Spelling Bee

"Actually, any one who gives the matter unbiased consideration will realize that it is for the benefit of the rich to plug loopholes in tax laws, since this raises more revenues without raising rates."

With this neat bit of logic, Secretary of the Treasury Henry Morgenthau Jr. last week opened the great 1937 hunt for rich tax dodgers launched so suddenly by him and Franklin Roosevelt early this month (TIME, June 14). The hunt meet was not in the customary inquisition chamber, the Senate's barnlike caucus room, but in the House Ways & Means Committeeroom, which has much better acoustics, handsome indirect lighting, and comfortable chairs of green-blue leather. On the long bench were little placards identifying the committeemen for the audience. In the centre sat old Representative Bob Doughton of Laurel Springs, N. C., chairman of the joint committee, his bald dome almost as bright as his Palm Beach suit; at his left, Senator Pat Harrison, vice chairman.

There was no mistaking the curiosity of the inquisitors, just as eager to hear the names of the wealthy tax dodgers whom President Roosevelt castigated in his message to Congress as were the newshawks scribbling at tables below and the audience perched on chair edges.

But the proceedings did not fail to recognize the formal purpose of the investigation: to find means of plugging holes in the income tax law, not just to ferret out individual tax dodgers. Chairman Doughton read a short statement saying that none but "those who used flagrant means of tax avoidance'' need be uneasy about the coming inquisition. Secretary Morgenthau in a monotone told the committee that nowadays there are 45,000 tax lawyers and accountants, specialists in saving their clients taxes, that often it is difficult to tell the difference "between tax avoidance which is proper and tax-evasion which is supposed to be immoral" until after a long legal battle. Rich men have split their personalities by setting up alter egos in the form of corporations and creating losses in some to balance profits in others. "These transactions," said he, "partake of the same unreal character as if a small taxpayer incorporated his household kitchen as a restaurant and deducted his expenses and losses from his taxable income because he has so few customers."

When Under Secretary Roswell Magill, who followed his boss, did little more than rehearse the different kinds of tax dodges already outlined by the President, even Senator Harrison became impatient. What were some of the names of those people who bought single payment life insurance policies in the Bahamas, then borrowed back their payment and claimed deductions for the interest they paid on it? Mr. Magill said that the Treasury thought it best to have its experts testify on the different types of tax avoidance, one by one, giving names and examples as they went.

Names, Names, Names. At the next session of the committee, last before an adjournment to this week, Elmer L. Irey, head of the Bureau of Internal Revenue's intelligence unit, read a paper on foreign companies as means for rich men to dodge taxes. He was pretty sure that there were 243 such companies in Prince Edward Island, 202 in Newfoundland, 94 in the Bahamas, 46 in Panama. He thought there were a good many more in the little principality of Liechtenstein at the eastern edge of Switzerland, since 349,128 Swiss francs ($80,000), or about 45% of that country's revenue, were derived from corporation taxes. The only country on which he had detailed information was the Bahamas. From 1880 to 1924 only 93 corporations of any kind were formed in those peaceful islands, about 20 a year were formed until 1934. Since then have been formed no less than 122 holding companies, not counting some 60 other companies. A new $100,000 trust company was started to enter the safe deposit business because existing vaults would not hold all the securities now in the islands. An attorney named Kenneth Solomon of an old Bahama family handled about half the incorporations and since Bahama law requires the name of a corporation to be displayed on its resident office, his building has become plastered with signs, each about 30 in. long and 8 in. high, and is now a curiosity for tourists.

A list of Bahama companies suspected of being blinds for tax dodgers had little interest for the Committee since few well-known U. S. names were among the few stockholders listed, but when Mr. Irey mentioned Kenneth Solomon, that was a name. Mr. Cooper leaned forward and asked Mr. Irey henceforward to spell any name he came to--the committee did not want to miss them or have the press miss them. So at last Mr. Irey began naming:

P-H-I-L-I-P D-E-R-O-N-D-E, New Jersey-born banker, onetime of Manhattan's Hibernia Trust Co., formerly chairman of Phoenix Securities Corp. (investment trust). He "now owes the U. S. Government $33,000 for unpaid taxes and interest" and on Jan. 7 last he swore that he was without any substantial funds, offered to settle his tax bill for $1,700. Four months later the SEC questioned him and he admitted that on Jan. 6 General Investment Co. gave him a $100,000 check and $150,000 in cash as commission on the sale of a subway to Buenos Aires. He said the check was made out to Philip DeRonde, Ltd., a Bahama corporation to which he also turned over the entire $150,000 cash. He said that he was an officer and director of the company but denied that he held any stock in it. Its stock-holders were "a group of Argentinian, Paraguayan and English friends of mine."* Mr. Irey declared that Mr. DeRonde "took out of the U. S. $250,000 of which $33,000 belonged to the U. S." and Mr. Magill added that Mr. DeRonde "lied to us under oath."

J-U-L-E-S S. BACHE, well-known Jewish financier and philanthropist, head of the firm of the same name in Manhattan, organized two Canadian corporations. To one of them, the Wenonah/- Development Co. Ltd., he transferred $13,000,000 of assets in 1930. Thereafter the income from this money escaped the high personal surtaxes which Mr. Bache would have had to pay if he received it directly. From his company he borrowed $2,300,000 in 1932 and in 1934 the interest which he then paid the company canceled out his remaining U. S. income, thereby making him virtually income-tax-free. He also formed a Bahama corporation to hold his stock interest in Canadian mines. Said Mr. Irey: "Mr. Bache apparently acted with an honest conviction that he was within his legal rights in utilizing foreign corporations as he did. We therefore cite this case not in criticism of Mr. Bache, but to illustrate. . . ."

W-A-L-L-A-C-E GROVES, who through connection with various investment trusts is credited with control of United Cigar-Whelan Stores Corp., had a Bahama corporation and also controlled General Investment Corp. The Bahama company bought General Investment Corp. stock from the public, sold it to General Investment Corp. itself at a profit of $14.50 a share on the transaction. This deal is being looked into not only by the Bureau of Internal Revenue but by the SEC.

P-E-R-C-Y K. HUDSON, onetime member of the New York Stock Exchange, owns 78% of a company in Newfoundland, the rest belonging to his brother and a close friend. Last year he lost $130,000 on the sale of securities. According to the income tax law a taxpayer cannot deduct losses beyond $2,000 unless they are balanced by corresponding profits. Rather than let his loss (tax credit) go to waste, Mr. Hudson sold other securities to his Newfoundland company for a profit of $130,000. Later if and when that company sells those securities it will not have any taxable profit on them unless they rise still higher. Mr. Irey described this as "rather novel" and added, "it should be stated in fairness to Mr. Hudson that his transactions seem to fall within the letter of the law."

J-A-C-O-B SCHICK, retired lieutenant colonel in the Army Engineers Corps, invented the Schick electric dry shaver manufactured in New Haven, drew big royalties. In 1933 he formed a Bahama corporation to receive his royalties, thereby making a saving in taxes. In 1935 by special dispensation of his friend Prime Minister Bennett of Canada he became a Canadian citizen, without the customary five years' steady residence. He formed more Bahama companies and transferred a big block of securities to them and could not be stopped in any way from doing so because he was no longer a U. S. citizen.

C-H-A-R-L-E-S LAUGHTON. British actor (The Private Life of Henry VIII, Rembrandt), has all his earnings in Hollywood assigned to his British holding company which pays him a salary of $20,000 a year. His earnings were some $190,000 in 1935 and although his British holding company paid a tax to the U. S. he had a considerable tax saving. Said Mr. Irey: "The conduct of Mr. Laughton in this instance may be perfectly legal. The case however is cited as another illustration. . . ."

One more name was mentioned after Mr. Irey finished his paper. Representative Cooper asked who the taxpayer was, previously cited by the President, who had a Bahama corporation and makes his returns every year from a different foreign country with the result that the Treasury cannot catch up with him. His name, Mr. Irey explained, was George Westinghouse Jr.

"And who is he?" demanded Representative Cooper.

"He jumps around so much," said Mr. Magill, "that it's hard to say except that he's evidently a young man with $3,000,000."

In Whose Eye? This first week's work was plainly unsatisfying to the Congressional inquisitors. "Is that all?'' asked Senator La Follette. "Aren't you going to discuss the incorporated yacht?'' asked Congressman Frank Crowther of Schenectady. "Let's have some information, not a Roman holiday."

Mr. Magill explained that the Treasury was not yet sure of its facts in other cases. So unprepared was it for a real red-hot millionaire hunt that foes of the Administration caught the ear of the press with some tax questions of their own. Republican Representative Hamilton Fish went so far as to ask questions about two of his constituents. Did Squire Franklin Delano Roosevelt of Hyde Park,* did Squire Henry Morgenthau of Fishkill, report their gentlemen-farming costs as business expenses in the "unethical" fashion in which other rich men treated racing stables, chicken farms, and yachts? Mrs. Roosevelt took notice of the question raised by Columnist David Lawrence-- whether having checks for her radio performances turned over directly to charity was a form of tax avoidance (TIME, June 14). Without directly answering his question, she said: "On every penny of income I have received, I've paid my full tax."

Embarrassed were some Treasury officials when members of the Congressional Committee pointed out that when the last tax bill was framed they and the State Department had urged Congress to fix at 10% instead of 22% the tax on U. S. income going to foreigners. Not one of these was Mr. Magill, but he had embarrassments of his own. As a special Treasury adviser he had a large hand in making the tax bill of 1934 whose loopholes he is now pointing out. Moreover, before becoming Under Secretary, he was a professor at Columbia University and wrote several learned books on taxation which pointed out the kinds of tax avoidance which were legal, the kinds that were illegal evasions. One speech of his was regarded as such valuable advice on how to save on taxes that Manhattan's Chemical Bank published and circulated it. Washington watched alertly to see if some of the mud kicked up by the President's tax-dodger hunt might not land in New Dealer eyes.

*As described, this transaction looked to some businessmen less like a tax evasion than such a polite device to grease the palms of Latin Americans, as is often necessary to complete a sale.

/-A favorite name with Mr. Bache. On Upper Saranac Lake (N. Y.) is his Camp Wenonah.

*The main Roosevelt estate at Hyde Park belongs to the President's mother, but he owns a nearby farm.

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