Section 233. For suggestions relating to this section see suggestions under section 213.

Section 234. For suggestions relating to this section, see suggestions under sections 214 and 216.

Section 234 (a) (3). Taxes paid by obligors of tax-free covenant bonds deductible as interest.

The Treasury Department in article 31, regulations 45, in defining what shall be included in gross income, requires that the amount of income tax paid for a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income.

Inasmuch as the corporation is prohibited by statute from deducting the amounts so paid on tax-free covenant bonds and the recipient of the interest is required to take up the amount so paid as additional income, it is suggested that the proviso in paragraph 3 of subdivision (a) of section 234 should be amended to permit the corporation to deduct the amounts paid on account of its tax-free covenant bonds as interest paid. The corporation not being entitled to deduct these amounts pays income, war-profits, and excess-profits taxes on such amounts, and the individual is required to take them up and pay both normal and additional taxes. In this way it is suggested that the Government is receiving the normal tax twice on the same item of income.

It has been suggested that this change can be accomplished by an amendment in substantially the following form:

Amend paragraph 3 of subdivision (a) of section 234 by striking out the semicolon at the end thereof and inserting a comma and the following: "but such tax may be deducted by the obligor as interest;"

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Section 250 (d). Limitation upon the reexamination and amendment of income tax-returns.

This section of the law has been held by the department to impose a five-year limitation upon the assessment or reopening of income taxes, and upon the beginning of any suit or proceeding for the collection of any income tax, only to taxes due under the revenue act of 1918 and not to taxes due under prior income tax laws.

It has been suggested that it would be expedient to extend this limitation to taxes due under all income tax laws which have been imposed, except in the case of false or fraudulent returns, as now provided with respect to the taxes due under the revenue act of 1918.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Strike out subdivision (d) of section 250 and insert in lieu thereof:

(d) Except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return under this or prior acts shall be determined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be determined at any time after the return is filed, and the tax may be collected at any time after it becomes due.

Section 250 (e). Interest payment rate of one-half per cent per month and abatement of 5 per cent penalty in the case of bona fide claims for abatement made applicable to claims still pending under prior

acts.

There are a few income tax cases of bona fide claims for abatement still pending under prior acts.

It has been suggested that the more liberal rule adopted in the revenue act of 1918 should apply in such cases.

This rule provides that with respect to any amount of income tax which is the subject of a bona fide claim for abatement the 5 per cent penalty shall not attach and the interest from the time the amount was due until the claim is decided shall be at the rate of one-half of 1 per cent per month.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Strike out the first paragraph of subdivision (e) of section 250 and insert the following:

(e) If any income tax under this or prior acts remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons, there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due: Provided, That as to any such amount which is the subject of a bona fide claim for abatement such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of one-half of 1 per centum per month.

TITLE III--WAR-PROFITS AND EXCESS-PROFITS TAX.

Section 302. Adjustment of the limitation provided by this section in the case of returns covering less than twelve months. Doubt exists whether, in the application of section 302, the limits or brackets of $3,000 and $20,000, respectively, should be reduced when the taxpayer makes return for less than one year. If such reduction be not made, a discriminatory advantage is conferred on the taxpayer who makes return for less than 12 months. In order to set this doubt at rest it has been suggested that there be inserted n section 302 a specific statement to the effect that if the return is made for less than 12 months, the limiting amounts of $3,000 and $20,000 as used in this section shall be correspondingly or proportionately reduced.

It has been suggested that this change could be accomplished by an amendment in substantially the following form:

Amend section 302 by adding a new paragraph at the end thereof, as follows:

In cases in which a return is made for less than a twelve-month period, the limiting amounts of $3,000 and $20,000 as used in this section shall be reduced to an amount equal to the same number of twelfths of such limiting amounts as the number of calendar months for which the return is made.

Section 325. For suggestions relating to this section, see suggestions under section 216.

Section 326 (a) (3). Federal income and excess profits taxes in computation of invested capital.

This section of the law provides that in computing invested capital there may be included therein the "paid in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year." The interpretation placed upon the statute by the Treasury Department is that for the purpose of computing invested capital, Federal income and war profits and excess profits taxes are deemed to have been paid out of the net income of the taxable year for which they are levied, and that amounts payable on account of such taxes for the preceding year may be included in the computation of invested capital only until such taxes become due and payable.

It has been suggested that this interpretation of the Treasury Department should be included in the law in order to remove all doubt as to the legislative intent.

It has been suggested that this change can be accomplished by an amendment in substantially the following form:

Amend paragraph (3) of subdivision (a) of section 326 by striking out the semicolon and inserting a colon and the following:

Provided, That amounts payable on account of income and war profits and excess profits taxes for the preceding year may be included in computing surplus and undivided profits only for the proportionate part of the year represented by the period of time between the close of such preceding year and the date or dates upon which such taxes become due and payable;

TITLE IV-ESTATE TAX.

Section 402 (c). Transfer of property in contemplation of death.

This paragraph of the law provides for the inclusion in the gross estate of a decedent of the value of property of which he has made transfer "in contemplation of death."

It has been suggested that this part of the law should be amended in the following three ways:

1. By defining the words "contemplation of death" in the manner in which these words are defined in the California statute. The California statute reads as follows:

The words "contemplation of death," as used in this act, shall be taken to include that expectancy of death which actuates the mind of a person on the execution of his will, and in nowise shall said words be limited and restricted to that expectancy of death which actuates the mind of a person making a gift causa mortis; and it is hereby declared to be the intent and purpose of this act to tax any and all transfers which are made in lieu of or to avoid the passing of property transferred by testator or intestate laws. (Stats. of Cal. 1913, chap. 595, sec. 1, subd. (f).)

Nevada has a similar statute (Stats. of Nev., 1913, chap. 266, sec. 30).

2. To extend the present prima facie presumption of taxability so as to include transfers made within six years of the decedent's death. Wisconsin has a statute of this kind. It reads as follows:

A tax shall be, and is hereby, imposed upon any transfer of property, real, personal or mixed, or any interest therein, or income therefrom in trust or otherwise, to any person, association, or corporation, within the State.

* * *

When the transfer is of property made by a resident or by a nonresident when such nonresident's property is within this State, or within its jurisdiction, by deed, grant, bargain, sale or gift, made in contemplation of the death of the grantor, vendor or donor, or intended to take effect in possession or enjoyment at or after such death. Every transfer by deed, grant, bargain, sale or gift, made within six years prior to the death of the grantor, vendor or donor, of a material part of his estate, or in the nature of a final disposition or distribution thereof, and without an adequate valuable consideration, shall be construed to have been made in contemplation of death within the meaning of this section. (Stats. of Wis., chap. 48b, sec. 1087.)

3. To make absolute the presumption that any transfer has been made in contemplation of death if the conveyance was made within two years of death.

Indiana has a statute of this kind. It reads as follows:

Provided, That any conveyance, gift, or transfer made within two years of the death of any decedent, without consideration, save and except love and affection, shall be conclusively presumed to have been made in contemplation of death. (Burns's Ann. Ind. Stats., sec. 10143a, subd. 4.)