return made in 1919 hang over his head like the sword of Damocles and be examined in 1922 when he may find out that he has a lot more tax to pay than he thought. I have in mind a cotton mill down in South Carolina which paid in 1919 $1,800,000. In New York and Massachusetts that is a small matter, but in South Carolina that is an awful amount of money. In 1921 the revenue agent came around and made an examination of the books of the corporation and found that it owed the government $500,000 more. The mill had set aside all of its reserves and had so fixed its books-so lined up its books-that it did not have any money to pay this extra tax, and it was very embarrassing to the mill. I was just wondering if these states that have the income tax law are accepting these returns, making them final, making a final audit of them in the year in which the returns are made, or whether the returns are hanging over into the years to come, to worry the taxpayer I don't think there is anything in the income tax law that so worries a taxpayer as that procrastination, and I should like to hear from these states along that line.

CHAIRMAN BULLOCK: Will Mr. Ivins tell us about the practice in New York.

MR. IVINS: Mr. Chairman, in New York, with few exceptions, we audit every return received in April of one year before we come to April of the next year, in the personal income tax. I am not in position to speak for the corporation bureau. I am entirely disconnected from it, and I am not familiar with the situation there.

In the personal income tax bureau we clean up each year's audit. When disputes arise between taxpayers and the department sometimes it takes time for litigation or for hearings and settling. In those cases the taxpayer knows that he is in suspense; but, in a general way, the audit is cleaned up before the next year's collection begins.

CHAIRMAN BULLOCK: Will Mr. Shaw tell us about the practice in Massachusetts?

MR. SHAW: I cannot say exactly what Mr. Ivins says, but perhaps I should mean the same thing if I said that we finish our audits every year. What we do is to carefully audit and assess and bill each return, going over the figures for mistakes, checking items that are in dispute, and handle some forty or fifty thousand pieces of correspondence on returns. But that is not what we call an audit. What we call an audit is going out to the taxpayer's place of business, or to his home, or calling him into the office and going over his whole situation, to see whether he has filed a return, showing all the income he should report. That is done in probably not

over 5,000 cases a year. However, we are limited to two years, and whatever we don't audit within two years of the date of the bill, we must let slide. For that reason the sword of Damoclees is not hanging very long.

I should like, for the purposes of having it in the record, to call attention to Mr. Handy's widow-excuse me-the widow to whom Mr. Handy referred. Under the general property tax law she would have paid a tax upon the stock in question at the general rate in the town or city where she lived, under the general property tax. Under the income tax she would be entitled to an exemption of $300 of taxable income, leaving the balance to be taxed at six per cent.

DR. ADAMS: I am very anxious to know what Mr. Ivins and Mr. Shaw and members of the Wisconsin commission think about the relation in their respective states between the personal income tax and the business income tax. Is it logical; is it a fair solution of that very difficult question, and do they see any better solution of that question? The problem I have in mind is this: You start out with a personal income tax, about which most of our discussion centers; you get perhaps a progressive income tax, applicable to individuals on their general income; you make that applicable to the earnings of sole proprietors and partnerships; then the question for us is, what about business in corporate form, and then the more difficult question, what of the dividend received from a corporation located in another state, and I regard that in many ways as the most difficult problem of income taxation. If these gentlemen have some contribution on that, I should particularly like to hear it.

CHAIRMAN BULLOCK: Mr. Ivins, will you tackle that problem

first?

MR. IVINS: Mr. President, if Senator Davenport is present, I think he would be a better man to speak for New York in that connection.

CHAIRMAN BULLOCK: Mr. Davenport has gone home. Mr. Ivins is alone in his glory.

MR. IVINS: The committee of which Mr. Davenport is chairman has recommended changes in New York to meet the situation as it exists. We have a so-called corporation franchise tax, measured by income, at a 42% rate. Individuals and partnerships pay a personal income tax of 1, 2 and 3%. In New York City, for example, we have Gimbel Brothers, Macy & Company-partnerships; and we have Saks & Company and Stern Brothers, corporations. The corporations are paying at the rate of 42%, and their stockholders are paying 1, 2 and 3% on top of that, and the partnerships are paying just 1, 2 and 3%.

CHAIRMAN BULLOCK: Will you let me interrupt you with a question on that point? How about the stock-in-trade of the partnerships? Corporations are not taxable on their personal property, are they?

MR. IVINS: No.

CHAIRMAN BULLOCK: How about the partnership?

MR. IVINS: Their tangible personal property is subject to assessment on the assessment rolls, with the exception of a small portion of it. In New York City and in all but one or two of our larger cities there is practically no assessment of personal property of that nature. It does not get on the rolls. So Senator Davenport's committee introduced in the last legislature a bill providing for a business income tax on individuals and partnerships, which would put them in practically the same situation as the corporations, but the legislature did not pass the bills.

S. S. KALISHER of Pennsylvania: I should like, if I may be permitted, to supplement Mr. Ivins' suggestions with respect to amending the model tax acts, as submitted by the committee. This model tax act makes no reference to the application of net losses of one year to the net income of other years, as provided in the federal Revenue Act of 1921. The new law provides, as did the old law, but in a slightly different way, and with different limitations, for the application of net losses of one year to the net income of other years. The justice of this averaging up of incomes over a number of years has generally been recognized by business men and legislatures.

It follows, of course, somewhat in line with the averaging of the incomes in the English law. Net losses between October 31, 1918, and January 1, 1920, were taken care of under the old law by providing that the returns of years previous to that in which net losses were sustained, could be re-opened and that the net loss could be applied to such previous years' net income, and the tax for such previous years recalculated. Under the new act net losses for taxable years beginning after December 31, 1920 — and I am of course speaking of the 1921 federal income tax act-can be deducted from income of succeeding years. Net loss is the loss resulting from business operations only, including losses incurred in the sale of capital assets and used in business, over and above the sum of gross incomes, and so forth.

I therefore wish, if I may, to offer this suggestion to the committee, to make it a part of their consideration in compiling the new draft with respect to state income and franchise tax laws, either based on income direct or as a franchise tax based on net income.

WILLIAM H. KING of New York: The city government of New

York City, which I represent at the conference, was materially affected by the income tax law in New York State, as were all the other cities of the state. The New York law, it should be understood, is twofold. It relates to individual income tax and also to what is called a franchise tax on corporations, based on income. The personal income tax took from the city the right to tax any intangible property. It left the right to tax tangible property. The difficulty, however, there was that the legislature did not amend the law with respect to taxing tangible personal property which had previously existed and permitted deduction of indebtedness.

That was all right when the city taxed both the tangible and intangible, but by leaving provision for the deduction of indebtedness and providing that only tangible property could be taxed, the result was that taking out the deduction for indebtedness from the tangible property, only makes the tangible property tax a mere farce. That is illustrated every year, as people come in in great numbers to have it sworn off.

The city feels this with respect to tangible property. Nonrevenue producing tangible personal property of individuals should bear a local tax, because it receives, entirely apart from state protection, city protection, for which moneys are expended every year in the budget-fire protection; police protection-and there is a great amount of that in New York City. By practically wiping it out, makes it all the more difficult for the city to meet its tax burdens, because it takes away a substantial and proper source of revenue for the city.

With respect to the tax on corporations, in the main the result was that corporations no longer pay a local tax. The change above noted affected of course what was formerly known as the capital stock and surplus tax on intangibles and on the actual properties; but the legislature went further and provided for taxing business corporations on their income, and provided that they should not be taxed on personal property, and then defined personal property to include, in addition to what is ordinarily regarded as personal property, machinery of corporations, substantially all the machinery which previously had been assessed as real estate. Therefore, the cities lost the tax on real estate as well as personal property, by the operation of the law.

These two things have a bearing upon the questions which are referred to in the program today, which have not yet been discussed, namely, the function of an income tax; its place in a system of taxation; how far it should supplement property taxation, and how far supplant it, and should the tangible property be continued at rates imposed on real estate? From the experience in New York City it seems clear that the function of an income tax should be to take over the tax previously imposed upon intangibles.

leaving the tangible personal property and the real estate subject to local taxation. Both of those classes receive local protection, and moreover, the fact that they are locally assessed keeps up the interest of the taxpayer in his city government, whereas with indirect taxation he loses that particular interest.

The real property tax we think should certainly be locally assessed, and in that it has a bearing on the report of Senator Davenport, providing for a tax on the earnings of public utilities as an exclusive tax, which would wipe out local assessments on real estate. These public utilities having large properties - office buildings; barns; and so forth-which receive local protection and should certainly be taxed locally.

With respect to tangible personal property, it seems clear that non-revenue producing tangible personal property of individuals would escape taxation entirely, unless it is locally assessed, and it is perfectly proper for local assessment, because it receives the protection and benefits by the expenditures of municipalities.

J. E. BRINDLEY of Iowa: Senator Van Alstine, chairman of our special legislative tax commission, a few moments ago asked Judge Leser a question regarding the flat rate tax of Maryland. He opened up what with us in Iowa, for reasons so admirably expressed by Mr. Lord in his presidential address of last evening, is a very serious question, and I am sure I speak the mind of the members of our special commission who happen to be present.

We are much interested and hope to profit by this discussion. Of course, in brief remarks you cannot go into detail, but the situation is substantially this: In Maryland, as I recall, Judge, you stated that your rate on banks is 1% plus the state rate, is that correct?

MR. LESER: That is right.

MR. BRINDLEY: What is the state rate?

MR. LESER: Thirty-five cents on $100.

MR. BRINDLEY: Now, with us in Iowa, by law, the capital stock, surplus and undivided profits of banks is arbitrarily listed at 80% of its book value, and of course we have the one-quarter rule, which means one-quarter of that. Our supreme court has held that the power of the assessor is ministerial; that he cannot exercise any judgment as to any classes of property. The result is that the assessment of the capital stock, surplus and undivided profits of banks resolves itself merely into adding up a column of figures and signing on a dotted line. As a member of a city council, I will give you a personal experience, acting as a local board of review. About three or four years ago we very frankly recognized that we were listing property at not to exceed, at that time, 60% of a reasonable and fair value of the same, as that term is generally