payers keeping regular books of account, in which are reflected those items of estimated loss which the judgment of the managers dictates as necessary to fairly protect the business. It would simplify the procedure of reporting and auditing if the actual entries made were allowed, subject to such reasonable limits and under such penalties for false entries, as may easily be provided. Reserves for bad debts, for contingent liabilities (with appropriate explanation) and for other legitimate business purposes, would thus enter into the computations, obviating the necessity of reconciling the income as stated on the books with that returned for income tax purposes. These reserves, when freed, would be reflected in surplus or would otherwise become taxable as income at that time, which would, for all practical purposes, be sufficiently accurate for the purpose of taxation, as it is for the private purposes of the business. Doubtless this provision may be made by ruling, and it would be better to thus accomplish the object, making the ruling applicable to those taxpayers only who keep regular books of account along standard lines and whose accounts are available for examination over a period of years.

c. Net Losses

A provision was made in the 1918 Act whereby a loss suffered in one year may be allowed against the net income of the previous year, the return for which will be reopened to make the adjustment. If such loss is in excess of the income for the prior year, the balance not allowed may be taken as an offset against the income of the succeeding year. This provision meets to a considerable extent a justifiable criticism. of the earlier laws and follows in a way, the principle of the rule in England, where the three-year average income is used as a basis for the tax. It is recommended that this provision should be made a permanent feature of the law and not expire with the year 1920 as it now stands. An alternative course would be to adopt the British three year average method which might be satisfactory, although involving much more complication in the return and in administration.

d. Amortization

The special provision for amortization which applies to

plant and equipment acquired by the taxpayer for the production of articles contributing to the conduct of the war, may well be extended so as to cover the articles themselves so produced and which, being of special types not salable as standard commodities, cannot be realized on as intended and yet which cannot be satisfactorily handled as inventory losses. The provisions should also be extended to cases where the taxpayer rendered services contributing to the prosecution of the war, instead of being limited to articles and ships, as at present. This provision also is temporary and it would conduce to greater ease in adjusting past transactions and removing cause for long drawn out controversies if it were made a permanent feature of the law.

e. Depletion

The present statute contains for the first time a logical provision concerning the allowance for depletion in ordinary cases. The provision is however complex and contains obscurities making it difficult to understand and administer. Particularly is this true with respect to the value allowed in the case of discovery of mines, oil wells, and gas wells, in which cases the taxpayer is allowed to claim depletion on a value determined within thirty days after the date of discovery. The date of discovery is perhaps a fact on which it will be difficult to obtain agreement, and thirty days after that date is altogether too short a time in which to find the discovery reflected in definite values. The period of time. should be extended to one year, as the bill provided originally. Or, preferably, some simpler, more definite allowance to the discoverer should be provided.

f. Inventory losses

The provisions in the statute relating to losses in inventory (Sec. 214-12-a and Sec. 234-14-a) are obscure and may be construed either as allowing the taxpayer to claim an abatement on the basis of a revaluation of his entire inventory as of the end of the preceding year based upon the normal market prices of the following year, or as allowing him to claim a loss only with respect to the goods sold during the following

year at prices less than the market prices existing at the close of the preceding year and with respect to the amount remaining unsold at the end of the following year, taking the prices existing at the close of such year.

Serious differences of opinion have arisen between the Treasury Department and important groups of taxpayers, particularly the manufacturers, with regard to the interpretation of this part of the statute. On the whole, the Treasury regulations appear to be fairly satisfactory to the mercantile interests but far from satisfactory to the manufacturers. The subject is an extremely difficult one, involving complicated technical details. In the time at its disposal, the Committee has not been able to study this subject thoroughly enough to enable it to make positive recommendations. As it has turned out, the matter of inventory losses has proved not to be so important as was originally expected. The Committee inclines, therefore, to avoid any recommendation for change of the statute, and suggests merely that the law be interpreted broadly so as to deal fairly with the various interests concerned.

8. Stock Dividends

Full discussion of the present method of taxing stock dividends may well be suspended until decision is rendered in the case of Macomber v. Eisner, which was recently argued before the United States Supreme Court. It will be recalled that the district court decided that the provision of the Act of 1916, by which stock dividends were in terms stated to be income and taxable as such to the same extent as cash dividends, was unconstitutional, because, to impose a tax upon stock dividends is to tax capital or principal, contrary to the requirement that direct taxes be laid by apportionment among the several states according to population. That the question is not free from doubt may be seen from the fact that the court has restored the case to its calendar for reargument. Four members of the committee are inclined to the view that the stock dividend is not, as such, income but a transaction affecting capital, and that it should therefore not be taxed as income. These members believe further that however this

question may be decided in the supreme court, the present method of taxing stock dividends is wrong. According to it, the value of each share of stock distributed is taken to be a proportionate part of the distributed surplus, and this results in practically every case in valuing a share at par. This rule almost certainly overvalues the actual gain, if any, accruing to the stockholder through the issue of the stock dividend. A person purchases, for instance, a share of stock at $160, which figure, we will assume, reflects the enhanced value due to the accumulated surplus of the corporation. He receives through a stock dividend an additional share of stock having a par value of $100 and is taxed upon $100 of income under the present method. Whether or not his two shares are now worth any more than his one share before the stock dividend, it is practically certain that there has been no gain to him approaching $100, in amount.

The question in reality involves the same considerations heretofore discussed with respect to dealings in capital assets and these members are inclined to the view that no tax should be imposed until the stockholder actually realizes profit through a sale. If, however, the stock dividend is to be taxed as gain, they believe that provision should be made that the taxable gain resulting from a stock dividend should not exceed the difference between the value of all the shares held by the stockholder after the declaration of the dividend and the price paid for his original shares or their value on March 1, 1913, following the provisions in force for the calculation of gains from sale of capital assets.

One member is unable to accept the foregoing recommendations. He is opposed to any recommendation for a change in the present method of taxing stock dividends unless and until the supreme court holds that they are not taxable at all.

9. Non-Resident Citizens and Aliens

The policy of taxing non-resident aliens upon income derived from sources in the United States is clearly open to a difference of opinion. Your committee deems this question one of those as to which an expression of opinion is hardly of practical value. It belongs so clearly to the field of inter

national politics and involves so much that is far removed from the question of revenue that it would lead us astray to discuss it at length. We may venture the suggestion that under certain conditions and limitations, international comity is not violated by such taxation. A reciprocal provision such as the 1918 Act contains, removes to a great extent criticism of such taxation.

Nor are we greatly concerned with the purely legal aspects of the question, interesting though they are. If it is right and proper to tax non-resident aliens, the fact that the existing constitutional limitations or those limitations that are said to limit the constitution itself, would not deter us from expressing our view of the appropriate course to pursue.

The decision of the supreme court in the case of DeGanay v. Lederer, just rendered (June 9), appears, however, to settle the question in favor of the power to tax a non-resident alien on income derived from investments in this country. This case arose under the 1913 law, which provided that nonresident aliens were to be taxed upon income from "property owned" in the United States. Under this language the Attorney General held that the non-resident alien could not be taxed for income from either interest or dividends, regardless of whether the evidences of title were or were not located in the United States. Later, the Department ruled that "certain expressions" of the court in the Brushaber case nullified this opinion and thereupon held that such income was taxable. The present law does not contain the words "property owned" and specifically defines taxable income of non-resident aliens as including interest and dividends derived from United States sources. It is therefore possible that the opinion in the case. referred to is not conclusive upon the construction of the present law, but as that law is even more general in its application than the 1913 law, it seems to be now settled that non-resident aliens are taxable for investment income, and until the law is amended or repealed, it should be enforced as fully and completely with respect to aliens as citizens and residents. We believe that this is not being done and that the law itself is ineffective in this regard.

The collection of taxes from non-resident aliens is sought