Senator COUZENS. The bureau has a system of making arbitrary assessments, as I understand it, after a mere superficial audit, in order to protect the Government against the running of the statute of limitations. Is that correct?

Commissioner BLAIR. Well, yes and no. In 1917, the law provided that you shall have 30 days after the A-2 letter goes out to file an appeal or to object to a proposed assessment. Now, the statute expires on the 15th of March, and a letter goes out between the 15th of February and the 15th of March. If you give him 30 days, the statute will expire; so we have been obliged in the cases that come in in those 30 days to make the arbitrary assessment, and we always permit the taxpayer to file a claim, so that he can be heard.

Mr. HARTSON. He is given an opportunity to file a waiver first. Commissioner BLAIR. Of course, he can always file a waiver, in which case the arbitrary assessment is not made. That has amounted to very little this year, and we feel that there will be no necessity for it in any year after this, because the work is becoming so nearly current, or will after this year. We do not think there will be any necessity for it next year, and there was very little necessity for it this year.

Doctor ADAMS. All taxpayers are given an opportunity to file a waiver before an arbitrary assessment is made.

Commissioner BLAIR. Yes, sir.

Doctor ADAMS. I want to get that straight. I understood you to say before you put on arbitrary assessment, you warn the taxpayer and say that you are going to do it, and would like to have a waiver.

Mr. BRIGHT. I think there have been very few instances where we have made an assesssment, without giving the taxpayer a notice of the assesssment, with the request that he file a waiver.

Doctor ADAMS. I do not know the differences; I only want to get it straight. I hear of an enormous amount of complaint on this point, that taxpayers, out of the blue, got some big assessment, and it subsequently transpires that what you wanted was a waiver and that really the assessment had not been carefully made. I have heard that from a number of reliable people, and I wanted to get your statement on it.

That was true in March a year ago.

Senator COUZENS. You handle the Prohibition Bureau, do you not?

Commissioner BLAIR. Yes, sir.

Senator COUZENS. I understand that there was some testimony given before a committee of the Senate to-day which, if I am correctly informed, charges that some member of the Department of Justice was requested to investigate the Secretary of the Treasury in regard to liquor transactions. Did you ever hear of any such

case as that?

Commissioner BLAIR. No; I did not know there was any such thing. Let me have that again, Senator.

Senator COUZENS. I say, before another committee of the Senate to-day, a witness testified, who was formerly with the Department of Justice, that former President Harding had instructed the department to make an investigation of Mr. Mellon's relations with the liquor warehouses, etc., and particularly in the New York district, if I am correctly informed. Do you know of any investigation that

was made in the Prohibition Bureau by the Department of Justice in that connection?

Commissioner BLAIR. No; I do not know of any that has ever been made.

Senator COUZENS. You have never heard of any such investigation?

Commissioner BLAIR. No.

Senator COUZENS. That was the testimony given before the Daugherty committee to-day.

Mr. HARTSON. Who was that-Gaston Means, Senator?
Senator COUZENS. Yes; I think that was the witness.

The CHAIRMAN. Who was that witness?

Mr. HARTSON. Gaston Means. I assume so from following the public press. His name has been featured in the press.

Senator COUZENS. So far as I am informed, I have nothing further to ask at this pont.

The CHAIRMAN. Then, may we not adjourn?

Senator KING. I think we ought to take up some of these matters with Doctor Adams.

Senator COUZENS. I would like to suggest, Mr. Chairman, that the Commissioner and his staff be excused for the balance of the day. The CHAIRMAN. All right; you may come back at our call. Our next meeting will probably be on Monday, Mr. Commissioner.

Commissioner BLAIR. I can come whenever you desire me. I want to prepare this statement for you as quickly as I can. I will write it out so that I may have it ready on Monday. I will go ahead with it, at any rate, and have it for you, and I will come here at your call.

The CHAIRMAN. If we want you on Monday we will let you know. Commissioner BLAIR. We will come when you notify us.

The CHAIRMAN. The committee will stand adjourned and will meet next at the call of the Chair.

(Whereupon, at 5.05 o'clock, p. m., the committee adjourned, subject to the call of the Chair.)

INVESTIGATION OF THE BUREAU OF INTERNAL

REVENUE.

WEDNESDAY, MARCH 19, 1924.

UNITED STATES SENATE,

SELECT COMMITTEE ON INVESTIGATION OF THE

BUREAU OF INTERNAL REVENUE, Washington, D. C. The committee met, pursuant to call, at 2 o'clock p. m., Senator William H. King presiding.

Present: Senators King, Jones of New Mexico, Ernst, and Couzens. Present also: Mr. D. H. Blair, Commissioner of Internal Revenue; Mr. C. R. Nash, assistant to the Commissioner of Internal Revenue; Mr. J. G. Bright, Deputy Commissioner, Income Tax Unit; Mr. N. T. Hartson, Solicitor Internal Revenue Bureau; and Dr. T. S. Adams, tax expert, Yale University.

Senator KING. The committee will be in order.

Senator COUZENS. I would like to ask Colonel Drake a few questions.

Senator KING. You may proceed, Senator.

Senator COUZENS. Colonel Drake is the president of the Standard Steel Car Co., of Pittsburgh, and was formerly assistant to the president of the Gulf Oil Corporation.

STATEMENT OF J. FRANK DRAKE, PRESIDENT OF THE STANDARD STEEL CAR CO., OF PITTSBURGH, PA.

Senator COUZENS. I have not put anything in the record that you wrote me, Colonel, because I thought you probably could state it best in your own way. You might state for the committee now

your connection with the Treasury or with the Bureau of Internal Revenue, how you became connected with it, what you have done since you have been connected with it, and what, if any, part you took in the management of the bureau.

Colonel DRAKE. As I have written to you, under date of March 14, Senator Couzens, I am president of the Standard Steel Car Co. of Pittsburgh, Pa., and was formerly assistant to the president of the Gulf Oil Corporation. The Mellons of Pittsburgh have a substantial interest in said companies and consequently I came into contact occasionally with Hon. A. W. Mellon prior to the time when he became Secretary of the Treasury. When the Secretary came to Washington, March 4, 1921, I accompanied him and assisted him for a time in a private, confidential capacity by endeavoring to secure accurate information as to the qualifications of persons who were being considered for some of the more important positions in

the Treasury Department. In order to render the greatest possible service in this regard I made such a study as time would permit of the nature of the various positions to be filled and the particular qualifications which men should have in order to fill them. In this way, as time went on, I acquired a knowledge of the Internal Revenue Bureau, and particularly of the Income Tax Unit, and became familiar to some extent with the problems of administration confronted by the bureau. Much has been accomplished in the way of solving those problems, but I believe that it lies within the power of Congress alone to correct what I regard as the most serious defects in the present system of administration. Some of these defects and my recommendations for their correction are as follows:

The salaries paid in the bureau are woefully inadequate. This results in a big labor turnover which has most disastrous effects, as it does in any other business. It is particularly disastrous in the Income Tax Unit because it tends to reduce production and delay tax collections and at the same time causes dissatisfaction among the taxpayers. Secretary Mellon and, I believe, his immediate predecessors have been cognizant of this situation and endeavored to correct it by requesting larger appropriations, but Congress has refused such requests. Until Congress changes its attitude and sees the wisdom of sanctioning a more liberal policy so far as salaries in the bureau are concerned, it is idle to expect the close approach to 100 per cent efficiency which we would all like to see.

Another very serious obstacle to efficient administration is the fact that the various branches of the bureau are scattered over a large area in Washington, there being no less than seven different places where the bureau is doing business, some of them being at a remote distance from others. I believe that administrative efficiency would be increased 25 per cent if all of the said branches could be housed in one building. Furthermore, it would be a great convenience to taxpayers. The Secretary of the Treasury has called attention to this situation repeatedly, and I believe there is now before Congress a request for an appropriation sufficient to provide for such a building.

I indorse most heartily the present move for a Board of Tax Appeals which shall function as a judicial body independent of the Internal Revenue Bureau and guarantee to the taxpayer both a judicial and expeditious decision of his appeal. In order that this board may accomplish all that is desired it is most essential that adequate salaries be paid.

The three defects above mentioned I regard as vital and fundamental compared with any others that may exist. I believe firmly that if the special committee, as a result of its investigation, can induce Congress to enact the legislation necessary to correct them, it will have rendered a great constructive service and that the solution of the chief problems of administration in the Internal Revenue Bureau will have been obtained.

Senator COUZENS. I would like to ask you some questions about your experience with the method of handling depletions in the bureau. I understood from some talks that I have had with you that you have some ideas in that connection.

Mr. DRAKE. I do not know very much about the details. Of course, that has been left to the engineers of the Gulf organization and also to the accountants whom we employed on the case. I just

have some very general ideas, as I have expressed them to you, and I do not know enough about the details, really, to have an intelligent opinion of how the valuations are made up. If you wish to ask me some specific questions, perhaps I can aid a little.

Senator CoUZENS. It is recorded in the Congressional Records, through correspondence between Senators and the Treasury Departthat certain claims were filed by the Gulf Oil Corporation.

Mr. DRAKE. Yes.

Senator COUZENS. And they were allowed, prior to the administration of Mr. Mellon; is that correct?

Mr. DRAKE. That is correct.

Senator COUZENS. Can you tell us about when those claims began, when they ended, and if they were paid?

Mr. DRAKE. No; I can not. The Gulf Oil Corporation employed Ernst & Ernst, of Cleveland, Ohio, and they handled the whole case, and have all of the details. Mr. A. C. Ernst is head of that concern, and I would respectfully suggest, if you want all of the details, you call Mr. Ernst. I am sure, Senator, that the Gulf Oil Corporation would have no objection toward giving you any figures of any kind pertaining to their case. I mean, it would not be necessary to go to the department. I think they would give you everything that you wanted, and I think it would be a very interesting discussion you would have, because there are a great many points there that would be of interest.

Senator COUZENS. I want to bring this up, because it might be used as a basis to get at what appears to be the incorrect law or incorrect construction of the law, or a wrong rule of the department. I understood you to say, during one of our conversations, that you believed that the depletion credit had been too great.

Mr. DRAKE. Yes; and they cut that down, as you will remember. I think it was in 1921. There was no limit prior to the 1921 law, as I understand it, but,in 1921, I believe they limited it to the net income of each property, and in the present bill now before Congress I believe the Treasury has recommended that that limit be cut right in two.

Senator COUZENS. That means 50 per cent of the net earnings? Mr. DRAKE. Yes, sir.

Senator CoUZENS. That is the maximum that would be allowed for depletion in oil properties?

Mr. DRAKE. Yes. Personally, I believe that cut should be made, to be frank about it.

Senator COUZENS. Mr. Chairman, Mr. Drake has suggested that we get Mr. Ernst here, and I wanted to have it appear in this record that he is no relation to Senator Ernst.

Senator KING. He is from Cleveland, Ohio.

Mr. DRAKE. Yes. I was saying, Senator, that Mr. Ernst handled the Gulf Oil Corporation case when it was before the bureau. It was disposed of before the present administration, and any questions that you want to ask him about that case, I believe that the Gulf Oil Corporation will not have the slightest objection to his giving you all the information you wanted.

Senator KING. What official in the department handled that case? Mr. DRAKE. I have not the slightest idea. I presume there must have been a lot of them. Usually, in those big cases, there would be 50 men to handle them, I should imagine.