Also this subject matter concerns inequities to persons in various districts because of the fact that a decision in one circuit is not binding upon a person in another circuit, and again there are in many instances conflicting decisions between circuits on the same set of facts.

Then we have the problem of the Commissioner not being bound by the decision of any one district in any other district, or even in the same district in which the case has been ruled upon, thereby resulting in necessity of each taxpayer with a similar case to go into his court with his case.

By requiring the Commissioner to appeal, the taxpayer who may not desire to expend additional funds would overcome the possibility of the Commissioner winning by default and thereby take from the taxpayer a sum to which the Government is not justly or legally entitled. If the Commissioner does not accept the ruling of one court, yet the Commissioner does not appeal that case within the time limited by law, it should be consider prima facie evidence that the Commissioner acknowledges his error and the taxpayer has won the right to file a claim for refund and have the claim allowed by the Internal Revenue Department.

As to the jurisdiction of districts, it would seem that the Commissioner should be bound throughout the country, regardless of the district in which the decision is rendered if the Commissioner does not take positive action in appeal.

Bill H. R. 130 introduced by Congressman Curtis would make it mandatory for the Commissioner to appeal, whereas now the taxpayer cannot require the Commissioner to do so, and it therefore works a hardship on the taxpayer even though the taxpayer won his case in a lower court. By requiring the Commissioner to appeal, the Commissioner could no longer win by default, that is, by his failure or unwillingness to appeal. It does not seem practical from either the standpoint of the taxpayer or the Commissioner to require either one to appeal, but it does seem proper to permit the taxpayer to be awarded a claim for refund on the same set of facts in cases where not only the Commissioner but also the Tax Court have been overruled, and do not see fit to appeal.

I think it highly proper, just and equitable that when the Commissioner of Internal Revenue and the Tax Court have made an improper ruling, resulting in an unjust tax upon a taxpayer, that the statute of limitation should not be 3 years after taxpayer has filed his tax return but the law should read 3 years after a court of competent jurisdiction has returned a decision in favor of the taxpayer and where they find the Commissioner and the Tax Court have erred in their ruling. By this procedure I could have filed a claim for refund against the unjust decision of both the Commissioner of Internal Revenue and the United States Tax Court.

What I propose is a setting up of corrective methods, for I could not have filed a claim before the statute of limitation expired since United States Court of Appeals, Second Circuit, did not make its decision in the Willis Wood case until May 23, 1951, when the statute of limitation for my filing for refund had already expired by only 2 months.

As of this moment, taxpayers in three circuits, under a similar set of facts, would have their income considered capital gains, whereas, taxpayers in all other circuits, under the same set of facts, would have to consider the income from the Frisco transaction as ordinary income. I ask you, is that impartial treatment of the taxpayer? I think not. This is making fish of one and fowl of the others. Think of the several thousand taxpayers in the same identical situation who have also paid taxes on the basis of ordinary income instead of capital gain in this Frisco Railroad bond transaction. The total issue of defaulted Frisco bonds aggregate $279 million.

In a case of fraud by the taxpayer, there is no statute of limitation as to time and the Revenue Department can open such tax return at any time, yet here is a case of the Treasury Department letting the three court decisions go by default with the result that I and many others have paid to the Revenue Department an amount to which they were not and still are not entitled. I should not be penalized due to no fault of mine, either as to element of time or because of the incorrect decision of the Treasury Department. Under the conditions I have set forth, I think I am entitled to relief, even though the statute of limitation has expired.

If bill H. R. 130 is approved in sufficient time prior to March 15, 1958, I can get the relief for which I pray. I am not asking for legislation to cover my individual case, but rather for legislation to apply to all cases present and past where a tax has been unjustly collected by the Treasury Department from a taxpayer on these Frisco defaulted bonds because of an unjust ruling by not only the Commissioner of Internal Revenue but also by the Tax Court.

All I ask is a square deal—this in your power to grant. Permit me to repeat, H. R. 130 must become effective in sufficient time prior to March 15, 1958, if I and all other Frisco Railroad defaulted bondholders can hope to obtain refunds to which they are justly entitled.

If H. R. 130 cannot be passed in ample time prior to March 15, 1958, then remedial legislation should be passed to correct this unjust collection of taxes so proper refund can be made, or by making H. R. 130 retroactive for calendar year 1947 and subsequent years.

As the A. J. Dunbar case was tried in St. Louis, I delved further into same and here is what I found:

This was a 1947 case settled August 4, 1953 (some 5 years later), and I wondered why the 3-year period of limitation did not prevail as was and is the factor in my case.

Mr. Dunbar had never heard of the Commissioner's ruling on the Frisco reorganization and did not include in his 1947 return any moneys coming from the Frisco reorganization. Dunbar's return was audited within the 3-year statutory period, at which time the agent made adjustments for the Frisco moneys and he (Dunbar) was assessed a deficiency tax in 1950. Because of this, Dunbar still had another 3 years in which to sue for a refund, which in fact gave him almost a 6-year period.

In my case, I followed the Commissioner's ruling and paid exactly what the Commissioner then said was due, whereas, in the Dunbar case, as no doubt in the case of many other taxpayers, they were not cognizant of any such rulings until their returns were audited. This has given them an advantage of 3 years over me, who meticulously followed the Commissioner's ruling. Because of the fact that I did so, I have been penalized by reason of the 3-year period of limitation which ran from the time I filed my 1947 return and not from a date 3 years hence as in the case of Dunbar who was assessed a deficiency. In the one instance you have me as a taxpayer who felt it a duty to keep himself thoroughly advised on how to proceed with his tax return and, on the other hand, a taxpayer who was not trained or informed on such matters.

I think the Ways and Means Committee should recognize this type of a situation and enact legislation that will assure equitable treatment.

If Congress is not going to recognize such situations, it would seem that all taxpayers will have to always assume that the Commissioner is wrong and let the Commissioner set up a deficiency in order that the taxpayer may enjoy a longer period of time in which to file claim for refund when subsequent litigation holds to the taxpayer's views.

Congressman Curtis' bill, H. R. 130, removes all such cases of inequity and allows sufficient time for these matters to be settled. Since the office of Commissioner of Internal Revenue moves slowly, as do also our courts, matters of this nature remain pending for many years.

The CHAIRMAN. Our next witness is Mr. Sidney B. Gambill.

Mr. Gambill, you have come also, as I understand, at the invitation of the committee. We appreciate very much having you with us this morning.

Mr. Eberharter.

Mr. EBERHARTER. Mr. Chairman, I think it would be proper for me to say that I am glad the committee invited Mr. Gambill. I am particularly glad, and want the record to show, that there are experts in the tax field outside of the cities of Washington and New York, and also I wish to say that I hope Mr. Keogh will not become angry at that statement.

Mr. Gambill is connected with one of the most highly respected firms in the city of Pittsburgh, Mr. Chairman, and is highly regarded in that field himself. I am certain, although I do not know what his testimony will be, that the members of the committee will give it due regard.

The CHAIRMAN. Mr. Gambill, will you please give your name, address, and the capacity in which you appear, for the benefit of the record.

Mr. KEOGH. Mr. Chairman?

The CHAIRMAN. Yes.

Mr. KEOGH. I want to assure may distinguished friend from Pennsylvania that I find it impossible to become angry at anything he says, and I join with him in conceding that there is no monopoly on brains in the District of Columbia or in the city of New York. As a matter of fact, many of our experts in the city of New York have been nice enough to go there from other parts of the country.

Mr. GAMBILL. Thank you very much.

STATEMENT OF SIDNEY B. GAMBILL, ESQ., REED, SMITH, SHAW & MCCLAY, PITTSBURGH, PA.

The CHAIRMAN. Mr. Gambill, for the purposes of the record, will you first identify yourself.

Mr. GAMBILL. Yes. I am Sidney B. Gambill, a partner in the law firm of Reed, Smith, Shaw & McClay in Pittsburgh.

Referring to Congressman Eberharter's kind remarks, I would like to say that I did have a good start in the tax field by commencing as a private secretary to your former distinguished chairman, Congressman Doughton. That started me off on the right foot.

The CHAIRMAN. As a member of this committee, I would agree with you completely, that that was a wonderful start for anyone to have. Mr. GAMBILL. He was following me for many years.

The CHAIRMAN. He was a very great man.

Mr. GAMBILL. We who, like Mr. Chapman and myself, deal day by day with tax problems and taxpayers, do not have time to get into much economic theory, and probably that part of our problem is sorely neglected. But we do have experts in that field, many of whom have appeared, and many of whom have been helpful, I am sure, as to the question of the economic effect of taxation of our tax system.

While I am not an economist, I do know that we came out of World War II with a tremendous backlog of need for everything. I do know that since that time, we have filled that need, and our capacity for production has doubled; our economy has been affected by the expenditures made in increasing that capacity for production.

We had a shot in the arm in the Korean days. Since then, and during that time, we have filled the needs of the people of this country for automobiles, for the most part, and for most of the homes and appliances and furniture, and all of those things.

Then, we had the campaign of selling ahead on installments of homes and automobiles and everything that the average-particularly the young-families in this country needed.

That has caught up with us today, and I fear that we have trouble ahead. However, I am not qualified to do more than merely point out that observation as a layman. I do know that taxes are awfully high. I do know that the taxpayers of this country are deeply concerned, because when you deal every day with taxpayers, with their particular problems and not only their tax problems, of knowing what the law is, and what should be done about problems of raising money, you have an opportunity to feel the pulse of the taxpayers outside of economic theory.

Many people have general ideas as to what is wrong with our tax system, but they are lost when they are called upon to be specific.

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The problem of making specific recommendations is further complicated by day-to-day changes in conditions at home and abroad.

First, I would like to make it clear that I am not one of those who feel that our present tax system is in a mess and that our tax laws are full of unfair exceptions, exemptions, and special benefits. Those who have over the years kept up with the persistent struggle on the part of this committee, the Senate Finance Committee, and the Congress as a whole to impose taxes on the basis of the ability to pay, to close loopholes as they develop, and to give relief to hardship cases, know full well that an excellent job has been done. If the burden of taxation is to be equitably apportioned, our tax laws must inevitably be complicated.

One point of general agreement is that taxes should be laid on the basis of ability to pay, that hardship cases should be cared for, that inequities in our tax laws should be eliminated, and that there should not be any so-called gimmicks or loopholes of which a few may take advantage.

When I received your invitation to appear before your committee, I thought I would list what I thought to be inequities still in the law which needed remedial legislation, and loopholes still in the law which needed closing. I reexamined the Internal Revenue Code of 1954 and the Technical Amendments Act of 1957 (H. R. 8381). When the Technical Amendments Act of 1957 corrects certain unintended benefits and hardships arising from the 1954 code, and makes numerous technical amendments to the 1954 code, there will be brought together the fairest tax provisions which we have ever had in this country.

When I concluded my review of the 1954 code and the amendments proposed in H. R. 8381, I did not find too many other things that in my view needed immediate attention. Many confusing things with which we have struggled over the years are clarified. Many so-called loopholes are closed. Numerous hardship situations are relieved.

I concluded that I should not dwell on minor differentiations from what I might deem to be absolute perfection in the law. I believed that I should narrow my suggestions down to a few items which I feel have merit in substance and about which there can be little disagreement among different groups of taxpayers. Taxpayers will not criticize any improvement in the law if the improvement is entirely equitable, even though it misses them and benefits their neighbors.

1. I recommend the reinstitution, for a short period of time, say for a period of 1 year, of the voluntary disclosure of fraud policy which was abandoned by the Treasury about 10 years ago. This should be by statute, so that there would be no doubt of its protection in the case of taxpayers who comply.

I believe that many hundreds of millions of dollars of untaxed revenue which otherwise might never be discovered would be disclosed. Civil-fraud penalties and interest would be collected. The Treasury's expense of tracking down fraud cases would be lessened. The information gathered from the volunteers would lead to other unreported income. A chain reaction would be set in motion. Congestion in the courts would be relieved. Finally, those who voluntarily disclosed would become permanent taxpayers on the Treasury's rolls.

The objection is that many guilty taxpayers would be unpunished. The answers to this are:

(a) The taxes, fraud penalties, and interest which would be collected with respect to open years and years otherwise barred by the statute of limitations, would cause in many cases the financial destruction of the taxpayers concerned. This is a severe punishment in itself and certainly acts as a deterrent to others who might contemplate defrauding the Government.

(b) A practical problem is present. The Treasury needs the reve

nue.

(c) The Treasury personnel involved in fraud investigations are freed for investigation of others who do not volunteer and who otherwise might never be discovered.

(d) The purpose of criminal penalties is to persuade compliance with the duty to pay taxes. Where those penalties initially have failed to achieve their purpose, as they have in this area, they become an absolute deterrent to the payment of taxes.

Our primary interest is in the collection of revenue. Our interest to punish those persons who are guilty of fraud is merely incidental to that primary interest. Thus, even though the guilty volunteers will not be punished with a loss of liberty, revenue will be collected from those who initially were not persuaded to pay by a threat of a loss of liberty. I might repeat, in this regard, that many of these people might never be detected.

It is a serious problem, and I think that some action in that direction should definitely be made. Throughout this country are many taxpayers, not honest citizens at all, but taxpayers who have started to cheat and have been cheating, and they cannot turn back. They are afraid to file an honest return, because that honest return would point to their guilt. They are going to go on, either until they are caught or until they die, filing dishonest returns.

2. Section 6501 of the Internal Revenue Code of 1954 provides a normal 3-year limitation for the making of an assessment in the case of all taxes. A 6-year limitation is provided for cases where the taxpayer omits 25 percent of gross income. Where fraud is present, there is no statute of limitations. Refund claims for all taxes must be filed within 3 years after the due date of the return or within 2 years after payment, except for stamp taxes (sec. 6511 of the Internal Revenue Code of 1954).

I have seen cases where the Commissioner has asserted deficiencies under the 6-year rule (formerly a 5-year rule), and put taxpayers to the expense of litigation which resulted in a determination that the taxpayers actually overpaid their taxes. Even though the taxpayers had been put to the expense of defending, they were unable to collect their refunds because they had not filed timely claims.

There are also instances where the Commissioner has attempted to open up years through the assertion of fraud. After litigation, it was determined that there was no fraud, but that the taxpayers had, in fact, overpaid their taxes. Here, again, the taxpayers could not receive their refunds because of the lack of timely claims.

I suggest the amendment of sections 6501 and 6511 so as to entitle taxpayers to any refunds which might result as a consequence of the Commissioner's attempt to open up cases because of an alleged understatement of gross income or because of the alleged presence of fraud. The issuance of a statutory notice of deficiency should be the act which

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