ness, thoroughly to grasp from an argument of several hours on a side, and from such study as even the most conscientious judge can find time for in the heavy round of his duties with cases of other kinds, the lem with the other problems still to be decided, is unreasonable and dangerous. Scattered over he country there are pending at this time approximately a thousand cases involving a variety of difficult points in income tax theory. Their final decision will profoundly affect the Government revenues and the country's business interests. The same point is being decided one way in one circuit and another way in some other circuit. Nothing is final until passed on by the Supreme Court, but if tax questions went to a single Circuit Court of Appeals, instead of being distributed through nine circuits and commingled with other cases, as now, the question would be promptly and efficiently prepared for the Supreme Court's attention, with the chances strongly in favor of affirmance. A regulation made by the Department and relied on by the taxpayer, may, under the present system, remain on the books for as much as one or two years or longer before its validity is determined by a court whose decision carries conviction, and if by any chance the regulation is overturned, a serious question arises as to the effect of such decision on the rights of the many taxpayers who have relied during the interval on the interpretation originally made by the Department. This situation is all the more embarrassing because of the extreme difficulty of many of these points and the small margin of arguments which may turn the scales one way or the other. only way in which a wise and permanent decision can be made between two plausible possibilities, is for the deciding authority to be acquainted with the other important questions which it affects. To accomplish this, there should, in our opinion, be estab-complex relations which connect each problished a Circuit Court of Appeals for taxes, consisting of five members, and for the present at least, located at Washington. District Court cases involving taxes should be appealable to this court and it should also be granted original jurisdiction for the benefit of those who do not care to institute suit in the District Court. Even a Tax Circuit Court of Appeals will not at the outset possess the necessary wide experience with special cases, but if practically all the important questions raised in tax litigation are before a special court, it will not be long before the judges will develop the far-reaching knowledge of the subject, which is essential if a wise and consistent body of decisions is to be had. However skillful bureau interpretation may become, our political system requires that the interpretation of the tax law must finally be one for the courts, but no wise or sound interpretation of the tax law can be made without a wide knowledge of and a thorough recognition of certain principles which have been developed and tested in accounting and economics. It has been suggested that such a court should have, to assist and advise it, an expert accountant or accountants of the highest ability and broadest viewpoint. Experience shows that the assitance of such men is not only helpful in deciding legal questions which arise in interpreting the tax law, but such assistance is absolutely necessary for a successful analysis of the problems of the Income Tax Law. No decision is wise or safe which does not take into account and conform to well recognized and accredited methods of doing business, as developed under the guidance of the high grade business men accountants and economists of this country. To expect a court whose principal time is taken up with other busi Uncertainty in the construction of the law and uncertainty as to the effect of the law are the two ogres which make present tax laws a very nightmare to high class business men. The establishment of this court would go a long way toward establishing certainty of construction, at least. (7) Congress should, in our opinion, | exampled difficulty to find and train suffiadd to the law a relief provision which per- cient qualified men for this stupendous task. mits a taxpayer who has suffered a net loss in any taxable year, to make use of the amount of such loss as a deduction in subsequent years until it is exhausted. Such a provision has been seriously challenged by men whose judgment is valuable, as being out of line with the general American policy of making the tax for a certain year depend upon the result of that year's operations alone, but this seems to me to be overborne by the many distressing cases of corporations and individuals who, while still suffering from the effects of a great operating loss which has seriously impaired capital, have been obliged, if the next year proved profitable, to apply a large proportion of the earnings toward taxes, instead of toward remedying the impairment. There are of course, many other changes which might well be made in the law, but space does not permit of further suggestions. To the taxpayer who must deal with the Internal Revenue Bureau, his experiences often appear to be an endless succession of delays and misunderstandings. We think it is only fair, however, to invite the reader to consider that as compared with the taxpayer's one case, the Bureau has millions of cases to consider; that a principle which operates to the satisfaction of one group of taxpayers is often utterly distasteful to another group of taxpayers, and that in deciding what is right, the Bureau must of necessity run counter to the interests of one group or the other; that the Commissioner of Internal Revenue has no discretion to alter the law and in cases not covered by specific relief provisions in which the terms of the law produce an unjust result, his duty compels him to reach and to execute an unjust result. Above all, it should be borne in mind that the problem of auditing income tax returns is one requiring such high qualities, mental, moral and technical, that it is a task of un Do we realize that in the Income Tax Unit alone there are written and dispatched on Government business every working day throughout the year, an average of ten thousand letters, and a corresponding number received? No one will pretend that the writing, filing and classification of this number of letters are equal in importance and difficulty to the great technical problems and decisions which must be met, but these figures as to merely mechanical operations will have to give some idea of the size of the administrative task in Washington alone, without considering the organization which it is necessary to maintain throughout the United States. From personal observation the writer can attest that whatever the actual result, the spirit of the entire organization at Washington shows a desire to get things right, and to minimize the hardships of a law which in its nature must be hard on the taxpayer. He can attest that throughout this great task, the remarkable collection results achieved by the Bureau would not have been possible without night and day work by administrative men of high ability and of absolute devotion to the work. There are serious delays and errors. These are distressing but impossible to avoid absolutely while the law remains so complicated. During the 58 years preceding the great war, internal revenue had produced in all approximately eleven billions; while in the first two and one-half years of the war taxes, more than eleven billions in taxes were collected. Such a sum cannot be collected from the taxpayers of the country unused to such burdens, without considerable hardship and inequality. It cannot be collected at all, with or without hardship, unless hard work, honesty and genius for organization are present in abundance. I am convinced the Department itself has no self-satisfied attitude toward the present ad ministration of the law. The administration is being steadily improved. While delay cannot be defended, it would be extremely unfair to minimize the difficulties connected with the greatest administrative task in this country, or to allow the greatness of what has actually been achieved under difficult circumstances and is being achieved, to go without recognition. such valuation is material, methods by which invested capital may be permissibly reconstructed from accounts kept on an insufficient basis; ways of establishing the reasonableness or unreasonableness of salaries paid stockholders of corporations; questions as to what taxable year is the proper year in which to report certain kinds of income, or as to the taxable year to which certain losses suffered properly belong; the true definition of income, as distinguished from capital returns; the proper treatment of gifts; the question as to what constitutes realization of income, as distinguished from mere ascertainment that to the determination of profit in the sale of assets, and many others. The country is fortunate in having the services of the present Commissioner of Internal Revenue, Mr. William M. Williams, and was fortunate in his predecessor, Daniel C. Roper, who took over the Bureau in the war-time emergency. It is fortunate in the present solicitor of Internal Rev-appreciation has occurred; the question as enue, Mr. Wayne Johnson, of New York. The Commissioner as the primarily responsible officer for administering the law and the Solicitor, to whom he looks for legal advice, are keenly aware of the difficulties which the law presents from the taxpayers' standpoint and are bending every possible effort toward such improvements in the way of dispatch and simplicity as are possible under any law which forces the collection of so large an aggregate amount as the present law demands. I stated above, that the collection of these war taxes is the most difficult administrative problem in this country. I say this not primarily because of the large personnel required, but because of the intensely difficult decisions which must be made in that administration-decisions that would be hard for a Supreme Court or any other body of men in the world. It is hard to realize how many questions lie concealed in the collection of these taxes. To bring before the reader a realization of this, it might be helpful to recall In this brief enumeration, I have named broad questions, each one of which is capable of subdivision into many subsidiary questions, all of great importance and each one bearing more or less on the other. To illustrate this, suppose we take the one last mentioned, the determination of profit in the sale of assets, and consider some of the complications that are bound up in this single heading. When property which the owner bought before March 1, 1913, is sold, the seller is required to determine its market value as of that date, and if this figure with adjustments is less than the amount received in the sale, the difference is taxable gain, under the terms of the present law. This rule, once accepted as valid, seems a simple one, but the questions it raises are legion. How shall the valuation as of March 1, 1913, be made, especially as to good will? How far are valuations as of March 1, 1913, dependent on contemporaneous sales of similar property, or on the capitalized value of earnings, or on stock sales, if the property is a corporate one; what expenditures since acquisition may be added to the March 1, 1913, value as a part of the true cost; what rate of depreciation is to be used in adjusting the March 1, 1913, value to the date of sale? Again, if the sale is not for cash, is it a typical in stallment sale, or merely a sale in which part of the purchase price is deferred; are the terms of the sale such that the whole profit is realized in the year the initial payment is made? In the case of an executory contract, what is the effect of retention of possession, or of failure to pass a deed? Is there a difference when the deferred payments are represented by ordinary contractual obligations, as distinguished from negotiable instruments; what sales are to be regarded as forced or compulsory, within the meaning of the so-called replacement regulation under which realization is avoided? What rule is proper in determining the cost of property acquired after March 1, 1913, by gift or as a dividend in kind? Where, instead of a sale, an exchange occurs, and especially where the property so received consists of stock in the purchasing corporation, new and difficult problems of realization and valuation arise in endless variety. Is stock so received worth par, or less, or more? Do the rules covering invested capital of the corporation which issues the security affect the value which the recipient must assign to the stock received? In cases where a variety of property is given in exchange for a variety of other property, how are costs and selling prices to be allocated under the separate terms? On practically each one of these typical questions the Department has taken a definite stand, but in the whole field, the questions which lie hidden and uncertain are more than those as to which a reliable conclusion has been reached; just as years of litigation in the law of contracts have not sufficed to exhaust the fund of disputed questions in contract law. Let me add in conclusion that the war taxes have been an acid test of the principles and patriotism of the average American, and that the average American, in spite of some Americans who deviated from the average, has come out of the test with honor. He does not want to pay more than has been assigned to him by the law, but I want to say that the average American has proved himself willing to do his fair share in giving financial support to the Government of which he is proud to be a citizen, and which does him the honor of relying on him to help in supplying its daily necessities. ROBERT MILLER. Louisville, Ky. BANKRUPTCY-FARMING In re SUTTER. 270 Fed. 248. District Court, E. D. Missouri, E. D. December 29, 1920. An alleged bankrupt, who for 20 years had resided on a farm of 300 acres, a part owned by him and part by his wife, during each of which years he cultivated and pastured all or the greater part of the land, and raised cattle and hogs, which he fed and marketed, held a "person engaged chiefly in farming," and under Bankruptcy Act, § 4 (Comp. St. § 9588,) not subject to adjudication as an involuntary bankrupt, although he sometimes fed cattle which he bought and sometimes bought additional feed. FARIS, District Judge. The matter before me is a petition in involuntary bankruptcy. Certain technical objections are raised by the creditors of Sutter, as also a question of fact, in opposition to his adjudication as a bankrupt. After carefully considering the evidence adduced upon a hearing before a special commissioner appointed to take the testimony, I have reached the conclusion that no necessity exists for the consideration of the technical objections urged; for I am of the opinion that the question of fact raised will, when decided, dispose of the case. This question of fact turns on the provisions of section 4 of the Act of July 1, 1898, c. 541, as amended by the Acts of February 5, 1903, and June 25, 1910 (Comp. St. § 9588.) So much of said section as is apposite to the point urged reads thus: above quoted, is whether John W. Sutter was, at the time he committed the alleged acts of bankruptcy, a "person engaged chiefly in farming, or the tillage of the soil." Sutter himself absconded on the 6th of July, 1920, and his whereabouts up to this hour are unknown. Certain attaching creditors are, however, contesting his adjudication. Since, as stated, I am of opinion that the determination of the question whether Sutter falls into the category excepted by the statute will be decisive, I lay aside for the present any consideration of the technical questions urged by the contesting creditors. The facts adduced upon the trial were, substantially, that Sutter had for some 20 years resided with his family on a farm containing some 300 acres of tillable and pasture lands, situated about 4 miles north of Wellsville, in Montgomery county, Mo. Of this tract 100 acres belonged to his wife, but during the whole of his residence in Montgomery county the latter tract was used by him just as were the remaining 200 acres. In the year 1919, or in the early part of the year 1920, he sold 80 acres of this land. Before this sale he had either cultivated or pastured the whole of the 300 acres, and after the sale he had either cultivated or pastured the remaining 200 acres thereof, just as if he had owned the whole in fee. Up to the year 1916 he had himself cultivated or pastured the tract-the whole 300-acre tract -annually. After 1916, and up to the date that he left the country, he had rented to others, sometimes 40 acres per year, and sometimes 80 acres, and had received as rent thereon a part of the crops raised on the land so rented. On this farm, which is shown to have been rather larger than the ordinary farm in that commu. nity, he annually raised crops of corn, oats, and wheat. The wheat he sold, but the corn, the whole of it, and the oats, were fed by him to hogs and cattle, which he sold, when fat, in the markets either at St. Louis or in Kansas City. Some of these cattle and many of the hogs he raised himself. Some of them he purchased from neighboring farmers in the community. Many of the cattle he would buy as "feeders" in St. Louis, and perhaps in Kansas City. He seems to have fed to the stock thus purchased, not only all of the corn and oats raised by him on this farm, but to have bought from neighbors other corn, which he fed to hogs and cattle upon the place. In addition, the evidence shows that between October, 1918, and January, 1919, he purchased six cars of what is known as "commercial feed." A considerable part of this so-called commercial feed was, however, resold by him to his neighbors. Be tween June, 1918, and March, 1919, the evidence shows that he shipped 4 cars of hogs and 14 cars of cattle to either St. Louis or to the Kansas City markets, mostly to the former. He also shipped in April, 1919, two carloads of sheep; but the evidence shows that these sheep belonged to a neighbor, and were shipped by him in his own name for the purpose of getting some advantage, either in the freight rate or by way of return fare. The evidence shows, as to many of these carloads of hogs and cattle, either that some parts of the same belonged to his neighbors, or that he purchased them merely to fill out the carload. The record goes no further back as to his financial dealings than the year 1916, in which year, by reason of the impossibility of securing labor for his farming operations, he seems to have been compelled to an extent to modify his farming methods. In 1916 he received from live stock commission companies, so far as the record discloses, only $294.30; in 1917, about $4,700; in 1918 about $4,300; and in 1919, $882. To these receipts, it is inferable, there should be added whatever deductions were made by these companies for money due them from Sutter for "feeders" sold him from time to time, the amounts whereof do not clearly appear from the evidence. His expenditures for "feeders" bought from live stock commission companies, for hogs and cattle purchased from his neighbor, for corn also purchased from the latter, and for commercial feeds, largely exceeded the sums received by him for the sale of stock, so he became rather heavily indebted; bankhence this proceeding in involuntary ruptcy, and the numerous attachments which have been run upon his property. The evidence is conclusive that good husbandry in the community in which he lived, the nature of the soil regarded, made it necessary for him to rotate the crops upon his farm, and to feed and pasture cattle thereon, in order that the fertility of the soil might be conserved. The evidence, is also conclusive that in this he followed the custom of other farmers in the community, who owned and operated farms of a similar size and consisting of similar soils. He bought, fed, and sold more cattle and hogs than the majority of his neighbors, but not as many as some of them. He also produced upon this farm fruit, garden vegetables, and poultry, all of which, however, seem to have been consumed by himself and his family. The question of law, therefore, arises upon these facts as to whether Sutter was a person engaged chiefly in farming. I conclude that he was, and that his estate is not subject to an involuntary proceeding in bankruptcy. In re Thompson (D. C.) |