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$67,214.70, which is exclusive of the $175,000 collected from stamp tax at 10 cents from assessments in previous years, above referred to. At this time of the urgent need of increased revenues and of the conservation of the food supply, especially the fats, made necessary by the war in which we are now engaged, attention is invited to the wisdom and desirability of a revision of the oleomargarine law to impose a flat tax of a nominal rate on the product, which would not only produce greater revenue, but would give the masses of the people of this country opportunity to buy this wholesome food product without the additional burden of the heavy poundage tax now imposed by the present law. This amendatory legislation would seem a proper corollary to the war legislation enacted at the last session of Congress.

ADULTERATED BUTTER.

All the violations of the adulterated butter law, act of May 9, 1902, discovered during the fiscal year 1917, consisted of cases in which butter containing 16 per cent or more of moisture was produced and placed on the market, and a majority of these were dropped upon payment by the manufacturers of the tax imposed by law and the butter reworked and placed in legal condition."

Prosecutions were instituted only in those cases where the evidence showed the manufacturers had deliberately or knowingly incorporated abnormal quantities of water in the butter. A total of 185 cases against manufacturers, 14 against wholesale dealers, and 43 against retail dealers, making a total of 242, were reported during the past fiscal year. Prosecutions were instituted in those cases of flagrant violations, which resulted in the conviction of 2 manufacturers and 1 wholesale dealer.

There were 43 cases against manufacturers, 1 wholesale dealer, and 3 against retail dealers settled by compromise, while 71 cases against manufacturers, 2 against wholesale dealers, and 6 against retail dealers were dropped upon payment of the taxes due.

A revision of this law, as well as oleomargarine statutes, should receive the most careful consideration at this time, and I would urge that action be taken to secure the proper and needed legislation upon these two subjects.

NARCOTIC LAW.

At the close of the fiscal year ended June 30, 1917, the act of December 17, 1914, known as the Harrison narcotic law, had been in force 28 months, and while the results accomplished during this period have proved the great value of this law, they have also disclosed several serious defects which need amendatory legislation to remedy. During the 12 months ended June 30, 1917, there was reported a total of 22,641 violations of this act, which includes those of a technical nature, and also violations of the provisions of the regulations issued under authority of the law. These violations involved 12,777 registered and 44 unregistered physicians, 4,290 registered and 12 unregistered dentists, 1,231 registered and 5 unregistered veterinarians, 41 registered and 1 unregistered manufacturers of drugs, 11 registered and 8 unregistered importers of drugs, 50 registered wholesale dealers, 2,997 registered retail dealers, and 16 unregistered retail deaelrs, 406 by registered miscellaneous classes, and 752 unregistered miscellaneous classes.

Prosecutions in the more flagrant cases were instituted and resulted in the conviction of 160 registered persons, 285 unregistered, a total of 445, and the acquittal of 29 registered and 73 unregistered persons, or a total of 102, while at the close of the fiscal year 1917, 117 registered and 116 unregistered persons were under indictment or held for the grand jury.

The cases of 407 registered and 4 unregistered persons were compromised, and 20,775 cases of minor infractions by the registered and 221 by unregistered persons, including those who failed to pay special tax within the required time, were dropped upon satisfactory evidence of the technical or unintentional character of the violation.

At the close of the fiscal year 1917 there were pending 315 cases against registered and 139 cases against unregistered persons, in which cases final action had not been taken at that time.

Collections from fines imposed by the courts in 117 cases amounted to $14,466.22, while there was collected from compromises during the fiscal year 1917 $25,365. During the year ended June 30, 1917, special taxes and penalties amounting to $27,202.20 were assessed against delinquents, of which amount there has been collected $26,932.60.

The decision of the United States Supreme Court in the case U. S. v. Jin Fuey Moy makes it very difficult to control the illicit traffic in narcotic drugs by unregistered persons, as under that decision the mere possession of any quantity of the drugs is not evidence of violation, which forces the Government to prove an actual sale in such a case, even where the circumstances clearly indicate a sale or dispensing. Legislation to amend and strengthen this law is urgently needed if the physical and moral interests of those directly and indirectly affected by the drug evil are to be adequately protected. This is especially true at this time when these interests are so vital to the welfare of our country.

Owing to the interruption and partial demoralization of foreign commerce incident to the present war, which has undoubtedly materially lessened the available supply of raw material from which narcotic drugs for legitimate medical purposes are obtained, and so vitally necessary for the use of our Army and Navy engaged in the struggle, it is urged that Congress, by proper legislation, take immediate steps to conserve the available supplies, and to this end it might be advisable for the Government to license and regulate the manufacture of such drugs from the imported materials, or take over the control of the manufacture, sale. and use of these drugs. In event this is not done, it is recommended that this act be amended or revised to provide:

First. A tax on the drugs with provision for original stamped packages and to limit the dealing in and dispensing of and from such. stamped packages to those registered under the law. and to make the absence of stamp from any package evidence of nonpayment of the tax and violation of the law, except where such packages contain drugs put up upon prescriptions issued for legitimate medical purposes by a registered practitioner, and to make the possession of an original stamped package by any person not registered prima facie evidence of nonpayment of special tax and violation of the law.

Second. That the limitations as to registration under the act be clearly set forth and restricted to persons lawfully engaged in the sale of or dispensing, administering, or prescribing the drugs covered by the act, and that the writing of a prescription by any unauthorized person, or the altering or forging of any prescription shall be fully covered with adequate provision for punishment of such offense.

Third. That the provisions of the act be extended to include chloral-hydrate, cannabis indica or cannabis sativa, and any other drug or drugs having the same general properties, with a clear definition of "substitutes" and "synthetic substitutes" for all such drugs. coming within the scope of the act.

Fourth. Making all the general provisions of the internal revenue statutes relating to seizures, forfeitures, etc., applicable to the drugs taxed and the persons upon whom special taxes are imposed under this act.

It is further recommended that Congress provide for the treatment by the Government, through some designated medical agency, of the persons addicted to the use of any of the proscribed drugs where such treatment may be rendered necessary.

OPIUM.

During the 12 months ended June 30, 1917, there was reported a total of 222 violations of the act of January 17, 1914, regulating the manufacture of smoking opium. Persons convicted numbered 41, acquitted 16, number of persons under indictment or held for the grand jury 43, number of cases dropped upon payment of offers in compromise or discharged by United States commissioner 92. number of cases pending (exclusive of those under indictment or held for the grand jury) 30.

The quantity of smoking opium forfeited was 2 pounds; quantity destroyed, one-half pound; quantity held as evidence in pending cases, 3 pounds.

Amount of fines imposed upon conviction was $13,875; amount of fines collected, $2,850; and the amount collected from compromises, $605.

LABORATORY WORK.

The comparison of this year's report with that of last year will show that there has been an increase of more than 4,000 samples over that of the past year. The number of butter samples decreased to some extent. A large increase is noted in the number of distilled spirit samples: this represents suspected refiled bottled-in-bond bottles, suspected substitution, and underfilling cases. The major portion of the samples were suspected refilled bottles. Very few cases of substitution were made during the past year for the reason that this practice was practically ended during the campaign against this particular offense inaugurated a few years ago and the practice has not been resumed. The number of fermented beverages and medicinal preparations remain about the same. So, also, do the oil samples from the oleomargarine factories. The number of miscellaneous samples shows an increase; under this heading are included

samples of distillery beer, a large number of samples examined for the Auditor of the Treasury, fusel-oil samples, and all other samples. that are not included under the various headings. The oleomargarine samples show a large increase; the analysis of the product on the market disclosed the fact that the product of several of the factories was artificially colored with annotto. Upon further investigation it was proved that the coloring matter became incorporated in the oleomargarine because artificially colored butter had been used in the process of manufacture. The narcotic samples have decreased in number, due, no doubt, to the decision of the Supreme Court that possession did not constitute a violation under the Harrison Act. This class of work consumes a great deal of time both by reason of the very careful analysis that must be made and because the majority of the cases are tried in court and the analyst of necessity must testify to his work.

The work in the Division of Chemistry has steadily increased each year and the past year has shown a large increase. In addition to the regular work the Council of National Defense requested the Secretary of the Treasury to have the laboratory undertake the investigation of the chemical synthesis of glycerine. It is gratifying to report that the investigation has been successful as far as it has gone. The President has allotted sufficient funds from the defense act of April 17, 1917, to enable this bureau to try out the process on a manufacturing scale. If successful it is believed that glycerine can be produced from an entirely new source of material at approximately one-third of its present market price.

CORPORATION INCOME TAX.

Notwithstanding the lack of sufficient competent help, both in the office and in the field, to administer the income-tax law as promptly and efficiently as is desired, the result of the year's work as it relates to corporations, joint stock companies, or associations and insurance companies has been encouraging. The amount of income tax assessed for the year ended June 30, 1917, in pursuance of the provisions of Title I of the act of September 8, 1916, exceeded by many million dollars the highest estimates made a year ago, and in this respect the result has been both gratifying and surprising. The amount assessed during the year covered by this report was a little more than three times as great as that assessed during the fiscal year immediately preceding, the exact figures being $181,720,990.65 as compared with $58,547,081.71 for the year ended June 30, 1916.

During the fiscal year covered by this report there were received in the Bureau of Internal Revenue 345,047 returns of annual net income of corporations, joint stock companies, or associations and insurance companies. As compared with the number received during the year immediately preceding, this shows a falling off of 21,396 corporate returns. This decline in the number of returns made is more apparent than real, and is accounted for in the fact that the number (366,443) received during the fiscal year 1916 was abnormally large, including some 25,000 or 30,000 returns received by the collectors during the 1915 fiscal year and which were not forwarded to the Internal Revenue Bureau until after the close of that year, and

which therefore entered into the count of returns received during 1916. Allowing for this excess or duplication of 1916, the number of returns received for the year ended June 30, 1917, is substantially greater than the number actually due and received for any year since the inception of the corporation tax law in 1909. It is believed that the number of returns received during the fiscal year 1917 very closely approximates the number of corporations which come within the purview of the present income-tax law.

For the several years during which corporations have been subject to tax, either special excise or income, the number of returns received has been as follows:

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an average of 306,778 per year for the entire period. Except for the years 1915 and 1916, for the first of which the number of returns received was subnormal and in the second abnormal (for reasons herein before stated), the increase in the number of returns received each year over those of the preceding year has been at approximately the same rate, thus indicating that the number of returns received has practically kept pace with the normal growth of corporate enterprises.

Of the entire number (345,047) of corporate returns received during the last fiscal year (1917), 204,551 show a taxable net income the aggregate amount of which was $8,693,841,327.21, upon which income tax (not including penalties) was assessed in the sum of $173,876,826.54. The remaining number (140,496) shows an operating deficit or no taxable income. The number of taxable returns filed was a little in excess of 56 per cent of the whole number as compared with 52 per cent of the whole number received during the preceding fiscal year.

Of the 366,443 filed during the fiscal year ended June 30, 1916, 190,911 showed a taxable net income the aggregate amount of which was $5,184,442,389.17. For the year 1917, as above stated, the total net earnings, as shown by 204,551 taxable returns filed were $8,693,841,327.21.

Notwithstanding the fact that the aggregate number of returns received during the fiscal year 1916 was 366,443 as against 345,047 received during the year 1917, the taxable returns of the latter year exceeded those of the former by 13,640, and the excess of the 1917 net income returned by taxable corporations over that of the same class for 1916 was $3,509,398,938.04. The average per corporation of those returning a taxable income for each year was, for 1916, $27,156.33, and for 1917, $42,502.07. The excess of the aggregate net earnings of all taxable corporations for the year 1917 over those of the same class for 1916, represented an increase in earnings of a little more than 67 per cent; that is to say, the aggregate corporate net earnings for 1917 were 67 per cent greater than those of 1916,

13034°-FI 1917-49

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