XVIII

A not infrequent method of evading the spirit of the agreement was that of setting up a "jobbing department," selling the whole output of the mill or a large part of it to the jobbing department at a profit within the twenty-five cents per barrel rule, and then getting all the additional profit possible from so-called jobbing operations, limited only by the more liberal jobbing regulations, which authorized profit margins varying from twenty-five cents to seventy-five cents per barrel, according to the nature of the service performed. Out of some 1500 mills reporting their costs to the Food Administration under the voluntary agreement 439 had separate jobbing departments on June 18, 1918. In many cases these jobbing departments were new creations, designed to cover up profits in excess of the allowable maximum. It was an undoubted weakness in the rules which permitted and perhaps even suggested the creation of these bogus jobbing departments.

On the other hand it must be recognized that many mills which had regularly done some jobbing and retailing did not take advantage of the permission to segregate their jobbing business from their merchant milling operations. Indeed, it had even been hoped and expected that the larger mills which had segregated their jobbing business in the past would, for Food Administration purposes, consolidate their manufacturing and selling costs under a single return and not take a jobbing profit in addition to their milling profit. A maximum profit of twenty-five cents per barrel was considered ample return upon the entire business of such concerns jobbing and merchant milling combined. Many of the very large mills did, in fact, consolidate their milling

and jobbing returns, especially the Minneapolis mills which operate extensive distributing warehouses. Not so many mills agreed to handle their business in this manner, however, as had been hoped.

XIX

The effective control of this and other kinds of abuses was hindered by some shifting of jurisdiction between the Food Administration offices at Washington and the Milling Division headquarters at New York, and perhaps by the fact that the Milling Division itself was administered by millers engaged in active business operations and having the point of view of private interest rather than that of the unfettered public official. In November, 1917, the Food Administration established an Enforcement Division at Washington whose duty was to see that the regulations of the Food Administration were enforced. The difficulties of this task were admittedly very great; the inspection of the millers' monthly cost reports was for some time confined to a mere statistical examination and audit, without serious inquiry into the underlying facts. In this matter, as in all the problems of regulation, the nature of the task became apparent only with experience; the best mode of dealing with the situation could only be developed gradually.

In February the activities of the Enforcement Division were extended to the flour milling and flour jobbing regulations. A widespread inquiry was made as to the methods followed by the millers in the preparation of their monthly cost reports and many cases of irregularity and some of fraud were detected. Largely as a result of these investigations a marked reform was brought about: the millers in general responded will

ingly to the new and more careful methods of regulation initiated by the Enforcement Division. For the purpose of getting comprehensive and fairly detailed information all mills of a daily capacity of 75 barrels and over were required to submit a consolidated statement covering the operations of the first seven months of operations under Food Administration control-September, 1917, to March, 1918. This was followed by a similar consolidated report on the three months, April, May, June, 1918-thus completing the portion of the season's business for 1917-18 coming within the period of control. These statements followed closely the general form of the original monthly cost reports, with the addition of a certain amount of itemization deemed essential, e. g., under the captions: milling expense, selling expense, general expense, reserves, jobbing business, etc. At the same time definite instructions were issued designed to clarify the whole accounting problem and indicating the basis of profit determination to be followed in the settlement of the year's accounts between the millers and the Food Administration. Millers were permitted to correct in the consolidated statements errors and misstatements which had appeared in the earlier monthly reports, without prejudice.

1

Those mills, relatively a small per cent of the total number, whose reports indicated that their profits on the season's business had been in excess of the maximum allowable rate of twenty-five cents per barrel, were required to give up their excess gains, either by the sale of flour, to the government at a nominal price, or by setting up an equivalent credit to the government's purchasing agencies on their books. The Enforcement Division also undertook a thoro-going audit of the accounts of many of the larger mills; a considerable

1 Milling Division Circular No. 1310, May 15, 1918.

number of mills, on their own initiative, called in the services of auditors and chartered accountants in the preparation of the consolidated statements. The opportunity to remodel their statements was availed of in good faith in most cases, and served to bring about a general conformity to the spirit of the regulations without resort to stringent measures. The number of cases of positive deception or deliberate profiteering proved, in the end, to be relatively small.

XX

One of the most troublesome questions in the whole problem of profit regulation and one which occasioned a great deal of discussion and much misunderstanding concerned the method of handling the items of income tax and excess profits tax in the millers' monthly cost reports. Through the representations of overzealous members of the Milling Division in August and September, 1917, many mills were induced to enter the voluntary agreement with the understanding that the profit limitation of twenty-five cents per barrel meant that they would be permitted to make twenty-five cents per barrel net after all deductions, including taxes. In November the Food Administration through the Milling Division issued a positive declaration to the contrary, so far at least as the excess profits tax was concerned. None the less the idea of a net divisible profit of twentyfive cents per barrel persisted and many mills, including some of the largest, charged in their monthly cost reports as expense items against current costs of production reserves set up in anticipation of excess profits tax payments.

The act by which the excess profits tax was imposed was enacted on October 3, 1917, very shortly after the

milling regulations had been instituted. Few persons were at once aware of the significance and importance of this tax. Altho the earlier act of March, 1917, contained an excess profits tax, that in the later law was much more far-reaching. It was inevitable that adjustment to it should be difficult and that unexpected problems should arise.

Under the legislation of October, 1917, the procedure as to allowing excess profits taxes and income taxes also to be charged against cost of production in the accounts of mills would seem, as a matter of principle, to be clear. Excess profits and income taxes are to be regarded not as items of expense- not as charges which are expected to be passed on to the consumer-but as taxes to be paid out of the earnings and incomes of those on whom they are directly levied. In other words, all such taxes should come out of income and should operate as deductions from income. The Food Administration, even tho it limited the profits of millers to a maximum of twentyfive cents per barrel, in consistency was obliged to hold that the profits were taxable like other producers' net earnings.

Nevertheless, there were unexpected and unequal results from the application of this principle, especially as regards the taxes on excess profits. They ensued more particularly from the circumstance that the taxable year for which the mills made their tax returns were not uniform. Many mills made returns for the calendar year 1917; some for a fiscal year running from July 1, 1917, to June 30, 1918; others for a fiscal year from September 1, 1917, to August 31, 1918, and so on. A mill which made its return for the calendar year might easily be in a position and this happened for a considerable number in which the whole of its net earnings after September 10, 1917, became subject to a tax