested and business transacted within the United States, bears to the gross amount of its income from all sources, throughout the world. Also, an organization existing in the United States is entitled to include in its third deduction, the total interest paid by that organiza- tion, on any debt which is wholly secured by some col- lateral, which is the subject of sale in the ordinary busi- ness of the organization owing that debt; and a bank, banking association, loan or trust company existing in the United States, is likewise entitled to include, in its third deduction, whatever interest it paid on deposits, or on moneys received for investment and secured by in- terest bearing certificates of indebtedness issued by that organization; whereas n'o corresponding organization, 35 existing under the laws of any foreign country, is en- titled to include any interest of either of those classes, in its third deduction from its "corporate gross income". Fourth: A corporation organized in the United States, is entitled, in its fourth deduction from its "cor- porate gross income", to include all taxes imposed by the Government of any foreign country; whereas a for- eign organization is not entitled to include any foreign taxes in that deduction. Fifth: The provisions of the statute, relevant to special deductions from "corporate gross incomes" in the cases of foreign insurance companies, are identical in language, with the corresponding provisions of the stat- ute, in the cases of insurance companies organized and existing in the United States ; which deductions are those above designated as Fifth, Sixth, Seventh and Eighth, re- spectively, in respect of corporations organized and ex- isting in the United States. Indeed, the language of those provisions is printed four times,«without any change, in two adjoining para- graphs of the statute. The first instance of that print- ing, begins in line 5 from the bottom of page 115, and ends in line 22 from the top of page 116, of that copy of the statute which constitutes the appendix in this pamph- let. The second instance begins in the bottom line of page 117, and ends in line 27 of page 118, of the same appendix. The third instance begins in line 12 of page 121, and ends in line 3 of page 122, of the same appendix. And the fourth instance begins in line 9 and ends in line 35, of page 122, of the same copy of the statute. 36 Section 5. multiple corpoeate taxation. The income tax law operates alike upon every cor- poration or other taxable organization; regardless of whether the capital stock of that organization is owned by natural persons, or is owned by some other organiza- tion. This operation of the law will result in multiple taxation of the same money, in each of the numerous cases in which stock in one corporation, is owned by another corporation. For example, all of the stock of the Philadelphia & Reading Eailway Company is owned by the Eeading Company; and a large proportion of the stock of the Reading Company, is owned by the Lake Shore & Michi- gan Southern Eailway Company; and substantially all the stock of the Lake Shore & Michigan Southern Eail- way Company, is owned by the New York Central & Hud- son Eiver Eailroad Company; and a large amount of the stock of the New York Central & Hudson Eiver Railroad Company, is owned by the Union Pacific Eailroad Com- pany. The net earnings of the Philadelphia & Eead- ing Eailway Company for the fiscal year ending June 30, 1913, were $12,000,000. Assuming that the net earnings of that corporation for the fiscal year ending June 30, 1914, will be $12,000,000, that cor- poration will pay an income tax of $120,000 for that year, on that money. Afterward, most of the remaining $11,880,000 will be paid by the Philadelphia & Reading Railway Company, to the Reading Company, as the entire dividend, payable for that year, on the stock of the Philadelphia & Reading Railway Company. There- upon, the Reading Company will pay an income tax of one per cent upon the entire amount of that dividend. 37 Afterward, the Eeading Company will pay to the Lake Shore & Michigan Southern Eailway Company, a con- siderable share of what is left of the money received by the Reading Company, from the Philadelphia & Eeading Eailway Company. Thereupon, the Lake Shore & South- ern Eailway Company will pay an income tax of one per cent upon the money thus received by it from the Eeading Company. Afterward, the Lake Shore & Michi- gan Southern Eailway Company will pay to the New York Central & Hudson Eiver Eailroad Company, most of what is left of the money received by the Lake Shore & Michigan Southern Eailway Company, from the Bead- ing Company. Thereupon, the New York Central & Hudson Eiver Eailroad Company, will pay an income tax of one per cent upon the money thus received from the Lake Shore & Michigan Southern Eailway Company. Afterward, the New York Central & Hudson Eiver Eail- road Company, will pay to the Union Pacific Eailroad Company, much of what is left, of the money received by the New York Central & Hudson Eiver Eailroad Com- pany, from the Lake Shore & Michigan Southern Eail- way Company. Thereupon, the Union Pacific Eailroad Company, will pay an income tax of one per cent, on the money thus received from the New York Central & Hud- son Eiver Eailroad Company. In this particular example of the operation of the income tax law, it will result that the money received by the Union Pacific Eailroad Company, through three in- termediate corporations, from the Philadelphia & Eead- ing Eailway Company, will pay the income tax of one per cent five times. And the money received by the New York Central & Hudson Eiver Eailroad Com- pany, through two intermediate corporations, from the Philadelphia & Eeading Eailway Company, will pay the income tax of one per cent four times. And the money 38 received by tlie Lake Shore & Micliigan Soufhem Eail- way Company througli one intermediate corporation, from the Philadelphia & Eeading Eailway Company, will pay the income tax of one per cent three times. And the money received by the Eeading Company, from the Philadelphia & Eeading Eailway Company, will pay the income tax of one per cent twice. And the money re- ceived as net earnings by the Philadelphia & Eeading Railway Company, but kept in its treasury instead of being transferred to the Reading Company, will pay the income tax of one per cent once. The system of multiple corporate taxation, which will result from the income tax law, will be applied to each of the more than one thousand holding companies, which own all or nearly all of the stock of more than eight thousand subordinate corporations ; and will also be ap- plied, in turn, to each of those subordinate corporations ; and again in turn to their subordinate corporations, from degree to degree of subordination, including the operat- ing corporations which underlie them all. Such a holding company is like the trunk of a tree, which sucks its sap from the remote ends of its rootlets, through its numerous roots and subroots. And the op- eration of the income tax, upon such a combination of corporations, is similar to what would occur, if all the sap transmitted from each rootlet of a tree, had to be taxed one per cent, of its volume, every time it passes from that rootlet, to a larger, and to a still larger root, upward on its way to the trunk of the tree. The largest holding company, is the United States Steel Corporation, which has approximately one hun- dred subordinate corporations, of varying degrees of subordination. Assuming that the net income which will reach that holding company from its subordinate corpo- 39 rations, will amount to $100,000,000, for the fiscal year ending June 30, 1914, that corporation will itself pay an income tax of $1,000,000 on that net income. But the larger amount of money which will have constituted the aggregate net incomes of its operating subordinate cor- porations, will have paid an income tax of one per cent, out of the treasuries of those corporations. And what will have been thereupon left of those original net in- comes, will also be taxed one per cent, as often, and to whatever extent it passes upward, through the treasury of an intermediate corporation, to the treasury of the United States Steel Corporation itself. This plan of multiple corporate taxation is not de- scribed or even mentioned in the. income tax law. But it is a logical and inevitable part of that law, from which none of the more than a thousand holding companies,, and their more than eight thousand subordinate corpora- tions, can escape, except by severing the bonds which respectively hold them together. Congress and the President, did not establish this part of the income tax law, inadvertently. They knew what they were doing. They did it as a means of check- ing those violations of the Sherman Law, which those holding companies and their subordinate corporations, have been doing throughout many money-making years, and which have been too numerous and too extensive to be heretofore prevented or even much diminished, by the Sherman Law itself. 40 CHAPTER III. INCOME TAX RETURNS. Section 1. peksonal income tax retubns. The statute provides that each person of "lawful age", who has received a taxable annual income of $3,000 or more, during the last preceding calendar year, shall on or before March 1, 1914, and also on or before March 1, in each year thereafter, make, under oath or affirmation, a "true and accurate return" to the collector of internal revenue, for the district in which such taxable person resides or has his principal place of business ; or in the case of a person residing in a foreign country, to the collector for the district in which his principal business is carried on in the United States ; which true and accur- ate return, must set forth specifically the separate items which constitute his "personal gross income" for that calendar year; and also the total amount of those items; and also the items and the amounts, of such of the deduc- tions which are specified in Section 2, or Section 3, of Chapter 1, of this pamphlet, as are justified by the facts of his case. Where the income of a person under "lawful age", or subject to other legal disability, is in the custody or control and management of some person or corporation acting in a fiduciary capacity for that person; it is the duty of the party so acting, to make and render a true and accurate return of the income of that person, if his "pei'sonal taxable income" amounts to $3,000 or more; which return must have all the characteristics that are specified in the first paragraph of this section, relevant 41 to a return made by a person of "lawful age" for him- self. And where the income of a particular person under legal disability, is in the custody and control and man- agement of two or more fiduciary parties jointly, any one of those parties may act alone, in making the re- quired return for that person. "When any particular person knows, that if he were to make a true and accurate return to the collector of in- ternal revenue, for himself or for any person under legal disability, that return would show that the person mak- ing it, or the person on whose behalf it would be made, had' no "personal taxable income," during the last pre- ceding calendar year, after all proper deductions, includ- ing $3,000, would be subtracted from his "personal gross income"; no return whatever is required by the statute to be made to the collector of internal revenue in that case. When the collector of internal revenue, or any deputy collector, has reason to believe that the personal taxable income which is specified in any return, is understated therein, he will give due notice to the person making that return, to show cause why the amount of that taxable income should not be increased; and upon the acquire- ment of proof of the extent of any understatement, the collector or deputy collector may increase that taxable income to that extent. From such an increase, the per- son making the return, may appeal to the Commissioner of Internal Revenue; and the Commissioner will decide the appeal, upon all the papers which were before the collector of internal revenue, and upon whatever sworn testimony of witnesses the appellant may submit to the Commissioner. 42 Section 2. coepobate income tax eettjiins. The statute provides that any corporation, joint stock company, association, or insurance company, which is subject to the income tax law, may make its income tax returns for successive calendar years, or for its chosen fiscal years, at its option; and that, if it chooses to go by calendar years, it shall make its "true and accurate return", on or before the filrst day of March of each year, for the preceding calendar year; and that if it chooses to go by fiscal years, it shall make its "true and accur- ate return" within sixty days after the close of each fiscal year, for that fiscal year. The statute also provides that the "true and accurate return" of each corporation, joint stock company, as- sociation or insurance company, shall be made under the oath or affirmation of its president, vice-president or other principal officer, and its treasurer or assistant treasurer; to the collector of internal revenue for the district in which that organization has its principal place of business; and that every such "true and accurate return" shall state the following facts relevant to the business of the organization making it : First: The total amount of its paid up capital stock outstanding; or if it has no capital stock, its capital em- ployed in business at the close of the year covered by the report. Second: The total amount of its bonded and other indebtedness, at the close of the year covered by the report. Thied: In the case of an American organization, the gross amount of its income, received from all sources during the year covered by the report; and in the case 43 of a foreign organization, the gross amount of its in- come, received during tlie year covered by the report, from capital invested and business transacted in the United States. Fourth: In the case of an American organization, the total amount of its ordinary and necessary expenses, paid out of earnings in the maintenance of its business and property, during the year covered by the report, stating separately all rentals or other payments, required to be made as a condition to the continued use or posses- sion of property; and in the case of a foreign organiza- tion, the same facts relevant to its business transacted in the United States, during that year. Fifth : In the case of an American organization, the total amount of all losses, actually sustained during the year covered by the report, and not compensated by in- surance or otherwise, stating separately any amounts al- lowed for depreciation of property; and in the case of a foreign organization, all losses actually sustained by it during the year covered by the report, in business con- ducted by it within the United States, not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property. Sixth : In the case of an American organization, the amount of interest accrued and paid within the year covered by the report, on its bonded or other indebted- ness, not exceeding one half of the sum of its interest bearing indebtedness and its paid up capital stock, out- standing at the close of that year ; or, if it has no capital stock, then the amount of interest paid within that year, on an amount of indebtedness, not exceeding the amount of capital employed in the business at the close of that year; and in the case of a bank, banking association oi trust company, stating separately all interest paid within that year, on deposits. 44 In the case of a foreign organization, the facts rele- vant to interest, which the statute requires to be stated, in its "true and accurate return," are so ambiguously defined in the statute, that recourse must be had to the form of return, to be hereafter prescribed by the Com- missioner of Internal Revenue, for information of the precise character of those facts. What the statute says on that subject, is printed in the language which begins with the second word from the end of line 9, and ends with the sixth word from the beginning of line 21, of page 123, of that copy of the statute which comprises the appendix to this pamphlet. Seventh : The amount paid by it during the year cov- ered by the report, for taxes imposed under the authority of the United States, and separately the amount paid during that time by it, for taxes imposed by the Govern- ment of any foreign country. The statute also provides that every insurance com- pany shall report the net addition, if any, required by law to be made within the year covered by the report, to its reserve funds, and shall also report whatever sums, other than dividends, it has paid within that year, on insurance contracts or on annuity contracts. The statute also contains, in respect of all American and all foreign life insurance companies, a provision that such a company shall not include as income in any year, such portion of any actual premium, received from any individual policyholder, as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder within such year. The statute also provides, in respect of all American and all foreign mutual fire insurance companies, which require their members to make premium deposits to pro- vide for losses and expenses, that they shall not return 45 as income, any portion of those premium deposits wHcli they shall have returned to their policyholders ; but shall return as taxable income, all income received by them from all other sources, plus such portion of the premium deposits, as are retained by the companies, for purposes other than the payment of losses and expenses and rein- surance reserves. The statute also contains, in respect of all American and all foreign mutual marine insurance companies, a provision that they shall include in their return of gross income, the gross premiums collected and received by them, less the amounts paid by them for reinsurance ; but that those companies shall be entitled to include in their deductions from gross income, the amounts repaid to policyholders on account of premiums previously paid by them, together with whatever interest has been paid upon such amounts between the ascertainment thereof, and the payment thereof. The statute also provides that every corporation, joint stock company or association or insurance company, shall state in its "true and accurate return" its net in- come, after making the deductions authorized by Subsec- tion G of the statute ; which are the deductions specified, in respect of American organizations, in Section 3 of this chapter of this pamphlet, and which deductions, in respect of foreign organizations, are those specified in Section 3 as modified by Section 4 of this chapter: and all of which deductions are provided for in paragraph b of Subsection G- of the statute; and which paragraph is printed on pages 115 to 119 inclusive, of that copy of the statute which constitutes the appendix to this pamph- let. 46 CHAPTER IV. INCOME TAX ASSESSMENTS. Section 1. Collecting Data for Assessments. Though the income tax law provides that every per- son, corporation, joint stock company, association and in- surance company, which ought to pay an income tax, shall furnish the proper foundation for its assessment, by making a proper income tax return for each calendar year, or for each fiscal year, as the case may be, and delivering that paper to the proper collector of internal revenue, within two months after the end of the year which it covers; that law contemplates the possibility that the performance of that duty, will be omitted in some cases, unless it is prompted by the danger of some penalty, or by the action of some official person. The penalty which the statute prescribes to be in- flicted upon any person, who ought to make an income tax return for any particular calendar year, on or before March 1, of the next year, but who neglects or refuses to do so, is a fine of not less than $20, nor more than $1,000. And the statute provides that any such person who, with intent to defeat or evade the assessment required by the statute, makes his return false or otherwise fraud- ulent, is guilty of a misdemeanor, and shall be fined not exceeding $2,000, or be imprisoned not exceeding one year or both, at the discretion of the court, with the costs of prosecution. Any corporation, joint stock company, association or insurance company, which ought to make an income re- turn for any calendar year or fiscal year, but which neg- lects or refuses to do so, within the time 'or times specified 47 in the statute, or wMch. renders a false or fraudulent return, is subjected by the statute to a penalty not ex- ceeding $10,000. And the statute provides that any officer of any corporation, who is required by law to make, render, sign or verify any income tax return, on behalf of that corporation, and who makes any false or fraudulent return or statement, with intent to defeat or evade the assessment required by the statute, is guilty of a misdemeanor, and shall be fined not exceeding $2,000, or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. Those provisions of the statute which are stated in the last two paragraphs, comprise the substance of Sub- section F, and of the last paragraph of Subsection G, of the statute. But those parts of the statute must be read and construed in connection with those parts of Sub- section I, of the statute, which contain Sections 3173, and 3176, of the Revised Statutes of the United States, in the extended forms into which those two sections are amended by the income tax statute. The relevant pro- visions of those two amended sections of the Eevised Statutes are as follows : If any person, who ought to make an income tax re- turn, for any particular calendar year, on or before March 1, of the following year, fails to do so, but con- sents to disclose to the proper collector of internal rev- enue, or his deputy, all the facts which ought to be stated in that return; it is the duty of that collector or deputy collector, to make out such a return as will properly state those facts, which paper being distinctly read by or to, ^ncl consented to, and signed and verified by, the person required to make it, shall be received and treated as his own return. In case no annual income tax return has been rend- ered by a person who ought to do so, as required by the 48 statute, and in case that person is absent from Ms or her residence or place of business, at the time the col- lector or deputy collector calls there to get the required return; it is the duty of that collector or deputy collector to leave at that place, with some person of suitable age and discretion, if any such person is present, or other- wise to deposit in the nearest post office, a note or mem- orandum, addressed to the person who ought to make the return, requiring him or her to render, to such col- lector or deputy collector, the required return, verified by oath or affirmation, within ten days from the date of such note or memorandum. If thereupon, that person fails to render such a return within that time, or delivers any return which, in the opinion of the collector, is false or fraudulent, or contains any understatement, the col- lector may summon that person, or any other person, to appear before him. at a time and place named in the sum- mons, and to produce any and all relevant account books, and to give any proper sworn testimony, relevant to the question of the honesty or dishonesty of the return under investigation To enable the collector to make that investigation thoroughly, the statute provides that he may summon any person, found within the state in which his district lies; and that when any person whom he wishes to summon, can not be found in that state, that the collector may enter any other collection district in the United States where that person can be found, and may there require him to furnish whatever testimony and other evidence he can supply, relevant to the correctness or incorrectness of the return, which in the opinion of the collector, may be false or fraudulent or otherwise erroneous. To enable the collector of internal revenue to enforce this requirement, the statute confers jurisdiction upon the District Courts of the United States, to compel 49 obedience to any such summons, after being properly issued and served, by any collector of internal revenue. When any person, corporation, company or associa- tion, refuses or neglects to render an income tax return as required by law, or renders a false or fraudulent re- turn, the proper collector of internal revenue, or any deputy of his, shall make a return for the person or or- ganization in default, according to the best information which that collector or deputy collector can obtain. And the return so made, when subscribed by such collector or deputy collector, will be held to be prima facie good and sufficient, for all legal purposes. In case the default consisted in intentional fraud or falsehood, it will be the duty of the Commissioner of Internal Revenue, when he comes to assess the iucome tax, upon the return which has been made by the collector of internal revenue for the party guilty of that fraud or falsehood, to add one hundred per cent to the amount of the tax called for by the face of that return. In case the default consisted in omission to make any return by reason of sickness or absence, the collector, before making a return himself, for the party in that default, may extend the time allowed by the statute to that party for making his return, but that extension can not exceed thirty days. In case the default consisted in refusal to make any return, or in neglect to do so for any other cause than sickness or absence, it will be the duty of the Commis- sioner of Internal Revenue, when he comes to assess the income tax, upon the return which has been made by the collector of internal revenue for the party chargeable with that default, to add fifty per cent to the amount of the tax called for by the face of that return. And in any case, whatever amount is thus added by the Commissioner of Internal Revenue to the amount of 50 tax called for by the face of the return, will be collected at the same time and in the same manner as the nnin- creased tax itself; except where the cause for the increase is discovered after the unincreased tax has been paid, in which case the amount added will be collected in the same manner as the original tax. The income tax statute also amends Section 3172, of the Eevised Statutes of the United States, in such a way as to make it the duty of every collector of internal rev- enue, from time to time, to cause his deputies to proceed through every part of his district, and inquire after and concerning, all persons therein, who are liable to pay any internal revenue tax. Wherever and whenever such a person is thus discovered, the collector of internal rev- enue will call upon him to make and deliver a proper income tax return for himself. Whereupon it will be the duty of that person to proceed so to do, in accordance with those provisions of the statute which are explained in Chapter 3 of this pamphlet. Section 2. making assessments of income taxes. The income tax law provides that all assessments of taxes thereunder shall be made by the Commissioner of Internal Eevenue, and that all persons shall be notified of the amounts for which they are respectively assessed on or before the first day of June of each successive year, and that those amounts are to be paid before the end of that June. The statute also provides that when any income tax remains due and unpaid after the end of June in any year, the collector of internal revenue having jurisdiction of the case, shall furnish to the party in default, a notice 51 thereof, and a demand that the unpaid tax shall be paid forthwith; and that if the non-payment continues ten days longer, five per cent of the unpaid amount shall be added thereto ; and that one per cent shall be added there- to, at the end of every calendar month after the month of June in which the tax became payable. On this point, the statute makes an exception in favor of the estates of insane, deceased or insolvent persons ; so that in those cases, neither the five per cent addition, nor the one per cent addition is authorized to be made. But the statute also provides, that in any case where- in no return has been made for a particular year, and in any case wherein the Commissioner of Internal Revenue ■discovers after the tax has been paid upon a particular return, that that return was false or fraudulent, the Com- missioner may make a return for the party in default, at any time within three years after a true and accurate return was due from that party, and may make that re- turn, according to the best information which he can obtain, and may thereupon assess the proper income tax upon the return so made by him ; which income tax must be paid by the person or persons against whom it is thus assessed, immediately upon notification to them of the amount of such assessment. The statute also provides that the Commissioner of Internal Eevenue, when making an assessment of a per- sonal income tax for the year 1913, shall charge the per- son being assessed with only five-sixths of whatever amount of income tax appears to be called for by the in- come tax return for that year in that case. Thus the statute makes the income tax law retroactive as far back as March 1, 1913, but no further. As to all calendar years after 1913, the statute provides that all personal income taxes, shall be assessed for those years separately. 52 The statute also amends Section 3167, of tlie Revised Statutes of the United States, so as to make it prohibit all collectors, deputy collectors, agents, clerks, or other officers or employees of the United States, from divulg- ing, in any manner not provided by law, to any person whatever, any operation, style of work, or apparatus of any manufacturer or other producer, visited by him in the discharge of his official duties; and also from like- wise divulging the amount or source of any income, profit, loss, expenditure, or any particular thereof, which is dis- closed in any income return of any person or corpora- tion; and also from permitting any income return or copy thereof, or any book containing any abstract or par- ticular thereof, to be seen or examined by any person, except as provided by law. And the same section of the Bevised Statutes as thus amended, makes it unlawful for any person to print or publish in any manner what- ever, not provided by law, any income return or any part thereof, or the amount or source of any income, profit, loss, or expenditure appearing in any income return. And the same section as thus amended, provides that whoever violates any of its prohibitions is guilty of a misdemeanor, and shall be punished by a fine not exceed- ing $1,000 or by imprisonment not exceeding one year, or both, at the discretion of the court; and that if the offender is an officer or employee of the United States, he shall be dismissed from office, and be incapable there- after of holding any office under the Grovernment. But the income tax statute also provides in para- graph d of Subsection G, that after the income tax in a particular case has been assessed by the Commissioner of Internal Revenue, the income tax return in that case, together with any correction thereof which may have been made by the Commissioner, shall be filed in his office, and shall constitute a public record; but that those papers 53 shall not be open to inspection, except upon tlie order of the President of the United States, under rules and regulations to be prescribed by the Secretary of th.e Treasury and approved by the President ; except that the proper officers of any State which imposes a general in- come tax, may upon the request of the Governor of that State, have access to such return, or to an abstract there- of, so far as to learn therefrom the name and income of each corporation, joint stock company, association or insurance company which, may be or may become subject to income taxation in that State. CHAPTER V. TERRITORIAL SCOPE OF THE STATUTE. The States which co-operated, through their dele- gates, in framing the Constitution of the United States in 1787, were New Hampshire, Massachusetts, Con- necticut, New York, New Jersey, Pennsylvania, Dela- ware, Maryland, Virginia, North Carolina, South Caro- lina and Georgia. But the States, which ratified that Constitution, and thus originally constituted the nation, which is named in the Constitution as the ' ' United States of Ajnerica," and which established in 1789, the consti- tutional government of that nation, included only eleven of the twelve, whose delegates had participated in fram- ing the Constitution two years before. For North Caro- lina declined to join in establishing that government, and only eleven States became members of the newly established United States of America, until some time af- ter "Washington was inaugurated as the first president of the new nation. During the first one hundred and twenty-three years after "Washington's inauguration, as president of the 54 then eleven United States of America, thirty-seven other States were admitted into that union; so that now in 1913, the United States of America is a nation composed of forty-eight States. The income tax law primarily applies to all of those forty-eight States, without any deviation from uniform- ity; except so far as deviation from uniformity of result, may be caused by deviation from uniformity of income among the persons and organizations which may happen to reside or be taxed in one State or another. The United States as a nation, is the paramount owner of many parts of the surface of the earth, which are separated from each other, by oceans or by parts of oceans. Congress derives its power to legislate for those parts of the earth's surface, from paragraph 16, of Sec- tion 8, of Article I, and from paragraph 2, of Sec- tion 3 of Article IV of the Constitution of the United States. The principal areas and islands which are now the paramount property of the United States, are designated in the statutes of the United States, as follows, re- spectively. The "District of Alaska," which was ceded to the United States by Kussia in 1867. The "District of Columbia," which, during Washing- ton's administration, was ceded to the United States by the State of Maryland. The "Territory of Hawaii," which comprises the Hawaiian Islands, which formerly constituted the Ee- public of Hawaii, but which were annexed to the United States by act of Congress in 1898. The "Philippine Islands," which were acquired by the United States from Spain in 1898. "Porto Eico," which comprises the island of Porto Eico and the adjacent islands, lying east of the seventy- 55 fourtli meridian of west longitude, all of whicli were ceded to the United States by Spain in 1898. All these five possessions are subject to the income tax law. That subjection is uniform in respect of the operation of the statute upon persons, and organizations to be taxed, and in respect of the methods of ascertaining the incomes and assessing the taxes of those classes of taxpayers respectively. For Subsection H, of the statute provides that the word ' ' State " or " United States ' " when used in the statute, shall be construed to include any Territory, Alaska, the District of Columbia, Porto Rico and the Philippine Islands, when such construction is necessary to carry out its provisions. But Subsection M of the statute provides that the administration of the income tax law and the collection of the income taxes, in Porto Eico and the Philippine Is- lands, shall be by the appropriate internal revenue offi- cers of those governments ; and that all income taxes col- lected in Porto Eico and the Philippine Islands, shall accrue to the general governments of those two posses- sions, respectively; and that the jurisdiction which the statute confers upon the District Courts of the United States, in the forty-eight States, is vested in the courts of first instance of the Philippine Islands, in respect of the administration of the income tax law in those islands ; and that the compensations paid to officials of the District of Columbia, Porto Eico, or to officials of the Philippine Islands, or any political subdivision thereof, are subject to the income tax law. In this respect, those compensa- tions agree with the compensations of all officers of the United States, except the President and the Federal judges who were in office on October 3, 1913 ; while they disagree with the compensation, of all officers and em- ployees of any State or any political subdivision thereof^ except where such a man is paid by the United States. 56 CHAPTER VI. ADMINISTRATIVE PROVISIONS. Sectiotst 1. relevant to income taxes collected at theib sotjbces. Subsection J of the income tax statute provides that it is the duty of every collector of internal revenue to whom any payment of income tax is made, to give to the person making that payment, a written or printed receipt, stating the amount paid, and the particular account for which it is paid; and that, when required by any person paying any income tax as a debtor on behalf of separate creditors, any collector of internal revenue shall give a separate receipt to that debtor, for each tax thus paid by him ; and that each separate receipt shall be in such form, that the debtor can conveniently and separately present it to the creditor to whose tax it refers, in satisfaction of his debt, to the amount specified in such receipt. And this subsection of the statute also provides that such a receipt shall be suflRcient evidence in favor of such a debtor, to justify him in withholding the amount ex- pressed therein, from his next payment to that creditor ; but that such creditor may require the surrender to him of that receipt, upon giving to that debtor a written re- ceipt, acknowledging the payment to him, of whatever sum of money, he may have actually received from the debtor, and accepting the (Collector's income tax receipt, as part payment of the debt due to him. 57 Sbotion 2. kea:,evant to general administblatiok. Subsection L, of th.e income tax statute, provides that all administrative, special and general provisions of law, including all laws in relation to the assessment, remission, collection and refunding of internal revenue taxes, not specifically repealed prior to October 3, 1913, and not inconsistent with the provisions of the income statute, are applicable to all the provisions of that statute, and to the taxes imposed thereby. Subsection N, of the statute appropriates a large sum of money, and makes many administrative arrange- ments, for the execution of that law, by the Commissioner of Internal Revenue, under the general direction of the Secretary of the Interior. That subsection is printed in two long paragraphs, on pages 131 and 132 of the appen- dix to this pamphlet; wherein it will be seen that the power of the Commissioner of Internal Revenue to ap- point one deputy commissioner, and all necessary of- ficers, agents, inspectors, deputy collectors, clerks, messengers, janitors and other employees, to act under him, in executing the income tax law, is unlimited ; except that it is to be exercised with the approval of the Secre- tary of the Treasury, and except that the salaries and wages to be paid to the persons appointed, are specifi- cally limited in some cases, and in other cases are limited to the rates of compensation now being paid for similar work, in the internal revenue service. 58 CHAPTER VII. THE CORPORATION TAX LAW OF 1909. The United States tax law which was approved by- President Taft August 5, 1909, was like the United States tax law which was approved by President Wilson Octo- ber 3, 1913, in being mainly devoted to regulating com- merce with foreign nations, by means of tariff enact- ments, applicable to imports of commodities. But that tax law of 1909, instead of containing any provision for income taxes, by that name, as does the tax law of 1913 in its Section II, did contain an elaborate system of pro- visions for excise taxes, with respect to any doing of business, by corporations, joint stock companies, asso- ciations and insurance companies, in any State or Ter- ritory of the United States, or in Alaska or in the Dis- trict of Columbia. That system of provisions was made in Section thirty-eight, of the tax law of 1909, and was there formulated in eight subsections. Now subsection S, of Section IV, of the tax law of October 3, 1913, expressly repealed the whole of the tax law of August 5, 1909, with some Provisos, which are operating to retain that statute in force, in some of its parts, to some extent, and for some purposes. Among those Provisos, is one which enacts that all excise taxes, provided for by Section thirty-eight of that statute, which accrued or were imposed for the year 1912, shall be attended to and collected, in the same man- ner and under the same provisions, liens, and penalties as if that section had continued in force. Another of those Provisos enacts that an excise tax with respect of doing business, equivalent to one per cent upon their respective net incomes, shall be levied, assessed and collected, upon all corporations, joint stock 59 companies, associations and insurance companies, of the character described in said Section thirty-eight, for the months of January and February, 1913 ; which tax shall be computed upon one-sixth of the respective net in- comes of the said organizations for the year 1913, and which net incomes are to be ascertained in accordance with the provisions of Subsection G, of Section II of the tax statute of October 3, 1913, and which Section 11, is the income tax portion of that statute. Another of those Provisos is one which enacts that the provisions of said Section thirty-eight of the tax statute of August 15, 1909, relative to the collection of taxes therein imposed, shall remain in force, for the pur- pose of the collection of the said excise taxes, for the months of January and February, 1913 ; except that any corporation, joint stock company, association or insur- ance company, may include in one return, a report of its income for January and February, 1913, and a report of its income for the last ten months of that year ; and that the Commissioner of Internal Revenue may use that re- turn, as the basis of his assessment of the excise tax upon that organization for the first two months of 1913, and may also use it as the basis of his assessment of the income tax upon that organization, for the last ten months of that year. INSERTION. 62 A CRITICISM OF THE SPEER PAMPHLET. On the third day after President Wilson signed the Federal tax law of 1913, including the Federal income tax law, the Corporation Trust Company of 37 Wall Street, New York City, published a pamphlet, which it had procured to be written and compiled by Luther F. Speer. He was then the head of the Corporation Tax Division of the Internal Eevenue Department of the United States Treasury; but on October 8, 1913, he was, with the approval of the Secretary of the Treasury, ap- pointed by the Commissioner of Internal Eevenue, to be the deputy commissioner, who is to represent the Com- missioner of Internal Eevenue, in the performance of the functions imposed- by the income tax law, upon that officer of the Government. That Speer pamphlet comprises 107 pages, the last thirty of which constitute a substantially true copy of Section II, of the Federal tax law of October 3, 1913; plus a substantially true copy of those portions of Sec- tion IV, of that tax law, which relate to the corpora- tion tax law of August 5, 1909. There is no error in that copy of that Section II, except one which does not affect the meaning of the sentence in which it occurs. And there is no error in the Speer pamphlet copy of part of that Section IV. except that it is headed "Sec- tion V." Pages 66 to 77, of the Speer pamphlet are devoted to a list of the locations of the offices of the sixty-three internal revenue collection districts, into which the forty- eight States and the Territory of Hawaii, and the Dis- trict of Alaska are divided ; and that list also sets forth the States and the counties or other political subdivisions of States, which comprise those districts respectively; the Territory of Hawaii being, however, a district by itself, and Alaska being included with the State of Wash- ington, as one district. Pages 7 to 65, of the Speer pamphlet, are devoted to an analysis and explanation, written by him, of what he understands to be those provisions of the income tax law, which constitutes Section II. of the Federal tax law of October 3, 1913, and which income tax law is printed on pages 78 to 106 of the Speer pamphlet. Mr. Speer 's analysis and explanation of the provi- sions of the income tax law, is a work which derives its importance from the fact that he is the officer of the United States Government who is charged with the ad- ministration of that statute, everywhere except in Porto Rico and the Philippine Islands. This importance is so great, that the many hundreds of thousands of per- sons and corporations who are liable to be taxed under that statute, are entitled to whatever benefit they may derive, from any candid criticism which may be made of Mr. Speer 's interpretation of the law, which Congress has enacted, and which is as binding upon Mr. Speer, as it is upon any other person, or on any corporation. And I who have subjected Mr. Speer 's pamphlet to a criti- cal analysis, with the result of discovering its non-con- formity to the statute in a number of important respects, believe it to be my duty to disclose the errors which I have discovered. Those errors are the following: First. — In respect of the interest upon the obliga- tions of a State or any political subdivision thereof, and the interest upon any obligations of the United States or its possessions ; the Speer pamphlet takes the ground, that any corporation which receives any such interest (by reason of being the holder of any United States bond, State bond, or municipal bond, or any other obli- gation of the United States, or any of its possessions. 64 or of any State or of any subdivision thereof), is sub- jected, by the income tax statute to an income tax of one per cent upon that interest. If this had been a provision of the statute it would have subjected many of the insurance companies, banks, trust companies and other corporations of the United States, to resulting taxes, amounting to several millions of dollars each year. And such a provision would per- manently operate, through those corporations, to tax every State government and every municipal govern- ment between the two oceans and also likewise tax the government of every /county or other political subdivi- sion of a State, which may hereafter be obliged to sell its bonds to corporations. But the Speer pamphlet is out of conformity with the statute on this subject. For the sixth paragraph of the statute (which is printed in the upper half of page 105 of that copy of the statute which constitutes the ap- pendix to this pamphlet, and which is printed in the upper half of page 82 of the Speer pamphlet) provides : "That in computing net income under this section there shall be excluded the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions." And the word "section" in this place, as in every other place where it occurs in the income tax statute, signifies that entire statute ; for that entire statute is Section II, of the Federal tax law of October 3, 1913. Second. — The Speer pamphlet, on page 12, contains the following sentence: "Persons receiving fees or emo- luments for professional or other services, as in the case of physicians or lawyers, should include actual re- ceipts for services rendered in the year for which return is made ; together with all unpaid accounts, charges for 65 services or contingent income due for that year, if the same are considered good and collectable." The idea that the statute obliges a laAvyer or a doctor to somehow raise money with which to pay, during the month of June of each calendar year, an income tax upon the as yet unpaid fees which he earned during the preced- ing calendar year, even though he has not received and may never receive payment of those fees, is an extraordi- nary idea, which can not be supported by reference to the statute. On the contrary, the statute provides, in the third paragraph that the items which are to be in- cluded in the gross income of a person, are such items of gains, profits, and income as that person "derived" from any source whatever. In the English language, the verb "derive" is a synonym of the verb "receive"; and the adjective "derivable" is a synonym of the ad- jective "receivable". If the statute had used, in its third paragraph, the adjective "derivable," or the adjective "receivable" Mr. Speer'e pamphlet would have been right on this point. But as the statute never uses any such word as "derivable" or "receivable" in respect of the items of the gross income of any person; it was a plain error for Mr. Speer to interpret the statute as if it had used one or the other of those adjectives, in that connection. Mr. Speer's erroneous idea on this point appears to have entered his mind from the word "ac- cruing, ' ' where it appears in the first paragraph, and also in the eighth paragraph, of the statute, in reference to the "net income" of a person. But in both those places, and everywhere else in the statute, where the word "accruing" is similarly used, the implication is that a net income "accrues" from a gross income; though the gross income is everywhere said to be "derived" or "received" as money from the various sources of money, which are specified in the statute. The statutory use of 66 the word "accruing," is accurately proper; for the net income to which it is applied does "accrue" from the gross income, through a process of successive deductions which is prescribed by the statute, as the proper method of ascertaining the amount of the net income which ac- crues from the gross income. Third. — The Speer pamphlet on page 12 contains the following sentence : "Debts may be considered to be found worthless, only after legal proceedings to recover the same have proved fruitless, or it is clearly evident that the debtor is insolvent, and that proceedings to collect the debt would avail nothing." This would be an absurd provision to put into the statute, for legal proceedings to recover a debt could not be "proved fruit- less" without the expenditure of more money than the creditor could afford, and without the passage of months or even years during the litigation. And nothing but litigation would make it "clearly evident" that a debtor is insolvent, and that proceedings to collect the debt would avail nothing. Fortunately, this idea of Mr. Speer has no foundation in the statute; for the statute clearly authorizes debts due to the taxpayer, to be deducted from his gross income, in ascertaining his net income, when- ever such a debt is ascertained, to the satisfaction of the taxpayer, to be worthless, and is thereupon "charged off" by him from his account books. Fourth. — The Speer pamphlet on page 12, contains the following sentence: "The interest accrued during the year on notes, bonds, or other evidence of indebted- ness, if good and collectable at the end of the year, should be returned as income, whether actually collected or not. Accrued interest means interest due and payable." Mr. Speer 's error on this point consists in implying that the 67 statutory word whicli characterizes whatever interest is to be included in gross income is the word "accrued;" whereas the word which the statute really uses in that behalf is the word "derived." Fifth. — On page 15, of the Speer pamphlet, its author correctly quotes the statutory provision for the second deduction to be made from gross income when ascertain- ing net income, as follows: "All interest paid within the year by a taxable person on indebtedness." But the author undertakes to limit that statutory language, by saying that it should not include any interest paid within the year, which was payable in some previous year, though actually paid within the year referred to by the statute. In order to make the statute convey Mr. Speer 's idea, it would have to be amended by inserting after the word "year," the words " and not payable in any previous year." Neither Mr. Speer nor anybody else, has any authority to amend the statute by any such limitation. Sixth. — The Speer pamphlet on page 15, contains the following sentence: "While the law reads that all taxes of the nature mentioned, which are paid within the year are deductible, it will require a ruling of the Treasury Department to determine whether such payments will be limited to the taxes falling due within the year for which return is made, or whether the payment of accumulated taxes which were due in previous years will also be al- lowed as deductions." This statement is erroneous, in expressing the idea that the Treasury Department has power to make a ruling to insert in the statute, a limita- tion which is absent and which is admitted to be absent from the statute itself. 68 Seventh. — Page 18, of the Speer pamplilet, among other things in its first paragraph, states that certain offi- cial compensations are exempt from the income tax, among which are said to be "the compensations of all officers and employees of a State or any political subdivi- sion thereof. ' ' But the statute contains an exception to this exemption. That exception covers ail cases, wherein the compensation of any officer or employee of any state or political subdivision thereof, is paid by the United States Government, as plainly appears at the end of the sixth paragraph of the statute. Eighth. — The Speer pamphlet on page 33 contains the following paragraph: "The language of the law pro- viding that the net income to be reported shall include accruals as well as actual income, will also dispose of many troublesome questions as to what shall be reported as income, in the return of annual net income." The error in this statement consists in implying that the "ac- cruals" of net income, to which the law refers are ac- cruals of rights to receive gross income; whereas they are really expressed in the statute as being "accruals" of net income from gross income. Mr. Speer is entirely mistaken in construing the statute to mean that it pro- poses to extort income taxes from persons, on all moneys which they were entitled to receive during a particular calendar year, even though they did not receive them during that year, and even though they may never receive them at all. Ninth. — ^Page 37, of the Speer pamphlet contains the following sentences : "The returns of corporations must show the gross income derived from the business, prop- erties and every other source, and the allowable deduc- tions therefrom will determine the amount of net income. 69 Gross income must show the income arising or accruing from all sources during the preceding calendar or fiscal year." These two sentences show that Mr. Speer con- strues the word "accrue" as if it were a synonym of the word "derive," which it plainly is not. For a sum of money accrues when it becomes receivable, but it is not derived untU it is received. The statute properly uses the words "derived" and "received" as synonmous. For where and when it defines the gross income of a per- son, from which his taxable net income "accrues" by a process of successive deductions, it speaks of that gross income as being "derived from any source whatever." And when and where it defines the gross income of a corporation from which its taxable net income ' ' accrues ' ' by a process of successive deduction, it speaks of that gross income as "received from all sources." That statutory use of the word "derived" can be found in line 14, and also in 22 of page 103 of that copy of the statute which constitutes the appendix to this pamphlet; while that statutory use of the word "received" can be found in line 18 of page 115 of the same copy of the statute. Tenth. — Another instance wherein Mr. Speer mis- quotes the statute by substituting his word "accruing" for the statutory word "received," occurs in the third paragraph of page 52 of the Speer pamphlet. On that page Mr. Speer begins his account of the eight parts of a statutory income tax return to be made by corporations. That account literally copies from the statute, the first of those eight statutory parts. But instead of copying the third of those eight statutory provisions, the Speer pamphlet alters it by substituting the words ' ' arising or accruing" for the word "received," in each of both places where the statute uses the word "received" to designate the gross income which it requires each cor- 70 poration to report. Thus it again appears that Mr. Speer has determined to create apparent authority for himself, to levy an income tax upon money which a cor- poration was entitled to receive, but did not receive dur- ing the year covered by the tax. To that end, when pur- porting to quote the statute literally, he altered the stat- utory language, in the third paragraph of that page, by substituting the words "arising or accruing" for the word "received," in two places in that paragraph. But there was no more accuracy maintained in making that alteration, than would be involved in the president of a national bank including "bills receivable" among the items of "cash on hand" in making up a report to the Controller of the Currency. Eleventh : The fourth paragraph of page 52, of the Speer pamphlet purports to state the fourth part of such a corporate income tax return, as is prescribed by the statute to be made by each corporation, joint stock company, association or insurance company, which is subject to the income tax law. These statutory parts of such a report are all described in paragraph c of sub- section Gr of the statute, under regularly numbered heads from first to eighth, inclusive. But the fourth of those parts is misquoted on page 52 of the Speer pamphlet. In respect of American corporations, the statute provides that such a corporation shall report the total amount of all its ordinary and necessary expenses, paid out of earn- ings, in the maintenance and operation of its business and property; but the Speer pamphlet alters the word "paid" to the word "incurred," and omits the statutory limitation relevant to earnings. So also in respect of foreign corporations, the Speer pamphlet alters the stat- .utory word "paid" to Mr. Speer 's word "incurred." 71 Twelfth: The paragraph which occupies the lower half of page 52, and the upper half of page 53, of the Speer pamphlet, purports to be a paraphrase of the stat- utory provisions relevant to the fifth part of a corpor- ate income tax return. Those statutory provisions are printed on pages 121 and 122, of that copy of the statute which constitutes the appendix to this pamphlet ; and that printing begins with the word "fifth" in line 9 of page 121, and ends with the word "year," in the second line from the bottom of page 122. That fifth part of a cor- porate tax return relates to losses during the year cov- ered by such return. But the Speer definitions of those losses are substantially different from the statutory defi- nitions thereof. Thus where the statute deals Avith "all losses actually sustained," the Speer pamphlet repre- sents it as dealing with "all losses actually sustained or ascertained. ' ' This difference between the statute and Mr. Speer 's account of the statute, relevant to the fifth part of a corporate tax return, is not the only such dif- ference; but it is particularly noteworthy, because the Speer pamphlet erroneously represents the statute as requiring a corporation to report all losses "ascertained" during the year covered by a report, regardless of whether those losses were incurred in that year, or int some earlier year or years or even in the last century, Thieteenth : Pages 56, 57 and 58 of the Speer pam-- phlet, contain six consecutively numbered paragraphs,, relevant to the duty of corporations, with respect to pay- ing income taxes of other parties, where the incomes uponi which those taxes are based, have their sources in those • corporations, respectively. The fourth of those para- graphs represents the statute as providing that no re- turn of income not exceeding $3,000, shall be required' in any such case. This is wrong. For the third proviso 72 in the third paragraph of subsection E of the statute, and paragraph 4 of that subsection, do provide that such a return shall be made, and that such a tax shall be paid, in any such case, although the income involved does not amount to $3,000; where that income arose from interest upon bonds, mortgages or deeds of trust, or similar obligations of any corporation, joint stock 'company, association or insurance company, or from either of two other classes of sources which are specified in that behalf, in the statute. The statutory provisions on this subject are printed on pages 111 and 112 of that copy of the statute which constitutes the ap- pendix to this pamphlet, beginning with line 8 of page 111 and ending with line 27 of page 112. And the same provisions are printed on pages 87 and 88 of the Speer pamphlet, beginning with line 23 of page 87, and ending Avith line 38 of page 88. FoxjEflPEENTK : The Speer pamphlet, in four para- graphs, beginning with line 8 from the bottom of page 37, and ending with line 7 from the top of page 39, takes the ground that any increase in the value of the prop- erty of a person or corporation during a particular year, constitutes taxable income for that year. Mr. Speer sup- ports this contention for the following "reasons": "First, the law provides that accrued income shall be re- ported: Second, an allowance for depreciation of prop- erty is made." The first of these "reasons" is destitute of founda- tion ; for the gross income of a person or corporation, ac- cording to the statute, does not include anything but in- come "derived" or "received," and because, according to the statute, the net income of a person or corporation includes nothing not included in the gross income thereof. 73 The second of Mr. Speer's "reasons," is destitute of foundation in logic; for the depreciation of property which is allowed for by the statute, is expressly confined to physical depreciation, due to depletion or exhaustion, or to wear and tear, arising out of the use or employ- ment of property. There is no analogy, by way of con- trast or otherwise, between the statutory allowance for physical depreciation of property, and Mr. Speer's prop- osition to charge the owner of property with every in- crease in the value of property, as if that increase were income which ought to be taxed. Property may decrease in physical value, or it may decrease in market value without decreasing in physical value. On the other hand, very few kinds of property ever increase in physical value, except as a result of expenditure of other property thereon. But Mr. Speer if permitted, will tax an increase of the market value of a piece of property, as if it were income ; and he under- takes to justify such taxation by an argument from analogy ; which argument he draws from the fact that the statute allows deductions from incomes, on account of de- creases in physical value of property. But the supposed analogy being absent, the conclusion drawn therefrom is logically vitiated. But Mr. Speer is the Government official who is charg- ed with the administration of the income tax law; and therefore his view of this subject must be taken seri- ously. Thus taken, it is proper to think up how it would work in particular cases. It would work as follows in such a case as the following : During the year 1909, the market value of a thousand shares of the common stock of the Union Pacific Railroad Company increased from $172,500 to $219,000. According to Mr. Speer's view of the income tax law, if that statute had been in force for the year 1909, any person who 74 then owned a thousand shares of that stock, without any desire to sell any of it, and without any money with which to buy any more of the same kind of stock, would have been charged by the collector of internal revenue with $46,500, as income on that stock, and would have been compelled to pay $465 as income tax thereon. But before that $465 would have to be paid on June 30, 1910, the market value of that thousand shares of stock de- creased to $152,250; so that when the income tax of $465, would have to be paid on account of the increase in the value 'of that stock which occurred in 1909, that entire amount of increase and $20,250 in addition thereto, would have been wiped out from the market value of the stock. And all this would have happened to a particular piece of property, the actual_ income from which is expressly ex- empt from the income tax law; that actual income being a dividend of $10,000, paid to the owner of the stock, by the Union Pacific Eailroad Company out of its net earn- ings, after those net earnings had themselves paid an income tax of one per cent to the United States. I could state many other examples of how unjustly Mr. Speer's plan to assess income taxes on increases in the market value of property would work. But I forbear. So many such examples will occur to every property owner who reads this pamphlet, that he will be sufficiently alarmed of his own accord, to try to do something toward diverting the executive government of the United States, from placing upon the income tax statute, any such sur- prising and injurious construction, as that which Mr. Speer advocates, relevant to what he calls "Income from Increased Property Values." The foregoing fourteen errors of Mr. Speer, if un- corrected by him, or by his superior officer, will cost the corporations and the people of the United States more than fourteen million dollars every year. APPENDIX. AN ACT To reduce Tariff Duties, and to provide Revenue for the Government, and for other purposes. Be it enacted by the Senate and House of Repre- sentatives of the United States of America in Con- gress assembled: Section II. A. Subdivision 1. That there shall be levied, assess- ed, collected and paid annually upon the entire net income arising or accruing from all sources in the pre- ceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United States, though not a citi- zen thereof, a tax of 1 per centxun per annum upon such income, except as hereinafter provided; and a like tax shall be assessed, levied, collected, and paid annually upon the entire net income from all property owned and of every business, trade, or profession carried 'on in the United States by persons residing elsewhere. Subdivision 2. In addition to the income tax provided under this section (herein referred to as the normal income tax) there shall be levied, assessed, and collected upon the net income of every individual an additional income tax (herein referred to as the additional tax) of 1 per centum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000, and 2 per centum per annum upon the amount by which the total net income exceeds $50,000 and does n'ot exceed $75,000, 3 per centum per annum upon the amount by which the total net income exceeds $75,000 102 and does not exceed $100,000, 4 per centum per annum upon the amount by which the total net income exceeds $100,000 and does not exceed $250,000, 5 per centum per annum upon the amount by which the total net income exceeds $250,000 and does not exceed $500,000, and 6 per centum per annum upon the amount by which the total net income exceeds $500,000. All the provisions of this section relating to individuals who are to be chargeable with the normal income tax, so far as they are applicable and are not inconsistent with this subdivision of para- graph A, shall apply to the levy, assessment, and collection of the additional tax imposed under this section. Every person subject to this additional tax shall, for the pur- pose of its assessment and collection, make a personal return of his total net income from all sources, corpo- rate or otherwise, for the preceding calendar year, un- der rules and regulations to be prescribed by the Com- missioner of Internal Eevenue and approved by the Secretary of the Treasury. For the purpose of this additional tax the taxable income of any individual shall embrace the share to which he would be entitled of the gains and profits, if divided or distributed, whether di- vided or distributed or not, of all corporations, joint stock companies, or associations, however created or 'organized, formed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to ac- cumulate, instead of being divided or distributed; and the fact that any such corporation, joint stock company, or association is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business shall be prima facie evidence 'of a fraudulent purpose to escape such tax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not 103 be construed as evidence of a purpose to escape the said tax in such case unless the Secretary of the Treasury shall certify that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Commissioner of Internal Eevenue, or any district collector of internal revenue, such corpo- ration, joint stock company, or association shall forward to him a correct statement of such profits and the names of the individuals who would be entitled to the same if distributed. B. That, subject only to such exemptions and deduc- tions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages or compensation for per- sonal service of whatever kind and in whatever form paid, 'or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of 'or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any law- ful business carried on for gain or profit, or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent: Provided, That the proceeds of life insurance policies paid upon the death of the person insured or payments made by or credited to the insured, 'on life insurance, endowment, or annuity contracts, upon the return thereof to the in- sured at the maturity of the term mentioned in the con- tract, or upon surrender of contract, shall not be included as income. That in computing net income for the purpose of the normal tax there shall be allowed as deductions: First, the necessary expenses actually paid in carrying on any business, not including personal, living, or family ex- 104 penses; second, all interest paid within the year by a taxable person on indebtedness; third, all national, State, county, school, and municipal taxes paid within the year, not including those assessed against local bene- fits; fourth, losses actually sustained during the year, incurred in trade or arising from fires, storms, or ship- wreck, and not compensated for by insurance or other- wise; fifth, debts due to the taxpayer actually ascer- tained to be worthless and charged off within the year; sixth, a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employ- ment in the business, not to exceed, in the case of mines, 5 per centum of the gross value at the mine 'of the output for the year for which the computation is made; but no deduction shall be made for any amount of expense of restoring property 'or making good the exhaustion there- of for which an allowance is or has been made. Pro- vided, That no deduction shall be allowed for any amount paid out for new buildings, permanent improve- ments, or betterments, made to increase the value of any property or estate ; seventh, the amount received as div- idends upon the stock or from the net earnings of any corporation, joint stock company, association, or insur- ance company which is taxable upon its net income as hereinafter provided; eighth, the amount of income, the tax upon which has been paid or withheld for payment at the source of the income under the provisions 'of this section, provided that whenever the tax upon the income of a person is required to be withheld and paid at the source as hereinafter required, if such annual income does not exceed the sum of $3,000 or is not fixed or cer- tain, or is indefinite, or irregular as to amount or time of accrual, the same shall not be deducted in the personal return of such person. The net income from property owned and business 105 carried on in the United States by persons residing elsewhere shall be compnted upon the basis prescribed in this paragraph and that part of paragraph G of this section relating to the computation of the net income of corporations, joint stock and insurance companies, organized, created, or existing under the laws of for- eign countries, in so far as applicable. That in computing net income under this section there shall be excluded the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions, also the compensation of the present President of the United States during the term for which he has been elected, and of the judges of the supreme and inferior courts of the United States now in office, and the com- pensation of all officers and employees of a State 'or any political subdivision thereof except when such compen- sation is paid by the United States Government. C. That there shall be deducted from the amount of the net intfome of each of said persons, ascertained as provided herein, the sum of $3,000, plus $1,000 additional if the person making the return be a married man with a wife, living with him, or plus the sum of $1,000 addi- tional if the person making the return be a married woman with a husband living with her; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife. Provided, That only one deduction of $4,000 shall be made from the aggregate in- come of both husband and wife when living together. D. The said tax shall be computed upon the remain- der of said net income of each person subject there- to, accruing during each preceding calendar year ending December thirty-first: Provided, however. That 106 for the year ending December thirty-first, nine- teen hundred and thirteen, said tax shall be com- puted on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five- sixths only of the specific exemptions and deductions herein provided for. On or before the first day of March, nineteen hundred and fourteen, and the first day of March in each year thereafter, a true and accurate return, under oath or affirmation, shall be made by each person of lawful age, except as hereinafter provided, subject to the tax imposed by this section, and having a net income of $3,000 or over for the taxable year, to the collector of internal revenue for the district in which such person resides or has his principal place of busi- ness, or, in the case of a person residing in a foreign country, in the place where his principal business is carried on within the United States, in such form as the Commissioner of Internal Eevenue, with the approval of the Secretary of the Treasury, shall prescribe, set- ting forth specifically the gross amount of income from all separate sources and from the total thereof, deduct- ing the aggregate items or expenses and allowance here- in authorized; guardians, trustees, executors, adminis- trators, agents, receivers, conservators, and all persons, corporations, or associations acting in any fiduciary capacity, shall make and render a return of the net in- come of the person for whom they act, subject to this tax, coming into their custody or control and manage- ment, and be subject to all the provisions of this section which apply to individuals: Provided, That a return made by one of two or more joint guardians, trustees, executors, administrators, agents, receivers, and con- servators, or other persons acting in a fiduciary capacity, filed in the district where such person resides, or in the 107 district where the will or other instrument under which he acts is recorded, under such regulations as the Sec- retary of the Treasury may prescribe, shall be a suffi- cient compliance with the requirements of this para- graph; and also all persons, firms, companies, copart- nerships, corporations, joint stock companies or asso- ciations, and insurance companies, except as hereinafter provided, in whatever capacity acting, having the con- trol, receipt, disposal, or payment of fixed or deter- minable annual or periodical gains, profits, and income 'of another person subject to tax, shall in behalf of such person deduct and withhold from the payment an amount equivalent to the normal income tax upon the same and make and render a return, as aforesaid, but separate and distinct, of the portion 'of the income of each per- son from which the normal tax has been thus withheld, and containing also the name and address of such person or stating that the name and address or the address, as the case may be, are unknown: Provided, That the provision requiring the normal tax of individuals to be withheld at the source of the income shall not be con- strued to require any of such tax to be withheld prior to the first day of November, 1913. Provided, further, That in either case above mentioned no return of income not exceeding $3,000 shall be required: Provided, fur- ther. That any persons carrying on business in partner- ship shall be liable for income tax only in their individ- ual capacity, and the share of the profits of a partner- ship to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid, under the provisions of this section, and any such firm, when requested by the Commissioner of Internal Kevenue, or any district collector, shall forward to him a correct statement of such profits and the names 'of the Individ- 108 uals who would be entitled to the same, if distributed: Provided, further, That persons liable for the normal income tax only, on their own account or in behalf of another, shall not be required to make return of the in- come derived from dividends on the capital stock or from the net earnings of corporations, joint stock com- panies or associations, and insurance companies taxable upon their net income as hereinafter provided. Any per- son for whom return has been made and the tax paid, or to be paid as aforesaid, shall not be required to make a return unless such person has other net income, but only 'one deduction of $3,000 shall be made in the case of any such person. The collector or deputy collector shall require every list to be verified by the oath or affirma- tion of the party rendering it. If the collector or dep- uty collector have reason to believe that the amount of any income returned is understated, he shall give due notice to the person making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated may increase the same accordingly. If dissatisfied with the decision of the collector, such person may submit the case, with all the papers, to the Commissioner of Internal Eev- enue for his decision, and may furnish sworn testimony of witnesses to prove any relevant facts. E. That all assessments shall be made by the Com- missioner of Internal Eevenue and all persons shall be notified of the amount for which they are respectively liable on or before the first day of June of each suc- cessive year, and said assessments shall be paid on or be- fore 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 Commis- sioner of Internal Revenue shall, upon the discovery 109 thereof, at any time within three years after said re- turn is due, make a return upoil information obtained as provided for in this section or by existing law, and the assessment made by the Commissioner of Internal Eevenue thereon shall be paid by such person or per- sons immediately upon notification of the amount of such assessment; and to any sum or sums due and un- paid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of 5 per centum on the amount of tax unpaid, and interest at the rate of 1 per centum per month upon said tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons. All persons, firms, copartnerships, companies, corpo- rations, joint stock companies or associations, and insur- ance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, admin- istrators, agents, receivers, Conservators, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, com- pensation, remuneration, emoluments, or other fixed 'or determinable annual gains, profits, and income of another person, exceeding $3,000 for any taxable year, other than dividends on capital stock, or from the net earnings 'of corporations and joint stock companies or associations subject to like tax, who are required to make and ren- der a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby au- thorized and required to deduct and withhold from such annual gains, profits, and income such sum as will be sufficient to pay the normal tax imp'osed thereon by this section, and shall pay to the ofiScer of the United 110 states Government authorized to receive the same; and they are each hereby made personally liable for such tax. In all cases where the income tax of a person is with- held and deducted and paid or to be paid at the source, as aforesaid, such person shall not receive the deduction and benefit of the exemption allowed in paragraph C of this section except by an application for refund of the tax unless he shall, not less than thirty days prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him, a signed notice in writing claiming the benefit of such exemption and thereupon no tax shall be with- held upon the amount 'of such exemption: Provided, That if any person for the purpose of obtaining any allowance or reduction by virtue of a claim for such exemption, either for himself or for any other person, knowingly makes any false statement or false or fraudu- lent representation, he shall be liable to a penalty of $300; nor shall any person under the foregoing condi- tions be allowed the benefit of any deduction provided for in subsection B of this section unless he shall, not less than thirty days prior to the day on which the re- turn of his income is due, either file with the person who is required to withhold and pay tax for him a true and Correct return of his annual gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to withhold and pay the tax, or likewise make application for deductions to the collector of the district in which return is made or to be made for him: Pro- vided further, That if such person is a minor or an in- sane person, or is absent from the United States, or is unable owing to serious illness to make the return and Ill application above provided for, the return and applica- tion may be made for him or her by the person required to withhold and pay the tax, he making oath under the penalties of this act that he has sufficient knowledge of the affairs and property of his beneficiary to enable him to make a full and complete return for him or her, and that the return and application made by him are full and complete: Provided further, That the amount of the normal tax hereinbefore imposed shall be deducted and withheld from fixed and determinable annual gains, profits, and income derived from interest upon bonds, and mortgages, or deeds of trust, or other similar obli- gations of corporations, joint-stock companies or associa- tions, and insurance companies, whether payable annually or at shorter or longer periods, although such interest does not amount to $3,000, subject to the provisions of this section requiring the tax to be withheld at the source and deducted from annual income and paid to the Government; and likewise the amount of such tax shall be deducted and withheld from coupons, checks, or bills of exchange for or in payment of interest upon bonds of foreign countries and upon foreign mortgages or like obligations (not payable in the United States), and also from coupons, checks, or bills of exchange for or in payment of any dividends upon the stock or inter- est upon the obligations 'of foreign corporations, asso- ciations, and insurance companies engaged in business in foreign countries; and the tax in each case shall be withheld and deducted for and in behalf of any person subject to the tax hereinbefore imposed, although such interest, dividends, or other compensation does not ex- ceed $3,000, by any banker or person who shall sell or otherwise realize coupons, checks, or bills of exchange drawn or made in payment of any such interest or divi- dends (not payable in the United States), and any per- 112 son who shall obtain payment (not in the United States), in behalf of another of such dividends and interest by means of coupons, checks, or bills of exchange, and also any dealer in such coupons who shall purchase the same for any such dividends or interest (not payable in the United States), 'otherwise than from a banker or another dealer in such coupons; but in each case the benefit of the exemption and the deduction allowable under this section may be had by complying with the foregoing provisions of this paragraph. All persons, firms, or corporations undertaking as a matter of business or for profit the collection of for- eign payments of such interest or dividends by means of coupons, checks, or bills 'of exchange shall obtain a license from the Commissioner of Internal Eevenue, and shall be subject to such regulations enabling the Gov- ernment to ascertain and verify the due withholding and payment of the income tax required to be withheld and paid as the Commissioner of Internal Eevenue, with the approval of the Secretary of the Treasury, shall pre- scribe ; and any person who shall knowingly undertake to collect such payments as aforesaid without having ob- tained a license therefor, or without complying with such regulations, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not exceeding $5,000, or imprisoned for a term not exceeding one year, or both, in the discretion of the court. Nothing in this section shall be construed to release a taxable person from liability for income tax nor shall any contract entered into after this Act takes effect be valid in regard to any Federal income tax imposed upon a person liable to such payment. The tax herein imposed upon annual gains, profits, and income not falling under the foregoing and not re- turned and paid by virtue of the foregoing shall be as- 113 sessed by personal return under rules and regulations prescribed by the Commissioner of Internal Eevenue and approved by the Secretary of the Treasury. The provisions of this section relating to the deduc- tion and payment of the tax at the source of income shall only apply to the normal tax hereinbefore imposed upon individuals. F. That if any person, corporation, joint stock com- pany, association, or insurance company liable to make the return or pay the tax aforesaid shall refuse or neg- lect to make a return at the time or times hereinbefore specified in each year, such person shall be liable to a penalty of not less than $20 nor more than $1,000. Any person or any officer of any corporation required 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 $2,000 or be imprisoned not exceeding one year, or both, at the discretion of the Court, with the costs of prosecution. G. (a) That the normal tax hereinbefore imposed upon individuals likewise shall be levied, assessed, and paid annually upon the entire net income arising or accruing from all sources during the preceding calendar year to every corporation, joint stock company 'or asso- ciation, and every insurance company, organized in the United States, no matter how created or organized, but not including partnerships ; but if organized, authorized, or existing under the laws of any foreign country, then upon the amount of net income arising or accruing by it from business transacted and capital invested within the United States during such year : Provided, however, 114 That nothing in this section shall apply to labor, agri- cultural, or horticultural organizations, or to mutual savings banks not having a capital stock represented by shares, or to fraternal beneficiary societies, orders, or associations operating under the lodge system, or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for* the payment of life, sick, accident, and other benefits to the members of such societies, orders, or associations and dependents of such members, nor to domestic building and loan associations, nor to cemetery companies, organ- ized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, chari- table, scientific, or educational purposes, no part of the net income 'of which inures to the benefit of any private stockholder or individual, nor to business leagues, nor to chambers of commerce or boards of trade, not organ- ized for profit or no part of the net income of which in- ures to the benefit of the private stockholder or indi- vidual; nor to any civic league or organization not or- ganized for profit, but operated exclusively for the pro- motion of social welfare: Provided further, That there shall not be taxed under this section any income derived from any public utility or from the exercise of any essen- tial governmental function accruing to any State, Terri- tory, or the District of Columbia, or any political sub- division of a State, Territory, or the District of Co- lumbia, nor any income accruing to the government of the Philippine Islands or Porto Eico, or of any political subdivision of the Philippine Islands or Porto Eico: Provided, That whenever any State, Territory, or the District of Columbia, or any political subdivision of the State or Territory, has, prior to the passage of this Act, entered in good faith into a contract with any per- 115 son or corporation, the object and pnrpose of which is to acquire, construct, operate, or maintain a public util- ity, no tax shall be levied under the provisions of this Act upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, or the Dis- trict of Columbia, or a political subdivision of a State or Territory ; but this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corporation from the payment of a tax as provided for in this section upon the part or portion of the said income to which such person or corporation shall be entitled under such con- tract. (b) Such net income shall be ascertained by deduct- ing from the gross amount of the income of such corpo- ration, joint stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses paid with- in the year in the maintenance and operation of its busi- ness and properties, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by in- surance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any; and in the case 'of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made ; and in case of insurance Companies the net addi- tion, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts; Pro- vided further, That mutual fire insurance companies re- 116 quiring their members to make premium deposits to provide for losses and expenses shall not return as in- come any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves : Pro- vided further, That mutual marine insurance companies shall include in their return of gross income gross pre- miums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in de- ductions from gross income amounts repaid to policy- holders on account of premiums previously paid by them and interest paid upon such amounts between the ascer- tainment thereof and the payment thereof and life in- surance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policy- holder, within such year; (third) the amount of inter- est accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding 'one- half of the sum of its interest-bearing indebtedness and its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an am'ount of its indebtedness not exceeding the amount of capital employed in the busi- ness at the close of the year : Provided, That in case of indebtedness wholly secured by collateral the subject of sale in ordinary business of such corporation, joint stock company, or association, the total interest secured and paid by such company, corporation, or association within the year on any such indebtedness may be deducted as a 117 part of its expense of doing business : Provided further, That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest pay- able thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be al- lowed; and in the case of a bank, banking association,, loan, or trust company, interest paid within the year on deposits or on moneys received for investment and se- cured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or 'of any State or Territory thereof, or imposed by the Government of any foreign country; Provided, That in the case of a corporation, joint stock company or association, 'or insurance company, organized, author- ized, or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income accrued within the year from business transacted and capital invested within the United States, (first) all the ordinary and necessary expenses actually paid within the year out 'of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year in business con- ducted by it within the United States and not compen- sated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any, and in the case of mines a reasonable allowance for depletion of ores and all other natural de- posits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the com- putation is made; and in case of insurance companies 118 the net addition, if any, required by law to be made witliin the year to reserve funds and the sums other than dividends paid within the year on pol- icy and annuity contracts: Provided further, That mutual fire insurance companies requiring their mem- bers to make premium deposits to provide for losses and expenses shall not return as income any por- tion of the premium deposits returned to their policy- holders, but shall return as taxable income all income re- ceived by them from all other sources plus such portions of the premium deposits as are retained by the com- panies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided fur- ther, That mutual marine insurance companies shall in- clude in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them, and inter- est paid upon such amounts between the ascertainment thereof and the payment thereof and life insurance com- panies shall not include as income in any year such por- tion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; (third) the am'ount of interest accrued and paid within the year on its indebtedness to an amount of such indebtedness not exceeding the proportion of one-half of the sum of its interest-bearing indebtedness and its paid- up capital stock outstanding at the close of the year, 'or if no capital stock, the capital employed in the business at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross 119, amount of its income derived from all sources within and without the United States: Provided, That in the case of bonds or 'other indebtedness which have been is- sued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed shall be allowed; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State, or Territory thereof, or the District of Columbia. In the case of assessment insurance companies, whether domes- tic or foreign, the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guarantee or reserve funds shall be treated as being payments required by law to reserve funds. (c) The tax herein imposed shall be computed upon its entire net income accrued within each preceding calen- dar year ending December thirty-first: Provided, how- ever. That for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be imposed upon its entire net income accrued within that portion of said year from March first to December thirty-first, both dates inclusive, to be ascertained by taking five- sixths of its entire net income for said calendar year: Provided further. That any corporation, joint-stock com- pany or association, or insurance company subject to this tax may designate the last day of any month in the year as the day of the closing of its fiscal year and shall be en- titled to have the tax payable by it computed upon the basis of the net income ascertained as herein provided for the year ending on the day so designated in the year preceding the date of assessment instead of upon the basis of the net income for the calendar year preceding the date of assessment; and it shall give notice of the day it has thus designated as the closing of its fiscal year to the collector of the district in which its principal business office is located at any time not less than thirty 120 days prior to tlie date upon which its animal return shall be filed. All corporations, joint-stock companies or as- sociations, and insurance companies subject to the tax herein imposed, computing taxes upon the income of the calendar year, shall, on or before the first day of March, nineteen hundred and fourteen, and the first day of March in each year thereafter, and all corporations, joint-stock companies or associations, and insurance com- panies, computing taxes upon the income of a fiscal year which it may designate in the manner hereinbefore provided, shall render a like return within sixty days after the close of its said fiscal year, and within sixty days after the close of its fiscal year in each year there- after, or in the case of a corporation, joint-stock company or association, or insurance company, organized or ex- isting under the laws of a foreign country, in the place where its principal business is located within the United States, in such form as the Commissioner 'of Internal Revenue, with the approval of the Secretary of the Treas- ury, shall prescribe, shall render a true and accurate return under oath or affirmation of its president, vice president, or other principal officer, and its treasurer or assistant treasurer, to the collector of internal revenue for the district in which it has its principal place of business, setting forth (first) the total amount of its paid-up capital stock outstanding, or if no capital stock, its capital employed in business, at the close of the year; (second) the total amount of its bond- ed and other indebtedness at the close of the year; (third) the gross amount of its income, received during such year from all sources, and if organized under the laws of a foreign country the gross am'ount of its income re- ceived within the year from business transacted and cap- ital invested within the United States; (fourth) the total amount of all its ordinary and necessary expenses paid 121 out of earnings in the maintenance and operation of the business and properties 'of such corporation, joint-stock company or association, or insurance company within the year, stating separately all rentals or other pay- ments required to be made as a condition to the con- tinued use or possession of property, and if organized under the laws of a foreign country the amount so paid in the maintenance and operation of its business within the United States; (fifth) the total amount of all losses actually sustained during the year and not compensated by insurance 'or otherwise, stating separately any amounts allowed for depreciation of property, and in case of insurance companies the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts : Provided fur- ther, That mutual fire insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any por- tion of the premium deposits returned to their policy- holders, but shall return as taxable income all income received by them from all other sources plus such por- tions of the premium deposits as are retained by the com- panies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided fur- ther, That mutual marine insurance companies shall in- clude in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in the deduc- tions from gross income amounts repaid to policyhold- ers 'on account of premiums previously paid by them, and interest paid upon such amounts between the ascertain- ment thereof and the payment thereof, and life insur- ance companies shall not include as income in any year such p'ortion of any actual premium received from any individual policyholder as shall have been paid back or 122 credited to such individual policyliolder, or treated as an abatement of premium of such individual policyhold- er, within such year; and in case of a corporation, joint- stock company or association, 'or insurance company, organized under the laws of a foreign country, all losses actually sustained by it during the year in business con- ducted by it within the United States, not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property, and in case of insurance companies the net addition, if any, re- quired by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts : Provided further, Thaf mutual fire insurance companies requiring their mem- bers to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all 'other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves : Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the pay- ment thereof, and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, 'or treated as an abatement of premium of such individual policyholder, within such year; (sixth) the amount of interest accrued and paid within the year 123 on its bonded or otlier indebtedness not exceeding one- lialf of tbe sum of its interest-bearing indebtedness and its paid-up capital stock, outstanding at the close of the year, or if no capital stock, the amount of interest paid within the year on an amount of indebtedness not ex- ceeding the amount of capital employed in the business at the close of the year, and in the case of a bank, bank- ing association, or trust company, stating separately aU interest paid by it within the year on deposits; or in case of a corporation, joint-stock company or associa- tion, or insurance company, organized under the laws of a foreign country, interest so paid on its bonded or other indebtedness to an amount of such bonded or other in- debtedness not exceeding the proportion of its paid-up capital stock outstanding at the close of the year, or if no capital stock, the amount of capital employed in the business at the close of the year, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States; (seventh) the amount paid by it within the year for taxes imposed under the authority of the United States and separately the amount so paid by it for taxes imposed by the Gov- ernment of any foreign country; (eighth) the net income of such corporation, joint-stock company or association, or insurance company, after making the deductions in this subsection authorized. All such returns shall as re- ceived be transmitted forthwith by the collector to the Commissioner of Internal Revenue. All assessments shall be made and the several cor- porations, joint-stock companies or associations, and in- surance 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 assess- ment shall be paid on or before the thirtieth day of June : 124 Provided, That every corporation, joint-stock company or association, and insurance company, computing taxes upon the income of the fiscal year which it may desig- nate in the manner hereinbefore provided, shall pay the taxes due under its assessment within one hundred and twenty days after the date upon which it is required to file its list or return of income for assessment; 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 Eevenue shall, upon the discovery thereof at any time within three years after said return is due, make a return upon information ob- tained as provided for in this section or by existing law, and the assessment made by the Commissioner of In- ternal Eevenue thereon shall be paid by such corpora- tion, 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, or after one hundred and twenty days from the date on which the return of income is required to be made by the taxpayer, and after ten days' notice and demand thereof by the collector, there shall be added the sum of 5 per centum on the amount 'of tax unpaid and inter- est at the rate of 1 per centum per month upon said tax from the time the same becomes due. (d) When the assessment shall be made, as provided in this section, the returns, together with any correc- tions thereof which may have been made by the commis- sioner, shall be filed in the 'office of the Commissioner of Internal Eevenue and shall constitute public records and be open to inspection as such: Provided, That any and all such returns shall be open to inspection only upon the order of the President, under rules and regulations to be prescribed by the Secretary 'of the Treasury and 125 approved by the President : Provided further, That the proper officers of any State imposing a general income tax may, upon the request of the governor thereof, have access to said returns or to an abstract there'of, showing the name and income of each such corporation, joint- stock company, association or insurance company, at such times and in such manner as the Secretary of the Treasury may prescribe. If any 'of the corporations, joint-stock companies or associations, or insurance companies aforesaid, shall re- fuse 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 exceeding $10,000. H. That the word "State" or "United States" when used in this section shall be construed to include any Territory, Alaska, the District of Columbia, Porto Eico, and the Philippine Islands, when such construction is necessary to carry out its provisions. I. That sections thirty-one hundred and sixty-seven, thirty-one hundred and seventy-two, thirty-one hundred and seventy-three, and thirty-one hundred and seventy- six of the Eevised Statutes of the United States as amended are hereby amended so as to read as follows : "Sec. 3167. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or to make known in any manner whatever not pr'ovided by law to any person the operations, style of work, or apparatus of any manu- facturer 'or producer visited by him in the discharge of his official duties, or the amount or source of income, profits, losses, expenditures, or any particular thereof, 126 set forth or disclosed in any income return by any per- son or corporation, or to permit any income return or copy thereof or any book containing any abstract or par- ticulars thereof to be seen or examined by any person except as provided by law; and it shall be unlawful for any person to print or publish in any manner whatever not provided by law any income return or any part thereof or the amount or source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding one year, or both, at the discretion 'of the court; and if the offender be an officer or employee of the United States he shall be dismissed from office and be incapable thereafter of holding any office under the Government. "Sec. 3172. Every collector shall, from time to time, cause his deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal-revenue tax, and all persons owning or having the care and manage- ment of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects. "Sec. 3173. It shall be the duty of any person, part- nership, firm, ass'ociation, or corporation, made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, in case of a special tax, on or before the thirty-first day of July in each year, in ease of income tax on or before the first day of March in each year, and in other cases before the day on which the taxes accrue, to make a list or return, verified by oath or affirmation, to the collector or a deputy collector of the district where located, of the articles or objects, including the amount of annual income charged with a duty 'or tax, the quantity of goods, wares, and merchan- 127 dise made or sold and charged witli a tax, the several rates and aggregate amount, according to the forms and regulations to be prescribed by the Commissioner of In- ternal Eevenue, with the approval of the Secretary of the Treasury, for which such person, partnership, firm, association, or corporation is liable: Provided, That if any person liable to pay any duty or tax, or owning, possessing, or having the care or management of prop- erty, goods, wares, and merchandise, articles or objects liable to pay any duty, tax, or license, shall fail to make and exhibit a list or return required by law, but shall consent to disclose the particulars of any and all the property, goods, wares, and merchandise, articles, and objects liable to pay any duty or tax, or any business or occupation liable to pay any tax as aforesaid, then, and in that case, it shall be the duty of the collector or deputy collector to make such list or return, which, being distinctly read, consented to, and signed and verified by oath or affirmation by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person: Provided further, That in case no annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the an- nual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discre- tion, if such be present, otherwise to deposit in the near- est post office, a note 'or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note 'or memoran- dum, verified by oath or affirmation. And if any person, 128 on being notified or required as aforesaid, shall refuse or neglect to render such list or return within the time required as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects subject to tax fails to do so at the time required, or de- livers any return which, in the opinion of the collector, is false or fraudulent, or contains any undervaluation or understatement, it shall be lawful for the collector to summon such person, or any other person having pos- session, custody, or care of books of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and produce such books, at a time and place named in the summons, and to give testimony or answer inter- rogatories, under 'oath, respecting any objects liable to tax or the returns thereof. The collector may summon any person residing or found within the State in which his district lies; and when the person intended to be summoned does not reside and can not be found within such State, he may enter any collection district where such person may be found and there make the examina- tion herein authorized. And to this end he may there exercise all the authority which he might lawfully exer- cise in the district for which he was commissioned. "Sec. 3176. When any person, corporation, company or association refuses or neglects to render any return or list required by law, or renders a false or fraudulent return or list, the collector or any deputy collector shall make, according to the best information which he can obtain, including that derived from the evidence elicited by the examination of the collector, and on his own view and information, such list or return, according to the form prescribed, of the income, property, and objects liable to tax owned or possessed or under the care or management of such person or corporation, company or 129 association, and the Commissioner of Internal Eevenue shall assess all taxes not paid by stamps, including the amount, if any, due for special tax, income or other tax, and in case of any return of a false or fraudulent list or valuation intentionally he shall add 100 per centum to such tax; and in ease of a refusal or neglect, except in cases of sickness 'or absence, to make a list or return, or to verify the same as aforesaid, he shall add 50 per centum to such tax. In case of neglect occasioned by sickness or absence as aforesaid the collector may allow such further time for making and delivering such list or return as he may deem necessary, not exceeding thirty days. The amount so added to the tax shall be collected at the same time and in the same manner as the tax unless the neglect or falsity is discovered after the tax has been paid, in which case the amount so added shaU be collected in the same manner as the tax; and the list or return so made and subscribed by such collector or deputy collector shall be held prima facie good and suffi- cient for all legal purposes." J. That it shall be the duty of every collector of internal revenue, to whom any payment of any taxes other than the tax represented by an adhesive stamp or other engraved stamp is made under the provisions of this section, to give to the person making such payment a full written or printed receipt, expressing the amount paid and the particular account for which such payment was made; and whenever such payment is made such col- lector shall, if required, give a separate receipt for each tax paid by any debtor, on account of payments made to or to be made by him to separate creditors in such form that such debtor can conveniently produce the same separately to his several creditors in satisfaction of their respective demands to the amounts specified in such re- 130 ceipts; and such receipts shall be sufficient evidence in favor of such debtor to justify him in withholding the amount therein expressed from his next payment to his creditor ; but such creditor may, upon giving to his debtor a full written receipt, acknowledging the payment to him of whatever sum may be actually paid, and accept- ing the amount of tax paid as aforesaid (specifying the same) as a further satisfaction 'of the debt to that amount, require the surrender to him of such collector's receipt. K. That jurisdiction is hereby conferred upon the dis- trict courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books shall reside, to compel such attendance, production of books, and testimony by appropriate process. L. That all administrative, special, and general pro- visions of law, including the laws in relation to the as- sessment, remission, collection, and refund 'of internal- revenue taxes not heretofore specifically repealed and not inconsistent with the provisions of this section, are hereby extended and made applicable to all the provis- ions of this section and to the tax herein imposed. M. That the provisions of this section shall extend to Porto Eico and the Philippine Islands: Provided, That the administration of the law and the collection of the taxes imposed in Porto Eico and the Philippine Islands shall be by the appropriate internal-revenue officers of those governments, and all revenues collected in Porto Eico and the Philippine Islands thereunder shall accrue intact to the general governments, thereof, respectively: And provided further, That the jurisdiction in this sec- 131 tion conferred ilpon the district courts 'of the United States shall, so far as the Philippine Islands are con- cerned, be vested in the courts of the first instance of said islands : And provided further, That nothing in this section shall be held to exclude from the computation of the net income the compensation paid any official by the governments of the District of Columbia, Porto Eico, and the Philippine Islands or the political sub- divisions thereof. N. That for the purpose of carrying into effect the provisions of Section II of this Act, and to pay the ex- penses of assessing and collecting the income tax there- in imposed, and to pay such sums as the Commissioner of Internal Eevenue, with the approval of the Secretary of the Treasury, may deem necessary, for information, detection, and bringing to trial and punishment persons guUty 'of violating the provisions of this section, or con- niving at the same, in cases where such expenses are not otherwise provided for by law, there is hereby appro- priated out of any money in the Treasury not otherwise appropriated for the fiscal year ending June thirtieth, nineteen hundred and fourteen, the sum of $800,000, and the Commissioner of Internal Eevenue, with the approv- al 'of the Secretary of the Treasury, is authorized to ap- point and pay from this appropriation all necessary of- ficers, agents, inspectors, deputy collectors, clerks, mes- sengers and janitors, and to rent such quarters, pur- chase such supplies, equipment, mechanical devices, and other articles as may be necessary for employment or use in the District of Columbia or any collection district in the United States, or any of the Territories thereof: Provided, That no agent paid from this appropriation shall receive compensation at a rate higher than that now received by travelling agents on accounts in the 132 Internal Eevenue Service, and n'o inspector shall receive a compensation higher than $5 a day and $3 additional in lieu of subsistence, and no deputy collector, clerk, messenger, or other employee shall be paid at a rate of compensation higher than the rate now being paid for the same or similar work in the Internal Eevenue Serv- ice. In the office 'of the Commissioner of Internal Eevenue at Washington, District of Columbia, there shall be ap- pointed by the Commissioner of Internal Eevenue, with the approval of the Secretary of the Treasury, one ad- ditional deputy commissioner, at a salary of $4,000 per annum; two heads of divisions, whose compensation shall not exceed $2,500 per annum; and such other clerks, messengers, and employees, and to rent such quarters and to purchase such supplies as may be necessary: Provided, That for a period of two years from and after the passage of this Act the force of agents, deputy col- lectors, inspectors, and 'other employees not including the clerical force below the grade 'of chief of division employed in the Bureau of Internal Eevenue in the city of Washington, District of Columbia, authorized by this section of this Act shall be appointed by the Commis- sioner of Internal Eevenue, with the approval of the Secretary of the Treasury, under such rules and regula- tions as may be fixed by the Secretary of the Treasury to insure faithful and competent service, and with such compensation as the Commissioner of Internal Eevenue may fix, with the approval of the Secretary of the Treas- ury, within the limitations herein prescribed: Provided further, That the force authorized to carry 'out the pro- visions of Section II of this Act, when not employed as herein provided, shall be employed on general internal- revenue work. Approved, 9.10 p. m., October 3, 1913. WooDKOw Wilson. THE UNCONSTITUTIONAL CHARACTER AND THE ILLEGAL ADMINISTRATION OF THE INCOME TAX LAW DEMONSTRATED BY ALBERT H. WALKER OF THE NEW YORK BAR AUTHOR OF THE HISTORY OF THE SHERMAN LAW. A pamphlet with this uncompromising title was lately written by me, and was published on Wednesday, Feb- ruary 11, 1914. It comprises eighty-nine large printed pages of original writing, divided into three Parts. Part One demonstrates that the income tax statute of October 3, 1913, is permanently unconstitutional, be- cause it violates the Fifth Amendment in being confisca- tory; and that, if it were not permanently unconstitu- tional, it would be inoperative upon the year 1913, because it levies direct taxes for that year, upon property, with- out apportioning those taxes among the forty-eight States, according to their respective populations, and thus violates paragraph 3, of Section 2, of Article I, of the Constitution. Part Two demonstrates that the administration of the income tax law by the Commissioner of Internal Eevenue, is injuriously illegal, because it deviates in many respects from the administration which the statute prescribes, and thus deviates against the rights and in- terests of nearly a million citizens of the United States. [over] Pakt Theee demonstrates the existence of five sep- arate constitutional, and otherwise proper remedies, for the unconstitutional and illegal wrongs, the existence and character of which are demonstrated in Parts One and Two, respectively. This pamphlet is uniform in style and appearance with my well known Analysis and Clarification of the In- come Tax Law, which was published in October, 1913, and has gone into extensive use in every one of the United States. Either pamphlet will be sent to any address for one dollar, and both will be likewise furnished for two dollars ; but orders, to be effective, must be accompanied by the proper payments. Such payments should be made with paper money, rather than with checks or postal money orders, and can be so made at my risk. Whenever I receive a letter saying that the writer has sent me money for a pamphlet, but has not received any pamph- let in return, I immediately send another copy to the writer, without any charge therefor. I trust the good faith of my correspondents, and the honesty of the postal clerks and carriers, and I have never lost any money in the mails. I do not care to sell any of my books or pamphlets through book-stores, but a copy of any of them can be obtained at my office, by calling there, or by addressing a letter to Albert H. Walker, Park Eow Building, New York City. THE UNCONSTITUTIONAL CHARACTER AND THE ILLEGAL ADMINISTRATION OF THE INCOME TAX LAW DEMONSTRATED BY ALBERT H. WALKER AUTHOE'bF WALKER ON PATENTS, AND THE HISTORY OF THE SHERMAN LAW. PUBLISHED AT THE LAW OFFICES OF THE AUTHOR : Floor 10, PARK ROW BUILDING, NEW YORK CITY. THE PRICE IS A DOLLAR E.V, COPYRIGHT, 1914 ALBERT H. WALKER PREFACE. My first pamphlet on the income tax law was pub- lished in October, 1913, and has gone into extensive use throughout the United States. Its character is indicated by its title "The Income Tax Law, of the United States of America, Analyzed and Clarified." It contains no detailed criticism of the statute, except in incidentally specifying a few of its errors and ambiguities, without elaborating upon any of them. When it was published, the administration of the statute had not begun, and therefore could not be made a subject of discussion. During the fifteen weeks which have passed since then, no error of translation has been made known to me as occurring in that pamphlet; and it will probably always be regarded as being, what it purports to be. This second pamphlet has resulted from the applica- tion to the provisions of the statute, of the relevant pro- visions of the Constitution of the United States; and from the application to the administration of the stat- ute, of the provisions of the statute itself, and of some of those principles of ethics and equity, which all good men regard as a proper system of moral law. The writ- ing of every unquoted sentence in this pamphlet, was done with the utmost care to state with accuracy, every- thing stated therein; and with a constant sense of re- sponsibility to the public, and to "that infinite and eter- nal energy, from which all things proceed. ' ' Albert H. Walker. Park Row Building, Manhattan, New York, February 4, 1914. TABLE OF CONTENTS. PART ONE. PAGES Ceiticisms 1-27 Chapter I. Unconstitutional 1-10 Section A. Confiscatory 1-7 Section B. Retroactive 7-10 Chapter II. History 11-16 Chapter III. Character 16-22 Chapter IV. Administration 22-27 PART TWO. Income Tax Rettjens 28-84 Introduction 28-31 Section 1. Relevant to Natural Persons 31-49 Section 2. Relevant to Fiduciaries 50-57 Section 3. Relevant to Corporations 58-84 PART THREE. Recommended Remedies 85-89 PART ONE. CRITICISMS CHAPTER I. UNCONSTITUTIONAL. Section A. CONFISCATOBY. All the provisions of the statute of 1913, ' ' relating to the deduction and pajmaent of the tax at the sources of income" are void; because they are contrary to the Fifth Amendment to the Constitution of the United States. That amendment prohibits the enactment by Congress of any statute, which, if enforced, will deprive any person or corporation of property without due process of law. Thirty-seven years ago that great judge in constitutional law, Mr. Justice Miller, when delivering the opinion of the Supreme Court of the United States in the case of Davidson v. New Orleans (96 U. S. Reports, p. 99, 1877) explained that the phrase "due process of law" in the Federal Constitution, is not to be defined by a single statement, but that its meaning is to be arrived at "by the gradual process of judicial inclusion and exclusion, as the cases presented for decision shall require, with the reasoning on which such decisions may be founded." That gradual process of inclusion and exclusion has been going on ever since, and will continue further into the future than we can foresee, before it becomes complete. But that process has already excluded many classes of transactions from the domain of "due process of law;" and among these, is every transaction, which constitutes legislative confiscation of private property. Now it is quite undeniable, among those who really understand the income tax law of October 3, 1913, that those of its provisions which relate to the deduction and payment of income taxes at their sources, are confiscatory provisions. They are confiscatory, as against the persons whose in- comes are thus taxed, because they purport to deprive those persons, at least temporarily, of much more money than the amount of the income tax imposed upon them by the statute. The particular part of the statute which must always have this effect, is composed of twenty- three words in subsection E, followed by the latter half of the first proviso of that subsection. When those two passages are properly joined together, they will be found to read as follows : "In all cases where the income tax of a person is with- held and deducted and paid or to be paid at the source," that person shall not "be allowed the benefit of any de- duction provided for in subsection B of this section, unless he shall, not less than thirty days prior to the day on which the return of his income is due, either file with the person who is required to withhold and pay the tax for him, a true and correct return of his annual gains, profits and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the per- son required to withhold and pay the tax, or likewise make application for deductions, to the collector of the district in which return is made or is to be made for him. ' ' On referring back to subsection B, it will be found that the deductions provided for thereby may belong to any or all of seven regularly numbered classes, and it is quite undeniable that many a person whose income tax is with- held and deducted, and paid or to be paid at the source, in pursuance of the provisions last quoted from subsection E of the statute, is entitled to deductions enough, under subsection B, of the statute, to relieve him from paying any income tax whatever, under the statute as a whole. But the statute as a whole, instead of providing any plan by means of which any such person can secure such re- lief, does provide that considerable money shall be with- held from Mm, by his employer or employers, or debtor or debtors and paid over to the Government, instead of being paid to him. And the statute provides that the per- son thus deprived of his money, without his consent and without his fault, and without being taxable, shall never get any of that money back again; unless he shall, not less than thirty days prior to March 1, either file with the person who has withheld his money from him, a true and correct return of his annual gains, profits and income from all other sources, and also the deductions asked for by him, or likewise present the same set of papers to the collector of the district in which return is made or is to be made for him. This program presents a case of temporary confisca- tion of private property at least; and the statute pro- vides that this confiscation shall become a permanent one, in every case where the victim does not learn and understand the statute soon enough to prepare and file. at least thirty days prior to Marcli 1, a certain set of papers disclosing Ms private affairs and praying to be permitted to escape from that confiscation. And even if the victim does thus learn and understand the statute, and does prepare and file that set of papers, either with his employer or employers, or his debtor or debtors, or with the Collector of Internal Revenue of the district in which the return is made, or is to be made for him; the statute does not provide any certain way by means of which he can recover his confiscated property. Indeed, he can never recover that money, except by means of a petition presented by him to the Commissioner of Internal Revenue, in pursuance of Section 3220' of the Revised Statutes of the United States; followed, in not less than six months after its presentation, nor more than two years after the money was taken, by a suit in some court, against the particular collector of internal revenue, who collected the money. This program is provided for in Sections 3226 and 3227, of the Revised Statutes of the United States, as those sections were understood in 1895, by Mr. Justice White, when he delivered his dissenting opinion in the Pollock case, in 157 United States Reports at page 609. Moreover, even if after a delay which ma:y continue for years, the Commissioner of Internal Revenue does have to pay back to a particular victim, the money with- held from him long before, that victim will have been deprived of the use of that money during all that while. And the Fifth Amendment to the Constitution of the United States is violated as really, though not as exten- sively, when a person is deprived of property for a lim- ited tinje, as when he is deprived of property forever. Those provisions of the statute, which relate to the deduction and payment of income taxes at their sources, are also confiscatory, as against the vicarious persons and corporations which are required by the statute to act as agents of the Government in the business of collecting income taxes claimed by the Government to be due from the employee or creditors of those vicarious parties. As to them, the program of the statute is a process of gar- nishment. And that process, instead of being conducted as a judicial proceeding, as all such processes must be, in order to be valid, is conducted and controlled entirely by executive officers. And that process, instead of being conducted at the expense of the debtor or of the gar- nishor, as it should be, is conducted entirely at the ex- pense of the garnishee. And that expense, in the case of each of many persons, or corporations having many employees or many creditors, or both, must amount to large sums of money. Now it is plain enough and quite undeniable, that a statute which compels any person or corporation to expend money, belonging to that person, or to the stockholders of that corporation, in the busi- ness of collecting taxes for the Government, from other persons or corporations, thereby confiscates all the money thus compelled by legislative enactment to be expended. Those provisions of the income tax statute which re- late to "the deduction and payment of the tax at the sources of income", being thus undeniably confiscatory, and therefore unconstitutional; they operate to invali- date the entire income tax Section II, of the tax statute of October 3, 1913; because that Section constitutes one entire scheme of taxation, which cannot survive the de- struction of a pai-t so pivotal. The doctrine that an entire statute may be vitiated or rendered inoperative by the invalidity or inoperative- ness of some, bnt not all, of its provisions, was the ground upon which the United States Supreme Court, in the case of Pollock v. Farmers' Loan & Trust Co., (158 U. S. 601, 1895) decided that the entire income tax law of 1894, was void. That income tax statute consisted of Sections 27 to 37, inclusive, of the United States tax statute, which became law in August, 1894, without the approval of President Cleveland ; the bill therefor not having been either signed or vetoed by him, ^^ithin ten days after he received it, and Congress having remained in session during those ten days. That income tax stat- ute levied an annual tax upon property, rents, interest^ dividends, and salaries, and also all income received from any profession, trade, employment or vocation car- ried on in the United States or elsewhere, by any of our citizens or residents. The Supreme Court decided that the Constitution of the United States did not au- thorize Congress to levy a tax upon any income from property; and that the fact that the income tax statute of 1894, included income from property, together with income from all other sources, rendered the statute in- valid as to all income. The conclusions which Chief Justice Fuller formulated, to express exactly what points the Court decided, were formulated by him in the following three paragraphs : "We adhere to the opinion already announced, that, taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equaJlly direct taxes." "We are of 'opinion that taxes on personal property, or ojx the income of personal property, are likewise di- rect taxes." "The tax imposed by sections twenty-seven to thirty- seven, inclusive, of the act of 1894, so far as it falls on the income of real estate and of personal property, be- ing a direct tax within the meaning of the Constitution, and, therefore, unconstitutional and void because not ap- portioned according to representation, all those sections, constituting one entire scheme of taxation, are neces- sarily invalid." Section B. Retroactive. Even if the income tax statute of October, 1913, had not contained any provision for collecting income taxes at their "sources"; that statute would be inoperative, in respect of the whole of the year 1913; and nobody would be constitutionally and legally bound to pay any income tax for any portion of that year. This statement may startle at first, but it must convince at last. Tn the last analysis it will be seen to result from the following facts and considerations. The Sixteenth Amendment to the Constitution of the United States is the only constitutional basis for the in- come tax law of October 3, 1913. That constitutional amendment was never a part of the Constitution of the United States, until it was proclaimed to be such by the Secretary of State on February 25, 1913. It was on that day that Congress first acquired power to enact any such statute, as the present income tax statute. But Con- gress never exercised that power until October 3, 1913. On that day, it had power to enact a statute to lay and collect taxes on incomes, though it never had any power. 8 in pursuance of the Sixteenth Amendment, to lay and col- lect any tax on anything except incomes. But no money which had been received by any person or corporation prior to October 3, 1913, could be constitutionally made subject to an income tax law enacted on that day; for that money had become capital in the hands of that per- son before that day, and indeed may have already become outgo. An income tax statute can operate only in futuro ; because it can operate only on money to come in after its enactment. If it could operate upon money which had come in before its enactment, it would not be operat- ing upon the act of coming in, but would be operating- upon the status of being in. The difference between an income tax and a tax upon property, is the difference between a tax upon an active transaction, and a tax upon a static condition. No income tax statute can operate- upon a static condition which existed before its enact- ment; for if it could, it would be operating upon prop- erty and not upon income, and therefore would not be an income tax statute at all. And Congress has no consti- tutional right to levy any tax on property; without ap- portioning that tax among the several States, according to their respective numbers ; which proposition the Supreme Court decided in the Pollock case, and which apportioning is absent from the income tax statute of October 3, 1913. The law which was established by this decision was not affected by subsection T, of Section IV, of the Fed- eral tax law of October 3, 1913, which section reads as follows : " If any clause, sentence, paragraph, or part of this Act, shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair or invalidate the remainder of this Act, but shall he confined in its operation to the clause, sentence, paragraph or part thereof, directly in- volved in the controversy in which such judgment shall have been rendered." For subsection T, has its op- eration in saving Sections I, III, and IV of the statute,, from the invalidity of Section II. For the reasons thus far stated under this section of our criticism, it follows that the income tax statute of October 3, 1913, is inoperative in respect of the seven, months and two days which last preceded its approval by the President. The reasons why that income tax statute is also inop- erative in respect of the two months and twenty-eight days of the year 1913, which followed its approval by the President, are the following: The first proviso of subsection D, of the statute enacts : ' ' That for the year ending December thirty-first, nineteen hundred and thir- teen, said tax shall be computed on the net income ac- cruing from March first to December thirty-first, nine- teen hundred and thirteen, both dates inclusive, after- deducting five-sixths only of the specific exemptions and deductions provided for by the statute." Now, if the Commissioner of Internal Eevenue were to attempt to apply the statute to the two months and twenty-eight days in October, November and December,, nineteen hundred and thirteen, which followed its enact- ment, he would have no authority for deducting from the gross income of any person or corporation, during those two months and twenty-eight days, any particular fraction of the specific exemptions and deductions, to which that person or corporation would be entitled, if the gross income, and also the exemptions and deduc- 10 tions of that party, were to be calculated for the whole of the year 1913. If Congress had expressly confined the operation of the income tax statute during the year 1913 to the two months and twenty-eight days which followed its enactment by Congress, and its approval by the Pres- ident ; then Congress would have been obliged to provide that the exemptions and deductions in question should be calculated on the basis of what actually occurred in respect to them, during those two months and twenty- eight days; or alternatively. Congress would have been obliged to provide that those exemptions and deduc- tions should be calculated on the basis of assigning to them 89/365 of what those deductions would have amounted to, if they had been calculated for the whole of the year 1913. For these reasons, it is apparent, that nobody knows or can conjecture what enactment Congress would have made relevant to exemptions and deductions from gross income, if Congress had been avowedly legislating for the last two months and twenty-eight days of 1913, in- stead of avowedly legislating for the last ten months of that year. And it is also apparent that what Congress had power to do for the last two months and twenty- eight days of 1913, is so mingled in the statute with what it attempted to do without power, in respect of the seven months and two days which preceded the en- actment and approval of the statute, that those two ele- ments of the statute are inseparable, and that that in- separability operates to render the entire income tax statute inoperative as to the whole of the year 1913. The logic of the Supreme Court decision in the Pollock case, makes this conclusion inevitable; unless it is averted by some statute; and there is no statute which is adapted to have that effect. 11 CHAPTER II. HISTORY. The bill for the income tax statute of 1913, was com- posed and put together in the following method : When the Democratic members of the Committee on Ways and Means of the House of Representatives, un- dertook early in 1913, to write a bill to become the Unit- ed States tax statute of 1913, they committed the writ- ing of the income tax portion of that statute, to one of their own number, the Hon. Cordell Hull of Carthage, Tennessee. At that time, Mr. Hull was forty-one years of age, and was a lawyer by profession, and for six years, had been a member of Congress. In constructing the framework of his income tax contribution, to the United States tax bill, Mr. Hull borrowed the scheme of col- lecting income taxes at their "sources," from the in- come tax law of the United Kingdom of Great Britain and Ireland. But he overlooked the fact that the Par- liament which rules that kingdom, is not subject to any constitutional limitation; whereas the Congress of the United States is subject to many definite limitations, which are prescribed in the Constitution of the United States. When Mr. Hull began to write his proposed income tax enactment, he wrote its first paragraph in the fol- lowing words : "That there shall be levied, assessed and paid an- nually, upon the entire net income arising or accruing from all sources in the preceding calendar year, to every •citizen of the United States, whether residing at home ■or abroad, and to every person residing in the United 12 States, though not a citizen thereof, a tax of one per centum per annum upon such income, over and above $4,000; and a like tax shall be assessed, levied and paid annually, upon the entire net income from all property owned and of every business, trade or profession, car- ried on in the United States by persons residing else- where". But Mr. Hull overlooked the fact that the very first paragraph thus written by him, was self-contradictory, in respect of the income tax to be levied upon citizens of the United States, residing elsewhere. For the first part of his paragraph purported to provide that every such citizen shall pay a tax of one per centum per an- num upon Ms entire net income from all sources; where- as the latter part of his paragraph purported to provide that every such citizen shall pay a tax of 'one per cen- tum per annum only upon his entire net income from all property owned and of every business, trade or profes- sion carried on in the United States. The difference be- tween these two provisions, is vitally important to many citizens of the United States, residing in foreign coun- tries. For example, there are nearily a hundred citizens of the United States who permanently reside in France, and practice dentistry there, and receive nearly or quite all of their incomes, in compensation for professional work performed by them in Paris, and mainly performed for citizens of France. According to the first part of Mr. Hull's first paragraph, those American dentists must send every year to the United States treasury, one per cent of their entire net incomes earned in France; whereas according to the latter part of his paragraph, none of those American dentists are required to pay any income tax on any of their earnings received by them 13 for professional services performed in any foreign country. This contradiction between the first part and the sec- ond part of Mr. Hull's first paragraph, constitutes evi- dence of incapacity in that statesman to accurately frame, even one short statutory paragraph. And the fact that his error was never corrected by the Commit- tee on Ways and Means, or by the House 'of Repre- sentatives, or by the Finance Committee of the Senate, or by the Senate itself, or by the Conference Committee between the two houses, or by the President of the Unit- ed States, and is in the income tax statute now; consti- tutes convincing evidence that most of the personages whose will operated to carry Mr. Hull's work into the statute books, failed to subject that work to any critical examination, before they made it into law. The tax bill of 1913, which was prepared by the De- mocratic members of the Ways and Means Committee of the House of Eepresentatives, and which was named the Underwood Bill in honor of the chairman of that committee, and the income tax section of which was writ- ten by Mr. Hull; was passed by the House and sent to the Senate, and referred to its Finance Committee, on May 8, 1913. That Committee reported that bill to the Senate with amendments on July 11, 1913. Those amendments did not include any systematic reor- ganization of the income tax section, which Mr. Hull had prepared and which the House had passed. Quite otherwise than so doing, those amendments included a large number of miscellaneous patches, put promiscuous- ly upon Mr. Hull's text; sometimes by way of addition thereto, and sometimes by way of substitution for some portions of that text, which were cut away to make places for those patches. 14 The entire bill, thus reported with amendments from the Senate Finance Committee, was under some consid- erable consideration in the Senate, during nearly two months, until it was passed by that body on September 9, 1913, with some amendments. During that consideration, but little attention was given to the income tax section of the bill. And no important amendment was made in that section, prior to its passage by the Senate ; except in respect of the steps in the graduated scale of incomes, subjected to the "additional" tax. But the bill as a whole, as it passed the Senate, on September 9, 1913, contained many hundreds of differ- ences between it, and the bill which passed the House on May 8, 1913. Thereupon, the two bills were referred to a Committee of Conference between the two houses, which Committee was composed of four of the Democratic and two of the Eepublican members, and of Mr. Murdock, of Kansas, the Progressive member, of the House Commit- tee on Ways and Means, and of four of the Democratic and three of the Republican members of the Senate Com- mittee on Finance. Thereupon, the Democratic members of that Conference Committee assembled alone in a committee room, and proceeded to review the two bills, and to patch together a third document, to rep- resent them both, and to agree to vote to report that third document to the two Houses, respectively. This being done, those gentlemen invited the other six members of the Conference Committee into their room, and sub- mitted to them that third document, for their considera- tion. But instead of giving any of them any time or op- portunity for any such consideration, the chairman of the Conference Committee promptly put to a vote, the ques- tion whether the third document should be reported to 15 the two Houses; upon which question the Democratic majority voted in the affirmative, and all the minority members in the negative ; and thus that third document was technically "agreed to" by the Committee of Con- ference on September 29, 1913, but against the protest of its minority members. At that time, that third document was not any consecutive and fair copy of anything, but was composed of a mass of heterogeneous matter, on numerous sheets of paper, which were loosely connected together, as far as they were connected together at all. Thereupon that heterogeneous collection of sheets, was sent to the Gov- ernment printing office to be printed for the information of the two Houses, when they should come to consider the report of the Conference Committee. Within a couple of days thereafter, the Government printing office fur- nished the two Houses with a printed copy of whatever its compositors and proof readers could make out of that heterogeneous mass of papers. That printed copy constituted two hundred and forty-two pages, each of which, not including its margins, was five inches by nine inches in dimensions, so that the document contained more than ten thousand square inches of printed matter. The income tax section of the copy occupied fifty- four of those pages, with more than two thousand square inches of printed matter ; but that printed matter did not present any consecutive composition from end to end. Quite otherwise than this, it was composed of more than eleven thousand words, partly in large Roman type, and partly in small Eoman type, and partly in Italic type; the words in large Eoman type representing the bill as it was written by Mr. Hull; and the indicated cancella- tions of much of that matter, plus the words in Italic 16 type, representing the patching done by the Senate Finance Committee ; and the words in small Koman type, plus the indicated cancellations of many of the words in large Eoman type, and pins the indicated cancellations of many of the words in Italic type, representing the final crazy quilt of words and phrases, which resulted from the repatching which was done by the Democratic members of the Committee of Conference. It was this volume of two hundred and forty-two pages of partly cancelled and sadly confused language that constituted the United States tax bill of 1913, when it passed both Houses of Congress. After that passage, a fair copy of it was submitted to the President for his consideration. He did not consider it long enough to read it through and understand it; for such a reading would have occupied his perfect attention many more hours than passed after he first saw it on the afternoon of October 3, 1913, and before he signed it at 9.10 o 'clock in the evening of the same day. CHAPTER III. CHARACTER. The income tax statute, as it was signed by Presi- dent Wilson, on October 3, 1913, has the following char- acter, as a specimen of statute writing. Many of its sequences of words which are nominally sentences, are so complicated and incoherent that they cannot be parsed, or otherwise analyzed by means of any set of rules of English grammar. And what is worse, the elements of the statute are so unsystematically con- nected and disconnected, that no accurate and complete 17 knowledge of its purport, can be achieved by any man without many days of hard study. Though many mil- lions of copies of its full text have been printed and pub- lished and examined, during the four months of its stat- utory existence, it is not probable that twenty men in the world, understand it even now. For example, the obscure and complicated subject 'of income taxation at the "sources" of incomes, makes its very first appearance in the middle of a sentence, just after a semi-colon, in the middle of a proviso, in the middle of a paragraph, in the middle of subsection D ; though that subsection refers to many subjects which have no more relevancy to income taxation at the ' ' s'our- ces," than they have to many other parts of the income tax statute. That difficult subject having thus been in- troduced by a semi-colon, it is dropped in favor of other topics, long before the end of the subsection. It next comes to the surface of the muddy statute, at the beginning of the second paragraph of subsection E, and thence it runs on through its ambiguous course, to the end of that subsection. It is very difficult to reconcile with each 'other, all the provisions of subsections D, and E, relevant to income taxation at the "sources" of the incomes; and very few men are supposed to have worked long enough and hard enough at that task, to see through the fog of words and phrases which they tried to penetrate in that endeavor. All those ambiguous provisions were in the bill as written by Mr. Hull, and passed by the House of Eepre- sentatives on May 8, 1913 ; but the Senate Finance Com- mittee and the Senate itself, discarded most of Mr. Hull's subsection E, and otherwise so changed its provi- sions, and those 'of subsection D, as to make them much 18 less burdensome to tlie people, than they were before. The Committee of Conference, however, repudiated everything which had been done by the Senate commit- tee and by the Senate, to improve subsection E; and it stands in the statute, exactly as it was passed by the- House on May 8, 1913. So also, those parts of subsec- tion J), which refer to income taxation at the "soarces", are about the same in the statute that they were in the bill as it was written by Mr. Hull. The New York Times of January 30, 1914, published the following telegram, conspicuously displayed on one of its pages : "Washington, Jan. 29. — Eepresentative Underwood, of Alabama, Democratic leader of the House, in a state- ment today, served notice that there would be no tinker- ing with the new tariff law at this session of Congress. "His declaration was called forth as a result of the introduction of bills in the House within the past few days, which would repeal the 'collection at the source' feature of the Income Tax act. 'It is safe to say,' Mr. Underwood asserts, 'that no bills affecting the new tariff will have consideration at this session. The Income Tax law is a part of the new tariff law.' " "Representative Hull of Tennessee, author of the Income Tax law, said today that 'complaints of its ad- ministration were premature,' and urged that criticisms be withheld until the law had been fully tested." It appears in this telegram that Mr. Underwood, a Eepresentative in Congress from Alabama, has assumed jurisdiction to not only prohibit Congress from correct- ing any of the numerous errors which have been dis- 19 covered by mimerous citizens in the income tax law^ since it was signed by President Wilson on October 3, 1913, but Mr. Underwood also proposes to prevent Con- gress from even considering any bill to correct any of those errors. Moreover, it appears that on January 29, 1914, Mr. Underwood "served notice" on the whole nation that its hundred millions of people must relin- quish any hope they may have had of relief from those errors, at least in respect of their income taxes for the year 1913. The history of the United States will have to be searched, at least as far back as the adminis- tration of Andrew Johnson before any case can be found in that history of another announcement sO autocratic as having ever been made by any leader of either house of Congress. During that administration, Eepresentative Thaddeus Stevens took at times a lofty and dictatorial tone in his pronunciamentos, but Mr. Stevens was a venerable man of great sagacity; and besides, when he spoke he represented the opinions and wishes of the majority of the people, instead of setting up his will against those wishes and those opinions. In this telegram to the Times, Mr. Hull, a Represen- tative in Congress from Tennessee, takes a tone which is as modest as Mr. Underwood's tone is somewhat con- centric. Mr. Hull seems inclined to ask the nation to shut up its eyes and stop up its ears, while the Commis- sioner of Internal Revenue administers the income tax law long enough to demonstrate by actual experience how bad it really is. But the foregoing critical para- graphs upon his work were written and sent to the printer before Mr. Hull published his request that all criticisms of his statute should be withheld until that statute is fully tested; and his expression of a wish for 20 silence does not seem to be an adequate reason for sup- pressing those paragraphs. Moreover, Mr. Hull, when he wrote the bill for the in- come tax statute, made a mistake which still remains to be mentioned, and which resides in the statute as enacted, and which can not be cured by the Commissioner of In- ternal Revenue in administering that statute, and which, unless it is cured by an amendment to the statute made by Congress and signed by the President, before the end of February, 1914, will operate to inflict flagrant in- justice upon a large number of persons in Ohio, and upon a considerable number of individuals residing in other states. That blunder has had the following history, and is as follows: Subsection B, of Mr. Hull's draft of a proposed in- come tax statute, prescribed the method of computing the taxable incomes of persons, by making a series of classes of deductions from their gross incomes, respec- tively. One of those classes of deductions was defined by Mr. Hull as "losses actually sustained during the year, incurred in trade, or arising from fires, storms, or ship- wreck, and not compensated for by insurance or other- wise. ' ' But when Mr. Hull came to write his subsection G, and to prescribe therein the method of computing tax- able incomes of corporations by making a series of classes of deductions from their gross incomes, respec- tively ; he defined the class consisting of losses in the f 0I7 lowing language: "all losses actually sustained within the year, and not compensated by insurance or other- wise." These two definitions differed from each other in a very important respect, which discriminated against in- 21 dividuals and in favor of corporations. That discrimina- tion consisted in the fact that the deductible losses of persons were confined to those incurred in trade, or aris- ing from fires, storms or shipwrecks; whereas the de- ductible losses of corporations were not limited at all, and included losses caused by robbery or other crimes, and those involved in railroad wrecks, and those in- flicted through earthquakes or floods. And these dis- criminatory definitions were never changed by the Com- mittee on Ways and Means of the House, or by the Finance Committee of the Senate, or by either of those Houses of Congress; and they were both incorporated in the income tax statute as it was enacted, and as it was approved by the President. It results from this plutocratic discrimination be- tween persons and corporations that any corporation in Dayton, Ohio, which incurred heavy losses in the flood which so nearly submerged that city in the spring of 1913, is entitled to deduct all those losses from its gross income from that year, when computing its taxable in- come; whereas any person engaged in any competing business in that city, or indeed in any business whatever, who incurred heavy losses in the same flood, is not enti- tled to deduct any of those losses from his gross income for that year, when he is computing the income taxes to be paid by him. The practical result of this legislation, if enforced, will be to compel all such persons to pay in June, 1914, income taxes on all the property which they lost in the flood of April, 1913. And what is true of the flood in Dayton, Ohio, is equally true in respect of every other flood which caused losses in that state, or in any state during the spring of 1913. And what is true in respect of losses in floods any- where in the United States in the spring of 1913, will 22 always be true of losses in floods and of losses caused hy robbery or other crimes, and of losses involved in rail- road wrecks or earthquakes, anywhere in the United States, as long as the income tax statute of October 3, 1913, remains unrepealed, vinamended and not invalid- ated. For the Commissioner of Internal Eevenue has na authority to remove, from the administration of the stat- ute that undeniable discrimination in favor of corpora- tions and against individuals. Mr. Hull's request that all criticism of his statute be withheld till it has been fully tested, is a wrong request. On that principle, Guiteau could have had a suspension of criticism, till the result of his shooting of G-arfield could be tested by months of struggle between life and death. CHAPTER IV. ADMINISTRATION. The administration of the income tax law by the Commissioner of Internal Eevenue has thus far been even more blundering and incompetent than was the writing of that statute by Congressman Hull; which truth is partly indicated by the following example : On November 15, 1913, I wrote and mailed a letter to Mr. W. H. Osborn, Commissioner of Internal Eevenue, Washington, D. C, in which I called his attention to page 9 of the pamphlet of "Eegulations" which he had issued on October 25, 1913, and in which I pointed out that his "Eegulation" on that page, expressly announced -that ' ' Non-resident foreigners owning interest bearing bonds are not subject to taxation on income from such bonds,"' provided they will sign and furnish certificates for them- 23 selves to tlie effect that they are non-resident foreigners. I also pointed out to Mr. Osborn in that letter, that that proposed exemption of non-resident aliens from United States income taxes on the interest drawn by them from corporations organized and doing business in the United States, was a discrimination in favor of those non-resi- dent aliens, as against all American citizens ; and I also stated to the Commissioner in the same letter that no such discrimination was expressed in the income tax statute, and that it was plain enough, in the absence of any statutory authority therefor, that no administrative officer was justified in making any such discrimination. On November 20, 1913, not having received any reply to my letter of November 15 to Mr. Osborn, I wrote to him again upon the same subject, and called his atten- tion to that decision in the Erie case which was written more than thirty years ago by Mr. Justice Bradley in the Supreme Court of the United States, and which, as I told him, is printed on pages 703, 704 and 706 of Volume 106 of the Reports of the Supreme Court of the United States. I told Mr. Osborn in that letter, that that deci- sion was based upon the Civil War income tax statute, and that it related to the question of the taxability under that statute, of coupons upon bonds which had been is- sued by the Erie Eailway Company, and Avhich bonds and coupons were owned by non-resident aliens. I also told the Commissioner that the decision held that money due on those coupons to those non-resident aliens was "property in the United States," and was taxable as such under the United States income tax statute of that time. I also pointed out to Mr. Osborn that the in- come tax statute of October 13, 1913, also prescribes its taxation upon "property owned in the United States" by persons residing elsewhere, and that the intention of 24 Congress to include the bonds of corporations doing bus- iness in the United States in the category of "property owned in the United States," is indicated by the fact that in several places in the income tax statute the phrase "capital invested within the United States" is used as an equivalent for the phrase "property owned in the United States. ' ' Having thus, in two successive letters, fully presented this vastly important matter to Mr. shorn, I summed up my statements in the following paragraph : "For these reasons, it is perfectly plain and it is un- deniable, that your proposal to exempt non-resident for- eigners, owning interest bearing bonds, issued by cor- porations in the United States, from that income tax, which everybody else owning such bonds must pay, is a proposition which is contrary to the plain meaning of the statute itself, and is also contrary to the decision of Justice Bradley, which I am bringing to your knowledge in this letter." I never received any reply to either of my letters to Mr. Osborn on this subject until twenty-one days after the first of them was written, which was sixteen days after the second one was written. That reply reached me on December 7, 1913, and though it was signed "W. H. Osborn, Commissioner," it evidently was not composed by him, for it had written upon it the initials of deputy commissioner Luther F. Speer and also the initials of three clerks, and it had in typewriting, the initials of an- other individual, who was probably the typewriter oper- ator, who really wrote the letter. But whoever may have been the author of the communication, he did his work so carelessly that he dated the letter "November 6, 1913," instead of December 6, 1913. Moreover, that letter, in 25 response to my elaborate communication of November 15 and November 20, was merely perfunctory, as will ap- pear from reading its forty-five words, as follows : "This office is in receipt of your letter of the 20th ultimo, in which you express yourself forcibly as to the matter of exempting interest income from American cor- porations to nonresident aliens from the payment of the income tax. Your suggestion will be given considera- tion." If the Commissioner of Internal Revenue, ever did give any consideration to this subject, no equity resulted therefrom; for his "Instruction" No. 1, on the back of his "Form" 1040, omitted to cure the error, and left page 9 of his "Regulation" of October 25, 1913, in full force, with the results which are set down on pages 39 to 41, of this pamphlet. The man who really runs the income tax business in the office of the Commissioner of Internal Revenue is Mr. Luther F. Speer, who has been a clerk in the Treasury Department for twenty years, and who prior to the enactment of the income tax statute of October 3, 1913, had charge of the collection of the corporation tax, under the statute of 1909. While the Hull proposition for an income tax law Was pending in Congress, Mr. Speer wrote a pamphlet explaining Mr. Hull's bill, as he under- stood it. About the time the Committee of Conference agreed upon their report to be submitted to the two houses, relevant to the whole United States tax law of 1913, Mr. Speer revised his pamphlet, with a view to make it match the income tax portion of that bill, as he foresaw it would soon be adopted by the two houses of 26 ■Congress. And on the third day after October 3, 1913, when President Wilson signed that bill, Mr. Speer published his pamphlet, through the Corporation Trust Company of 37 Wall Street, New York City. The Walker pamphlet of October 16, 1913, which is entitled "The Income Tax Law of the United States of America, Analyzed and Clarified," contained and still contains an "Insertion" of thirteen pages, devoted to pointing out and proving the existence of fourteen im- portant errors in that Speer pamphlet. Inasmuch as Mr. Speer is now the deputy commissioner who has •charge of administering the income tax law, it is import- ant to ascertain and state whether he still adheres to all of those fourteen errors, or whether he has renounced some or all of them. To this end I have carefully com- pared those fourteen errors with the directions which he has printed on the faces, and with the "Instructions" which are printed on the backs, of his income tax return "Forms," 1030, 1031, 1032, 1033, 1034, 1035, 1040 and 1041, and I find that Mr. Speer has already renounced more than half of those errors ; and has materially modi- fied all the others, except those which, in the Walker pam- phlet are numbered Second and Third. But the administration of the income tax law, which is being conducted in the name of th« Commissioner of Internal Eevenue, contains scores of other deviations from the directions of that statute, and is therefore illegal in scores of particulars. Those illegalities consist in wrong directions to taxpayers, how to write their in- come tax returns. The best way in which to point out those errors, is to show how the statute requires those re- turns to be written; and to contrast its provisions, with the "Instructions" and other directions which have been 27 promulgated in the name of the Commissioner of In- ternal Eevenne. That therefore is the work which is recorded in the next twenty thousand words of this pamphlet; which are not more numerous than the facts themselves, and the great importance of those facts, re- quire them to be. PART TWO. INCOME TAX RETURNS INTRODUCTION. The income tax statute casts upon the taxpayers the function of writing their respective income tax returns. Uniformity of arrangement of the statements and sta- tistics which constitute the income tax returns of each class of taxpayers, is necessary to economy in the ad- ministration of the income tax law ; and such uniformity of arrangement can be attained only on blank "Forms," contrived by one person, or one council of persons. It is for this reason that the income tax statute casts upon the Commissioner of Internal Eevenue the function of contriving such "Forms" and prescribing them to the taxpayers. Such a "Form" properly consists of a systematic arrangement of spaces, on a sheet of paper, for the re- ception of Arabic numerals, and also of a word or a number of words, printed opposite to those spaces, re- spectively, to show what particular moneys are to be rep- resented by the numerals which are to be written into those respective spaces, in order to enable the taxpayer to systematically set forth, in his income tax return, all the statements and statistics which the income tax stat- ute requires him to record therein. But the Commissioner's function to contrive such a Form, and his power to prescribe it to the taxpayer, do 29 not include any function or power to effectively print thereon, any word or words wMcli, if followed by tlie taxpayer, will carry his income tax return out of con- formity with the income tax statute. And as the statute imposes upon the taxpayer the duty, at his peril, of mak- ing his return conform to the statute, and also requires him to make a solemn written oath or affirmation that it does so conform ; it follows that he must judge for him- self, whether the words which the Commissioner may have printed, on the face of one of his "Forms" to indi- cate the meaning of the numerals opposite thereto, are true or are erroneous, when compared with the require- ments of the statute. When a taxpayer is making out his income tax return he must be guided by the Com- missioner of Internal Revenue in respect of the form of that return ; but the law casts the responsibility of its substance upon that taxpayer alone. No official person has any power to interfere with any taxpayer when he is trying to- carry that responsibility, according to his own honest opinion, or according to the advice he hon- estly receives from any lawyer or other person, on whom he chooses to rely for guidance. The income tax statute does not confer upon the Com- missioner of Internal Revenue or any other official per- sonage, any jurisdiction to instruct any taxpayer upon any point of law. Every taxpayer must rely upon the in- come tax statute, for his guidance on every point of law which he needs to know, when making up j^is income tax return. In his efforts to learn the meaning of that statute, he may take information and advice wherever it is presented ; but nobody has any power to bind his action with any instruction on any point of income tax law. 80 The Commissioner of Internal Eevemae has pre- scribed and is publishing a "Form" for the use, in mak- ing up their income tax returns, of each of the classes of persons and corporations Which are subject to the income tax statute. In so doing he acted within his official juris- diction. But he also ventured to print, on the faces of those "Forms," many words and phrases for the guid- ance of taxpayers in performing their duties under the income tax law; and he even went so far beyond his jurisdiction, as to print on the backs of each of those "Forms," an elaborate code of "Instructions" on points of income tax law. Many of the directions which the Commissioner thus printed on the faces of his "Forms," and many of the "Instructions" which he thus printed on their backs, are harmonious with the income tax statute; and those may be useful as pieces of advice, though not entitled to be designated "Instructions." But much of that gratui- tously printed matter is discordant with the income tax statute ; and some important parts of it are exactly op- posite to what the statute expressly enacts. In every such particular, it is the right, and indeed the duty, of the taxpayers to follow the statute, and discard the guidance and lepudiate the "Instructions" of the Com- missioner. It is the purpose and the plan of this pamphlet; to criticise the Commissioner's "Forms" in a convenient order; and to show the taxpayers exactly wherein the "Instructions" and other directions which are printed on their respective backs or faces, are wrong; and also to point out precisely how each of those "Forms" can be used, in conformity to the income tax statute, and thus made to show the taxable income of the user, with- •61 out showing that exaggeration of that income which will follow every obedience to the erroneous "Instructions" or other erroneous directions of the Commissioner of Internal Eevenue. SECTION 1. Relevant to Natural Peesons. "Form" 1040 is a printed sheet of paper, ten and one-half by sixteen inches, adapted to be folded as two leaves, each of which is ten and one-half by eight inches, and the four pages of which leaves are numbered 1, 2, 3 and 4, respectively. Each of those pages is occupied by printed matter, which is too complicated to be self-explan- atory. Pages 1, 2 and 3 include several blank schedules, which when filled out with figures to indicate sundry wide- ly differing sums of money, will constitute the income tax return of the particular person filling out those schedules. But the lower two-thirds of page 3 is occupied by two blank affidavits the first of which may be executed by a person making his own income tax return, or the second of which may be executed by a duly authorized agent of the person whose income tax return is represented by the filled out schedules. The schedule on page 2 is devoted to "Grross Income". The schedule on the upper one-third of page 3 is devoted to "General Deductions". Line 1 of the schedule on page 1 is devoted to "Gross Income" and is adapted to be filled out with the figures which constitute the foot- ing of the schedule on page 2. The second line of the schedule on page 1 is devoted to "General Deductions" 32 and is adapted to be filled out with the figures which constitute the footing of the schedule on page 3. The third line of the schedule on page 1 is entitled "Net Income"; and is properly to be filled out with the figures which constitute the remainder, after the figures in the second line are subtracted from the figures of the first line. That phrase "Net Income" is an arbitrary one, which does not indicate that income of a person upon w'hich the normal income tax of one per cent is calcu- lated, but indicates a larger amount. Lines 4, 5 and 6 of the schedule on page 1 are respectively devoted to three deductions, always one and often two, and some- times three of which may properly be made from the amount of the above mentioned "Net Income", in order to ascertain the ' ' Taxable Income ' ' on which the normal tax of one per cent is calculated, in the case of every person, and which taxable income is the subject of line 7 of that schedule. Where the amount entered on line 3 oP the schedule on page 1 exceeds $20,000, that part of the schedule of page 1, which is below line 8, must be filled out to repre- sent that excess and to represent the "additional" in- come tax which, according to the statute, must be paid upon any such excess. According to the. statute that "additional" income tax is one per cent upon the first $30,000, or fraction thereof of such an excess; and on the next $25,000 or fraction thereof it is two per cent; and on the next $25,000 or fraction thereof it is three per cent; and on the next $150,000 or fraction thereof it is four per cent; and on the next $250,000 or fraction thereof it is five per cent ; and on any still ftirther amount, that ' ' additional ' ' tax is six per cent. The last three lines of the schedule on page 1 of Form 1040 provide places for inserting the amount of the 33 normal tax, and for adding the additional tax, if any, to the normal tax, so as to show, in the last of those three lines, the total tax liability of the person. The foregoing explanation of the schedules on pages 1, 2 and 3 of Form 1040, is enough to enable any person to use that form in making up his incom-i tax returns. But if any person is going to make his income tax return according to the income tax law, he must make some changes in some of the words which are printed on the faces of those schedules. Those changes are the fol- lowing : First. — In item 4, near the middle of the schedule on page 1, he must cancel the words "or accrued of," and substitute therefor the word "from." This is necessary, in order to make that item 4 correspond with item 11 of the schedule on page 2, of which that item 4 purports to be a condensed paraphrase. That item 11 is correct; but that item 4 is not correct, because it erroneously states that that item 11 includes moneys which have *' accrued," together with moneys which have been de- rived or received by the person making the return. That item 11 properly omits to include any money which has "accrued" to a taxpayer without being received or de- rived by him. But although the amount of money to be entered in that item 4 is to be copied from the amount entered in that item 11, it purports in item 4 to include money which is not included in item 11. Second. — ^In item 2, of the schedule on page 2, he must cancel the word "bonds," because that word in- cludes all bonds, and because the first clause of the last paragraph of subsection B, of the statute, expressly ex- 34 eludes from income taxation, all United States bonds, all State bonds, and all municipal bonds, as well as all other obligations of a State, or any political subdivision there- of, or of the United States or any of its possessions. Third. — In item 3, of the schedule on page 2, he must insert the word "taxable" before the word "securities," so as to exclude from that item those securities or ob- ligations which are exempted from income taxation by the first clause of the last paragraph of subsection B, of the income tax statute. Fourth. — In item 7, of the schedule on page 2, he must insert the word "taxable" before the word "in- come," in order to exclude from that Hem all those pieces of non-taxable income which may be received by a taxpayer from some trustee or other fiduciary party. Such pieces of non-taxable income include all interest upon United States bonds. State bonds or municipal bonds; and all money acquired through some fiduciary party by gift, bequest, devise or descent, and all pro- ceeds of life insurance policies paid through any fidu- ciary party upon the death of any person insured ; and all payments made through any fiduciary party upon any life insurance, endowment or annuity contract, at the maturity of that contract, or upon its surrender. Fifth. — In item 8, of the schedule on page 2, he must insert the word "taxable" before the word "income" in order to exclude from the amount of money entered op- posite to that item all of the non-taxable income which the person making the return may have received. The pieces of that non-taxable income may be any or all of 35 the following : All interest received upon any obligation of the United States or any of its possessions, or of any State or of any political subdivision thereof; all money and other property acquired by gift, bequest, de- vise or descent; all proceeds of life insurance policies, paid upon the death of the insured; and all repay- ments made to holders of life insurance, endowment or annuity contracts, upon the maturity or surrender of such contracts. The non-taxability of all such pieces of income is expressly enacted in subsection B, of the in- come tax statute. Sixth.— In item 2, of the schedule on page 3, he must change the words "on personal indebtedness of tax- payer" to the words "by a taxable person on indebted- ness," in order, to restore to its statutory scope, the lan- guage which the Commissioner of Internal Eevenue un- dertook to limit, by changing the statutory language. That language is in the second paragraph of subsection B of the statute, and is as follows: "all interest paid within the year by a taxable person on indebtedness." This language plainly includes interest paid by a tax- able person on the indebtedness of some other person or persons, as well as interest paid upon his own indebted- ness ; which vicarious payments, many persons are every year compelled to make, as endorsers or guarantors of the notes or other obligations of other persons. The statute plainly allows any taxpayer to deduct from his gross income, all such payments of interest made by him, as well as to deduct payments of interest upon his own indebtedness. But item 2, of the schedule on page 3, without the slightest authority in the statute, limits all deducted interest, to interest paid on the personal in- debtedness of the taxpayer. 36 The forms of affidavits which are printed on the lower two-thirds of page 3, of Form 1040, differ so extensively from what the statute provides in respect of such affi- davits, that it is not practicable to amend them on their faces, into conformity with the statute. Nobody can truthfully make either of those affidavits, whether ne shall have filled out the schedules on pages 1, 2 and 3 of Form 1040, exactly as directed on their faces, or whether he shall have amended those schedules in any or all of the six particulars which are specified above. In any case, any person may properly refuse to make either of the affidavits printed on page 3, of Form 1040. In any case a proper and legal substitute for the first of those two affidavits may be drawn as follows: I solemnly swear (or affirm) that the foregoing schedules, which are partly in print and partly in pen- writing or typewriting, constitute a true and accurate return, according to the best of my knowledge and be- lief, such as is required of me by the income tax law of the United States of America, which was approved Oc- tober 3, 1913 ; and that my gross income, during the year for which the return is made, is truly stated therein, according to that statute, and according to the best of my knowledge and belief ; and that, according to the best of my knowledge and belief, I am entitled to make, in my said return, all the deductions specified therein, from my said gross income. So also, a proper and legal substitute for the second of those two affidavits may be as follows : I solemnly swear (or affirm) that I have sufficient knowledge of the income of to enable me to make a true and accurate return for that person, in accordance with the income tax law of the United States of America, which was approved 37 October 3, 1913; and that the foregoing schedules, which are partly in print and partly in penwriting or typewrit- ing, constitute a true and accurate return, according to the best of my knowledge and belief, such as is required by that statute to be made by or for that person ; and that, according to the best of my knowledge and belief, the gross income of that person during the year for which the return is made, is truly stated in that return, accord- ing to that statute, and that, according to the best of my knowledge and belief, that person is entitled in said re- turn, to all the deductions specified therein from said gross income. Those faults in the Commissioner's forms of affida- -vits which are contrary to the statute, and are absent from the above suggested substitutes, are the following: First: The Commissioner's forms state that "the foregoing return" contains "a true and complete state- ment of all gains, profits and income received" by the person making the affidavit, or by the person on whose "behalf it is made, as the case may be ; whereas the stat- ute, in its subsection B, provides: "That the proceeds ■of life insurance policies paid upon the death of the person insured, or payments made by or credited to the insured, on life insurance, endowment or annuity con- tracts, upon the return thereof to the insured at the ma- turity of the term mentioned in the contract, or upon surrender of contract, shall not be included as income"; and that subsection also provides that the value of prop- erty acquired by gift, bequest, devise or descent shall not be included in the gains, profits and income to be reported to the Commissioner of Internal Revenue ; and subsection B, also provides that in computing net in- 38 come, there shall be excluded the interest upon the obli- gations of a State or any political subdivision thereof, and upon the obligations of the United States or its possessions. Thus all of these classes of income are exempted, by the income statute, not only from tlie pay- ment of any income tax, but also from being included in the gross income of any individual making an income tax return. But the forms of affidavit furnished by the Commissioner of Internal Eevenue would make any in- dividual swear or affirm that all those classes of exempt income are stated in his income tax return. Second: The forms of affidavit furnished by the Com- missioner, state that "the foregoing return" contains "a true and complete statement of all gains, profits and income accrued" to the individual making the affidavit, or by the individual for whom it is made, as the case may be; whereas the statute does not provide that any gross income which merely accrued to anybody at any time, shall be included in any income tax return, except where profits are left undivided for an illegitimate rea- son, and then only in respect of the "additional" tax. And the eight classes of gross income which are specified on page 2 of Form 1040, as including all the gross income which an individual is required to state in his income tax return, are all confined to income "derived" or "/p- ceived", and are totally destitute of sviggestion that in- come which merely "accrued", ought to be included in any of those items. Page 4 of Form 1040, is occupied by 20 "Instruc- tions", which are furnished by the Commissioner of In- ternal Bevenue, to tell taxpayers what statements to insert in the "Form" on pages 1, 2 and .3, and what 39 statements to omit therefrom, and also how to conduct themselves in some other respects. Instruction No. 1, is misleading in respect of what it tells non-resident aliens to do about their income tax returns. According to that Instruction, such income tax returns are to be based upon income derived "from property owned and business, trade or profession car- ried on in the United States ' ' by the respective non-resi- dent ahens making the returns. This is misleading; be- cause the third paragraph of subsection B, of the stat- ute provides that net income from property owned and business carried on in the United States by persons re- siding elsewhere, shall be computed upon the basis pre- scribed by that subsection, and by that part of subsec- tion Gr which relates to the computation of the net in- come of foreign corporations. And that part of sub- section G which relates to that subject, prescribes that foreign corporations doing business in this country, shall in their income tax returns state "the gross amount of income received within the year from busi- ness transacted, and capital invested in the United States." Now a non-resident alien who owns a bond of some railroad corporation, or some industrial corporation, or some other corporation, organized and operating in the United States, has capital invested in the United States, and is plainly taxable on the interest he receives on that bond, under the income tax law of the United States. But Instruction No. 1, instead of using the phrase "cap- ital invested within the United States", uses the phrase "property owned in the United States." 40 And the Commissioner of Internal Eevenue has made a "ruling", that the phrase "property owned in the United States" does not include any bond of any cor- ' poration organized and operating in the Uliited States^ and that the interest on such bonds, is untaxable when the bonds are owned by non-resident aliens. That rul- ing was expressed on page 9, of the Commissioner's- "Regulations" of October 25, 1913; and has ever since operated to discriminate between citizens of the United States and non-resident aliens, in respect of interest on such bonds ; taxing all such interest as against such citi- zens, and exempting all such interest from taxation, as- against such aliens. Even if the statutory language on this subject had been everywhere expressed by the phrase "property owned in the United States", that ruling would still be exactly contrary to one of the two opinions upon which the decision of the Supreme Court of the United States was based, in the case of the United States against the Erie Eailroad Company; which opinion is printed on pages 703, 704 and 705 of Volume 106 of the United States Reports. If the Commissioner of Internal Eev- enue had used, in his Instruction No. 1, the statutory phrase "capital invested within the United States", he would have plainly told non-resident aliens that they must pay income taxes upon the interest received by them, on bonds of corporations organized and doing business in the United States. That information would have been entirely harmonious with the income tax statute, and with the decision of the Suprenie Court, in the Erie case. But the Commissioner's "Instruc- tion" No. 1, taken in connection with his "Regulation" of October 25, 1913, is contrary to that statute and to 41 that decision; and is tJius contrary, upon a point which is going to cost the United States Treasury more than a million dollars every year. For the amount of bonds, which were issued by corporations organized and oper- ating in the United States, and are owned by non-resi- dent aliens is about three thousand million dollars ; and the annual interest paid on those bonds is about a hun- dred million dollars; and the "normal" income tax and the "additional" income tax due on that interest is more than one million dollars. The Commissioner of Internal Eevenue, is practically giving that amount of money, from the Treasury of the United States to non- resident aliens, without appearing to realize his own vicarious benevolence. But we shall soon see that, with equal guilelessness, he is proposing to collect a still larger sum, from citizens of the United States, in addition to what the income tax law requires those citi- zens to pay. He is proposing to "rob Peter for the benefit of Paul"; Peter being the citizenship of the United States, and Paul being those thousands of non-resident aliens, who are sucking a hundred million of dollars of United States money, every year away from our corporations into their own bank accounts and treasuries. Instruction No. 11, relates entirely to the income tax returns of farmers. It provides that a farmer who buys an animal, and afterward sells it, must return as taxable income the excess of its proceeds over its pur- chase price, without any deduction from its proceeds on account of anything which he may have expended on it while he owned it. 42 This Instruction also provides that a farmer who raises an animal from its birth, and afterward sells it, must return as taxable income, the excess of its proceeds over "the amount of money actually paid as expense for producing it, ' ' without any deduction on ac- count of anything else, which he may have expended upon it during its entire life. This Instruction also provides that a farmer who produces and sells any other product, shall return as taxable income, the entire proceeds of its sale, with- out any deduction except ' ' the amount of money actually paid as expense" for producing that product. A farmer who does all his own work, with the help of his minor sons, and fertilizes his fields with manure from his own barnyard, and sows no seeds except those of his own production, and employs no power, except that of his own horses or oxen, is told by this Instruc- tion, to return his entire gross income as taxable income, without any deduction on account of the cost of his pro- ducts. These requirements seem hard on American farm- ers; but the Commissioner of Internal Eevenue had to do something to recoup the million dollars which he is remitting from the income taxes levied by the statute upon non-resident alien holders of American bonds. And no possible victims of extortion, are more unre- sisting, or more patient, than those farmers who labor under blazing suns, to evolve the food of the nation from the bosom 'of the earth. Moreover, this administrative discrimination against American farmers, will operate only on those whose incomes exceed $3,000 or $4,000 for the year in which the discrimination is perpetrated, and they are comparatively few. 43 Instruction No. 12 reads as follows: "In calculating losses, only such losses as shall have been actually sus- tained, and the amount of which has been definitely ascer- tained, during the year covered by the return, can be de- ducted." The nine words which are italicized in this quoted language, were interpolated by the Commissioner of Internal Revenue, without any authority in the statu- tory language; which language is plainly printed with- out, those nine words in the second paragraph of sub- section B, of the statute, as the fourth deduction allowed by law. This interpolation by the Commissioner of Internal Eevenue was absurd in addition to being unauthorized; for an individual, in making out his income tax return in January or February of one calendar year, for the preceding calendar year, might know that his losses in trade or arising from fires, storms or shipwrecks during that year, were greater than his gross income for that year, although the amount of those losses might not have been definitely ascertained before the end of February. In such a case, the statute permits the individual to re- frain from paying any income tax for that disastrous year; but the Commissioner of Internal Eevenue "in- structs" such a suffering citizen that he must pay an income tax upon his gross income during that year, al- though that income may have been much exceeded by the losses resulting from a disastrous fire on the last day of December ; unless the precise amount of the losses caused by that fire, shall have been made certain, before the end of February. Fortunately, however, the itali- cized words in the above Instruction No. 12 have no foundation in the statute, and may be properly ignored bv the citizens of the United States. 44 Instruction No. 13 is as follows: "Persons receiving fees or emoluments for professional or other services, as in the ease of physicians or lawyers, should include all actual receipts for services rendered in the year for which the return is made, together with all unpaid ac- counts, charges for services or contingent income, due for that year, if good and collectible." The italicized words, in this Instruction, are totally destitute of foundation in the statute. Indeed they are contrary to the statute, be- cause the statute provides that "income from salaries, wages or compensation for personal service of whatever kind," is taxable only when it shall have been derived and shall have been paid. The law on this subject is in the tirst sentence of the first paragraph of subsection B of the statute, and is there expressed as follows: "sub- ject only to such exemptions and deductions as are here- inafter allowed, the net income of a taxable person shall include gains, profits and income derived from salaries, wages or compensation for personal services of whatever kind and in whatever form paid." The erroneous idea of the Commissioner of Internal Eevenue on this point, appears to have entered his mind from the word ' ' accruing, ' ' where it appears in the first paragraph, and also in the eighth paragraph of the statute in reference to the ' ' net income " of a person. But in both those places, and everywhere else in the statute where the word "accruing" is similarly used, the impli- cation is that a net income "accrues" from a gross in- come; though the gross income is everywhere said to be "derived" or "received" from the various sources of income which are specified in the statute. The statutory use of the word "accruing" is accurately proper, for the net income to which it is applied does "accrue" from 45 the gross income, through a process of successive deduc- tions, which is prescribed by the statute as the proper method of ascertaining the amount of the net income which accrues from the gross income. But whether the Commissioner of Internal Revenue acquired his erron- eous idea from this conjectural but unreasonable source, or acquired that idea by some other derivation, it is certain that nobody is bound to agree with him, or to follow his Instruction No. 13 on this point. Instruction No. 14 is as follows : ' ' Debts which were contracted during the year for which return is made, but found in said year to be worthless, may be deducted from gross income for said year, but such debts can not be re- garded as worthless until after legal proceedings to re- cover the same have proved fruitless, or it clearly appears that the debtor is insolvent. If debts contracted prior to the year for which return is made were included as in- come, in return for year in which said debts were con- tracted, and such debts shall subsequently prove to be worthless, they may be deducted under the head of losses, in the return for the year in which such debts were charged off as worthless." This "Instruction" is ambiguous; but the statutory language which it purports to represent is plain enough. That statutory language defines the fifth deduction which every individual is entitled to make from his stat- utory gross income, when ascertaining his statutory tax- able income, as "debts due to the taxpayer, actually as- certained to be worthless and charged off within the year." Now when anybody takes time to translate In- struction No. 14 of the Commissioner of Internal Rev- enue into plain language, he will find that it probably has the following meaning: 46 "Debts which originated and were also ascertained to be worthless within the single year covered by an income tax return, may be deducted from gross income for that year, provided that legal proceedings to recover them have proved fruitless, or it clearly appears that the debtor is insolvent. If that proved fruitlessness or that clear appearance, shall not have been reached by March 1, of the next year, no deduction from gross income on account of those debts shall be made in the income tax return for the year in which the debts originated and were ascer- tained to be worthless ; but if by March 1, of some future year, that proved fruitlessness or that clear appearance shall have been reached, then the amount of the old and worthless debts may be deducted as losses, in the income tax return for the year in which that proved fruitlessness, or that clear appearance was at last established." This Instruction No. 14 differs from the statute, in the following respects: First. — The statute allows worthless debts to be de- ducted from the gross income of any creditor for the calendar year in which they are ascertained to be worth- less, regardless of whether those debts originated in that year or in some previous year; whereas the Instruction does not allow any worthless debt to be deducted from any gross income for 1913, unless it originated in that year; as well as being found in that year, to be worthless. Second. — The statute authorizes debts due to any tax- payer to be deducted from his gross income, in ascertain- ing his taxable income, whenever such a debt is ascer- tained in the judgment of the taxpayer to be worthless, and is thereupon "charged off" by him in his account books ; whereas the Instruction does not permit any such 47 deduction "until after legal proceedings to recover the debt have proved fruitless, or it clearly appears that the debtor is insolvent." Either of these two requirements of the Instruction would impose hardship and loss upon many a creditor. The first requirement would involve the expense, the de- lay and the trouble which always attend litigation; and the second requirement, depending as it does upon ap- pearances, would often be unattainable, even where debts would really be worthless. For example, a debtor might abscond with the very money which the creditor had loaned him, without leav- ing any other debt behind him ; in which case the creditor could not even begin any legal proceedings against him to collect the debt, and could not make it "clearly ap- pear" that the debtor is insolvent. If, in such a case, the creditor is convinced that the debt is worthless, and thereupon charges it off from his books, the statute per- mits him to deduct its amount from his gross income, for the year in which the debtor absconded. But the Instruction would never permit the amount of that debt to be deducted from the gross income of the creditor, for any year, or at least not until the debtor would come back to be sued, or to make it clearly apparent that he is insolvent. For another example, a debtor might clearly appear to be solvent, though poor, and not be able to pay his debt without thereby depriving his wife and children of necessary shelter, food or clothing; and his creditor might be unwilling to impose upon himself and the debtor the expenses incident to litigation, and rather than sue the poor man, might "charge off" the debt as worthless. In such a case the statute permits the debt thus charged 48 off to be deducted from the gross income of the creditor, for the year in which it was thus charged off. But the Commissioner of Internal Eevenue would penalize the creditor for his forbearance, and compel him to pay an income tax upon the amount of the debt which he was too tender hearted and too sensible to try to enforce against the poor debtor. And this is the same Commissioner of Internal Eev- enue, who in his Regulation of October 25, 1913, under- took to exempt from all United States income taxes, all those non-resident aliens who are receiving a hundred million dollars every year, as interest upon bonds of cor- porations organized and operating in the United States ; and is the same Commissioner who undertook to do that thing, Avithout any authority of law, and in the very face of the income tax statute itself, and of one of the opinions, upon which the decision of the Supreme Court of the United States in the Erie Railway case was based. Instruction No. 17 reads as follows: "Estimated ad- vance in value of real estate is not required to be re- ported as income, unless the increased value is taken up on the books of the individual as an increase of assets." The italicized last eighteen words of this Instruction imply that when the increased value of real estate is taken up on the books of the individual as an increased asset, the amount of that increment must be included in the gross income of the owner, for the year in which it occurred. This implied instruction has no foundation in the statute, and is contrary to that portion of the statute which relates to gross profits arising from in- creased value of real estate. That part of the statute is near the middle of the first paragraph of subsection B, 49 and provides that the profits arising from increased value of real estate, which are to be included in gross income, are the profits which arise from sales of or dealings in real property. The statute proposes to tax the income derived from real estate from year to year, which in- come naturally increases as fast as the value of the real estate increases. But the statute does not propose to tax any such increase of the value itself, until that in- crease is materialized in a sale of the property. To tax the increase of value and also to tax the increase of in- come due to the increase of value, would be multiple taxation. Moreover, if the statute were to tax any in- crease of the market value of real estate for one calendar year, it ought to make allowance for decrease of market value of the same real estate, during any later year in which its market value might depreciate. But the stat- ute confines its allowance for depreciation of real prop- erty, or any other property, to physical depreciation caused by exhaustion or wear and tear, arising out of its use or employment; and does not allow any deduction on account of any decrease of market value, due to dimin- ishing demand or to increasing competition. Instructions Nos. 2 to 10, inclusive, and Instructions 15; 16, 18, 19 and 20, on the back of Form 1040, are prop- er enough as advice to be taken, though not as instruc- tions to be obeyed. But Form No. 1040, as a whole, when analyzed and construed in connection with the code of twenty "Instructions" on its back, cannot be law- fully used by any individual, without those changes which are suggested and precisely described on pages 33 to 38, of this pamphlet, and except in the light of those comments upon those "Instructions," which are made on its pages 38 to 49, inclusive. SECTION 2. Eelevant to Fidxjciaeies. "Form" 1041 is a printed sheet of paper which, has the same general appearance as Form 1040, but it dif- fers therefrom in being devoted to income tax returns to be made by fiduciaries on behalf of taxpaying indi- viduals, whereas Form 1040 is devoted to income tax returns to be made by individuals for themselves. That part of the statute which requires such returns to be made by fiduciaries, is in subsection D thereof, and is expressed in the following language : ' ' guardians, trus- tees, executors, administrators, agents, receivers, con- servators, and all persons, corporations or associations acting in any fiduciary capacity, shall make and render a return of the net income of the person for whom they act, subject to this tax, coming into their custody or con- trol and management, and be subject to all the pro- visions of this section which apply to individuals". The phrase "this tax" must refer to whatever tax is men- tioned in the statute last preceding that phrase. That last mentioned tax is specified a few lines higher in the same paragraph as "the tax imposed by this section". And the word "section" is everywhere used in the stat- ute to designate the whole income tax statute, which enactment is Section II, of the United States tax statute of October 3, 1913. That Section II, is printed in thirty- three paragraphs, arranged in fourteen groups, the first paragraph of each of which groups is prefixed by a cap- ital letter, and all of which groups are arranged in al- phabetical order, from A to N inclusive, and are desig- nated in the statute as subsections. 51 The above quoted statutory language which imposes upon fiduciaries the duty to render income tax returns for the persons for whom they respectively act, and who are subject to the income tax statute, must, according to the quoted statutory language, perform that duty "sub- ject to all the provisions of this section which apply to individuals". And we have just seen, that the word "section" wherever it is used in the income tax statute, signifies that entire statute. It follows from these statutory provisions, that when any fiduciary is going to render an income tax return for the person for whom he acts, he must render that return in substantially the same shape, as if that person were rendering his income tax return for himself. But Form 1041, if followed by any fiduciary on behalf of a person whose total net income exceeds $20,000, is adapt- ed to enable that person to escape the payment of the "additional" income tax, which Form 1040 provides for, in respect of individuals making their own income tax returns. Surprising as this may seen. Form 1041 does not contain any schedule in which any entry can be made by anybody relevant to any "additional" income tax. Indeed no mention or allusion to any "additional" in- come tax, is made anywhere on the face or on the back of Form 1041. That form was evidently constructed on the theory that no person whose income is controlled by some guardian, trustee, executor or other fiduciary, is required by the statute to have any additional income tax paid on his behalf; even where, as in many actual cases, the net income of such a person exceeds $20,000, and even where, as in some actual cases, such an income exceeds $100,000, and even where, as in a few actual 52 cases, such a net income exceeds $1,000,000 a year. That theory must have arisen from the notion that the phrase "this tax" where it occurs in the above quoted relevant statutory language, is confined to the normal tax im- posed by the income tax statute. But that notion is destitute of foundation in the statute, and is quite in- consistent with the statutory provision in subdivision 2, of subsection A; which provides that, in addition to the normal income tax, there shall be levied, assessed and collected upon the net income of every individual, an additional income tax of one per cent per annum up- on the amount by which the total net income exceeds $20,000; and so forth in respect of a graduated series of still larger incomes. It is now in order to ascertain and state whether, and to what extent if at all. Form 1041 is adapted to be used by any fiduciary, in making out an income tax return for any person whose income does not exceed $20,000; and all further statements in this pamphlet relevant to Form 1041, are to be understood as being confined to that subject. The schedule on page 2, of Form 1041, is devoted to "Gross Income". That schedule is substantially iden- tical with the corresponding schedule on page 2 of Form 1040, except that it properly omits item 7 thereof, and renumbers items 8, 9, 10, 11 and 12, as items 7, 8, 9, 10 and 11. All the changes which are specified on pages 33, 34 and 35, of this pamphlet as being necessary to be made in the schedule on page 2 of Form 1040, must also be made in the schedule on page 2 of Form 1041, in order to render that schedule proper to be used by any fiduciary, when making out an income tax return for any person for whom he is acting. Those are the changes which are specified on those pages as second, third, fourth and fifth. But the change therein specified as fifth, must be made in item 7 of the schedule on page 2 ■of Form 1041; for that item is identical with item 8, of the schedule on page 2 of Form 1040. The first six items of the schedule on page 3 of Form 1041 are substantially identical with the first six items in the schedule on page 3 of Form 1040. All those six items are correct; except No. 2, which is in- •correct in the respect and for the reason explained on page 35 of this pamphlet, in the paragraph headed with the word "Sixth". Items 7 and 8 of the schedule on page 3 of Form 1041, •correspond with items 4 and 5 of the schedule on page 1 of Form 1040, and they are correct.. There should also be an item No. 9, in the schedule on page 3, of Form 1041, to correspond with item No. 6 of the schedule on page 1 of Form 1040; that item re- ferring to the specific deduction of $3,000 or $4,000, as the case may be, which the statute allows to every in- dividual whose net income does not exceed $20,000. The statute plainly provides that any such person, whose in- come is controlled by some fiduciary, is entitled to that specific reduction, equally with any such person who controls his own income, and makes his own income tax return. But Form 1041 contains no blank space for the insertion of any such deduction, and contains no indica- tion that any such deduction is allowed to be made, for the benefit of any person whose income tax return is made out by some fiduciary. 54 It is true that "Instruction" No. 18 on the back of Form 1041 states that: "An unmarried individual or a married individual not living with wife or husband^ shall be allowed an exemption of $3,000", and that "When husband and wife live together, they shall be allowed jointly a total exemption of only $4,000, on their aggregate income". But whoever constructed Form 1041, appears to have forgotten that part of the income tax law, for he omitted to so construct that form, as to enable anybody, when filling it out, to take advantage thereof. The two forms of affidavit which are printed on the lower two-thirds of page 3 of Form 1041, were so un- skillfuUy thrown together that neither of them can be used by any fiduciary, with any conscientious accuracy. For example, the first of those affidavits, would make the affiant swear that "the foregoing return" to the best of his knowledge and belief, contains a true and complete statement of all gains, profits and income com- ing into his custody and control and management, dur- ing the year for which the return is made; thus swear- ing that "the foregoing return" includes a true and complete statement 'of all his own gains, profits, and in- come, as well as a true and complete statement of all gains, profits and income coming into his custody or control and management, in his fiduciary capacity. When the writer of the two forms of affidavit came to write the second form, he happened to think of this point, and limited that form accordingly ; but it appears that he did not also happen to think that the first of the two forms required the same limitation, and therefore did not go back and correct that form in that respect. 55 A proper and legal substitute for the first of tlie af- fidavits on page 3 of Form 1041 might run as follows : I solemnly swear (or affirm) that the foregoing schedules, which are partly in print and partly in pen- writing or typewriting, constitute a true and accurate return, according to the best of my knowledge and be- lief, such as is required of me by the income tax law of the United States of America, which was approved Oc- tober 3, 1913, relevant to the incomes of the beneficiaries whose names are stated in the first of those schedules; and that I was the duly authorized fiduciary, who had the custody or control and management of said incomes, ■during the last calendar year; and that said beneficiaries are entitled, as I am advised and believe, under the said income tax law, to all the exemptions and deductions ■entered in said return ; and that all certificates claiming personal exemption, presented by any of said benefi- ciaries to me, are herewith enclosed; and that the said return contains a true and complete list of the names and addresses, as far as known to me, of all the beneficiaries to whom any part of the amount stated on line 3 of page 1 of said return, has been paid or is payable. And a proper and legal substitute for the second of those affidavits, might be framed as follows : I solemnly swear (or affirm) that I am the of the of which organization was the duly anthor- ized fiduciary party, which during the last calendar year had the custody or control and management of certain incomes of certain beneficiaries, whose names are stat- ed in the first of the foregoing schedules ; and that those schedules, which are partly in print and partly in pen- ■^vriting or typewriting, constitute a true and accurate 56 return, according to the best of my knowledge and be- lief, such as is required of the said fiduciary organiza- tion, by the income tax law of the United States of America, which was approved October 3, 1913, relevant to the respective incomes of said beneficiaries ; and that said beneficiaries are entitled, as I am advised and be- lieve, under the said income tax law, to all the exemp- tions and reductions entered in said return; and that aJll certificates claiming personal exemption, presented by any of said beneficiaries, are herewith enclosed; and that the said return contains a true and complete list of the names and addresses, as far as known to me, of all the- beneficiaries to whom any part of the amount stated in line 3 of page 1 of said return, has been paid or is pay- able. Page 4 of Form 1041, is occupied by 19 Instructions- which are furnished by the Commissioner of Internal Eevenue, to tell fiduciary parties what statements to in- sert in the "Form" on pages 1, 2 and 3, and what state- ments to omit therefrom; and also what to do in some other respects. Instruction No. 1, is wrong, in that it tells all fidu- ciaries to make and render the income tax returns for their beneficiaries, on Form 1041 ; which they cannot do without violating the income tax statute, as is proved by the statements on pages 50 to 56 inclusive of this pamphlet. Instructions Nos. 10, 11, 12, 13 and 16, on the back of Form 1041, are respectively identical with Instruc- tions Nos. 11, 12, 13, 14 and 17 on the back of Form 57 1040; and the criticisms on those Instructions wMch are printed on pages 41 to 49 inclusive of this pamphlet, are equally applicable to that set of five Instructions wher- ever they are printed. Instructions Nos. 2 to 9, inclusive, and Instructions 14, 15, 17, 18 and 19, on the back of Form 1041, are tolerable; except the second paragraph of No. 8, which is not tolerable. But Form 1041, as a whole, when taken in connection with the code of nineteen "Instruc- tions" on its back, cannot lawfully be used by any fidu- ciary; without those changes which are indicated as be- ing necessary, on pages 51 to 56 of this pamphlet, and except in the light of those criticisms on those "Instruc- tions" to which attention is called, on this page, and the one next before it. 58 SECTION 3. Relevant to Coeporations. Form 1031 is devoted to banks and otlier financial institutions ; Form 1032 is devoted to public service cor- porations, including railroad companies; Form 1033 is devoted to manufacturing corporations; Form 1034 is devoted to mercantile corporations; and Form 1035 is devoted to miscellaneous corporations. Each of these forms is printed on one side of a sheet of paper, ten and a half inches by sixteen inches ia size. All five of these forms are exactly alike, except that the one devoted to banks and other financial institutions contains one item which none of the others contains, namely the item of interest paid on deposits. Each of the five forms has two notes printed at its foot, namely Note A, and Note B. This set of notes is the same on Forms 1031, 1032 and 1035, and note B is the same on Form 1034. But note A on Form 1033 and note A on Form 1034 differ from each other, and each of them differs from note A on Forms 1031, 1032 and ' 1035 ; and note B on Form 1033 differs from each of the other notes Bi. An elaborate code of twenty- three "Instructions" is printed 'on the back of each of the five forms, and is identical in each case, except that in Forms 1031 and 1032, the word "interest-bearing" in Instruction No. 15, is misprinted as "inter-bearing". Inasmuch as these five forms are all so nearly iden- tical with each other, and inasmuch as the codes of In- structions on their backs are quite identical with each 59 other; they can all be critically reviewed as one form, ^vith proper collateral statements relevant to the foot notes, wherein there are some differences, and relevant to whatever differences may be detected, when the forms themselves are compared with the various provisions of the income tax statute which relate to them, respect- ively. Form 1035 for miscellaneous corporations is there- fore selected as the typical form to be reviewed and criticised. Everything to be mentioned in the course of this review and criticism, is equally applicable to each of the other four forms. And in the course of the state- ments to be made in that behalf, whatever collateral points which are peculiar to one or another of the other four forms, will also be attended to. Form 1035, is simple enough in respect of the ar- rangement of its items, to be readily understood with- out explanation; but those items themselves require careful attention. Items 1 and 2 are preliminary and are correct. Item No. 3 is devoted to "Gross Income," and the tax- payer is directed, in a parenthetical passage in that item, to foot Note A and to Instructions Nos. 10, 17, 18 and 19, for guidance in respect of what sums are to be added together, to constitute that gross income. Note A, tells the taxpayer to include in that gross income, whatever interest it shall have received during the year covered by the return, upon the obligations of a State or polit- ical subdivision thereof, and upon the obligations of the United States or its possessions, as shown hy entries upon its boohs during the year for which the return is made. The last sixteen italicised words of this require- 60 ment have no foundation in the statute or in reason ; and if they were effective, they would enable any corpora- tion receiving such interest, to omit its amount from its return of gross income, by simply omitting to enter its amount on its books. But aside from this point, a ques- tion arises relevant to the first clause of the last para- graph of subsection B, of the income tax statute, which clause provides "That in computing net income under this section, there shall be excluded the interest upon the obligations of a State or any political subdivision thereof, and upon the obligations of the United States and its possessions." It is true that sub-item b, of item 6 of Form 1035, provides that all such interest shall be included in the deductions which are to be made from the gross income, which according to Note A, must include all such inter- est. Therefore, the net taxable income to be entered as item No. 8, will be the same when Form 1035 is fol- lowed, that it would be, if the interest in question were to be omitted from the gross income on the 'one hand, and also omitted from the deductions on ike other hand. But a corporation receiving such interest may have a legi- timate preference for not mentioning it and including it in its income tax return on either side of the account, instead of including it on both sides of the account. It seems probable that it was the existence of this legiti- mate preference, which caused Congress to provide in the language last quoted from the statute, that the in- terest in question shall be excluded from the computa- tion altogether, instead of providing that it should be first included in gross income and afterward deducted therefrom when computing net inc'ome. 61 Instruction No. 10, on the back of Form 1035, is wrong in providing that the gross income of a corpora- tion for a particular year, shall include "all actual in- creases in value, by appraisement, adjustment or other- wise, in the value of the assets which have been taken up on the books as income, or credited to profit and loss during the year. ' ' There is no foundation in the statute for this Instruction. .Its only known foundation is in four paragraphs beginning with line 8 from the bottom of page 37, and ending with line 7 from the top of page 39, of a pamphlet which was written by Luther F. Speer, before the income tax law was approved by the Presi- dent, and even before it was passed by Congress. That pamphlet, having been thus written, was printed soon enough to be published and widely distributed, on the third or fourth day after the evening on which the in- come tax law was signed by President Wilson. And on the first or second day after the publication of the pamphlet, its author, who had for twenty years been a clerk in the Treasury Department, was appointed by the Commissioner of Internal Revenue, to be the deputy commissioner, to have charge of administering the in- come tax law. The Walker pamphlet which is entitled, "The In- come Tax Law of the United States of America, An- alyzed and Clarified", was published a few weeks later than the Speer pamphlet, and has since been purchased in large numbers by citizens residing in all parts of the United States. That pamphlet contains, between its text and its appendix, an "Insertion" of pages 62 to 74, which is entitled "A Criticism of the Speer Pamphlet", and which points out and elaborately establishes the 62 existence of fourteen important errors therein. The fourteenth of those errors is the one now under con- sideration. The original promulgation of that error by Mr. Speer in his pamphlet was argumentative only, and did not contain any assertion of any express statutory founda- tion for the opinion of Mr. Speer. His argument began as follows: "Income from increased property values is a question which has heretofore given rise to consider- able discussion, as to whether or not an increase in prop- erty value actually constitutes income. There is much of merit on both sides of the discussion. However, for the purposes of the income tax, such increases would ap- pear to be properly returnable as income for the follow- ing reasons. First, the law provides that accrued in- come shall be reported: Second, an allowance for de- preciation of property is made". The first of these "reasons" is destitute of founda- tion ; for the gross income of "a person or corporation, according to the statute, does not include anything but income "derived" or "received", and because accord- ing to the statute, the net income of a person or corpora- tion includes nothing not included in the gross income thereof. The second of Mr. Speer 's "reasons" is also desti- tute of foundation; for the depreciation of property which is allowed for by the statute, is expressly confined to physical depreciation, due to depletion or exhaustion, or to wear and tear arising out of the use or employ- ment of property. There is no analogy, by way of con- trast or otherwise, between the statutory allowance for physical depreciation of property, and Mr. Speer 's pro- position to charge the owner of property with every 63 increase in the market value of property; and the stat- ute does not allow any deduction from gross income, on account of any depreciation in market value of any- thing. The argument against Mr. Speer's error on this sub- ject is fully developed on pages 72, 73 and 74 of the above mentioned Walker pamphlet on the income tax law; where the fourteenth error in Mr. Speer's pamph- let is attended to and refuted. But it now appears that Mr. Speer, in his official capacity as deputy commis- sioner 'of Internal Revenue, charged with the administra- tion of the income tax law, is seeking to enforce that error upon all income tax payers, as if it were a part of the income tax statute ; instead of being, as Mr. Speer in the Speer pamphlet showed it to be, only his own argumentative opinion of what an income tax statute ought to provide. Item No. 3 in Form 1035" not only refers the taxpay- ing corporation to Instruction No. 10, on the back of that form, but likewise points to Instructions Nos. 17, 18 and 19 as proper guides for such a corporation. Instruction No. 17 is quite correct. Whether Instruction No. 18 is correct or not, depends upon the hereinabove discussed question, whether the interest received upon the obliga- tions of a State or any political subdivision thereof, and upon the obligations of the United States or its posses- sions, should be included among the items of gross in- come, and afterward deducted from gross income, by being included among the items of deducted income; or whether such interest should be omitted from both sides of an income return. 64 Instruction No. 19 is as follows: "Accrued interest is considered to be interest due and payable, except in the case of banking or other similar institutions, which close their accounts on the basis of the interest earned. In all eases the accrued interest shall be reported on the basis 'on which the books are closed". This Instruction appears on its face to refer to in- terest paid by a corporation as well as to interest re- ceived by a corporation. The question whether any item of interest should include interest earned but not accrued and not paid, or should be confined to interest earned and accrued, if paid or not, or should be confined to interest earned, accrued and paid, is a question which ought to be answered in the same way, in respect of both sides of the interest account of a corporation. But Form 1035, when analyzed in connection with this In- struction No. 19 on its back, requires a taxpaying corpo- ration to include in its gross income all accrued interest whether paid or not, and sometimes to include all earned interest whether accrued or not. But where, in sub- item a, of item 6 of Form 1035, provision is made for the other side of the interest account of a corporation, the instruction is to include therein only some interest which has accrued and has also been paid by that cor- poration. The statute itself is not chargeable with this inconsistency, for it expressly provides that in making up their income returns, corporations are to be credited with no interest not accrued and also paid by them ; and the statute does not provide that such a corporation is to be debited with any interest not accrued and paid to it. The idea of the Commissioner of Internal Eevenue 65 io the contrary of the last statement, has no even ap- parent foundation in the statute, except a misunder- standing of the first clause of subdivision a, of subsec- tion Gr of the income tax statute. That clause provides "That the normal tax hereinbefore imposed upon indi- viduals, shall likewise be levied, assessed and paid an- nually upon the entire net income arising or accruing from all sources during the preceding calendar year to every corporation". The Commissioner of Internal Eevenue apparently thinks that the word "accruing" in "this passage, refers to the accumulation of a gross in- come, and therefore means that a gross income includes money accrued as well as money received. But it ex- l)ressly appears in the passage that the word "accruing" therein, applies only to the process by means of which a net income is deduced from a gross income. In this place, as in other places in the statute, a net income is said to accrue from a gross income. But the statute nowhere expresses or implies the idea that any gross income includes anything which has not been actually received. Attention may now be given to item 3, on Form 1034, for mercantile corporations; for it points to one "In- struction" in addition to those pointed at in item 3 of Form 1035, and that is the following. Instruction No. 21, on the back of Form 1034, runs as follows: "The gross income of mercantile corpora- tions should be ascertained in the following manner: From the sum of the total sales during the year, plus the sum of the inventory at the end of the year; deduct the sum of the inventory at the beginning of the year, plus "the cost of goods and materials purchased during the year; to this difference add the income received from 66 any other source, and the result will be the gross income- to be reported under Item No. 3 of the return". This instruction is well enough as advice, except that it is erroneous in the use of the eleven words which are italicized above. Because no income taxpayer is re- quired to include, in a return of gross income, all the in- come received from every source. For example, a mer- cantile corporation may properly take out a life insur- ance policy for its own benefit, upon the life of one of it's officers or employees, to guard against such a pecun- iary loss as might result from the death of such a man. If afterward, the dreaded and injurious death does oc- cur, the mercantile corporation is entitled to receive the proceeds of such a life insurance policy; and the last sentence of the first paragraph 'of subsection B, of the income tax statute, expressly provides that the proceeds of life insurance policies, paid upon the death of the person insured, shall not be included as income to be taxed against the party receiving those proceeds. Form No. 1033 for manufacturing corporations, dif- fers from Form No. 1034, in respect of its item No. 3, in that, instead of pointing to Instruction No. 21, as nec- essary to be followed, it points to Instructions Nos. 22 and 23 in that behalf. Those Instructions are substan- tially one Instruction, which reads as follows : "Gross income in the case of a manufacturing cor- poration, shall include the total receipts from the sale- of all manufactured goods sold during the year, plus any increase in the inventoried value, ascertained through an accounting of the finished and unfinished product, raw material, etc., on hand at the close of the year. To- the income thus ascertained, there should be added the- income arising, accruing or received from any and all 67 other sources, the aggregate thus ascertained to be the gross income to be returned under Item No. 3 of the re- turn form. Since the gross income thus ascertained represents the total receipts as well as the inventoried value of finished and unfinished products, raw material, etc., the corporation will include in its deduction under Item No. 4, all expenditures for material, labor, fuel, and other items going to make up the cost of the goods sold or inventoried at the end of the year." This complicated double Instruction is erroneous, in that it requires the inclusion in gross income of what- ever accrues without being received; and in that it also requires the inclusion in gross income of all that is re- ceived, from all sources whatever. In this case as in other cases already explained in this pamphlet, the stat- ute does not contain any such, or any similar direction to include in any gross income everything which has merely accrued without being received. Also in this ease, as in other cases already discussed and explained, the statute does not require every taxpayer to include in his return of gross income, everything received from all sources. For the first paragraph of subsection B, of the statute, expressly provides that certain incomes re- ceived from certain sources therein specified, shall not be included as income. This complicated Instruction also has an error pecu- liar to itself, in that it ignores the fact that the in- ventoried value 'of the property of a manufacturing cor- poration, may be less at the end of a year, than it was at the beginning of that year. And ignoring that ob- vious fact, this Instruction tells the taxpayers to include in their respective gross incomes whatever increase in the inventoried value of their respective properties may 68 occur in a particular year; with'out giving any of those taxpayers any instruction or any opportunity to deduct anything from such gross income, on account of any de- crease in any such inventoried value during any year. It is now in order to explain the foot notes A and B, on the faces of the Forms 1031 to 1035, inclusive. Note A, at the foot of the face of Form 1033, for manufacturing corporations, tells such a Corporation how to calculate its gross income, and thus attends to the same subject that is attended to in Instruction 22, and in the first sentence of Instruction 23, on the back of Form 1033. But that note is less erroneous than those Instructions, in that it provides for the possibility that the amount and value of property in a factory may de- crease, instead of increasing, during a year. But Note A is equally erroneous with Instruction 23, in respect that it tells the taxpayer to include in his gross income, all income derived from any and all sources ; in face of the fact that the first paragraph of subsection B of the stat- ute provides, in respect of several kinds of income, which may be received by a manufacturing corporation, that they shall not be included as income. Note A at the foot of the face of Form No. 1034, for mercantile corporations, attends to the same subject as that of Instruction No. 21 'on the back of that form. But it is inconsistent with that Instruction, and also incon- sistent with reason, in that it charges the item of gross income with the sum of the inventory at the beginning of the year, and credits that item with the sum of the .inventory at the end 'of the year, which is opposite to what it ought to do, and opposite to what Instruction 21, directs to be done. 69 Note A, on the faces of Forms 1031, 1032 and 1035, is the same in each of those three cases, and it is er- roneous in each case, in that it calls upon the corpora- tion making the return, to include in its gross income, all amounts of income from all sources; in face of the fact that income from some sources, according to the first paragraph of subsection B of the income tax stat- ute, should not be included as income under that statute. Note B, at the foot of Forms 1031, 1032, 1034 and 1035, is the sahie in each case, and reads as follows: ■^'The deductions authorized shall include all expense items under the various heads, acknowledged as liabil- ities by the corporation making the return and entered upon its books during the year. Amounts of income ex- pended in paying dividends on stock, preferred or com- mon, or in making permanent improvements or better- ments, etc., or in any way transferred to capital account, should not be deducted in ascertaining annual net in- come. Interest paid on mortgage indebtedness, on real estate occupied or used by a corporation, may be de- ducted under Item 4, if the interest is paid as a rental or franchise charge, payment of which is required to be made as a condition to the continued use and posses- sion of the property. The amount so paid and included in Item 4, should be stated separately under Item 4 (b). (See paragraph 12 on reverse of this form.) " This Note B, and also Instruction 12, which is re- ferred to at its end, are both substantially correct, unless there is an important difference between the phrase "use and possession" in Note B, and the phrase "use or possession" in Instruction No. 12. The statutory phrase is "use or possession", as appears in the upper part of subdivision b of subsection G of the statute. 70 Note B, at the foot of the face of Form 1033, for manufacturing corporations, and Note A, at the foot of the same Form, when those two notes are considered to- gether, cover about the same ground, that is attended to in Instructions 22 and 23 on the back of the same form. Those two sets of attempted guidances, to the same ob- jective points, differ considerably from each other in ex- pression, and differ to some extent in substance. And both of them are wrong, in requiring the manufacturing corporation making the return upon Form 1033, to in- clude in its gross income, such items as those specified in the first paragraph of subsection B of the statute as not proper to be thus indluded. Deductions are provided for in items 4, 5, 6 and 7, in Forms 1031, 1032, 1033, 1034 and 1035 respectively. Sub-item a, of item 4, reads as follows, in each of the five forms: "Total amount of all the ordinary and neces- sary expenses paid within the year, in the maintenance and operation of the business and property of the cor- poration, exclusive of interest payments." This direc- tion is proper to be followed when filling out any of the five forms above specified. The quoted language is also accompanied by the suffix (See Note B) in each of the forms and Note B calls attention to Instruction 12, on the back of each form for further directions. That note and that Instruction are proper to be followed in each case, though there is a mild discord between Instruction 12 and Note B, on Forms 1031, 1032, 1034 and 1035. The suffix to sub-item a, in item 4, includes not only the direction to "See Note B." but also the direction 71 to see Instruction 23, on the back of that form. It is only the last sentence of Instruction 23 that is relevant to sub-item a, of item 4; but that relevancy is proper to be regarded and followed. Sub-item b, of item 4, is properly expressed in all five of the forms, and its suffix pointing to Instruction 12, on the back of each form, is also proper. Sub-item a, of item 5, is the same in each of the five forms, and is correct in each case. Sub-item b, of item 5, is the same in each form, except that Forms 1032, 10-33 and 1035 direct attention to Instructions 13 and 14 on their backs; whereas no such direction is expressed in Form 1031, or 1034. But those Instructions are applicable to those two forms as truly, though not as extensively, as to the other three. There is a difference of general application between those Instructions 13 and 14, and the statute which they purport to represent. That difference consists in the fact that those Instructions inform every tax paying corporation that its deduction on account of deprecia- tion of property, includes depreciation on account of " obsolescence " of buildings, machinery, and any other property. There is no foundation in the statute for any such deduction. It is a case of attempted law making by the Commissioner of Internal Revenue, and is apt to be availed of to defraud the Government, by means of deductions based on fictitious "obsolescence" of property, which will recover from that disease very soon after March 1 of each year. The approach of the vernal equinox, and the ascension of sap in the trees, will be likely to cure many cases of "obsolescence" in machinery every Spring. This sub-item b, of item 5, in each form, even as ex- plained in Instructions 13 and 14 on their respective backs, is wrong in not telling any corporation, owning a mine, that its deduction for depreciation thereof, must not ex- ceed 5 per cent of the gross value of the output of that mine, for the year for which the computation is made,^ though that is the law established for all corporations by the statute in the second paragraph of its subsection G. The Form 1040, prescribed for individual taxpayers, and the Form 1041, prescribed for fiduciaries, sets forth this law as applicable to them; but the Commissioner of Internal Revenue gives all corporations to understand that it is not applicable in any of their cases. Accord- ing to the Commissioner of Internal Revenue, the Phila- delphia and Reading Coal and Iron Company is not limited, in the amount of the deduction it may make from its gross income, on account of depreciation of value of any of its coal mines ; whereas John C. Haddock, an in- dependent coal miner, is limited in that respect, to 5^ of the annual output of each of his mines, respectively. But the income tax statute is not guilty of that discrim- ination in favor of the corporation, and against the man. It treats them alike. It thus treats the man, in the sec- ond paragraph of subsection B, and it thus treats the corporation in the second paragraph of subsection G. Sub-item a, of item 6, is the same in each of the five Forms 1031, 1032, 1033, 1034 and 1035; and is correct in all of them. Sub-item b, of item 6, of Forms 1032, 1033, 1034 and 1035, is alike in each of those four forms, and is also like sub-item c, in Form 1031. It is also correct, if the interest moneys covered thereby are to be included in the gross income, but not otherwise. 73 Sub-item b, of item 6, Form 1031, for Banks and other financial institutions, is wrong in confining the deduction to which it refers, to interest paid 'on deposits, for the statute extends that deduction to also cover in- terest paid on money received for investment, and se- cured by interest-bearing certificates of indebtedness ; as the Commissioner would have seen if he had read the sec- ond and third paragraphs of subsection G, of the statute. Item 7, in Forms 1031, 1032, 1033, 1034 and 1035 is uniform in all, and it agrees with the statute upon a point wherein the statute is undeniably wrong. That point consists in the fact that "assessments for local benefits" are not excluded from deductable taxes in the case of any corporation, though they are in the case of every individual. The error of the statute on this point results from the plain difference between the sec- ond paragraph of its subsection B, as to persons, and the second paragraph of its subsection G, as to corporations. Another discrimination in favor of corporations against persons resides in the fact that, according to sub- item b, of item 7, in each of the Forms 1031, 1032, 1033, 1034 and 1035, corporations deduct from their gross in- comes whatever taxes they may have paid in Canada, or any other foreign country; which is a thing no indi- vidual is permitted by the statute to do, or is told in Form 1040, or 1041, that he may even attempt. The form of affidavit on Forms 1031, 1032, 1033, 1034 and 1035 is alike in all five cases. Any officer of any cor- poration who makes out an income tax report on one of those forms, in conformity with the statute, and with- out helping to extort money from his corporation, runs 74 a considerable risk of committing perjury, if he signs and swears to one of those affidavits. To avoid this danger and still do his full duty, he may cancel from the blank affidavit the following words, namely : ' ' that the amount of gross income therein set forth, is the full amount of gross income, without any deduction whatsoever, re- ceived from all sources by said corporation, during the year stated" and he may add to the affidavit the follow- ing words, namely: "for the year to which the said an- nual return refers." The back of each of the Forms, 1031, 1032, 1033, 1034 and 1035 is occupied by a code of 23 "Instructions." Those numbered 10, 12, 13, 14, 17, 18, 19, 21, 22 and 23 have already been subjects of comment in this section of this pamphlet. Those numbered 1, 2, 3, 4, 6, 7, 8 and 16 are correct, and require no comment. Those numbered 5, 9, 11, 15 and 20 remain to be examined. Instruction No. 5 is wrong in telling the tax paying corporation that its return "must disclose all the income arising, accruing or received from all sources during the year for which the return is made." For no cor- poration is required by the statute to disclose any in- come which merely arose or accrued; and there are some classes of income which may be received by a corpora- tion which the statute does not require it to disclose. Some previous pages in this pamphlet are devoted to those exemptions from disclosure. Instruction No. 9 is wrong in saying that "In the case of banking corporations, and like financial institu- tions, deposits should not be reported as indebtedness." 75 The statute makes no such exception from its require- ment that every corporation shall state in its return, the total amount of its bonded and other indebtedness at the close of the year. Instruction No. 11 is wrong in limiting the required report of expenses to those "paid out of earnings." The statute allows all ordinary and necessary expenses to be deducted from gross income, whether those expenses are paid out of earnings, or out of capital, or out of borrowed money. Instruction No. 15 is correct, as far down from its beginning as the word "year" in the sixth line. From that word, down to and including the words "United States," eight lines below, the language of this Instruc- tion is a copy of a fragment of the third paragraph of subsection Gr of that statute. That fragment of the statute is the only part of it which absolutely defies analysis and clarification. It probably has no coherent meaning; or if it has, that meaning ig hidden so deep in its muddy verbiage that it will probably never be fished out. Instruction No. 20 is right in telling every corpora- tion that its legal deduction from gross income, on ac- count of taxes, does not include those vicariously paid by it on the interest due to its bond holders on its bonds, in pursuance of its "tax free" guaranty. But that in- struction is wrong in saying that said deduction does not include taxes assessed against local benefits. The statu- tory law on the first of these points is expressed in the first clause of the fourth proviso of the second para- graph 'of subsection Gr of the statute ; and . the law on the last of these points is expressed in the first language 76 which follows that proviso, and begins with the word "fourth," and ends with the word "country" immediate- ly before the fifth proviso of the second paragraph of subsection G. Insxtrancb Companies are required by the Commis- sioner of Internal Revenue to render their income tax returns upon Form 1030. That Form has a general ap- pearance much like Forms 1031, 1032, 1033, 1034 and 1035 ; but it differs from that set of Forms in so many particu- lars that it requires separate treatment. It is simple enough to be readily understood with respect to the ar- rangement of its items; but those items themselves re- quire some detailed attention. Item 1 is correct, as also is Instruction No. 8, on the back of the sheet, to which item 1 calls attention. Item 2 is correct. It calls attention to Instruction No. 9, on the back of the sheet. That Instruction has two points, stated in two separate sentences. The first of those sentences refers to insurance companies, and is correct. The second of those sentences refers to bank- ing corpprations and like financial institutions, and is incorrect as to them, for reasons stated in the preceding part of this pamphlet relevant to Form lOSl. Item 3 in Form 1030 covers gross income. It calls attention to Note A, at the foot of the Form, and also to Instructions Nos. 10, 18, 21, 22, 23, 25 and 26, on the back of the Form. Note A is complicated, but is correct in all respects, except that its words "together with all amounts of in- come from other sources," are much too broad. They cover a number of sources of income from which an in- surance company may receive moneys, and which moneys, if thus received, are exempted by the income tax statute from mention in any income tax return. Such are the proceeds of life insurance policies paid upon the death of the person insured, and such also are whatever amounts may be received by an insurance company, as interest upon the bonds or other obligations of a State or any political subdivision thereof, or of the United States or any of its possessions. Mr. Speer, the Deputy Commissioner of Internal Reve- nue, when he published his pamphlet early in October, 1913, took the ground that any corporation which re- ceives any such interest money, is subjected by the in- come tax statute, to an income tax of one per cent upon that interest. That was the first of the fourteen errors in the Speer pamphlet, which were disclosed to the pub- lic on pages 62 to 74, of the Walker pamphlet of October, 1913, on the income tax law. The refutation of that error, which was printed on pages 63 and 64 of that pamphlet, was so undeniable, that Mr. Speer abandoned that ground, when he construed Form 1030, for insurance companies. But in order to ' ' save his face ' ' as much as he could appear to do, he still takes the ground, in his Form 1030, that such interest must be included in the gross income of an insurance company, though he is now compelled to provide for its subsequent deduction therefrom, in sub-item b of item 6 of Form 1030. But Mr. Speer, acting as Deputy Commissioner of In- ternal Eevenue, still ignores the undeniable fact that an insurance company may properly take out a life insur- ance policy on the life of any of its officers or employes, in order to guard as far as possible against whatever loss might result, to such an insurance company, from the premature death of the person insured for its bene- fit. And he also ignores the fact that the income tax statute expressly provides, in the last sentence of the first paragraph of subsection B, that the proceeds of such a life insurance policy, when paid upon the death of the person insured, to the person or corporation for whose benefit the policy was issued, shall not be included as income of that beneficiary, in the eye of the income tax 78 law. And as Deputy Commissioner of Internal Revenue, Mr. Speer not only insists tbat the proceeds of any such life insurance policy shall be included in the gross in- come of life insurance companies, but also he does not provide that those proceeds shall be included in any deduction from such gross income. Therefore, his error relevant to such proceeds of any life insurance policy is not only an error of form, but is also an error of sub- stance. Instruction No. 10, which the Commissioner of In- ternal Eevenue directs to be followed in calculating gross income in Form 1030, is identical with Instruction No. 10, which he directs to be followed in calculating gross in- come in Forms 1031, 1032, 1033, 1034 and 1035; and that instruction is erroneous in respect of Form 1030, for the same reasons which make it erroneous in respect of those five Forins. Those reasons are stated and ex- plained on pages 61, 62, and 63, of this pamphlet. Instruction No. 18, to which the Commissioner calls attention in connection with item 3, in Form 1030, is really erroneous in requiring insurance companies to in- clude in gross income whatever interest they may have received upon the obligations of a state or any political subdivision thereof, or upon the obligations of the United States or its possessions ; although sub-item b, of item 6, of the same Form, provides for including the amount of such interest among the deductions from gross in- come. There is no warrant in the law for compelling any insurance company to laboriously and expensively calculate and add together all the items of interest which it may have received during a whole year, on all those obligations, for no other reason than to first add their amount to the debit side of their income tax account, and then deduct the very same amount from the credit side of that account. Moreover, the Commissioner of Inter- nal Revenue has no right to compel any person or any 79 corporation to disclose, in its income tax return, either the existence or the amount of any class of money which the income tax statute expressly exempts from income taxation. Instruction No. 21, to which attention is called in con- nection with the item of gross income in Form 1030, does not refer to mutual marine insurance companies, for those companies are expressly excepted therefrom. As to other insurance companies, that Instruction is correct, unless it contains some hidden meaning which is not visible on its surface. Instruction No. 22 refers only to mutual fire insurance companies, and it is correct. Instruction No. 23 refers only to mutual marine in- surance companies, and it is correct, except in referring to Instruction No. 21, which is not relevant thereto. Instruction No. 25 refers only to life insurance com- panies, and as to them it is correct. Instruction No. 26 refers only to mutual fire insurance companies, and as to them it is correct. The deductions from gross income which may be made by insurance companies when computing net tax- able income, are attended to in items Nos. 4, 5, 6 and 7 of Form 1030; item No. 4 comprising sub-items a and b; and item No. 5 comprising sub-items a, b, c, d and e; and item No. 6 comprising sub-items a and b; and item No. 7 comprising sub-items a and b. Sub-item a, of item No. 4, is correct in itself, and is also correct in referring to Note B at the foot of Form lO'SO; and that note is correct in itself, and also in referring to Instruction No. 12, on the back of Form 1030. Sub-item b, of item No. 4, is correct in itself, and is also correct in referring to Instruction No. 12. Sub-item a, of item 5 is correct. Sub-item b, of item 5, is correct, except in referring to Instruction No. 13 for guidance; and it is correct in 80 that respect also, except in thereby appearing to author- ize the corporation making the return, to include under the head of "depreciation" such depreciation of prop- erty as results, or may be claimed to result, from "ob- solescence." There is no authority in the statute for calculating depreciation of property upon the basis of any "obsolescence." Sub-item c, of item 5, conforms literally to the statute in providing that any insurance company is entitled to a deduction from its gross income of "the sums, other than dividends, paid within the year on policy and annuity contracts." But the statute does not state whether this word "dividends" includes those so called "dividends" of insurance companies, which are not paid in cash, but which are really unearned portions of previously paid premiums which are credited to policy-holders on the books of insurance companies, as against premiums to subsequently accrue. Officers and attorneys of insurance companies are apt to contend that the word ' ' dividends ' ' in this part of the statute does not include those so called dividends thus credited, and that therefore the amounts of those so called dividends may properly be deducted from their gross incomes, when calculating their net tax- able incomes. On this point, those officers and attorneys are probably right. Sub-item d, of item 5, requires to be corrected by changing its word "fund" to the plural number of the same noun. When thus corrected, that sub-item is right in itself, and is also right in referring to Instruction, No. 28, which Instruction is correct in all respects. Sub-item e, of item 5, is applicable only to mutual marine insurance companies, and though it does not literally conform to the statute, it does so substantially. Sub-item a, of item 6, is correct as applied to insur- ance companies having capital stock; but as applied to insurance companies having no capital stock, it requires 81 to be amended by adding the words "or if no capital stock, the amount of interest paid within the year, on an amount of its indebtedness not exceeding the amount of capital employed in the business, at the close of the year. ' ' Sub-item b, of item 6, is correct if the amounts of interest covered thereby are also included in the gross income covered by item 3. Properly and legally that amount should be excluded from item 3, and there- fore not deducted from gross income, as sub-item b, of item 6. Hut if that amount is to be put into gross income under item 3, it ought to be afterward deducted therefrom, as Form 1030 proposes to deduct it. Sub-item a, of item 7, is correct in itself, and is also correct in referring to Instruction No. 20, except that In- struction No. 20 is out of conformity with the statute, in telling insurance companies that they are not entitled to include in deducted taxes those which are assessed against local benefits. That is not true in the case of any insurance company or any other corporation; though it is true in the case of every natural person. Sub-item b, of item 7, conforms to the statute in al- lowing an insurance company to include in its deduc- tions from gross income, whatever taxes it may have paid in Canada or Cuba or any other foreign country, .which is a favor denied by the statute to all natural persons. Item 8, of Form 1030, is the net taxable income on which the normal tax is calculated, and that amount is arrived at in Form 1030, by adding together all the de- ductions which are properly inserted in their proper places in the Form, and thereupon subtracting their ag- gregate amount, from the amount of the gross income inserted in item No. 3. 82 The blank affidavit which is printed on the face of Form 1030, can not properly be used, for it purports, to require the affiants to swear to several points, which will not be true if the Form is to be filled out in accord- ance with the statute. Before signing or swearing t» that blank affidavit, any officer of any insurance com- pany should carefully draw a pen through those of its words which begin with the word "that," immediately after the word "particular," and which end with the words "during the year stated" immediately after the word "corporation". And having cancelled those words, an affiant should add the words "for the year covered by the said return" to the present end of the affidavit. A code of "Instructions" which are twenty-eight in number, are printed on the back of Form 1030, for the guidance of insurance companies, when making out their income tax returns upon that form. Those in- structions which are numbered 8, 9, 10, 12, 13, 20, 21, 22, 23, 25, 26 and 28, have already been commented upon, in the course of the foregoing explanation and criticism of Form 1030, itself. Those instructions which are num- bered 2, 3, 5, 6, 7, 14, 16, 17, 24 and 27 are correct and are self-explanatory. This leaves instructions Nos. 1, 4, 11, 15, 18 and 19 for consideration now. Instruction No. 1 reads as follows: "Eeturn of an- nual net income of corporation should be made on forms prescribed by the Treasury Department, and should be filed with the Collector of Internal Eevenue of the dis- trict in which such corporations have their principal places of business." This instruction is correct as it reads ^ but if any Collector of Internal Revenue were to insist that every return to be made on any Form thus pre- scribed, must be made in literal accordance with the di- rections printed on the face of the Form, or in literal obedience to the "Instructions" printed on its back. 83 that Collector would be doing wrong. For any person who would thus follow those directions and those in- structions, would be violating the income tax statute ;. and if he were then to swear to the report thus made out by him, he would be swearing erroneously. Instruction No. 4 reads as follows: "Under the pro- visions of the law, the return must be true and accurate in every respect, and must disclose all the income arising, accruing or received from all sources, during the year for which the return is made." This Instruction is con- trary to the statute, in that it demands a disclosure of all income arising or accruing, though not received, which is a disclosure which the statute does not require. And this Instruction also violates the statute in requiring- a disclosure of all the income received from all sources; whereas the statute expressly exempts from such dis- closure, all property acquired by gift, bequest, devise or descent; and also the proceeds of all life insurance policies, paid upon the death of the person or persons insured; and also all payments made or credited to any person, on any life insurance, endowment or annuity contract, at the maturity of the term mentioned in such contract, or upon the surrender thereof; and also all interest received upon any obligation of any State or any political subdivision thereof, or upon any obligation of the United States or upon any of its possessions. Instruction No. 15 is correct from its beginning dowa to the semi-colon which follows the word "year" in its sixth line. That portion of that instruction which fol- lows that semi-colon, and continues to the period which follows the words "United States" eight lines below, is a copy of a fragment of subdivision c, of subsection G, of the statute. That fragment refers only to income tax returns, to be made by foreign corporations, and refers only to one point in such a return. These are all the facts that are known about that frag- 84 ment, for its significance on the subject to whicli it re- fers is unknown, and past finding out. Probably its am- biguous language arose from some error of some type- writer girl, made when trying to copy some other paper, and whose work was never reviewed by any statesman, but was simply inserted in the statute as it came from her, without being considered by any other intellect. This pamphlet has thus reviewed and criticised, in minute detail, the eight "Forms" which have been pre- scribed by the Commissioner of Internal Eevenue, with the approval of the Secretary of the Treasury, to be used by persons, fiduciaries and corporations, when making up their "true and accurate" income tax re- turns, under oath or affirmation. Those eight "Forms" are all that have been thus prescribed, and they are all that are called for by the statute ; or rather they would be all, if they were all correct. 85 PART THREE. RECOMMENDED REMEDIES. First. — The President may remove Commissioner of Internal Eevenue Osborn from the office which he holds, and may nominate, and with the advice and con- sent of the Senate, may appoint some other man to that office who can, without self -stultification, reverse, in some cases, and amend in other cases, such of the "Regula- tions" or "Instructions" as the Commissioner has made and is trying to enforce, without any authority of law, and contrary, in many cases, to the income tax statute itself. And the President can select for that difficult work and great responsibility, some man who has large legal knowledge and executive ability, and who is willing and able to himself superintend the business of the office. Second.- — Congress may pass and the President may sign in February, 1914, a bill which can be properly written in a day, and made into law in a week, for the purpose and with the effect of amending the income tax statute of October 3, 1913, so as to cure those of its errors which are undeniable, and for the purpose and with the effect of directing the Commissioner of Internal Revenue to reverse those of his "Regulations" and those of his "Instructions," which are arbitrary and unjust, and in- consistent with the intention of Congress. Among those errors in the statute itself, which might thus be cor- rected, is that one which, if uncorrected, will compel many citizens of Ohio and other states to practically pay income taxes upon the property they lost in the floods of the spring of 1913. Among those "Regulations" of the Commissioner of Internal Revenue, which he can be caused by such an amendment to reverse, is that of Octo- ber 25, 1913, in which he undertook to discriminate against citizens of the United States, and in favor of 86 non-resident aliens, in respect of levying income taxes upon the interest received by them in the United States on precisely the same classes of bonds, of corporations, earning in the United States all the money used in pay- ing any of that interest. Third. — Congress, during its present session, may pass, and the President may sign, a bill providing for the appointment by the President, of a commission of a few able lawyers, for the special purpose of preparing for the use of Congress, a draft of a proper bill for a constitutional income tax law; and that bill might be drawn by that commission within a few weeks, and afterwards introduced into the House of Representa- tives by some member, and thereupon be enacted into law as thus drawn, before the end of 1914, to take the place of the income tax statute of 1913. This recom- mendation may be unpleasant to some members of Con- gress and some Senators; because they will feel that it assumes that those personages are not competent, with- out assistance, to frame all the statutes which they en- act, and do all the mental labor which is involved in per forming all their governmental functions. But the feel- ings of those gentlemen ought to be somewhat soothed, by the fact that the old country, from which we have drawn the foundation of our laws, long ago incorporated into her own customs, several proper plans for furnish- ing professional assistance to members of Parliament. Thus, the historic judicial functions of the House of Lords, are no longer performed by the hereditary noble- men themselves, but are performed by "law lords", who are appointed to sit in the House, for the express purpose of doing its judicial work. Thus also, the ira- 87 portaiit- legislation of the two houses of Parliament, is framed by non-official experts, who are employed by the ministry, to draw the bills which the ministry decides to introduce and to advocate. For these reasons, and for others quite honorable, it results that no insult to Con- gress is im-olved or implied in the present suggestion. Fourth. — That permanent unconstitutionality of the income tax statute, which results from ' ' the deduction and payment of the tax at the source of income," can be made the subject of a prompt decision of the Supreme Court of the United States, by the following procedure : Any stockholder of any corporation, organized and oper- ating in the United States, any of whose officers or em- ployees served that corporation through the year 1913, at a fixed or determinable compensation of more than $3,- 000, may file a bill in equity against that corporation, in the United States District Court, for any district where- in it may legally be sued ; and that stockholder may file that bill on behalf of himself, and of all other stockhold- ■ers of that corporation who are similarly situated. That bill in equity may state that the defendant is a corporation, organized and existing according to law in a particular State, and that the named complainant is a stockholder of that corporation ; and that said corpora- tion has one or more officers or employees, or both, who served it through the year 1913, at fixed or determin- able compensations of more than $3,000 each; and that the said corporation intends to conform to the United States income tax law of October 3, 1913, by expending its own money, in the business of collecting, at its own risk and without any compensation, certain income taxes Tvhich, according to that statute, appear to be due from 88 those officers and employees respectively, to the United States ; and that those provisions of that statute which im- pose upon the defendant corporation the cost and the risk which will be caused by its performance of that collecting business, are void in that they are violative of the Fifth Amendment of the Constitution of the United States. And that bill of equity may pray that a writ of in- junction shall be issued by the District Court, restraining^ the defendant corporation, and all its officers and other agents, from undertaking or conducting, any such col- lecting business, and also from withholding, from any of its officers or employees, and turning over to any of- ficer of the United States Government, any portion of any such compensation, earned by them respectively during the year 1913. Such a bill in equity being filed, it can most properlj^ be met, under the new equity rules, by a motion to dis- miss the bill, and which motion will have the same effect that a demurrer would have had under the old equity rules. Such a motion to dismiss will assume the truth of all the statements contained in the bill; and on the' hearing of that motion, the judge holding the District Court may enter an order sustaining it, on the ground that he will not take the responsibility of holding a statute of the United States to be void, as violative of the Con- stitution of the United States, and must therefore hold the income tax statute to be valid, and so holding, must dismiss the bill. From that decision, the complainant can immediately appeal to the Supreme Court of the United States, in pur- suance of Section 238, of the Judicial Code of March 3,. 1911, and thereupon the Supreme Court may, in pur- suance of its own rules, advance the case, and hear it and decide it almost immediately. 89 This is substantially the same procedure as that by means of which the question of the constitutionality of the income tax law of August, 1894, was taken through" the United States Circuit Court for the Southern Dis- trict of New York, to the United States Supreme Court, and argued there in March, 1895, and partly decided by that tribunal in April, 1895, and finally decided there, against the validity of that statute, on May 20, 1895; which was less than nine months after that law was pro- claimed by the Secretary of State. At the same rate of progress, the question of the permanent unconstitutional- ity of the income tax law of October, 1913, can be decided by the Supreme Court of the United States, prior to its adjournment early in June, 1914, and thus prior to the last day allowed by the income tax law for the payment of income taxes for the year 1913. Fifth. — The inoperativeness of the income tax statute,, upon the year 1913, can also be made the subject of a prompt decision of the United States Supreme Court, by proceedings begun with a bill in equity, filed by one of its stockholders, against any corporation organized and operating in the United States, which intends to pay an income tax, in accordance with that statute, upon any in- come which it received during that year. Those proceed- ings can be similar to those which are outlined, as the Fourth remedy, and if properly conducted, they may be expected to be successful. Albert H. Walkek. Pauk Eow Building, Manhattan, New York, February 4, 1914.