tion of natural deposits. In this case the court held that under the special excise tax law, mining corporations were not authorized to deduct from gross income any amount on account of depletion of natural deposits. The court later rejected a motion to reopen and review this case. The effect of this decision is to render many mining corporations which, in their original returns, had deducted from gross income large amounts for depletion and "unearned increment" liable to additional special excise tax for the calendar years 1909 to 1912, inclusive. Much of this additional tax has already been assessed either upon the basis of amended returns filed by the corporations or upon the basis of revenue agents' reports, and steps are being taken to assess and collect all the taxes that come within the purview of this decision.

Notwithstanding the care that has been taken to advise corporations of their liability to the addition to the tax (50 per cent) and to a specific penalty not in excess of $10,000 for failure to file their returns within the prescribed time, that is, on or before the succeeding March 1 in case of returns which are made on a calendar year basis, or on or before the last day of the 60-day period next following the closing date of the fiscal year, if made upon a fiscal year basis other than the calendar year, many corporations persist in filing delinquent returns.

Under the provisions of section 3176, Revised Statutes, as amended by the act of September 8, 1916, the conditions under which, prior to that time, liability to the 50 per cent additional tax in the case of delinquency automatically attached, were materially liberalized. This amended section provides in effect that the 50 per cent shall not be added to the tax in case a return is voluntarily filed after the due date without notice from the collector and it is shown that the delay was due to a reasonable cause and not to willful neglect. By reason of this provision many delinquent corporations have been relieved of the 50 per cent which otherwise would have been added to the tax to which their returns showed them to be subject.

The provision above referred to, as construed by this office in its administration, does not, however, relieve corporations from liability to the specific penalty, and in most cases of delinquency this penalty is being asserted and settled by a minimum offer of $10 in compromise. The knowledge that delinquent corporations may, upon a voluntary filing of their returns and a showing of "reasonable cause" escape liability to the 50 per cent addition to the tax, tends to increase delinquency which, to a very limited extent only, may be overcome by the assertion and acceptance of the present minimum offer in compromise of the specific penalty. If delinquent corporations are to be relieved of the 50 per cent addition to the tax on a showing of a "reasonable cause," an elastic and indefinite term, the minimum offer to be accepted in lieu of the specific penalty should be increased, otherwise the cases of delinquent corporations will become more numerous and the administration of the law more difficult.

INDIVIDUAL INCOME TAX.

The number of individual income tax returns for 1916, filed in the bureau, classified according to income, is shown graphically by the charts on pages 788 and 789 of this report and statistically by the tables on pages 790–797.

A more elaborate statistical report concerning returns filed by corporations as well as individuals is now being prepared and will soon be issued.

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 fiscal year was quite 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 1918 fiscal year.

In the statistical section of the report of the Commissioner of Internal Revenue will be found a comparative statement of the income tax assessed against corporations during the fiscal years ended June 30, 1916, and June 30, 1917, together with tabulated statements showing the number of income and munitions tax returns filed during the year 1917, the amount of tax assessed, etc., by collection districts and by States and Territories.

ESTATE TAX.

During the fiscal year ended June 30, 1917, the principal duties in connection with the collection of the estate tax levied by the act of September 8, 1916, consisted in the drafting of regulations interpretative of the law, the organization of an administrative force, and the development of a plan of procedure. The Estate Tax Division in the bureau was organized and a field force of competent investigators has been partially provided. This force was largely secured by the transfer from other lines of work of men who seemed especially qualified by education and training for estate tax work. A small number of investigators has been secured by transfer from other departments.

The policy has been adopted of having every final return on form 706 for estate tax promptly investigated, and the results achieved, as shown by the statement below, have already clearly demonstrated the wisdom of such procedure. It will be necessary, in order that this policy may be made thoroughly effective, to increase largely the field force during the present fiscal year.

Certain weaknesses in the law have been clearly demonstrated. The requirement that notice of taxable estates be given within 30

days after the taking possession of property or the granting of letters of administration works a very serious hardship. It is practically impossible to enforce this requirement in the cases of nonresident decedents, and it frequently occurs that the executors of estates of resident decedents can not determine within the 30-day period whether notice and return will be required. The bureau has found it necessary to adopt the policy of refraining from asserting the specific penalty provided in section 210, except in very unusual circumstances, as conditions so often arise which prevent administrators or executors from comp'ying with this provision of the law. It is recommended, therefore, that the law be amended to require the filing of the notice at the expiration of 60 or 90 days.

In the case of the estates of nonresidents the law should be amended so as to give the commissioner the right to designate the collector with whom return must be filed. As the law now stands, many estates are required to file return with the collector at Baltimore in cases where all or the major part of the property to be investigated is in other districts. The law should also be strengthened by a requirement that no property of a nonresident decedent situate within the United States shall be sold or transferred in any manner until the tax due because thereof has been fully satisfied.

It is suggested also that section 208 shou'd be amended so as to give the commissioner, or his authorized agents, power to examine any property of the estate, in whosesoever hands it may be, and to give the commissioner specific power to require that no personal effects of a decedent shall be distributed until after the Government has made an appraisal to determine their value. Instances have already occurred where, for lack of such authority, personal effects of great value have been sold or so widely dispersed that the commissioner is obliged to accept the estate's appraisal of their value; and experience has demonstrated that appraisals of this type of property made for executors are practically never made at the full market value as of the day of the decedent's death.

The following statement shows concretely the results achieved in the fiscal year in the administration of the estate taxing act:

The revenue act of September 8, 1916, by Title III provides that every person manufacturing the articles named in section 301 of such title shall, in addition to the income tax imposed by Title I of said act, pay for each taxable year an excise tax of 12 per cent per annum upon the entire net profits actually received or accrued for said year from the sale or disposition of such articles manufactured within the United States.

This tax, known as the munitions manufacturers' tax, applies to comparatively few manufacturers The profits upon which this tax was levied and assessed during the fiscal year ended June 30, 1917, were derived in almost their entirety from the performance of

contracts with foreign Governments. In many instances the performance of these contracts required the construction and equipment of special plants which, upon completion of the contracts, would be of little or no value, other than the salvage value, to the manufacturers.

By special provision of the law the manufacturers are permitted to deduct from their gross profits "a reasonable allowance, according to the conditions peculiar to each concern, for amortization of the value of buildings and machinery, account being taken of the exceptional depreciation of special plants." Under this provision, the manufacturers, anticipating the little value which these special plants would have upon completion of the contracts, generally undertook to charge against the contracts then in course of performance practically the entire cost (less estimated salvage) of the special plants, leaving but little if any plant cost to be charged against further or future contracts contingent upon the continuance of war conditions. As a result of this accounting practice a large per cent of the gross profits earned by manufacturers during the calendar year 1916 and returned for the fiscal year 1917 was consumed in plant cost. Because of the increased cost of labor, raw material, etc., over the estimated cost of these items at the time the contracts were entered into, the profits anticipated in many instances were not realized, and the amount of tax assessed under this law for the fiscal year 1917 was substantially less than that which had been anticipated at the time the law was enacted.

Prior to the close of the fiscal year there had been filed 498 returns representing that number of manufacturers of munitions or parts thereof. Of this number 269 showed a taxable profit, and on the basis of the returns made by this number of concerns original taxes were assessed in the aggregate sum of $26,552,402.49, to which was added $5,599.13, representing 50 per cent added to the tax because of the failure of the manufacturers to make their returns within the prescribed time, and $1,279,773.67 further tax assessed on the basis of the discoveries made prior to the close of the fiscal year by munitions agents, making a grand total of munitions tax assessed during the last fiscal year of $27,837,775.29.

Under the law munitions manufacturers are required to make their returns as of and for the calendar year, and to file such returns with the collector on or before the 1st day of March next following the year for which the returns are required. The bulk of the returns filed covering the calendar year 1916 were filed in the month of February, or, in cases where extensions were granted, in the month of March. There was in the minds of numerous manufacturers of parts, predicated somewhat upon the character of raw material, a doubt as to their liability to the tax imposed by this title. As a result, some of these manufacturers did not make returns or delayed the making until liability to the 50 per cent additional tax had attached.

Soon after the original returns and assessments thereon had been made a campaign of examination of the books of manufacturers for the purpose of verifying the returns was inaugurated. For this purpose a force of 24 income-tax agents, who had had successful experience in examining the books of corporations for the purpose of the income tax, was detailed to this work, and by this force a comprehensive investigation was made covering the books of every munitions manufacturer making a return. This investigation con

sumed the greater part of the time elapsing between the date it was begun and the close of the fiscal year, so that while an amount somewhat in excess of $16,000,000 was recommended for assessment in addition to that assessed on the basis of the returns, but $1,249,773.67 of the amount so recommended had been actually assessed prior to the close of the fiscal year. The revenue agents' reports covering the remaining amount, approximately $15,000,000, have, since the 1st of July, been in course of adjustment, and the amount finally agreed upon as due and payable has either been assessed or will be assessed at an early date.

The omitted taxes discovered by the examining officers were due. largely to the omission from gross profits of advance payments in 1915 for work done in 1916, profits received in 1916 on contracts begun but not fully performed in 1915, and to excessive deductions on account of compensation or bonuses paid to officers, depreciation, and amortization.

Under the law it is the duty of the Commissioner of Internal Revenue, after an investigation of the books of a munitions manufacturer has been made and additional tax liability discovered, to notify the person making the return, of the discovery, the amount of additional tax invol ed and the basis upon which the same is proposed to be assessed, and upon request of the munitions manufacturer to grant a hearing with respect to the questions at issue. In most cases in which additional taxes have been proposed as a result of munitions agents' examinations, hearings have been granted. Many of these hearings have been held and in some instances manufacturers have shown conclusively that the recommendations of the examining officers were, to certain extent at least, erroneous, and in such cases the amount of additional taxes recommended has been reduced or canceled accordingly as the facts appear. In practically all such cases, where hearings were had, adjustments have been reached to the satisfaction of the Government and the taxpayers. It is believed that when all these cases will have been determined it will be found that the more than $16,000,000 recommended by revenue agents for assessment will not be reduced to an extent greater than $3,000,000 or $3,500,000. So that the munitions tax assessed and assessable for the fiscal year 1917 on the basis of the 1916 calendar year profits will very closely approximate $40,000,000. Of the amount recommended by examining officers, $1,279,773.67 was assessed prior to July 1, 1917, and $6,784,120.31 has been assessed since that date, which, including the $26,561,699.31 assessed on the basis of the original returns, makes a total of $34,625,593.29 assessed up to date of this report, with approximately $2,000,000 additional adjusted and ready for assessment, and the sum of $5,000,000 or $6,000,000 recommended by examining officers yet to be passed upon, out of which an amount will no doubt be assessed sufficient to make an aggregate of all taxes assessed against munitions manufacturers on the basis of their 1916 profits of $40,000,000.

PRODUCTION OF STAMPS.

All of the stamps issued by this bureau are engraved and printed by the Bureau of Engraving and Printing with the exception of tobacco stamps imprinted on tin-foil wrappers. The printing of