Millions and Millionaires

Last week, there developed a major struggle concerning the conduct of the Government. One combatant was undoubtedly the richest man in public life. His opponent was probably the second richest man in public life.

Both made high marks in the business world before entering politics. Both entered politics for the love or the honor of it. The first, Andrew W. Mellon, Secretary of the Treasury, has been noted for nonpartisan conduct in office. The second, James Couzens, junior Senator from Michigan, is known for the many great services he rendered his city, Detroit, of which he was mayor.

Yet they have long been at swords' points. When Mr. Mellon issued his tax reduction plan more than a year ago, Mr. Couzens was one of the first to challenge its wisdom. The exchange between the two grew heated and ended by Mr. Couzens' suggesting that they hire a hall, divide the expense and debate for the public. More recently, Senator Couzens revived the controversy by undertaking on behalf of the Senate an investigation of the Bureau of Internal Revenue. Some days ago, a report from this Senate committee investigation was made public. It charged the Treasury Department with laxity in collecting income taxes.

On the same day that the Couzens report came out, Mr. Couzens was notified that the Treasury Department had received information that the tax he had paid on his income for 1919 was too small; in the course of a few days, he was served with a notice of an additional tax assessment of almost $11,000,000 for that year.

So was the battle joined.

The Committee's Charges. Among a number of cases brought, three principal cases of alleged laxity in collection of income taxes were discussed in detail by the Couzens Committee :

1) The Atlantic, Gulf & West Indies Steamship Corporation (AGWI ) . Against this company, for four years (1917 to 1920) was assessed a tax of $9,913,841, including a penalty of $830,808 for fraud. It was charged that the company was worth $9,909,407 but, by concealing its assets, managed to compromise the tax for $2,600,000-- a loss to the Government of more than $7,000,000.

To this, Mr. Mellon replied that the company had other creditors prior to the Government; that, if the Government had pressed its entire claim, it would have thrown the company into bankruptcy with the chance that the Government might get nothing. So the Treasury investigated, determined how much it thought the company could raise from its bankers and accepted that amount.

2) Copper Companies. It was charged that the Treasury had lost $50,000,000 in taxes for the years 1917 and 1918 by allowing excessive valuations (for computing depletion and invested capital); that the Anaconda Copper Co. in particular, claiming $184,152,965 valuation, valued at $54,865,822 by the Chief of the Metals Valuation Section, had been allowed $188,713,192-- even more than it claimed.

Mr. Mellon made answer that copper valuations allowed for the years 1917 and 1918 had been made by Mr. L. C. Gratton, who had been nine years in the Geological Survey work in connection with copper, and that taxes had been paid accordingly. In 1922, the Bureau had entirely revalued all copper properties at lower amounts. Inasmuch, however, as the companies had been told that the previous valuation was final for 1917 and 1918, had paid their taxes and arranged their finances accordingly, no attempt was made to reopen the case for those years.

3) William Boyce Thompson (Chairman of the Ways and Means Committee of the Republican National Committee in 1920) had claimed a loss of $597,000 in stock transactions and a deduction of $280,000 for foreign exchange, which were allowed by the Treasury, although no supporting evidence was offered; that Mr. Thompson in the same year (1918) had sold a zinc property (which he and another man had bought in 1913 for $10,000) for $600,000 and reported no income from the sale, contending that the property had always been worth $600,000:

Mr. Mellon replied that the case was not yet closed.

The Couzens Assessment. The extra tax which the Treasury started out to collect from Mr. Couzens was based on a transaction which took place in 1919. At the time the minority stockholders, holding some 41% of the 20,000 shares of stock in the Ford Motor Co., had brought suit to compel the Company (which had paid very low dividends) to pay dividends more in accordance with its earnings. Mr. Couzens was one of these stockholders. It is estimated that he held about 2,500 shares of stock.* The minority won their suit and Mr. Ford then offered to buy them out at $12,500 a share. The minority agreed, provided Mr. Ford could get the Treasury to set a satisfactory figure on the 1913 value of the stock. (This was because the difference between the 1913 estimated value and the 1919 sale price would constitute a taxable profit to those who sold-- 1913 being just before the income tax law went in force.)

Mr. Ford went to Washington and the Treasury, as a special favor, gave in advance the estimated value of the stock in 1913 (there had been no sales in that year). The 1913 value, as fixed, was $8,900. The sale was then carried out and the sellers paid tax on the difference between $8,900 a share and the $12,500 a share which they received.

Thus the question was disposed of and forgotten until a memorandum reached the Treasury from a "responsible person" calling attention to a number of facts, notably: 1) The value of the stock was established by a sale in 1919 at $12,500 a share; 2) the Ford company produced 850,000 cars in 1919, and only 165,000 cars-- one-fifth as many--in 1913;* 3) in 1919, the company's profits were about 100 million dollars a year, as compared to 25 million dollars in 1913; 4) in 1919, the earning power was $5,000 a share, compared to only $1,250 a share in 1913; 5) in 1919, the company had had 12 years of startling growth, and in 1913 had made large profits for only two years; 6) in 1919, the taxpayers had won a suit to compel the company to pay large dividends; in 1913, no such dividends were in prospect.

From these considerations, the memorandum deduced that the value of the stock in 1913 was not $8,900 a share but $2,500 a share. If that were the case, tax should have been paid by the minority stockholders not on $3,600 a share (the difference between $8,900 and $12,500) but on $10,000 a share (the difference between $2,500 and $12,500). That being the case, the minority stockholders escaped payment of about $35,000,000; and Mr. Couzens, the largest of the group, nearly $11,000,000.

Mr. Mellon announced that he felt he must take action on the memorandum. Mr. Couzens had made his tax return on Mar. 13, 1920. The Treasury has just five years to reopen such cases, unless the taxpayer waives his right in this respect. The other minority stockholders had signed such waivers. Mr. Couzens was asked to sign one until the Treasury had time to investigate the charges in the memorandum. Instead, he appeared on the floor of the Senate, read the memorandum, denounced it as persecution and declared he would sign no waiver. The Treasury, with only a few hours to spare, made a hasty calculation and notified the Senator that he owed $10,861,131.53-- leaving the matter to be accurately determined or disallowed by the Tax Appeals Board.

Later, Mr. Couzens declared in the Senate his belief that the Treasury had had the memorandum in question for more than two years, that the memorandum had been prepared at that time by Thompson & Black, Manhattan Accountants, in order to "get" Henry Ford, who was then having a contest with Truman H. Newberry over a seat in the Senate.

The Floor. The Senate confusion grew even worse. Senator Ernst, Republican of Kentucky, produced a telegram from Mr. Mellon saying that he had received the memorandum just a day before it had been sent to Mr. Couzens. Mr. Ernst accused Mr. Couzens of animus against the Secretary. Mr. Couzens replied, accusing Mr. Ernst of being in league with the Treasury to defeat the ends of the investigation, even of having connived in the disappearance of important letters. Mr. Ernst said he didn't hear and asked Mr. Couzens to repeat. Mr. Couzens refused. Then Senator Glass, ex-Secretary of the Treasury, began a speech criticizing all three-- Mr. Ernst, Mr. Couzens, Mr. Mellon. In the midst of it, Mr. Ernst jumped to his feet.

"I wish to know," he demanded, "if there be any way under the rules of the Senate, whereby I can, without breaking those rules and without offending the Senators about me, call a fellow member a wilful, malicious, wicked liar?"

Pandemonium broke out. Half a dozen Senators asked to be recognized at once. Others ran between Mr. Ernst and Mr. Glares to prevent a forcible encounter. A point of order took Mr. Ernst off the floor, but it developed he had not meant Mr. Glass, as Mr. Glass had feared, but Mr. Couzens, a transcript of whose remarks he had just obtained and comprehended.

The Significance. The real trouble is that the Income Tax Law is so complicated that it calls for exercise of judgment in its administration, about which there may develop two or more conscientiously opposed verdicts. The trouble is heightened by the antagonism of Senator Couzens and Secretary Mellon. The pride of each is at stake, especially the Senator's.

*In 1903, James Couzens, 31, Canadian by birth, was receiving $1,800 a year, working in a coal yard in Detroit. His employer, A. Y. Malcolmson, took some stock in the company Henry Ford was organizing in exchange for guaranteeing the Ford Company's credit up to $7,000. Malcolmson detached Couzens to work with Ford. Couzens had just received a bonus of $500 for bringing the profits of the coal yard up to $90,000 a year. He put this with $400 he had saved, borrowed $100 from his sister and added his personal note for $1,500-- with this total of $2,500 he bought 25 shares of Ford stock. As time went on and other stockholders sold out cheap, he increased his holdings to 100 times his original holdings. *Figures for production of Ford cars are as follows:

YEAR NO. CARS 1904 1,700 1907 8,800

1910 18,700

1913 164,500

1916 533,000

1919 850,000

1922 1,350,000

1925 1,800,000