INVESTIGATION OF BUREAU OF INTERNAL REVENUE HEARINGS BEFORE THE SELECT COMMITTEE ON INVESTIGATION OF THE UNITED STATES SENATE SIXTY-EIGHTH CONGRESS SECOND SESSION PURSUANT TO S. Res. 168 AUTHORIZING THE APPOINTMENT OF A SPECIAL COMMITTEE FEBRUARY 10, 11, AND 12, 1925 PART 11 EXCHANGE JU: 29 1944 Printed for the use of the Select Committee on Investigation 92919 WASHINGTON GOVERNMENT PRINTING OFFICE 1925 UNITED STATES SENATE, SELECT COMMITTEE TO INVESTIGATE THE BUREAU OF INTERNAL REVENUE, Washington, D. C. The committee met at 10 o'clock a. m., pursuant to call of the chairman. Present: Senators Couzens (presiding) and King. Present also: Mr. L. C. Manson, of counsel for the committee; Mr. L. H. Parker, chief engineer for the committee; and Mr. A. H. Fay, consulting engineer for the committee. Present on behalf of the bureau: Mr. A. W. Gregg, special assistant to the Secretary of the Treasury; Mr. C. R. Nash, assistant to the Commissioner of Internal Revenue; Mr. Nelson T. Hartson, solicitor, Bureau of Internal Revenue; Mr. James M. Williamson, attorney, office of solicitor, Bureau of Internal Revenue; and Mr. S. M. Greenidge, head, engineering division, Bureau of Internal Revenue. The CHAIRMAN. Before we start in on the formal work of the committee this morning, Mr. Hartson, I want to draw your attention to a few statements which were made in the meeting that we had on February 7, at which time the committee had a meeting by itself, to discuss the future work of the committee. During this meeting Mr. Manson made this statement: We have been unavoidably delayed in our statistical work, for the reason that the bureau has delayed furnishing us the data that we called for in September. Now, I do not mean to imply that they have not done the best they could to get it out, but it has been quite a large job. They have furnished us about one-seventh of the individual returns that were called for, and about one-half of the corporate returns, up to the present time. Is that your understanding, Mr. Nash, or Mr. Hartson? Mr. NASH. Yes, sir. Senator Couzens, that work has been going forward just as fast as it is physically possible to get it out. We even had to buy new photostatic machines to perform this work. I think they have just installed some of the machines and there are more to be installed. We have also been working a night shift on the work to get it out. The CHAIRMAN. When do you contemplate that you will be able to deliver all of that to the committee? ン Mr. NASH. I hesitate to make a statement on it. We are putting it out just as fast as we can, with our equipment. It is a much bigger job than we anticipated. The CHAIRMAN. Can you get it finished before the adjournment of Congress, do you think? Mr. NASH. I doubt it. I doubt it very much. The CHAIRMAN. Do you think that that work ought to be stopped after the adjournment of Congress, or that it ought to be finished up? Mr. NASH. The statistics which are being prepared from the individual returns will be valuable at any time, and I believe that we ought to continue to gather those statistics and finish the work up, inasmuch as we have started on it, or what we have done will be wasted. The CHAIRMAN. Does that apply to the corporation returns, or is that less important? Mr. NASH. Senator, I do not know what use is being made of the corporation returns. We are merely furnishing photostatic copies of the returns themselves, and that does not involve any work in the bureau other than the withdrawing of the returns from the files and photostating them and forwarding the photostats to the committee. It is work that could be stopped and taken up again at any subsequent time. The CHAIRMAN. Perhaps Mr. Manson can state at this time for the record what he is doing with the corporate returns. Mr. MANSON. From the corporate returns we are tabulating the net income, both taxable and tax exempt, the distribution of that income as dividends, the amount undistributed and the tax. We are also tabulating a summary of the balance sheets for the purpose of showing the extent to which the undistributed earnings are being reinvested in the business or being invested in outside investments. Before making these tabulations all of these corporations are classified, first, on the basis of the distribution of their income as dividends; second, on the basis of the relationship of their net earnings to their combined capital, surplus, and undivided earnings; third, on the basis of proportion of total stock of the corporation controlled by the officers; and, fourth, on the basis of the nature of the business of the corporation. The CHAIRMAN. What do you intend to use that information for after you get it? Mr. MANSON. That will reflect the extent to which corporate net earnings are not subjected to individual income taxes; it will reflect the ability of the corporation to distribute; it will reflect the nature of the corporations, as to whether their stock is closely held or widely distributed, and it will reflect the percentage of earnings in the different corporate classes, from the standpoint of the extent to which they distribute their earnings. It all goes to the question of the extent to which corporate earnings are escaping individual income taxes. The CHAIRMAN. That will show, as I understand it, also those corporations which were formed for the purpose of holding investments? Mr. MANSON. Those are being disclosed, yes. The extent to which that is being done will be disclosed by these statistics. The CHAIRMAN. Are you not classifying them in relation to the percentage of earnings which they distribute? Mr. MANSON. They are being classified in relation to the percentage of earnings which they distribute. The CHAIRMAN. Do you think, Mr. Nash, that that would be of any value to the bureau in making recommendations for legislation? Mr. NASH. Mr. Chairman, I do not know that I would be qualified to answer that. I have never gone into the technical side of the income tax law. The CHAIRMAN. Would you ask your associates or your superior, after having heard Mr. Manson's statement as to what their views would be as to the value of that information? Mr. NASH. I will be glad to do that. The CHAIRMAN. For legislative purposes. Mr. NASH. Yes, sir. The CHAIRMAN. Will you also ask Mr. Blair or your associates the probable time when you can complete the delivery of these returns? Mr. NASH. Yes, sir. The CHAIRMAN. Will you also ask your superior or your associates if they would approve of continuing this work to complete the statistical information? Mr. NASH. Yes, sir. The CHAIRMAN. I ask that because in these letters which I am going to hand to the reporter for the record, no mention is made of the statistical work. These letters, as I understand it, only deal with the investigation in a general way, and apparently have in mindand if I am wrong, I hope you will correct me the work that is being done by our engineers and auditors and does not have reference to the statistical work. Mr. NASH. If you refer to my letter, Senator, that is correct. The CHAIRMAN. Is that your understanding of your letter, Mr. Hartson? Mr. HARTSON. Yes, Senator. The underlying thought that prompted my letter was not what good might be accomplished by well-directed efforts to get information for use in a constructive way, but had to do with the manner in which this investigation was being conducted. The CHAIRMAN. Just explain what you mean by "the manner in which this investigation was being conducted." Mr. HARTSON. I mean the hearings that the committee conducts on particular cases, which, I believe, are not typical cases, but are exceptional cases. The necessity to appear here day after day, and be taken away from what, to my mind, is most importnt work in the bureau. In my own personal case, I am at the head of a very large office, and have most responsible duties to perform. For the last three months I had nothing to do with those duties of the office. They have been performed by subordinates in my name, and I have felt keenly the disadvantage that I was laboring under. I am in a position where things of great importance and moment are issuing from my office every day, with my name attached, which may be subject to criticism by this committee, and personally I am in the dark, having had no opportunity to keep up with the affairs of my office. My time, as you know, has been spent almost entirely on this investigation. That is the thought that I have in mind. I think the Senator has always recognized that, in my personal judgment, Congress could well devote time toward securing information from |