BUREAU OF INTERNAL REVENUE MONDAY, MARCH 31, 1924 UNITED STATES SENATE, SPECIAL COMMITTEE TO INVESTIGATE Washington, D. C. The committee met pursuant to adjournment at 2.30 o'clock p. m., Senator James E. Watson presiding. Present: Senators Watson (chairman), Ernst, and Couzens. Present also: Mr. C. R. Nash, assistant to the Commissioner of Internal Revenue; Mr. N. T. Hartson, Solicitor Internal Revenue Bureau; and Mr. S. M. Greenidge, head engineering division, Internal Revenue Bureau, and Dr. T. S. Adams, tax expert, Yale University. The CHAIRMAN. The committee will be in order. Senator COUZENS. I would like to have Mr. Greenidge take the stand and be sworn. TESTIMONY OF MR. S. GREENIDGE, HEAD ENGINEERING DIVISION, INTERNAL REVENUE BUREAU (The witness was sworn by the chairman.) Doctor ADAMS. Mr. Greenidge, had you not better state again, for Senator Watson's information, your position at the Bureau of Internal Revenue? Mr. GREENIDGE. I am head of the engineering division of the Income Tax Unit. The CHAIRMAN. How long have you held such position? Mr. GREENIDGE. I have been head of the engineering division about 10 months, and I have been in the bureau about three years and a half. The CHAIRMAN. In the same division? Mr. GREENIDGE. Yes, sir. Senator COUZENS. Are you a civil-service employee? Mr. GREENIDGE. Yes, sir. Senator COUZENS. You went into the bureau under the previous administration, then? Mr. GREENIDGE. Yes, sir; I came in on October 4, 1920, I think, to be exact. Senator COUZENS. When we adjourned on last Thursday, you were to look up some figures in particular showing the gains by the Gulf Oil Corporation as a result of allowing the lessee depletion. Mr. GREENIDGE. Yes, sir; I think I have those figures for you. The amount allowed in the year 1916 on account of the leasehold was $1,750,000, and on fee properties, $268,000. The round numbers are sufficient, I take it? Senator CouZENS. Yes. Mr. GREENIDGE. And in 1917, $1,690,000 for leaseholds and $234,000 for fee properties. Senator ERNST. For what kind of property? Mr. GREENIDGE. For fee properties properties that are held in fee. Senator ERNST. Oh, yes. Senator COUZENS. Will you proceed and give us the figures for the rest of the years? Mr. GREENIDGE. Did you wish them for other years? Mr. GREENIDGE. For 1918, it would become allowable under the law. Senator ERNST. As I understand you, that is the method that was pursued in 1916 and 1917, which was enacted into law in 1918; is that the idea? Mr. GREENIDGE. It was authorized by a Treasury decision in 1922. Senator ERNST. How about 1918? I thought your statement was in reference to that. Mr. GREENIDGE. Yes; it was enacted into law in 1918. The revenue act of 1918 carried that provision. Senator COUZENS. How do you account for the lapse of time between the 1918 law and the promulgating of the rule by the department in 1922? Mr. GREENIDGE. The matter had been under discussion for some time prior to my becoming connected with the department, and I think was submitted to the Solicitor's Office sometime during the year 1921. Perhaps Mr. Hartson could give you the detailed history of that better than I could, Senator. Senator COUZENS. We will delay that answer then until Mr. Hartson comes on, because we want to ask him some more questions. Will you proceed now and tell us what the depletion charges on leaseholds were during the years 1918, 1919, and 1920, etc.? Mr. GREENIDGE. In 1918, on discovery, $10,400,000; 1919, $10,590,000. The CHAIRMAN. Let me ask you this question, please: Between 1918, when the previous policy had ripened into law and 1922, when that policy was promulgated by the Treasury Department, what policy did you pursue? Mr. GREENIDGE. Some of the cases were closed allowing depletion to the lessee. Some were closed disallowing it, and the very large majority were held pending decision. The CHAIRMAN. Are they still pending? Mr. GREENIDGE. No; they were pending, sir. Doctor ADAMS. The law in 1918 and thereafter plainly allowed the lessee depletion. The only years really involved are prior to 1918. That is, the Treasury decision of August, 1922, was a retroactive decision in its effect, applying to years earlier than 1918, but as to the year 1918 and thereafter, there was no legal question. Senator COUZENS. As I get it from these figures, during the years 1916 and 1917, and prior to the law fixing a depletion charge for leaseholds, you allowed the Gulf Oil Corporation some $3,500,000 for depletion on leaseholds; is that correct? Mr. GREENIDGE. Yes, sir; the figure is very close to correct. Senator ERNST. Are you making any objection to that, if the same rule were followed with regard to other companies? Senator COUZENS. I am coming to that, if you do not mind, Senator. Senator ERNST. All right. Senator COUZENS. Can you tell us how many cases in which you applied that same rule for the years 1916 and 1917, other than the Gulf Oil Corporation? Mr. GREENIDGE. I can not tell you all of them, Senator, because our search has not yet been completed. It has been a rather big piece of work, but we have found a number; up to now, we have found twenty-odd, some of which were allowed and audited, passed through the audit process as well as the valuation. The CHAIRMAN. What was the nature of those cases? The CHAIRMAN. All oil cases? Mr. GREENIDGE. Yes, sir; Ohio, Oklahoma, California, Pennsylvania, West Virginia, and New York. The CHAIRMAN. Can you give us the names for the record? Mr. GREENIDGE. With your permission, I will consult with the solicitor. The CHAIRMAN. Yes. Mr. GREENIDGE. As to whether the names should be given? Mr. HARTSON. I think there is no objection to giving the names if the amounts of the taxes are not referred to. Mr. GREENIDGE. Well, I have not the amounts of the taxes, any- wav. Mr. GREENIDGE. Shall I give you the names that we found so far, sir? Senator COUZENS. Yes, sir; that is, that have been settled on this same basis and according to this same policy. Mr. GREENIDGE. B. F. Whitehill, Columbus, Ohio. Mr. GREENIDGE. An individual; yes, sir. Dorris Oil & Gas Co., Tulsa, Okla. Those were complete in their entirety. Lasoya Oil Co., Altoona, Pa.; Jacob Stelzer, Spencerville, Ohio; Hyde Carbon Black Co., Ridgway, Pa.; Paul Lovell, Marietta, Ohio; W. T. Hastings, Marietta, Ohio; Nevada Petroleum Co., San Francisco, Calif.; Dental Oil Co., Sistersville, W. Va.; Premium Oil Co., Franklin, Pa.; Big Fifty Oil Co., Tulsa, Okla.; D. T. Andrus, Rixford, Pa.; Boston Petroleum Co., Boston, Mass.; Warner Oil Co., Titusville, Pa.: Paraffin Oil Co., Bakersfield, Calif.; and Southwestern Petroleum Co., Buffalo, N. Y. That is the statement of those which were completed, even through the process of auditing and sending out the final assessment letter or over-assessment letter, as the case may have been. Senator ERNST. They were completed when? Mr. GREENIDGE. Prior to the promulgation of Treasury Decision 3386, August, 1922. Senator ERNST. Were not most of those cases, if not all of them, settled while Mr. Williams was Commissioner of Internal Revenue and while Mr. Houston was Secretary of the Treasury? I am referring to those that you have named. Mr. GREENIDGE. All but two, sir. Senator ERNST. That is all. Senator COUZENS. The case of the Gulf Oil Corporation was also settled by the administration prior to Mr. Mellon's assuming office, too, was it not? . Mr. GREENIDGE. Yes, sir. Senator COUZENS. Now, can you tell us how many cases there were in which depletion for leasehold was denied? Mr. GREENIDGE. No; I could not tell you that, Senator, without a considerable search of the files. Senator COUZENS. Well, it is a fact that there were quite a number, is it not? Mr. GREENIDGE. Oh, yes. Senator CoUZENS. That were denied. Mr. GREENIDGE. Yes. Senator COUZENS. Can you explain why the Treasury Department should deny a depletion to leaseholds in some cases and allow it in others? Mr. GREENIDGE. At that time, prior to the middle of 1921, the department was in its formative stage, and some difference of opinion existed among the employees as to the correct determination of the depletion allowance and its application to the ultimate tax settlement. The revenue act mentioned the decline in flow method as being the one to use in determining depletion, that had caused a great deal of comment, and had not yet been decided. The allowability of it was partially decided. The amount of the depletion was also determined, but its application had not been entirely decided upon by those in authority or those in a position to do so, and that I think will explain better than any other thing tha tI can say, according to my knowledge. Senator COUZENS. In cases where there was no depletion allowed to the lessee, was the entire depletion allowed to the lessor? Mr. GREENIDGE. No. Senator COUZENS. Was there any controversy that developed in the department when a division of the depletion charge was arranged between the lessor and the lessee? Mr. GREENIDGE. Yes; a very considerable controversy, even among the employess themselves-men who had nothing whatever to do with the amounts involved. Senator COUZENS. As a matter of fact, then, outside of this some twenty odd cases in which the lessee was allowed a depletion credit the lessor got all of the depletion credits? Mr. GREENIDGE. No; he only got his proportionate part. Suppose the lessor got a royalty of one-eighth of the production, he only got one-eighth of the depletion allowable. Senator COUZENS. Then, the Government retained for the Treasury the seven-eighths of the depletion credit that belonged either to the lessor or to the lessee? Mr. GREENIDGE. Yes; until the taxpayer made protest. Senator COUZENS. And if the taxpayer had made no protest, then he was out? Mr. GREENIDGE. Yes, sir. Senator COUZENS. The depletion credit for the proportion that would ordinarily have been allowed the lessee; he was out that amount? Mr. GREENIDGE. Yes, sir. Senator COUZENS. And no notice was served on these oil companies of the change of method or of the division of opinion that existed in the Treasury Department? Mr. GREENIDGE. No notice was served on them, but it was so generally known that notice was unnecessary. All who were interested, I might say, knew that it was a matter under discussion, and they did not, for that purpose and other purposes, present their final request for that settlement. Senator COUZENS. Now, in all of these cases where the depletion credit to the lessee was denied, have these companies since made claim for depletion? Mr. GREENIDGE. Oh, yes; I should say practically all. Senator COUZENS. And are those cases settled? Mr. GREENIDGE. Most of them. Yes; nearly all. All except a few of the larger ones. Senator COUZENS. What is holding up the larger ones? Mr. GREENIDGE. The settlement of other points in controversy. This point is no longer in controversy, of course. The CHAIRMAN. What do you mean by that? What is your policy now in reference to that? You do not hold up the taxes how? Mr. GREENIDGE. Oh, no. The CHAIRMAN. Do you notify the person interested? Mr. GREENIDGE. Yes. Whether he has claimed it or not, he is allowed it. Doctor ADAMS. You would not notify the taxpayer? Mr. GREENIDGE. No; we simply allow it, and it goes on to audit as if the taxpayer had claimed it. Doctor ADAMS. If the taxpayer who was denied lessee depletion, does not raise the question, you will not raise it on his behalf? Mr. GREENIDGE. Not at that time. The CHAIRMAN. No; at this time. Mr. GREENIDGE. At the time his taxes are being readjusted for another year, and it is evident that he has not gotten credit for it, of course, he would be granted it. The CHAIRMAN. Whether he makes claim or not? The CHAIRMAN. But it did not use to be that way? Mr. GREENIDGE. No. The CHAIRMAN. In other words, he was out, if he did not make a claim? Mr. GREENIDGE. Yes. Doctor ADAMS. Unless the taxpayer himself makes claim, it is not practicable to give him his rights, is it? Mr. GREENIDGE. Oh, yes; it is; and we are trying to do it in nearly every case we can. Of course, some deductions are so vaguely specific in a taxpayer's return, that we can not know what they are for; but where we know what they are for, we see that the taxpayer is granted what is coming to him; and in the later days, we are even inviting a claim where they do not know of their rights in regard to such claims |