politicians regard it as necessary to bamboozle the public into believing that a reduction in tax rates is a fine piece of work.

Last year, in December, the solemn announcement was made as front page news that our generous Congressmen were working day and night to make possible a Christmas Gift of several hundred millions of dollars to the American People! One might have thought that some of it at least came out of their own pockets, instead of merely being overpayments of tax by the same People. (Note to Printer. Please do not change the first letter in People to lower case type. That is the way politicians spell the word and I would not try to correct them.) Even though every dollar of the reduction arose out of unnecessary and excessive rates in the 1924 law, the apparent reaction of the People was favorable. It must have been that the People believed that if they intimated that it was no Christmas present at all, but merely a partial reduction in a gross overcharge, Congress would be peeved and would not reduce the rates at all. The plaudits of the People much resemble the stupid joy and gratitude of the Roman and French People when emperors and kings overtaxed them and then used a modicum of the tax to pay for gorgeous spectacles. In the United States the People are fooled just as successfully by the recurring "Christmas Gifts" of "tax reductions," which appear to justify the reputations for sagacity and omnipotence of our secretaries of the Treasury, our finance and tax leaders in the Senate and the House. They impose and collect five hundred millions of dollars in excessive taxes and return half of it as if it were a personal Christmas Gift to the American People. So much for the science of tax reduction, which, as practiced today, is pure bunk.

The administrative and substantive features of the 1926 law are discussed in detail in these two volumes and need no comment here. In view, however, of the continued shortening of the time within which refunds may be collected, it must not be forgotten that the apparent benefit of the three-year limitation on the right of the Treasury to assess additional taxes is more apparent than real. When the 3, 4 or 5 year limit is about to expire, the Commissioner flouts the running of the statute against the government by making hasty determinations of deficiencies, many of which are mere guesses. So taxpayers do not escape. But the law is so cunningly drawn that taxpayers, who are directed under heavy penalties to follow the law and the regulations and who pay the taxes demanded under the

Treasury's construction of the law, have no reasonable means whereby the excessive and erroneous taxes may be recovered. During the year 1926 the courts and the Tax Board have handed down not a few, but many decisions in which the regulations under 1921 and prior laws have been held to be erroneous. These operations on old regulations are highly successful but the patient, the taxpayer, dies. The statute of limitations having run, the Treasury says to taxpayers: "Yes, our regulations which you were commanded to follow were wrong, but what are you going to do about it?" During the last ten years the author has pointed out the illegality of many provisions in the regulations and has strongly urged taxpayers to protect their interests. Some of the specific suggestions related to as far back as the year 1917. But taxpayers who believe that they pay too much and who protect themselves for a few years become discouraged at the law's delays and give up the struggle only to find a few months later that they gave up too soon. Either the Treasury should be forced to expedite the adjudication of doubtful tax problems or taxpayers who follow the regulations automatically, or under duress, should be protected when, as and if any regulation is found to be illegal or erroneous.

There is something fundamentally wrong with Congress when year after year the new tax laws continue to be as bad as their predecessors in the most important feature of income and profits taxation, viz., certainty of application. Any tax law is intolerably bad which contains retrospective provisions. Certainly it is not conducive to the orderly conduct of business to make changes in the law affecting the basis of business transactions after the transactions have occurred. (The 1926 law passed February 26, 1926, was retroactive to January 1, 1925.) Taxpayers have a just ground for complaint when they transact business on the basis of existing laws and find later that the tax basis in effect when the transactions take place are nullified by the retroactive features of subsequent laws. This recurring feature of all recent laws must be due to ignorance or stupidity; it cannot be inferred that the leaders of Congress have deliberately intended to cause the tax mess of the last few years. Is it strange that our neighbors on the south should believe that our business men are reconciled to retroactive changes in fiscal measures? On October 30, 1926, Secretary Kellogg in his note to Mexico said: "My government . . . reiterates its adherence to the fundamental

principle that acquired rights may not be impaired by legislation retroactive in character or confiscatory in effect."

Our State Department has no sense of humor! All of our recent tax laws have contained provisions which have impaired acquired rights. Why blame Mexico for following our example?

The 1926 law not only is defective in what it omits but it introduces what may become the most vicious of all the policies which have marked our complicated federal tax system. I refer to the bare-faced disregard of court and Tax Board decisions which have interpreted previous tax laws. So many of the provisions of the laws and the regulations have been erroneous that astute taxpayers have reserved their remedies and protected their rights, or at least they thought they did. They believed, in their innocence, that one of the bulwarks of our republic consisted of a court review of departmental construction of a law, and in this belief carried their disputes with the Treasury to the courts. Congress has unwisely enacted into the 1926 law sections interpreting previous laws, and retroactively changing such previous laws wholly to nullify some of the decisions of the courts and the Tax Board. Congress should follow the advice of General Counsel A. W. Gregg, as given in the hearings of the Finance Committee, page 134:

. . . . It is a very bad precedent to set for Congress eight years after the enactment of an act to construe it retroactively for the Treasury Department, and provide for the application of a new rule of construction to cases remaining then unclosed. . . . . It seems to me that the matter of construing a statute enacted by Congress is up, in the first place, to the department and then to the

This is sound advice. Why shouldn't the courts be permitted to function?

The leaders of Congress flout the intelligence of the people by offering them "Christmas presents" in the shape of so-called tax reductions and Congress flouts the courts and the Tax Board when it nullifies, or attempts to nullify their sound, legal decisions. The mistakes of the Treasury are legalized. It is a method which has the effect of destroying orderly judicial procedure and adds another link to the chain of prevailing contempt for existing law.

The Roman and French populaces were fooled for a while but in the course of time the emperors and kings, and the forms of government which they represented, all perished miserably. This is not

a warning, I have merely cited a few facts. I am not responsible for the conclusions which may be drawn from them.

The Treasury's burdens increase cumulatively. The administration of a complicated new law added to the unsettled problems under old laws creates a situation which would require superhuman intelligence if mistakes were to be avoided. Even though all of us freely criticize the Treasury, we do not expect perfection and we are glad to note the constant improvement in administration. Many of the most intricate problems go to the General Counsel's office. in which there is today greater efficiency than ever before. Even with the handicap of a new law there is every reason to believe that the present intelligent direction and supervision of the General Counsel's office will reduce the congestion caused by war conditions. We may not understand the laws Congress imposes upon us but taxpayers and the Treasury have gained so much experience that some of the sections no one comprehends are being administered with dispatch if not with understanding.

385 Madison Ave., New York City,

December 1, 1926.

ROBERT H. MONTGOMERY

ACKNOWLEDGMENTS

More than ever before I am indebted to my associates who have worked with me for many months in rewriting last year's book. The task was harder than was anticipated. I have had the invaluable assistance of my associate, the Hon. Thomas G. Haight; of my colleagues at Columbia University, Professors Robert Murray Haig, and Roswell F. Magill; of my partner Walter A. Staub, C.P.A.; and of my assistants, J. Marvin Haynes, C. J. McGuire, and W. C. Magathan, all of the Bar of the District of Columbia; James O. Wynn, Jr., and William Diebold, both of the New York Bar; Conrad B. Taylor, C.P.A.; Hamilton Howard, C.P.A.; Robert Buchanan, C.P.A.; H. E. Bischoff; and Harold T. Gates, C.P.A.; and also of Orrin R. Judd, C.P.A., Vice President, and Henry Major, Assistant Secretary, of the American Exchange Irving Trust Company; and Joseph B. Ryan, Manager of the Tax Department of the Equitable Trust Company of New York.