THE UNICONSTITUTIONAL CHARACTER
AND
THE LLEGAL ADMINISTRATION
OE
THE INCOME TAX LAW
DEMONSTRATED
By
ALBERT H. WALKER
AUTHOR OF
walker on eatents.
AND THE
His Toº Y OF THE SHERMAN LAW.
Pue Lis HED AT THE LAW OFFICES
or THE AUTHOR -
Floor 10, PARK ROW BUILDING,
NEW YORK CITY.
THE PRICE IS A DC-L-AR

• COPYRIGHT, Igi A
BY
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.
CRITICISMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter I. Unconstitutional. . . . . . . . . . . . . . . . . .
Section A. Confiscatory. . . . . . . . . . . . . . . . . . . . . .
Section B. Retroactive... . . . . . . . . . . . . . . . . . . . .
PART TWO.
INCOME TAx RETURNs. . . . . . . . . . . . . * c e s e e s e e g tº
Introduction ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .
Section 1. Relevant to Natural Persons...... e e
Section 2. Relevant to Fiduciaries. . . . . . . . . . . . e
Section 3. Relevant to Corporations. . . . . . . . . . .
PART THREE.
REcoMMENDED REMEDIES. . . . . . •- - - - - - - - - - - - - -
PART ONE.
CRITICISMS
CHAPTER I.
UNCONSTITUTIONAL.
SECTION A.
CoNFISCATORY.
All the provisions of the statute of 1913, “relating to
the deduction and payment 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
2
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-
3
l
son required to withhold and pay the tax, or likewise
make application för 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 him, 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,
4
at least thirty days prior to March 1, a certain set of
papers disclosing his 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 may 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 time, as when he is deprived of property forever.
5
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 part so pivotal. *
6
The doctrine that an entire statute may be vitiated
or rendered inoperative by the invalidity or inoperative-
ness of some, but 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, within 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 equally
direct taxes.” *
“We are of opinion that taxes on personal property,
or on the income of personal property, are likewise di-
rect taxes.” - *
7
“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. In the
last analysis it will be seen to result from the following
facts and considerations. e
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 eaccept 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
9.
this Act, but shall be 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 Revenue 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 1
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 his entire met 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 met 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 nearly 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 Representatives, 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. º
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 Republican 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 Roman type, and partly in Italic type;
the words in large Roman 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 Roman type,
plus the indicated cancellations of many of the words
in large Roman type, and plus 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 “sour-
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 Repre-
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 the 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 D, which refer to income taxation at the “sources”,
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: & ºr -
: “WASHINGTON, Jan. 29.-Representative 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 numerous citizens in the income tax law,
since it was signed hy 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, Representative
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 fol;
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 by
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, unamended and not invalid-
ated. For the Commissioner of Internal Revenue has no
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 Garfield
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 Revenue 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 Revenue,
Washington, D.C., in which I called his attention to page
9 of the pamphlet of “Regulations” which he had issued
on October 25, 1913, and in which I pointed out that his
“Regulation” 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 the 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 705 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 Railway Company, and which 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. Osborn, 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.” gº
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
and 40, 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 the Commissioner of
Internal Revenue, 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 Revenue. 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 TVO.
INCOME TAX RETURNS
|NTRODUCTION.
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 Revenue 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 which, if followed by the
taxpayer, will carry his income taa, return out of con-
formity with the income taa, 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 his 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.
30
The Commissioner of Internal Revenue 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-
3].
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 Revenue.
SECTION 1.
RELEVANT To NATURAL PERSONs.
“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 nummbered 1, 2, 3
and 4, respectively. Each of those pages is occupied by
printed matter, which is too complicated to he 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 “Gross 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
which 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 of 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 further 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, are enough to enable any person
to use that form in making up his income 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.
cludes 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 item 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-
wise 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.
Siath.-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 Revenue 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 he
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 the 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 Revenue 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 “re-
‘eived’’, and are totally destitute of suggestion 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 Revenue, 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 aliens 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 G 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-
mess 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 Revenue 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 United 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 Railroad Company; which opinion is printed on
pages 703, 704 and 705 of Volume 106 of the United
States Reports. If the Commissioner of Internal Rev-
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 Supreme 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 thus 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 dolars; and the “normal” income tax and
the “additional” income tax due on that interest is
more than one million dollars. The Commissioner of
Internal Revenue, 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. º
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 Revenue 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 mine 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
Revenue 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 Revenue “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
by 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 case 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 first 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
Revenue 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
“delived’’ 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 Revenue 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 Rev-
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, without 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.
j()
SECTION 2.
RELEVANT TO FIDUCIARIES.
“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
3, 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
53
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 “Siacth'’.
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 met 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-
skillfully 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 the 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 author-
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-
writing 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 all
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
Revenue, 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 which 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 CoRPORATIONs.
Form 1031 is devoted to banks and other 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 in 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 B.
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,
with proper collatefal 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 by entries
wpon its books 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 the 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 income. -
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
first or second 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 cases 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 Revenue
65
to 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 G 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
Revenue 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-
pressly appears in the passage that the word “accruing”
therein, applies only to the process by means of which
a met 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
its 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
case, 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; without 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 possibi. By 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 same 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 àooks 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 included.
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. g
Sub-item a, of item 5, is the same in each of the five
forms, and is correct in each case. w
Sub-item b, of item 5, is the same in each form,
except that Forms 1032, 1033 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. -
72
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 G 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 is 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 G 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. .
INSURANCE 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 ris 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 corporations and like financial institutions, and is
incorrect as to them, for reasons stated in the preceding
part of this pamphlet relevant to Form 1031.
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
77
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 Revenue, 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 that 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 Revenue 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 Forms. 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. te
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
1030; 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.” gº
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. But 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 Čonformity 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. . . * 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 to
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: “Return 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 Revenue 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 down
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 which 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 Revenue, 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 Revenue 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 im-
87
portant 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 involved 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. º
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
which, 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 properly
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. t
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.—Theinoperativeness 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, upón 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. WALKER.
PARK Row BUILDING, & -
MANHATTAN, NEw York,
February 4, 1914.
THE UNIVERSITY OF MICHIGAN
GRADUATE LIBRARY
DATE DUE

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