Article 11.-Returns to Constitute Public Records. Sixth. When the assessment shall be made, as provided in this section, the returns, together with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such. Article 12.-Penalties. Paragraphs 7 and 8 of section 38 provide: Seventh. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employe of the United States to divulge or make known in any manner whatever not provided by law to any person any information obtained by him in the discharge of his official duty, or to divulge or make known in any manner not provided by law any document received, evidence taken, or report made under this section except upon the special direction of the President; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding one thousand dollars, or by imprisonment not exceeding one year, or both, at the discretion of the court. Eighth. If any of the corporations, joint stock companies or associations, or insurance companies, aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, or shall render a false or fraudulent return, such corporation, joint stock company or association, or insurance company, shall be liable to a penalty of not less than one thousand dollars and not exceeding ten thousand dollars. Any person authorized by law to make, render, sign, or verify any return who makes any false or fraudulent return, or statement, with intent to defeat or evade the assessment required by this section to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding one thousand dollars or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. Article 13.—Certain Revenue Laws Made Applicable, and Jurisdiction Conferred on United States Courts to Compel Attendance of Witnesses, etc. Paragraph 8 further provides: All laws relating to the collection, remission, and refund of internalrevenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section. Jurisdiction is hereby conferred upon the circuit and district courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books, as aforesaid, shall reside, to compel such attendance, production of books, and testimony by appropriate process. Article 14.-Collection of Tax. The tax assessed under the provisions of this act will be collected and will be receipted for on Form 1, as in the case of other assessed taxes. Unless paid within the time fixed by the statute, notice and demand should be at once issued, and, in case of nonpayment, distraint proceedings should be instituted without delay. THE FEDERAL CORPORATION TAX AND BY A. M. SAKOLSKI. It is not uncommon in these days for legislatures to enact revenue measures in utter disregard of modern accounting principles. Unfortunately accounting terminology is frequently employed in tax legislation without reference to the proper meaning as applied in business practice. In the tax laws of many of the states, for example, "intangible assets" are defined as stocks, bonds, mortgages and other forms of securities, whereas in accounting practice the same term represents merely the "good-will, franchises, patent rights," etc., of a business. The definitions of "gross earnings," "profits," "income, "revenue," "capital," etc., are likewise frequently applied in taxation in a sense differing from the meaning ordinarily attached thereto by accountants. Dagreement and confusion in the use of accounting terms is common to much of the legislation relating to corporations. Moreover, the decisions of both the federal and the state courts as to the proper interpretation of accounting terms are exceedingly unsatisfactory and in many cases incompatible with business practice. Any attempt to harmonize them into a set of general rules and principles appears a hopeless task. At one time the Supreme Court of the United Statest decided that "profits" are merely receipts over expenditures with no consideration given to depreciation. Other court decisions hold a contrary view, some agreeing to the established accounting principle that net profits are * From Yale Review, February, 1910. Reprinted by permission of the editors of the Review and by courtesy of Dr. Sakolski. Eyster v. Centennial Board of Finance, 94 U. S., p. 503. not finally determined until all losses due to waste, depreciation and obsolescence of both fixed and circulating assets are made good. In view of the confusion existing in the definition and use of accounting terms by legislatures and the law courts, the recently enacted federal corporation tax law might be expected to meet with condemnation and disapproval on the part of business men and accountants. On July 8, 1909, just previous to the final passage of the Act, a number of the leading accounting firms addressed a letter to the Attorney-General calling attention to the radical defects of the measure, which they characterized as impossible of application and utterly out of harmony with modern accounting practice. The important provisions of the law to which objections have been raised are as follows: Sec. 38. That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any State or Territory of the United States or under the acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States or in Alaska or in the District of Columbia, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed; Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, joint stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise 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 insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; (third) interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the paid-up capital stock of such corporation, joint stock company or association, or insurance company, outstanding at the close of the year, and in the case of a bank, banking association or trust company, all interest actually paid by it within the year on deposits; Aside from the protest against the requirement that the tax return cover the calendar year, the principal criticism of the measure from an accounting view-point is directed against the phraseology defining "net income." The language of the Act is so crude and the definitions so absurd and so contrary to accepted principles of accounting that it has been justly condemned as applicable only to the bookkeeping methods of the Middle Ages. The defects can be ascribed to hasty and careless legislation. Members of Congress, with but few exceptions, were utterly indifferent to the provisions of the bill, the belief prevailing that when handled by the executive and judicial branches of the Government, the measure would reach some final adjustment, or more likely, complete extinguishment. The official interpretation of the provisions concerns us more than the language of the Act itself. In the letter of the accountants addressed to the Attorney-General, the objections to the proposed tax were shown to center about the provision requiring "net income" to be ascertained by deducting from the gross amount of income received, expenses actually paid, losses actually sustained and interest actually paid. The use of the expressions "actually paid" and "actually sustained" in the calculation of net income naturally created consternation among the accounting profession. Modern accounting, especially as regards the determination of net profits, rests upon the principle that "income" is to be distinguished from "receipts" and "expenses" from "disbursements." Prior to the advent of the corporate form of business organization, bookkeeping was concerned almost exclusively with tracing out the movements of cash. The accounts showed the amounts and the sources of cash received and the manner in which it was disbursed. The main purpose of the early accounting methods was the testing of the honesty of the employes handling cash. The gauging of the proprietors' profits or the results of individual transac B-VIII-24 |