Senator KING. That is to say, it would have to go through the hands of 50 men there?

That

Mr. DRAKE. I would say so in some of the large cases. number would not be said to be at all high, I should say in some of the large cases, but that is merely a guess.

Senator KING. That is, where there are controversies?

Mr. DRAKE. Well, I would not say that that was only where there were controversies.

Senator KING. Is it not a fact that in many important cases where refunds have been made, they have been handled by a comparatively few men, perhaps not to exceed six or seven?

Mr. DRAKE. I do not know.

Senator KING. Did not your investigation go far enough to enable you to determine that fact?

Mr. DRAKE. I never investigated the thing in particular.

Senator KING. You did not investigate, then, the detailed operation of determining taxes and settling controversies or making refunds?

Mr. DRAKE. Well, I do not know just what you mean by detailed examination.

Senator KING. Well, so that you could determine who did it and the method that was followed.

Mr. DRAKE. My experience has been rather superficial, because it was limited practically to what I gave you in my statement there, because I have my own line of business that I am trying to take care of, and this is just a little service that I have been able to render down here.

Senator KING. Have you any further questions, Senator Couzens? Senator COUZENS. I think Colonel Drake has brought out the fact that he was not an official of the department, and therefore had no right to examine into any of the records of the department.

Mr. DRAKE. No; I have never seen a return of any kind.

Senator COUZENS. His duty was just to pass upon the personnel or the heads of the various units there.

Mr. DRAKE. Just in a general way, and more particularly during the first year, Senator, when everything was new down here, and the appointments had to be made.

Senator COUZENS. I want to suggest, Mr. Chairman, that I thought Colonel Drake would probably be a valuable witness to you, as, according to your original resolution, the principal complaints, as Í recall it, are the allowances for depletion.

Senator KING. Yes.

Senator COUZENS. And discovery, and as Colonel Drake has had some experience and has some facts in connection with that matter, I thought maybe you would like to ask him some questions.

Senator KING. Yes. The two principal grounds for investigation. as set forth in my resolution, were the questions of amortization, depletion, obsolescence, credits, allowances for losses in mines and in capital, and also the method of settling claims. My idea was that there should be a court, that it should be open, and that no claim should be settled in private where there was controversy, but they should be settled openly, just as it would be in a court, to see whether or not it was proper, and whether the machinery was sufficient for determining all of those controversial questions, for the purpose of

ascertaining the amount due, and whether or not refunds should be made.

Mr. DRAKE. This subject is so complicated that it requires a man who has made a special study of it to talk about it intelligently, and that is one reason, of course, why Ernst & Ernst would be capable of telling you about it, because they have a large organization, and their men in that organization are familiar with those problems.

As I stated to Senator Couzens before you came back, Senator King, he asked me point blank what I thought about a reduction of the limit of depletion, that is, in the present law recommended by the Treasury, and I told him I thought it should be made.

Senator KING. That is to say, they have been allowing too much? Mr. DRAKE. NO: I say that the law is not restricted quite as much as it should be. That is the reason I supposed that the change was being made.

Senator COUZENS. You say that prior to 1921, there was no law covering depletions, but it was rather a rule promulgated by the bureau, and that since 1921, they have limited the depletions to 100 per cent of the net income?

Mr. DRAKE. Of each property.

Senator COUZENS. Of each property?

Mr. DRAKE. Yes.

Senator COUZENS. And now in the bill coming from the House, there is a provision making it 50 per cent of the net income as the maximum allowed for depletion?

Mr. DRAKE. Yes.

Senator COUZENS. And that is a matter that Colonel Drake recognizes as right?

Mr. DRAKE. I certainly do.

Senator KING. Have you investigated it to determine how they they reach the amount that should be allowed for depletion? Mr. DRAKE. No.

Senator KING. What was the basis of it?

Mr. DRAKE. NO; I have never gone into that personally.

Senator KING. Nor the corporations which have obtained large reductions on account of depletion?

Mr. DRAKE. Well, just what do you mean by that, Senator? Senator KING. The corporations which have availed themselves of the construction placed upon the law and have secured reductions in their assessments on the ground of depletion.

Senator ERNST. What is your question about it? I did not catch it.

Mr. DRAKE. Neither did I.

Senator KING. Did you investigate the situation sufficiently to ascertain what companies those were that obtained reductions on account of depletion?

Mr. DRAKE. No.

Senator KING. Did you investigate any of the companies that got refunds?

Mr. DRAKE. The Gulf Co.?

Senator KING. No; any of the companies.

Mr. DRAKE. No; because I had no right to.

Senator KING. Then, you just say so.
Mr. DRAKE. I never went into that at all.

Senator KING. I did not know what was the basis of your recommendation of 50 per cent.

Mr. DRAKE. Just the experience of the Gulf Cos. as I have stated. It was merely an opinion. It was my suggestion that if you were to call Mr. Ernst or the men in his organization, you would be able to get an intelligent view of this depletion question. I really am not qualified to give that to you, Senator, I am frank to say.

Senator KING. They have been the ones who have been advocating, or at least securing large credits or deductions on the ground of depeltion. I do not say improperly, but they have been representing that side.

Mr. DRAKE. I do not know as to that.

Senator KING. Well, they represented the Gulf Oil Corporation. Mr. DRAKE. I have never heard that the Gulf Oil Corporation made any move toward asking for any refund, or took any part in getting any through. I do not think they ever did.

Senator KING. No; but did they get credits or reductions from their assessments for depeltion or obsolescence?

Mr. DRAKE. Every production oil company has.

Senator KING. Exactly so, and Ernst & Ernst would represent that side of the matter?

Mr. DRAKE. Yes, sir.

Senator KING. The corporation side of it.

Mr. DRAKE. Of course, they are in general business.

They do not just work for the Gulf Oil Co. They are a large firm of accountants that do general accounting work.

Senator COUZENS. I remember people saying, Colonel, that you speeded up this Gulf Oil Co.'s case so as to get it out of the way before Mr. Mellon took office.

Mr. DRAKE. I did not speed it up, but I said to Ernst & Ernst that this case must be closed before the Secretary, before Mr. Mellon, takes office, regardless of how much the Gulf Oil Co. sacrificed. is just what I told him.

That

Senator COUZENS. When you said that, did you know how much the Gulf Oil Co. claimed?

Mr. DRAKE. No; we had not completed it. That was in January, 1921.

Senator COUZENS. It was known, however, that Mr. Mellon was to be the Secretary of the Treasury at that time?

Mr. DRAKE. Well, it was not exactly known, but it was just supposed. It was not settled, so far as I knew, at the time, but we just did not dare to take that chance.

Senator COUZENS. I am not suggesting that there was any improper reason. I just want to find out.

Mr. DRAKE. I am very glad to have you bring that out.

Senator COUZENS. I just want to find out if, when you were speeding up this case, you arrived at any conclusion as to the method that was to be used in arriving at the depletion asked for by the Gulf Oil Co. when they asked for their credit.

Mr. DRAKE. No. You see, there really was not time to go into anything. As I recall it, they just filed their schedules as fast as they could. That is my recollection of it. This was three years ago, and of course I did not handle the details at all; but there was not any time to go over them again.

Senator COUZENS. You were assistant to the president of the company at that time?

Mr. DRAKE. Yes.

Senator COUZENS. What was the refund that was allowed by the bureau?

Mr. DRAKE. I do not remember. It was something like $3,800,000; but there were 14 corporations embraced in that, and it covered a great

many years.

Senator COUZENS. You said you were in such a hurry about getting this thing through so as to not embarrass the Secretary that you waived any question of claims that the Gulf Oil Co. might have, in order to get it out of the way. Can you say how much in money you

waived?

Mr. DRAKE. I do not know, but Mr. Ernst can tell you that. Senator COUZENS. As I understand it, the corporation has no objection to Mr. Ernst telling us fully how they arrived at these methods, etc.?

Mr. DRAKE. Not in the slightest degree. I can not speak for that corporation, of course, but I would say that I do not think they would impose the slightest objection, and would be glad to assist your committee in any way that they could.

Senator KING. Did you aid in preparing the tax returns of this corporation?

Mr. DRAKE. Not in the slightest degree.

Senator KING. Or for the subsidiary corporations?

Mr. Drake. Not in the slightest degree.

Senator KING. Who prepared the returns?

Mr. DRAKE. Ernst & Ernst.

Senator KING. They were familiar with tax matters?
Mr. DRAKE. Yes; that is their business.

Senator KING. That is their business?

Mr. Drake. Yes.

Senator KING. Did they prepare the returns under which your corporations paid more to the Government than they ought to have paid? Were they not made out legitimately and properly, according to the provisions of law, to secure reductions, abatements, and so forth?

Senator ERNST. Mr. Chairman, I understood him to say two or three times that he does not know how those reports were prepared. Mr. DRAKE. You are referring to the original return now? Senator KING. Yes; that is what I am speaking about.

Mr. DRAKE. The original returns were employed by the company Nobody was employed on those original returns.

Senator KING. That is what I was asking you about. I thought you said Ernst & Ernst were employed on them.

Mr. DRAKE. No; they prepared the amended returns which were filed, and upon which these refunds were based. Senator KING. Yes.

Mr. DRAKE. You see, that whole question of depletion was inserted in the law in 1918 for the first time, so that nobody on earth knew anything about it. The oil companies themselves did not know how to interpret it, and, as I recall it, the final interpretation of that law was not made until about December, 1919, which was long after

they had filed the 1918 return, and it was inevitable, in the nature of things, that all producing oil companies would have to get refunds. Senator KING. Was each of these a producing oil company?

Mr. DRAKE. No; a part of them. I should say half of them. There was a consolidated return, of course.

Senator KING. Do you recall how that $3,800,000 was allocated? Mr. DRAKE. No, I do not.

Senator KING. Whether to producing oil companies or selling oil companies?

Mr. DRAKE. I think it was divided amongst practically all of them. I do not remember in what proportions.

Senator KING. Do you recall the amount which was refunded, the ratio which it bore to the entire tax?

Mr. DRAKE. No; I do not remember it. guess on this.

I would hate to give a

Senator KING. All right, if you do not know.

Mr. DRAKE. But Mr. Ernst can give you those figures exactly.

Senator KING. All right. Did you make sufficient investigation of the workings of the Department to feel justified, as a business man, to make recommendations, other than the two recommendations contained in the letter which you read?

Mr. DRAKE. No, because, Senator, I regard that first recommendation of mine as absolutely fundamental. It is just like the foundation of a house. If I may be pardoned in making a personal allusion, taking my own case, where the companies of which I happen to be president employ not quite so many as there are in the Internal Revenue Bureau, but pretty nearly as many, and where I have full authority to employ and discharge and fix salaries. It is a pretty difficult proposition to handle companies like that, even with supreme authority of that kind. Now, when you are confronted by a condition such as you are in the Internal Revenue Bureau, where, first, you have the Civil Service Commission, with its limitations and restrictions, and with the difficulty, under the civil service regulations, of getting rid of employees, we will say, who are moderately inefficient, and then add to that the fact that inadequate salaries are paid, and furthermore the political element which may enter into it-I mean by that the pressure that is brought to bear upon the officials of the bureau by various people, Members of Congress and others, to appoint this, that, and the other man-you take that combination and, believe me, it is remarkable that they have accomplished what they have. I do not believe it will be possible to secure the efficiency that you desire to obtain in that bureau until Congress takes hold of that proposition and appropriates adequate salaries. I think that is the foundation of your whole structure.

Senator COUZENS. You think that more efficient men would take the civil-service examination if there were higher salaries? Is that your idea?

Mr. DRAKE. Yes, indeed, sir.

Senator KING. To which categories of employees are you referring to now?

Mr. DRAKE. I refer to practically all the important positions that there are down there, and there is a great number of them in all branches of the bureau, Senator.