OBJECTS OF TAXATION. DISTILLED SPIRITS. During the past fiscal year there were produced from materials other than fruit 277,834,366.6 taxable gallons of distilled spirits, an increase of 28,710,444.8 gallons as compared with the quantity of like spirits produced during the fiscal year ended June 30, 1916. Of this class of spirits there were removed from bonded warehouses on payment of tax 160,740,210.6 taxable gallons, an increase of 27,714,241.2 taxable gallons over the quantity tax paid during the preceding fiscal year. Much of this increase in tax paid withdrawals was probably due to the anticipated increase in rates of tax payment in the revenue bill then pending. The quantity of spirits remaining in distillery and general bonded warehouses at the close of the fiscal year 1917 was 194,832,682.6 gallons, a decrease of 37,570,195.7 gallons from the quantity, 232,402,878.3 so held in bond at the close of the preceding fiscal year. The increase in production of distilled spirits during the year was occasioned by the demand for alcohol and high-proof spirits to be denatured and for export to European countries. Withdrawals free of tax for denaturation increased 9,230,169.6 gallons during the year, and for export 2,517,900.9 gallons. The following table shows the quantity of distilled spirits produced from materials other than fruit from the fiscal year 1900, the quantity withdrawn upon payment of tax, and the quantity held in bond at the close of each fiscal year during that period. During the past fiscal year there were withdrawn from bond, free of tax, for denaturation, 93,762,422.7 proof gallons of alcohol and rum, as against 84,532,253.1 proof gallons withdrawn for like purposes during the fiscal year 1916. The following statement shows the quantity of spirits denatured during each fiscal year since the enactment of the denatured-alcohol law of June 7, 1906: Detailed statements showing by districts the quantity of alcohol denatured during the past fiscal year and the various commercial purposes for which such alcohol was denatured will be found on pages 115-120 of the report of the Commissioner of Internal Revenue. DISTILLERIES. During the fiscal year ended June 30, 1917, there were operated for the production of distilled spirits 198 grain distilleries, 25 molasses distilleries, and 284 fruit distilleries, a total of 507-a decrease of 98, as compared with the number operated during the previous fiscal year. A close supervision by distillery and field officers was maintained over all establishments engaged in the manufacture, rectification, and sale of distilled spirits. INDUSTRIAL (FARM) DISTILLERIES. There have been established six industrial distilleries, three of which have actually been operated, under the act of October 3, 1913, which act, for the purpose of encouraging distilleries of this class, has made special exemptions and provisions in the matter of registry and conduct of such distilleries, and which permits the manufacture of alcohol for denaturation "from any substance whatever." In view of pending legislation concerning the production of distilled spirits, it is not improbable that a number of distilleries heretofore operated for the production of spirits for beverage purposes may be converted into industrial distilleries, and possibly some new distilleries of this class established. BRANDY USED IN FORTIFYING WINES. During the fiscal year 1917 there were used in the fortification of pure sweet wines 5,039,786.5 tax gallons of brandy, as against 1.257 1,257,399 tax gallons used for like purpose during the preceding fiscal year. This large increase is doubtless due to the fact that by the act of September 8, 1916, the tax on brandy so used was decreased from 55 cents per proof gallon, as imposed by the act of October 22, 1914, to 10 cents per proof gallon. The quantity of brandy used at the rate of 10 cents per proof gallon in the last 10 months of the fiscal year 1917 was 4,982,560 tax gallons, as against 57,226.5 tax gallons at the higher rate during the first two months. TAX ON WINES, CORDIALS, ETC. Under the provisions of the act of October 22, 1914, all still wines were taxable at 8 cents per gallon, all cordials at the rate of 24 cents per gallon, and champagne and artificially carbonated wines at the rate of 20 cents per quart. These rates were changed under the act of September 8, 1916, as follows: Still wines not over 14 per cent alcohol.. Still wines over 14 per cent but not over 21 per cent alcohol. fortified under that act), 14 cents per pint or 12 cents per quart. pint or 6 cents per quart. Liqueurs, cordials, etc. (if containing wine pint or 6 cents per quart. Champagne and sparkling wine, 3 cents per Artificially carbonated wine, 14 cents per There was very little still wine over 21 per cent alcohol tax paid under the act of September 8, 1916, so that the tax receipts from still wines were, for the most part, at 4 cents and 10 cents per gallon, or an average of 7 cents per gallon, or 1 cent less than the tax imposed by the previous act of October 22, 1914. Attention is also called to the fact that no tax was imposed by the act of September 8, 1916, on imported cordials, and, as the quantity of domestic cordials produced which contained wine fortified under that act was very small, there was very litt'e tax derived from this class of goods. It will also be noted that the tax on champagne was reduced from 20 cents per quart to 3 cents per one-half pint, or 12 cents per quart, and on artificially carbonated wines to 14 cents per one-half pint, or 6 cents per quart. Notwithstanding the reductions in tax mentioned above, the tax on wines, cordials, etc., collected under the act of September 8, 1916, for the 12 months from September 1, 1916, to August 31, 1917, was $5,688,816.92, as against $2,688,368.30 collected on like articles under the act of October 22, 1914, from September 1, 1915, to August 31, 1916. FERMENTED LIQUORS. The production of fermented liquors during the fiscal year ended June 30, 1917, was 60,817,379 barrels, being an increase of 2,183,755 barrels, as compared with the preceding fiscal year. There were taxpaid for consumption 60,729,509 barrels and removed from breweries for export free of tax 87,870 barrels during the fiscal year. The number of breweries operated during the year was 1,217, a decrease of 115 as compared with the previous fiscal year. Pipe lines were employed for conveying fermented liquors to the bottling premises at 367 breweries, being a decrease of 7 as compared with the previous fiscal year. TOBACCO. The receipts from the tax on manufactured tobacco, snuff, cigars, and cigarettes, including special taxes for the fiscal year ended June 30, 1917, amounted to $103,201,592.16, an increase over the collec tions from these sources during the fiscal year ended June 30, 1916, of $15,137,644.65. The collections from special taxes levied under the act of October 22, 1914, and September 8, 1916, during the fiscal year amounted to $971,386.80. There were in operation at the close of the calendar year 1916, 14,576 cigar factories and 311 cigarette factories, this being a decrease of 1,156 cigar factories and a decrease of 56 cigarette factories as compared with the previous year. There were also in operation at the close of the last calendar year, 2,152 tobacco and snuff factories, 2,085 producing manufactured tobacco and 67 producing snuff, 4,139 dealers in leaf tobacco, and 331 retail dealers in leaf tobacco. There has been no material change in the volume of business of retail dealers in leaf tobacco, which is relatively small according to their quarterly reports forwarded to this bureau. Frauds upon the revenue by manufacturers of tobacco, cigars, and cigarettes have been aided by unscrupulous dealers in leaf tobacco. This has been possible under the present laws governing such business, weakness in which has been pointed out in previous reports. It is essential that every dealer in leaf tobacco should be compelled by law to give a bond, to be fixed by the collector of the district, based upon the quantity of business proposed to be done, the sum of which bond to be increased from time to time at the discretion of the collector or under instructions of the Commissioner of Internal Revenue. Each dealer in leaf tobacco should also be required to make a true inventory of stock on the first day of January of each year and to render reports of his transactions monthly and within 10 days after the close of each month to the collector of his district. The necessary authority should also be given the Commissioner of Internal Revenue to propose and levy assessment against dealers in leaf tobacco for tax on tobacco not properly accounted for. The recommendation heretofore made that manufacturers of tobacco snuff, cigars, and cigarettes, dealers in leaf tobacco, peddlers of tobacco, be required to register only on commencement of business and not annually, on the first day of July, when special taxes imposed upon these occupations are not in force, is urged again. The number of cigarettes weighing not more than 3 pounds per thousand tax paid has increased considerably over the previous fiscal year. The receipts from the sale of stamps during the fiscal year ended June 30, 1917, show tax payment of 30,501,735,144 small cigarettes, an increase over the previous fiscal year of 9,435,538,472 cigarettes, or an increase of 44.79 per cent. OLEOMARGARINE. The fiscal year ended June 30, 1917, stands out as the banner year in oleomargarine production in the United States, the volume of operations in this product being the largest in the history of this industry. There was produced a total of 225,158,080 pounds of uncolored oleomargarine, of which 224,047 821 pounds were withdrawn tax paid; 141,835 pounds withdrawn free of tax for export, and 2,400 pounds withdrawn free of tax for use of United States, as compared with the fiscal year 1916, with a production of 145,760,973 pounds, 145,443,578 pounds tax paid, 26,076 pounds withdrawn for export, and 2,250 pounds withdrawn free of tax for use of United States, showing a net increase of 79,397,107 pounds in production, 78,604,243 pounds tax paid, and 115,759 pounds exported free of tax, and 150 pounds in withdrawals of this class of product for use of the United States. During the fiscal year ended June 30, 1917, there were produced 8,012,031 pounds of the artificially colored oleomargarine, of which 4,476,351 pounds were tax paid at 10 cents, 2,752,431 pounds withdrawn free of tax for export, and 723,248 pounds withdrawn free of tax for use of United States, as compared with 6,748,940 pounds produced, 3,403,287 pounds withdrawn tax paid, 2,561.613 pounds exported free of tax, and 746,281 pounds withdrawn free of tax for use of United States during the fiscal year ended June 30, 1916, showing a net increase of 1,263,091 pounds produced, 1,073,064 pounds withdrawn tax paid. 190,818 pounds exported, and adecrease of 23,033 pounds withdrawn free of tax for use of United States. The collections from these sources during the past fiscal year amounted to $1,995,720.02, as against $1,485,970.72 for the fiscal year 1916, or a net increase of $509,749.30 in these collections. This total is made up from the following items: From stamp tax at 10 cents per pound, $632,716.76; stamp tax at one-fourth cent per pound, $570,165.02; special taxes from manufacturers, wholesale and retail dealers, $792,838.24, as against $558,349 33 from stamp tax at 10 cents, $366,350.58 from stamp tax at one-fourth cent, and $561,270.81 from special taxes during the preceding fiscal year. The total collections from stamp taxes during the fiscal year just ended include approximately $175,000 collected on assessments made in prior years arising from frauds discovered during 1914 and $12.631.77 on account of frauds and delinquents during 1917. Likewise the total collections from special taxes include $30,322.93 from frauds and delinquents discovered in the past year. As a result of the activities during 1917 to suppress these frauds, there were detected 87 violations involving illicit manufacturers, 35 wholesale dealers, and 3,542 by retail dealers, a large portion of which was on account of failure to pay the taxes due, making a total of 3,664 violations. In those cases where prosecutions were instituted and trials held, 21 illicit manufacturers and 2 retail dealers were convicted, making 23 convictions during the fiscal year ended June 30, 1917. Acquittals were rendered in 6 cases against such manufacturers and 1 wholesale dealer, total of 7 acquittals, while there were under indictment at the close of the year and held for the grand jury 17 cases against manufacturers, 5 wholesale dealers, and 8 retail dealers, making a total of 30 cases pending. Compromises were accepted in 29 cases of manufacturers, 10 wholesale dealers, and 98 retail dealers, a total of 137 cases settled in this manner. The other cases, where the facts did not warrant criminal action, were dropped on recommendation of the field and prosecuting officers upon payment of taxes and penalties. A summary of the financial results of these activities show $6,155 collected from fines, $18,105 from compromises, $30,322.93 from assessment of special tax and penalties, and $12,631.77 from stamp taxes, making a total of |