even then not if the donee were a charitable, educational, or other eleemosynary institution. But somebody got busy with the legislature and our amendment disappeared.

Another example: We found that the provision of paragraph 3 of section 376 of the New York law (identical with paragraph 5 of section 600 of the model act) was cumbersome in administration. Instead of a penalty of not more than one thousand dollars, to be sued for by the attorney-general (and fixed by a jury), we recommended a penalty of not more than one hundred dollars, to be assessed by the tax commission, in case of failure without fraudulent intent to furnish information. The bill was amended without notice to the tax commission to read "with fraudulent intent," and would have added a superfluous penalty in fraud cases, while it deprived us of any remedy in cases where no deliberate fraud could be proven (and it is no easy matter to prove fraudulent intent). We had to get the governor to veto the bill as passed.

So the burden of my advice to states about to adopt a tax law is: Get your statute in proper shape in the first instance! Do not rely on the possibility of amendment to correct initial mistakes! For amendment is not always as easy as it looks.

My criticisms of the model acts, in their present form, are of course matters of opinion, and I expect to be overruled with respect to some of them. They are merely suggestions, resulting from experience of over two years as counsel to our income tax bureau, and a year as director of it.

I will refer, seriatim, to the sections of the model tax law which I believe might well be amended.

THE PERSONAL INCOME TAX

Sec. 2, Pars. 4 and 6. If corporations are taxed differently from individuals, trustees under so-called "Massachusetts trusts" should be treated as corporations rather than as individuals, for they enjoy most of the advantages of corporations. These definitions should be modified accordingly, as should section 201.

Sec. 2, Par. 9. Thousands of individuals and firms use fiscal years ending on days other than the last day of a month. There is no real advantage to be gained by making them change their accounting period to end on the last day of a month, as this provision, strictly enforced, would compel them to do. Both the federal and the New York statutes contain such provisions, but it has been found impracticable and unnecessary to enforce them, and reports are regularly accepted for periods ending in the middle of a month. The provision would be better if it read The words 'fiscal year' mean an income year ending on any day other than the thirty-first of December."

Sec. 2, Par. 11. This leads to great injustice, double taxation

in some cases and avoidance in others, depending on the time of change of residence. I recommend the scheme adopted in New York of defining "resident as one domiciled in the state, thus eliminating any question of whether there is any distinction between residence and domicile, of whether a man is a resident under the income tax, but a non-resident under the inheritance tax, etc. And it seems fairer that residence during the time the income was received should control, rather than residence at the time (or on a certain day during the year in which) the tax is paid. A resident of the state for only one month should not, in justice, be taxed as a resident for the whole year, nor should one a resident for seven months escape the tax entirely. Under the present New York scheme, one moving into or out of the state, files a return as a resident for the fraction of a year during which he was a resident, and as a non-resident for the fraction during which he was a nonresident, prorating his exemptions between the two periods. No injustice arises. The model tax law does not contemplate taxing non-resident individuals, but the principle is the same, and double taxation or escape from taxation may be avoided, by looking to the income year rather than the tax year, and in case the taxpayer has been a resident during only a fraction thereof, taxing him only on income received during that fraction and allowing him only a prorata exemption.

I do not recommend for other states the provision of the New York law treating as residents all individuals maintaining permanent places of abode within the state and spending seven months or more within the state. As applied to persons domiciled in the state it is superfluous. As to persons domiciled elsewhere, its constitutionality is doubtful. It was put into the statute to reach persons maintaining theoretical domiciles elsewhere but actually living within the state-most of whom will probably be held to have actually been domiciled within the state, when it comes time to adjust their inheritance taxes.

Sec. 201. See note on sec. 2, pars. 4 and 6 above. Sec. 201, Par. 1. Why should the residence of the fiduciary have anything to do with it? Is it not better to let jurisdiction depend on the residence of the creator of the trust, at the time it was created? Then there is no question of splitting up, as under the section as it stands.

Sec. 201. Where income is accumulated by a fiduciary, it is quite proper that he should pay the tax out of that income. But at what rate? If there are ten beneficiaries of a single trust, each of whom will eventually get $1,000 of a given year's income, should the tax be $450, while if there are ten separate trusts, the tax will be $100? If a single beneficiary will eventually receive $1,000 of the year's income from each of ten separate trusts, should the aggregate tax

be $100, while if it were all one trust, the tax would be $450? Should not the rate of tax depend, not on what the fiduciary receives, but on what each beneficiary will eventually get from all trusts; or from all sources?

Sec. 301, Par. 1. The supreme court has held, under a similar definition in the federal law, that the increment of property heldthe profit on capital assets acquired and sold — is "income" and subject to taxation as such. It is clearly the intent of this section to include it as an item of gross income. A practice has grown up of attempting to avoid the tax by making gifts of property that have increased in value in the hands of the taxpayer. The present federal law makes a very clumsy attempt to meet this by comparing sales price on disposition by the donee with cost to the donor. But the latter is likely to be very difficult of ascertainment, at the time when the donee finally disposes of the property. In theory a donor realizes his profit when he makes the gift and gets credit for giving the whole property including increment, not merely its cost to him. This section and section 303 should be made to show that a gift is a disposition of property which may result in profit or loss to the donor. In case of loss of value, the donor will get his deduction anyhow, by selling the property and giving the proceeds, so the state might better get its tax when a profit is involved.

Sec. 301. Are dividends on national bank stock included in gross income? If so, is the tax constitutional? Or does it render the tax on bank shares void? It might be well to avoid these questions by deciding them before passing the law and making the decision appear in the language of the act.

Sec. 303. See note on sec. 301, par. 1, above.

Sec. 303. In view of the decisions in Goodrich v. Edwards, 255 U. S. 527; Brewster v. Walsh, 255 U. S. 536; Peo. ex rel. Klauber v. Wendell, 196 N. Y. App. Div. 827 (affirmed without opinion by the N. Y. Court of Appeals), and Brown v. Com'r of Corporations, recently decided by the supreme court of Massachusetts, should not this section be amended as have been the corresponding sections of the federal and New York laws?

Sec. 305. The last clause, tying up to the rulings of the federal government is dangerous. Stability is as important as consistency with the federal methods, and the federal administration has left much to be desired in respect to the former quality. The state tax commission should be permitted but not compelled to follow federal rulings.

Sec. 306 (h). See second note on sec. 303, above. Where this section applies to property acquired prior to the effective date of the law, should not depreciation or obsolescence be taken on the same basis as profit or loss?

Sec. 308, Par. 1 (b). In New York we have had a lot of trouble

over the personal exemptions. The provision giving $2,000 to the head of a family has been grossly abused. There are without question tens of thousands of persons taking this exemption in New York who are not entitled to it-cases where two or more children, contributing to the support of the home, are each claiming to be the head of a family. It might be possible to check up many of these cases, but the cost would usually exceed the resultant additional revenue. The model tax law does not define "head of a family”—an omission certain to result in abuse, for every taxpayer will supply his own definition. I recommend omitting any reference to head of a family and restricting the exemptions to $1,000 for each adult taxpayer-husband and wife to have $2,000 if they make a joint return and $1,000 each if they make separate returns. At first the provision of the New York statute was like that of the model tax law, in allowing husband and wife, making separate returns, to divide the $2,000 exemption, without restricting the division to an equal one. We had to amend the law to insert the word "equally" between "divided" and "between them," for there were a great many cases in which husband and wife could not agree on the basis of division and tried to take, between them, more than $2,000. Also, the unequal division was made the means of avoiding taxation at the higher rates when joint income or the income of one, separately, would be taxable at more than one per cent.

Sec. 308, Par. 1 (d). Why should a fiduciary be allowed an exemption at all? Exemptions are defended in the case of individuals on two grounds: (1) that it does not pay to collect taxes on very small incomes (but if it does not pay to collect $5 from a man with $500 net income, does it pay to collect $5 from a man with $1,500 net income?); (2) that an individual needs a certain minimum for subsistence before he should be taxed at all. The first reason is obviously fallacious. The second has no application to a fiduciary.

And the granting of $1,000 exemption to each fiduciary has resulted in the creation of many small trusts, for the purpose of increasing exemptions. A man with property yielding income of $8,000 a year, which he wishes to accumulate in trust, pending a future event, can divide it and set up ten separate trusts, each yielding $800 per annum-resulting in complete avoidance of the tax. See note on sec. 201, above.

Sec. 308, Par. 2. If an exemption of $2,000 is to be allowed to the head of a family (see note to sec. 308, par. 1b), will this result in allowing a man with children, whose wife dies during the year, to take $2,000 as head of a family, plus $200 for each child and to add $1,000 for the deceased wife? If a man with a wife and no children loses his wife and marries again during the year, can the couple take $2,000 and another $1,000 for the deceased wife? This provision should be made more definite.

Sec. 400. No return is required of a single man with net income of less than $1,000 or a married man with net income of less than $2,000. But a married man with five children and income of $2,800 must make a return though he pays no tax. We get thousands of these no-tax returns in New York, but the audit of them very seldom results in any change in the amount of the exemptions. On the other hand, the audit of no-tax returns frequently results in the discovery of additional income, or the disallowance of deductions improperly claimed, and assessments are accordingly made. It is a mistake to have the liability to make a return depend on the amount of net income. A man with a gross income of $100,000 may figure that he had a loss of more than that amount, and make no return. We have nothing to audit. If he made a return it might appear that his loss was not properly deductible, and we would assess a tax. I should recommend, in lieu of the present provision, a requirement that all persons with gross incomes in excess of a stated figure (the present federal law says $5,000) shall file returns, but that no returns need be filed by persons with gross incomes under that amount if their exemptions exceed their net incomes. This would result in the possibility of discovering on audit additional net income, in cases where such discovery is likely, and eliminate the necessity of auditing returns merely for the purpose of checking up the number of dependents-a process the cost of which is excessive, in comparison with the resulting additional

revenue.

The tax commission should have power to require a return in any case it chooses to investigate, regardless of the amount of gross or net income.

Sec. 401, Par. 1. See note on sec. 308, par. 1 (d). If the exemption to fiduciaries is eliminated, all fiduciaries should be required to report.

Sec. 403. Both the federal government and the state of New York found difficulty with the scheme of having taxpayers whose fiscal year ended say April 30, 1920, wait until March 15, or April 15, 1921, before making a return, and amended their laws. Why is it not better to require returns within a given period after the expiration of the income year? This not only prevents delays during which the business of auditing grows more difficult, but to a certain extent relieves the receiving tellers from having their work all concentrated in one short period.

Sec. 500, Par. 2. In New York we have had a lot of trouble with bad checks, protest fees, etc. One who tenders a check in payment of any tax, which check is dishonored on presentation, should be subject to criminal prosecution. This is the only way to put a stop to many abuses which have been common experience.

Sec. 501, Par. 6. The provision for refund says nothing about