realized in 1918 provided that the income taxed has all been received as income by the persons taxed and that you make some allowance for extreme cases. An extreme case I would take to be that of a man who refused an offer of $2,500,000 in 1916 for an oil property which cost about $400,000 in 1912. He was worth $2,500,000 in December, 1916. When he sold the same property for $2,000,000 in 1917, he was told that his profit was subject to all the new taxes for that year. That man was worth $2,500,000 in December, 1916. I do not know the exact figures, but we will assume he got of 1917 only a little over a million dollars, and the only satisfaction was that it was only his income for 1917 that was taxed. Now, that is preposterous. Mr. STERLING. I would like to submit this question to you: Suppose a man out in Illinois bought a quarter se tion of land 30 years ago for $50 an acie. He sells it this year for $250 an acre—and that is happening out there.

MI. REED. Yes; surely.

Mr. STERLING. How ought his income to be computed? Ought any of that property to be computed as income?

MI. REED. At $250 an acre, you say he sells it?

Mr. STERLING. Yes.

MI. REED. He may have mortgaged that property for $200 an acre last year or in 1916. If you tax him on the profits from $200 up to $250, you take everything he has got left there.

MI. STERLING. All of that is not profits of this year.

Mr. REED. It absolutely is not.

Mr. STERLING. It is the profit of 30 years.

Mr. REED (continuing). And if you want to tax the income of 1917, if you want to make a man contribute on what he is earning this year, you have to allow him the value of his property on the first day of the tax year. But if it accumulated during prior years when the profits were subject to tax-since 1916-then you should tax him according to the rate of that year. And it is not difficult. It adds to prior years the amounts that are now discovered. You examine them and figure out a man's income tax, and add $5,000 to it and assess him on the $5,000 additional.

Mr. SLOAN. The accumulation is not income.

Mr. REED. Under the Constitution, I think, it is not.

Mr. LONGWORTH. Then you would not tax him on that part of the property accumulated between 1913 and 1918?

Mr. REED. Originally the law did, but it is not as the law stands

now.

Mr. LONGWORTH. And for that portion of the profits which accumulated between 1913 and the day he sold it, you would call that income? Mr. REED. Yes.

Mr. LONGWORTH. And you would assess that at the rate of the year 1917?

Mr. REED. NO; I would not; because as to your new income tax, and as to your excess profits tax, these are new taxes for the year 1917. Now, on that point, I think you must take into consideration the decision of the Supreme Court which has been rendered within. the last month, in which they last interpreted this law, in the case of Doyle v. Mitchell. There was never any question of constitutional power to tax corporations, but in 1909 Congress undertook for the first time to impose a tax. The question involved in that case was

whether standing timber, standing on December 31, 1908, sold at a profit in 1909, should be valued for the purpose of determining that profit at its original cost or at its value on December 31, 1908.

The court held that it should be valued as of December 31, 1908; that was a part of the income for that year. Now, when you come in any year to levy a new tax, you are in exactly the same position as Congress was in levying the corporation excise tax in 1909. You should tax a man on his income accumulated during the year. And I want to stress it every time as I go along, every time I say it, that what I am trying to present to you gentlemen is the necessity of taking these extreme cases into consideration, so that you may levy the highest possible tax on actual beneficial incomes. You do not want any man, when you levy 50 or 60 or 70 or 80 per cent tax, to come out of the year, at the end of the year, worth half what he is worth at the beginning of the year, and have him come around and ask you how you did it, and have to say "That was only your 1918 income which was taxed," because he will say to you very quickly that you taxed the 1901 income.

Mr. MOORE. This is a very general question, but while you are on the question of incomes I would like to know, since you are speaking for representative investors, whether it is your belief that under existing law we lose a very considerable sum in collections on such incomes as ought to be taxable.

Mr. REED. I have no way of answering that question.

Mr. MOORE. You have suggested that we might raise more money on incomes, which suggests my question as to whether we are losing money on incomes that ought to be taxed.

Mr. REED. I have no doubt whatever that with the pending tax and with human nature as it is, we are getting to a time when people will more and more try to evade the income tax. I have never seen anyone try to do it; I have never seen people try to withhold or hide their income, personally.

Mr. MOORE. The present law is an intricate one. It is a law for lawyers rather than for laymen and it involves many references to preceding acts, and there are so many provisions which require skillful construction which are beyond the average business man, that I am compelled to ask whether it is possible to incorporate into the law the capital and income on which the Government necessarily loses a large amount of revenue.

Mr. REED. It is wholly an offhand answer, but under the present conditions I think a man might hold back a good many salient facts. Mr. MOORE. Could you give us any suggestions as to how we might prevent him from holding back the facts so that no injustice will be done to the Government in view of its increasing demands for revenue?

Mr. REED. I have never had the question to study. I think the suggestion is worth while considering, and if I can make any suggestions I will be glad to make them.

Mr. MOORE. The investment bankers have been very patriotic up to date and made suggestions during the pendency of the war-revenue bill, and they could help materially, if they would, to correct such errors of law as we may have been guilty of in passing the bill.

Mr. REED. I think it is a very fundamental and important thing that every possible effort should be made to do that. You might want to license accountants throughout the country to make returns

on large corporate incomes and things of that kind, to be sure that the accountants were of such a character as to be approved by the Government; and, as I said a moment ago, as you increase the tax you are increasing the tendency to conceal.

Mr. MOORE. The tendency to deceive?

Mr. REED. Yes. I think one of the most important factors in the present success of the income-tax law, and taking it by and large it has been tremendously successful in the matter of obtaining disclosures, is its secrecy. A man may make a full return to the Government under secret disclosure and oath which he would be inclined more or less constitutionally to avoid otherwise.

Mr. MOORE. Would you have these returns made public?

Mr. REED. Never individual returns.

Mr. MOORE. Would you have corporation income tax returns made public?

Mr. REED. Only in such cases as the Secretary of the Treasury thought fit.

Mr. MOORE. Do you think it would be wise to leave such a discretion to any administrative officer?

Mr. REED. I think during the war you have got to leave such discretion to the Treasury, and I think that discretion has been. exercised splendidly.

Mr. MOORE. Might not such discretion lead to favoritism that would be unfortunate, especially where a man was competing in the same line of business?

Mr. REED. Absolutely in peace times it would be tremendously so, but I have seen a good deal of the personnel in the Treasury Department and there is no doubt about the high-minded attitude adopted up there at the present time.

Mr. MOORE. That is a matter of faith in the present administration. It might be that a change of administration would cause a change of opinion.

Mr. REED. Do not misunderstand me on one point. I am not considering at all the general public policy. I am not a great believer, myself, in privacy; I am only speaking of the income tax from the point of view of a revenue producer. You are not going to get the incomes the Government ought to get if all the records are spread out before the public.

Mr. MOORE. My mind is not as strictly legal as that of some of the members of the committee, and I would like to get at things more directly than by the elaborate details provided by this law. I would like to know how we are going to get the money. We have got to get $8,000,000,000. It was suggested that the Government might in some instances collect double taxes. That would be unfortunate and I would like to see that corrected, if it is against the same sum of money.

Mr. REED. I have also suggested a difference of principle.

Mr. MOORE. A point extremely important to us is to know how we are going to get additional money, whether you get it out of incomes or from some other source, and we would like to have suggestions as to how the Government can get more income.

Mr. REED. What I said was with reference to the necessity of the paying power of income. You should reach your highest point at this time and this year. That is my present view.

Mr. MOORE. I had hoped that in view of your knowledge of investing conditions and of incomes that you might be able before the close of this hearing to make some suggestions as to how we can derive additional incomes, or to what sources we shall go.

Mr. REED. I shall be glad to do that. I will say you ought to have a much larger war normal income tax.

Mr. HULL. Some of us on the committee are not so much concerned about the rates as to get the knowledge of business people and professional people as to the best methods of applying these tax rates and tax methods, and how to get these taxes from business equitably and effi'iently.

Mr. REED. I am glad you asked that because you were not here when I tried to make it very clear at the commencement, directing myself to two fundamental propositions on which the basis could be laid, and those are: What is the income, and what are war profits? I have not given the thought that I was prepared to give later to the question of rates. The sources, I take it, are incomes, and you want to determine an income in such fashion, or possibly in no fashion at all, if you state in that law that you tax incomes and the Treasury be allowed to do the rest, so that you can tax the real beneficial income.

Mr. FAIRCHILD. Would you not also consider what the losses are? Mr. REED. My point is there is no income until the losses have been deducted.

Mr. FAIRCHILD. For instance, a man invests a million dollars in a security at par. The company gradually loses ground and the value goes down from par to five. He has got a loss of $950,000 but can not allow for that loss. What is your suggestion as to that?

Mr. REED. I think at the present time the Treasury could possibly extend what is called the inventory basis to the individual. Under the present provisions of the law, stating in the case of an individual keeping accounts on a basis other than that of actual receipts and disbursements, that if such basis does not fairly reflect his income, he may have a reduction for that and compute according to his conscience on that basis. I think Congress should extend and amplify that provision very materially so as to give complete power to the Treasury Department to allow individuals to deduct for depreciation. There is no question about it, that a man in the condition you speak of might be in the bankruptcy courts and have no income or hope of income.

Mr. FAIRCHILD. The Government would have to analyze the conditions for every corporation in the country.

Mr. REED. It would simply have to check up and see if the rates in his books represent a fair depreciation of stock, just as a local assessor would have to do in assessing for local taxes. The proper administration of the tax law compels you to compare the value of the property. It would be a big job, but not in proportion to the amount of property involved. It has been suggested that it is necessary to get the basis correct and if the basis is correct the amount of the income tax is only a question of rates and you can determine what the Treasury needs.

Mr. O'SHAUNESSY. How would you provide for calculating the depreciation in cases similar to the one suggested by Mr. Fairchild?

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Mr. REED. There are various ways of doing that. You might accept as prima facie the concern's statement approved by a licensed accountant.

Mr. O'SHAUNESSY. Then, you would get licensed accountants into the game of making returns!

Mr. REED. I do not know whether you have followed the regula tion, but under the present law the merchant's inventory of goods is subject to review by the Treasury.

Mr. O'SHAUNESSY. Is there any way to find out depreciation? Mr. REED. Your bank will tell you sometimes if you have got to borrow money. You may carry that stock into the bankruptcy court. On the allocation of income I would like to read an extract from this memorandum on behalf of the Investment Bankers' Association of America in the case of the Southern Pacific Co., on page 11:

We submit that the new 1917 tax, both the new income and the new excess-profits tax, must be read as of the date, or at least the year, of its enactment, and under the view first expressed the ongress can not by a new tax in 1917 tax as income and under the Constitutional amendment a right to the earnings of 1913 to 1916 convert into cash by the sale of the stock in 1917.

Also that it was not the intention of Congress to impose these new taxes on incomes accrued but not received prior to 1917.

Further that though not previously taxed, the profit realized by sale in 1917 would be subject to the previous tax at the rate of 5 per cent payable annually and should be paid at that rate.

Finally, if, as is of course the fact, the rate for each prior year was different, the profit attributable to each year must be apportioned on a correct business or legal method and taxed according to the rates of those years.

One more and very important consideration might be mentioned. Assuming that A was engaged in the business of a dealer in securities and that the net profits of such business in 1917, crediting the $40,000 profit and deducting losses, was $30,000, but that by a deal in real estate during the year outside of his regular business he lost $30,000, we feel very strongly that he has no income which can be taxed for that year under the constitutional amendment authorizing "taxes on incomes." He has no income at all. The $40,000 profit is a factor of income, as is the $30,000 net profit from his business, but neither of these factors is his income, it seems to us, within the sixteenth amendment, or subject to a tax "on income."

Let us take another concrete case: M in 1917 had an incorporated oil business which cost him $500,000 in 1913 (in the shape of wells and development). In 1916 he was offered and refused $3,000,000 for it. In 1917 the business earned $100,000 after paying an excess-profits tax of $300,000 on the corporation. M sells the stock in December, 1917, for $3,000,000 after receiving cash dividends of $300,000 out of the year's profits.

It is quite possible in this and many such cases that the combination of excess-profits and income taxes (all, in fact, income taxes as applied to the individual) as now administered will leave the individual with a mere fraction of what was on January 1, 1917, his capital, and yet each tax is declared to be, and popularly supposed to beand we contend that in law should be-a tax on income for 1917.

That is practically our whole proposition on all these points, that it should be the income, and the real income, that is taxed, and you never wanted to do anything else, and you do not want to do anything else now, and yet some people are likely to say they have been taxed unjustly, whereas if we wrote it into the law, a dozen times if we had to that we are only intending to tax the beneficial income we would lay the basis, and the sound basis for the highest possible

rates.

That brings us to a question which originally we did not think belonged to us or did not think we should discuss at all, the value of undistributed income of corporations, but the more we consider it the more it seems to be tied up with the other question.