Reputation v. Reputation

Ostensible purpose of the Board of Tax Appeals hearings which began last week in a courtroom of Pittsburgh's new Federal Building was to determine whether Andrew William Mellon owed the Government $3,075,103 in back income taxes & penalty, or whether the Government owed the onetime (1921-32) Secretary of the Treasury a $139,045 refund. But in effect it was a trial of two great reputations at the bar of public opinion. One reputation seemed bound to emerge incalculably damaged. Mr. Mellon, as an Old Deal statesman, stood to be convicted of a deliberate, contemptible attempt to cheat his Government while holding high public office. The New Deal, in the person of Attorney General Homer Stille Cummings, stood to be convicted of an equally contemptible, equally deliberate attempt to gain political advantage by smirching the good name of an honorable retired public servant.

When Attorney General Cummings announced last year that he was going to bring criminal action against Mr. Mellon for fraud in his 1931 income tax return, the old Pittsburgh financier cried "Politics of the crudest sort!" Because Homer Cummings' law firm had handled many a damage suit against the Mellon-controlled Aluminum Co. of America, Mr. Mellon openly accused him of personal animus in going after more taxes. To "General" Cummings' embarrassment, a Federal Grand Jury in Pittsburgh refused to indict its fellow-townsman for any criminality on his tax returns. Mr. Mellon promptly countercharged that, by failing to report all his philanthropies, he had actually overpaid his 1931 income tax by $139,045. The Bureau of Internal Revenue revived its original charge, slapped on a 50% indemnity for fraud. Last week three members of the Board of Tax Appeals went to Pittsburgh to hear Mr. MelIon's appeal and petition for refund.

The Government entrusted its case to Robert Houghwout Jackson, 43, an able but little known small-town (Jamestown, N. Y.) lawyer who was made general counsel of the Bureau of Internal Revenue last year. Mr. Mellon hired Frank J. Hogan, 58, one of the smartest, slickest, most successful lawyers in Washington.

Characteristically, Counsel Hogan opened his case by presenting Mr. Mellon as a greathearted, cruelly persecuted philanthropist and patriot. Climaxing a long recital of his client's good works, he announced that Mr. Mellon had long intended to build a great public museum in Washington to house his $19,000,000 collection of art treasures (see p. 32). Throbbed Lawyer Hogan: "God Almighty did not create a man who could at the same time and with the same heart be giving such a great gift to humanity and, on the other hand, be scheming to steal from his Government."

The Government contended that: 1) Mr. Mellon had failed to report about $5,000,000 of his 1931 income; 2) he had cut his reported income of nearly $11,000,000 down to a taxable $2,000,000 chiefly through bogus losses achieved by fake stock transfers. Prime instance, of which the facts but not the intent were verified last week by Mr. Mellon's longtime confidential secretary, Howard M. Johnson:

Late in 1931 Mr. Mellon sold to the Mellon-controlled Union Trust Co. of Pittsburgh 123,622 shares of Pittsburgh Coal Co., claiming for tax purposes a loss of more than $5,500,000. Exactly 118 days later Union Trust sold the shares to Coalesced Co. for the exact purchase price plus 6% interest and transfer taxes, even though the market value of the shares had since declined. Created by Mr. Mellon in 1929 as a private holding company, Coalesced Co. is an interesting family treasure chest which Government counsel asserted to be nothing but a tax-dodging device. Its voting but non-dividend-paying common stock is shared equally by Son Paul Mellon and Daughter Ailsa Mellon Bruce. Its dividend-paying preferred stock Papa Andrew kept for himself.

On the pretext that they constituted evidence of fraud, Counsel Jackson dragged into the first week's spotlight two sets of facts which had small bearing on the case at hand, large bearing on Mr. Mellon's reputation. One was that in 1931 Mr. Mellon had twice sold stocks short--an entirely legitimate operation except that the Secretary of the Treasury was simultaneously trying to bolster a falling securities market. Private Secretary Johnson explained that, while they were not on deposit with his broker, Mr. Mellon held more than enough shares in his portfolio to cover his short position.

Inestimably more serious was the Government's charge that for eleven years Mr. Mellon had violated his public trust by owning bank stocks while serving as Secretary of the Treasury. As an ex-officio member of the Federal Reserve Board, the Secretary of the Treasury is forbidden by law to own bank stocks. Over Counsel Hogan's repeated objections, Counsel Jackson last week drew the following story from pale, quavery Mr. Johnson:

Just before taking office in March 1921 Andrew Mellon turned over to his late Brother Richard his 3,300 shares in Union Trust. In return he took his brother's note for $10,500,000 at 5 1/2% interest, approximately the amount of Union Trust's dividends. Never did Brother Richard attempt to pay off the principal of his note. And as Union Trust's dividends jumped through the prosperous 1920's Brother Richard's interest payments rose with them, until finally the original 5 1/2% had become 8%. In 1930 Brother Richard transferred the stock to Son Paul at the original purchase price, gave a $300,000 dividend surplus to Brother Andrew. Son Paul kept 1,300 shares, joined his sister in plumping the rest into Smithfield Securities Corp., a subsidiary which pays all its dividends to Coalesced Co., which pays all its dividends to Andrew W. Mellon.

Explained Private Secretary Johnson: "Mr. R. B. Mellon said he did not want to profit at the expense of his brother's children on a transaction which had been one purely of accommodation for his brother, who had taken a public trust." In 1929 Secretary Mellon assured the Senate Judiciary Committee that he had "sold every share of stock" in any bank before taking office. After last week's revelations it seemed fair to assume that obliging Brother Richard, who evidently considered himself merely a trustee, had also delicately declined to infringe on the voting rights of the virtual, if not legal, owner of the stock.

Also brought out to Taxpayer Mellon's detriment was the fact that on each of six occasions during this period when R. B. Mellon bought bank stocks, the amount of his expenditure was credited to him on Brother Andrew's books. When he sold bank stocks his receipts were debited on the account. To Government counsel that meant just one thing: Andrew Mellon, while Secretary of the Treasury, was trading in bank stocks under his brother's name.

Having pumped his best testimony from Mr. Mellon's confidant, Counsel Jackson was forced to let Counsel Hogan make his point-of-the-week by means of a Government witness. Thumping away at his theme song of political persecution, Lawyer Hogan got a Deputy Commissioner of Internal Revenue to admit that an Assistant Attorney General had initialed the Bureau's letter notifying Mr. Mellon of his tax deficiency. The Hogan conclusion: Attorney General Cummings for political and personal spite had inveigled a reluctant Internal Revenue Bureau into pressing the case against Mr. Mellon.

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