Accounting Problems under the Excess Profits Tax

Abstract

A prominent jurist has said that taxation is an eminently practical subject-to which statement accountants add Amen. Too often, however, our legislators, jurists and administrative authorities pay lip service to the ideal and promptly forget it in practice. Perhaps that is too broad a statement. It may, in many cases, correctly describe the result but not the attempt, because often the accounting problems or difficulties are neither visualized nor appreciated. It is understandable that such a result may be reached by those who are not, in any way, acquainted with accounting difficulties which arise in attempting to apply statutory concepts, ideal in nature, to what might be termed fluid accounting principles and data. I use the term fluid not in the sense of uncertainty or lack of substance but to describe an ever-changing panorama. Accounting science must keep, and has kept, pace with business and changing industry and commerce. What is correct today was not accceptable five years ago, and that, in turn, was not acceptable ten years earlier. Accounting principles and practices have had to change as business has changed, as industrial organizations have changed, as the requirements of accounting data have changed, and as laws and administrative authorities have changed-as in the case of the tax laws and the Securities and Exchange Commission requirements. The excess profits tax law focuses more attention on these problems and difficulties than any tax law we ever have had, because it involves a heavy tax on net income in excess of certain statutory credits or exemptions, both of which are historical in nature or, as in the case of Section 722 relief claims, fictional. A correct determination necessarily requires that the needed historical accounting and other factual data be available, or that the ultimate results which may now be reflected in the accounts presently appearing in the records of corporate taxpayers reflect the result of accumulated accounting in line with what is now required for tax purposes. In seeking to develop a taxing statute which produces what seems to be the ideal result, legislators frequently fail to take into account, probably because the difficulties are not visualized, the inability of the taxpayer or his accountant to supply the answers required. So also do our jurists, who sometimes reach what may well be a * B.C.S., I923, New York University. Certified Public Accountant, New York State (1924), Oklahoma (1933), Pennsylvania (1937). Chairman of the Committee on Taxation of the New York State Society of Certified Public Accountants; Chairman of the Special Committee of the Tax Foundation on Post-War Reserves; formerly Chairman of the Committee on Federal Taxation of the American Institute of Accountants.