517) were $179,539,631.03, an increase of $122,566,910.15. The amount of additional taxes assessed against corporations on the basis of revenue agents' reports was $6,311,453.28, as compared with $5,808,393.65 from this source during the preceding year. The total collections represent an increase of more than 215 per cent over the previous year, but upon a 2 per cent rate instead of the 1 per cent for previous years.

The total receipts of income tax for the fiscal year ended June 30, 1917, exclusive of the income tax on railroads in Alaska, were $359,647,971.13. This total will indicate without comment the great source of revenue which the income tax has been and will be as the needs of the Government require.

The increase in the amount of collections by reason of the examinations of revenue agents is particularly pointed out, as the figures are a fulfillment of the estimates made as to what the result would be if this force were largely augmented.

An increase in the appropriations for the revenue agents' force became available July 1, 1917, and since that date the Commissioner of Internal Revenue has, as rapidly as he was able to choose proper men, added to the force already in the field, so that additional results may be expected for the fiscal year ending June 30, 1918.

The increase in the amount of tax recovered referred to above is largely due to the increased efficiency of the field force. Whether the increase in the revenue agents' force now being made can take care of the volume of work required to be performed by that force is problematical.

The commissioner's report indicates that the audit of returns in his office is more than one year in arrears. The cards which are the guides for the revenue agents' work are made up from the returns of corporations and individuals which are selected during the audit of the returns. The cards now in the hands of the revenue agents are sufficient to keep that force employed for a period of several years without adding new work. When the audit of returns has been brought up to date the number of corporations and individuals requiring investigation will be vastly increased. The failure to have the audit up to date grows out of the condition to which attention was called in the report for the year ended June 30, 1916, in which it was stated:

The immediate need of the Internal-Revenue Service is an increase in the clerical force in the bureau to enable it to cope with the constantly increasing amount of work. In the Corporation Division the work of auditing is much in arrears, and unless relief is afforded in an adequate measure the situation can not but become more complicated from year to year.

There has been an increase in the number of persons and corporations filing income-tax returns, and this increase adds con

13034°-FI 1917-13

stantly to the work of the bureau regardless of the abnormal times in which we are living and because of which an extraordinary burden will be thrown upon the Bureau of Internal Revenue.

It is due to the taxpayers that an adequate clerical force to keep the work current should at all times be provided, and while Congress has from time to time increased the appropriations for this purpose, yet the growth of the work both as to quantity and the increase in the effort made to get correct returns, giving in detail the information required for the assessment of the proper amount of tax, has been greater than the relief afforded.

Comment was made in the report for the fiscal year ended June 30, 1916, on the effect the delay in auditing returns and making examinations had upon the tax and the taxpayers. With regard to corporations the situation has not changed; with regard to individuals the results of this delay are becoming more apparent, because in numerous cases of inquiry for additional information the reply is made that the taxpayer has been long since deceased.

As stated in the report for the fiscal year ended June 30, 1916, until an adequate force is provided which will enable the Commissioner of Internal Revenue to audit and investigate each return of annual net income within a reasonable time after such return has been rendered to the Government it will not be considered that this phase of the collection of the income tax will be based upon a proper

basis.

It is anticipated that the increase in the volume of administrative work in connection with the new revenue bill will be very great. These needs have been considered and estimates made with the view of collecting the new tax with the least amount of friction consistent with the searching canvass for taxpayers, which of necessity must be made. The needs of the war are understood by the taxpayer, and the patriotism of the citizen is expected to make the work of the collection of the tax one of cooperation between official and taxpayer, and it is trusted that the results will be equally satisfactory to both.

In this connection it is a pleasure to report that in response to a notice to taxpayers that an early payment of income taxes due June 1, 1917, would be appreciated many millions of taxes were paid prior to the due date of such taxes. In many instances the taxes paid amounted to hundreds of thousands of dollars, the interest on which if held by the corporations until payment was required by law would have amounted to considerable sums. These payments were made voluntarily and without any deductions for interest. The response to the request for such payments was splendid and was appreciated by the officials charged with the duty of providing revenues to meet the early expenses of the war.

Congress provided in the act of September 8, 1916, "that the preparation and publication of statistics reasonably available with respect to the operation of the income-tax law and containing classifications of taxpayers and of income, the amounts allowed as deductions and exemptions, and any other facts deemed pertinent and valuable shall be made annually by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury." This work is well under way, and the statistics provided for will be published in a separate volume.

Munitions manufacturers' tax.

Title III of the revenue act of September 8, 1916, provided that every person (including corporations, etc.), in addition to the income tax imposed by Title I of said act, shall pay for each taxable year an excise tax of 123 per cent per annum upon the entire net profits actually received or accrued for said year from the sale or disposition of the articles named in section 301 of said Title III, and which are briefly described by the general term "munitions."

The results of this tax were practically in accord with the estimates, $26,552,402.49 being assessed from the returns and nearly $12,000,000 being assessed after an adjustment of the returns had been made. The Commissioner of Internal Revenue immediately after the returns were made organized a special corps of revenue agents to make examination of all munition manufacturers' returns for the purpose of making the adjustment referred to above. One million two hundred and seventy-nine thousand seven hundred and seventy-three dollars and sixty-seven cents was added to the tax from adjustments of returns during the fiscal year ended June 30, 1917, and the balance of the $12,000,000 has been added since that date.

This law provided among the deductions which could be made from gross income "a reasonable allowance, according to the conditions. peculiar to each concern, for amortization of the values of buildings and machinery, account being taken of the exceptional depreciation of special plants." This provision of the law gave rise to exceptional deductions, which, upon examination, appeared excessive, and the excess deductions were disallowed, resulting in many cases in large increases in the tax found due.

The munitions tax law also provides that after examination of the return the person making the same may make a written request for a hearing with the commissioner for the purpose of establishing to his satisfaction that the amount of income reported by the revenue agent or asserted by the commissioner was incorrect.

This provision of the law gave rise to requests for hearings in numerous cases, which hearings delayed the collection of the added taxes found due. These hearings are being held daily and it is ex

pected that all requests in this respect will have been complied with before the close of the calendar year 1917; $6,784,120.31 have been assessed from the revenue agents' reports referred to between July 1, 1917, and September 15, 1917.

Excess-profits tax.

Title II, act of March 3, 1917, in addition to the taxes imposed by then existing laws, levied a tax of 8 per cent on so much of the net income of corporations, joint-stock companies, etc., as is in excess of $5,000, plus 8 per cent of the actual capital invested in the property or business.

This act was made effective as of January 1, 1917, and for the current year applies only to those corporations which make returns on the basis of a properly established fiscal year ending with the last day of some month in 1917 prior to December 31. Because of the short time intervening between the date of the approval of this act (March 3, 1917), and the close of the fiscal year (June 30, 1917), covered by this report, and because of the delay in preparing, printing, and distributing return forms, the amount of tax assessed under this act prior to the close of the last fiscal year was negligible, the entire amount being but $2,953.42, and that amount was assessed against corporations making final returns and going out of business. More recently, however, returns are being received from all corporations whose 1917 fiscal year closes with a date other than December 31 and assessments of excess-profits tax are being made on lists now current in considerable sums, the amount of which will necessarily appear in the receipts for the fiscal year ending June 30, 1918.

Estate tax.

The principal duties under Title II of the revenue act of September 8, 1916, during the fiscal year ended June 30, 1917, consisted in interpretation of the law and organization of the work in the bureau and in the field. While the total estate tax paid during the fiscal year was $6,076,575.26, the returns that had been voluntarily filed during the year indicated tax considerably in excess of this amount, many returns having been filed where tax could not be paid so far in advance of the due date.

The policy of the bureau is that as soon as a reasonable period of administration has elapsed each return shall be sent to a field examining officer for investigation. This work was well under way at the end of the fiscal year, and the results of the investigations theretofore completed indicated that in an overwhelming majority of cases the returns as filed would not show the total tax due the Government. It is already established that the additional tax to be collected through prompt investigation of all estates making returns

will amply justify the cost to the Government of such an exhaustive system of investigation.

In spite of the limited experience in the administration of the estate taxing act, there have been demonstrated clearly certain weaknesses in the law which seem to demand correction. Particularly is the statute ineffective in providing means for the collection of the tax from the estates of nonresident decedents. There should be a specific requirement in the law that no property of a nonresident decedent situate within the United States may be transferred to a succeeding owner prior to the time return has been filed and the tax due paid. Furthermore, the law should be made clearer with regard to the status of bonds of American corporations owned by nonresident decedents, since the situs of such property is a mooted question and there seems to be little likelihood of a uniform interpretation of this question in the courts. Furthermore, the law should be amended so as to allow the commissioner to designate the internalrevenue district in which return for any given nonresident estate should be filed. The present law will often require the filing of return with the collector at Baltimore in cases where the major part of the property to be investigated will be located in another collection district.

It has been made clear also that the requirements that notice of the existence of a taxable estate be given to the collector within 30 days after the issuance of letters or the taking of possession of property works a serious hardship. In many cases it is practically impossible for this requirement to be complied with. It has been the uniform- experience thus far that it is impossible for the majority of executors to make a reasonable estimate of the value of the decedent's property within such a period. No objection is seen to the extension of this period to 60 or even 90 days, and it is recommended that the law be amended in this particular.

Work of revenue agents.

The number of illicit distilleries reported for seizure during the year ended June 30, 1917, was 2,232, which shows a decrease of 1,144 when compared with the number reported during the previous year.

This marked difference, amounting to nearly 34 per cent, should not be attributed to a decrease in illicit distilling. It is rather due to the fact that information leading to the capture of illicit distilleries is no longer paid for by the Government, the result being that information, voluntarily given, is now received from reliable sources and from citizens who are interested in the suppression of illicit distilling. It was found that the rewards paid to informers led often to very expensive raids upon abandoned distilleries. There has been a great saving to the Government by the discontinuance of this prac