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case 69 in the Supreme Court construing certain forfeiture provisions of the Internal Revenue Laws, and its authority has never been expressly questioned or restricted.

The latest statement of the United States Supreme Court referred to above 70 makes it clear that revenue laws, as to the persons and things to be taxed will be strictly construed in the sense that their provisions will not be extended beyond the clear import of the language used or their operations enlarged so as to embrace matters not specifically pointed out, and that doubt as to such matters will be resolved more strongly against the government and in favor of the citizen. In respect to their penal provisions, however, both those working forfeitures and those imposing penalties or imprisonment, rather than in respect to the question of whom and what the statute taxes, it may still be that revenue laws will be considered as remedial in their character and so liberally construed so as to carry out the purpose of their enactment.71

Exemption from Taxation. This paragraph deals only with the construction of the language of a tax law which exempts. The rules of construction applicable to language which lays the tax have already been discussed.72 The distinction between the rules of construction applicable to language laying the tax and language exempting from tax is important, for, as has been observed, in respect to the

69 U. S. v. Graf Distilling Co., 208 U. S. 198. 70 See Gould v. Gould, 245 U. S. 151.

71 This distinction will not reconcile all the cases. For instance, the early cases of Smythe v. Fiske (See Note 67) and Rankin v. Hoyt, (See Note 67), the later cases of Hunter v. Corning & Co., 86 Fed. 913; Lowe v. Farbwerke-Hoechst Co., 240 Fed. 671; De Ganay v. Lederer, 239 Fed. 568 (now on the docket of the United States Supreme Court), clearly contemplate the application of the of liberal construction with respect to subjects and objects of taxation. On the other hand, the case of U. S. v. Distilled Spirits (See Note 64) contemplates the application of the rule of liberal construction as announced in the Stowell case in a modified form; that is, neither liberally nor strictly but with reasonable fairness to the citizen.''

72 See paragraph headed "Strict or Liberal Construction."

former doubts will be resolved most strongly against the government and in favor of the citizen, while in respect to the latter, as will appear, a most strict construction in favor of the government is called for.73

The taxing power is of vital importance and is essential to the existence of government; the whole community is interested in maintaining it undiminished.74 Exemptions from taxation are regarded as in derogation of sovereignty 75 and it is abundantly established that the taxing power should never be presumed to be relinquished unless the intention to do so be declared in clear and unambiguous terms,76 which will admit of no other construction 77 and which are too plain to be mistaken.78

The existence of a well founded or rational doubt is equivalent to a denial of a claim to exemption.79 No claim can be sustained unless within the express letter or the necessary scope of the exempting clause,80 construed strictissimi juris; 81 an exemption will not be inserted in a statute by construction.82 But this salutary rule requiring a strict construction of exemptions must not be misunderstood. It is not a substitute for all other rules and does not mean that whenever a controversy is or can be raised as to the meaning of a taxing statute, such ambiguity occurs as immediately and inevitably to determine its interpretation. The proper office of the rule is to help solve ambiguities, not to compel an immediate surrender to them-to be an

73 Herold v. Parkview Building & Loan Ass'n, 210 Fed. 577. 74 Providence Bank v. Billings, 4 Pet. 514; Christ Church v. Philadelphia County, 24 How. 300.

75 Yazoo & Miss. Valley R. Co. v. Thomas, 132 U. S. 174.

76 Tennessee v. Whitworth, 117 U. S. 139; Keokuk & W. R. Co. v. Missouri, 152 U. S. 301.

77 Southwestern R. R. Co. v. Wright, 116 U. S. 231.

78 Chicago, etc., R. R. Co. v. Missouri, 120 U. S. 569.

79 Phoenix Fire Ins. Co. v. Tennessee, 161 U. S. 174; Wright v. Georgia R., etc., Co., 216 U. S. 420.

80 Ford v. Delta & Pine Land Co., 164 U. S. 662.

81 Vicksburg S. & P. R. Co. v. Dennis, 116 U. S. 665.

82 Providence Bank v. Billings, 4 Pet. 514; U. S. v. Coulby, 251 Fed. 982.

element in decision, and effective, perhaps, when all other tests of meaning have been employed which experience has afforded and which it is the duty of courts to consider.83 And so courts, in construing the exempting clauses of taxing statutes, are not required to hunt for an escape from an exemption, but will, where the intent to exempt-clearly appears, give effect to such intent without evasion.84

86

Rule of Construction Followed by the Treasury Department. As a general rule the construction by the Treasury Department is such as is most favorable to the enforcement of the revenue laws and no liberal interpretation in favor of the individual is indulged in.85 In announcing this rule the Attorney General cited the cases of Taylor v. U. S.; & Cliquot's Champagne,87 U. S. v. Hodson,88 and Smythe v. Fiske,89 and which, as has been stated, construed both statutes to prevent frauds on the revenue and the provisions of taking statutes laying the tax. The Attorney General does not appear to have taken account of the distinction which has been pointed out between these two kinds of provisions, so far as their construction is concerned. As a matter of practice the Treasury Department cannot, of course, assume the balanced judicial attitude of the courts in interpretation of doubtful points, as its function is to administer the law and its duty, primarily, to collect revenue. However, in some cases the Department has gone to great length in making liberal interpretation favorable to the taxpayer.90

83 Citizens Bank v. Parker, 192 U. S. 73.

84 Buchanan v. Knoxville & O. R. Co., 71 Fed. 324.

85 18 Op. Atty. Gen. 246.

86 3 How. 197, 210.

87 3 Wall. 114.

88 10 Wall. 395.

89 23 Wall. 374.

90 Compare, for instance, the Excess Profits Tax Law of 1917 with the Regulations No. 41.

CHAPTER 44

TAX ON UNDISTRIBUTED INCOME OF CORPORATIONS

The provisions which imposed this tax were contained in the 1916 Law as amended. No similar tax is imposed by the Revenue Act of 1918. The purpose of the tax was to counteract the tendency of corporations to permit their earnings to accumulate as surplus, which action, although not taken with the intent of evading the surtaxes, would, nevertheless, operate to reduce the surtaxes paid by individual stockholders. Under this provision of the law a corporation could retain any part or all of its earnings for the year 1917, provided it was willing to pay a tax of 10% upon such portion thereof as was not (a) actually invested and employed in the business, (b) retained for employment in the reasonable requirements of the business or (c) invested in obligations of the United States issued after September 1, 1917. If the earnings of the corporation were accumulated with a fraudulent purpose or intent of preventing the imposition of the surtaxes on the stockholders, such stockholders could be taxed under the 1916 Law as though the earnings had been distributed.2 The tax on undistributed income of corporations was not intended to take the place of this provision, but was intended to operate in cases where the annual net income was retained beyond the reasonable requirements of the business of the corporation and yet not with fraudulent

1 Revenue Act of 1916, § 10 (b), added by Revenue Act of 1917. 2 Revenue Act of 1916, § 3, corresponding to Revenue Act of 1918, $ 220.

intent to avoid the imposition of the surtaxes on the stockholders of the corporation.

Tax Repealed by Present Law. The provision of the 1916 Law imposing the tax on undistributed income of corporations is repealed by the 1918 Law, except to the extent that it "shall remain in force for the assessment and collection of all taxes which have accrued thereunder." It is also expressly provided that "except as otherwise provided in this Act, no taxes shall be collected under Title I of the Revenue Act of 1916 as amended * * * in respect to any period after December 31, 1917."3 It seems clear that no tax can be imposed with respect to any income received in 1918. If the phrase "any period after December 31, 1917," has reference to the point of time six months after the close of the taxable year, at which time the status of the income for the purpose of this tax was to be determined, then the repealer amounts to practically a complete nullification of the tax, since in the great majority of cases that point of time fell after December 31, 1917. A reasonable view, however, seems to be that this tax will be held to apply to all incomes earned in 1917, and in the case of corporations whose fiscal years ended in 1918, the undistributed income should be apportioned as was provided in the case of corporations whose fiscal years ended in 1917. As to the 15% tax imposed in cases where the Secretary of the Treasury should find that any "amount so retained at any time for employment in the business is not so employed or is not reasonably required in the business" it seems that such tax does not accrue until the finding of the Secretary has been made, and if the tax did not accrue before the date of repeal of the law no tax can be assessed under the law. Corporations Subject to the Tax. The law provided that the tax should apply to "every corporation, jointstock company or association or insurance company."4

3 Revenue Act of 1918, § 1400.

4 See T. D. 2736.

F. T.-44

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