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Mr. LYNCH. We did not think it was necessary. Our suggestion was at that time to take it up in the regular order with the Bureau of Internal Revenue.

Mr. KEAN. You do not know whether Mr. Oliphant kept any notes of the conversation ?

Mr. LYNCH. I know he didn't, because I have discussed this with him since.

Mr. KEAN. Do you not usually keep notes?

Mr. LYNCH. Not on a matter like that, no. This is perfectly ordinary. There is simply the fact that this gentleman came in and made a preliminary inquiry of a matter, we listened to him and we told him that the principal should take it up or his representative should take it up with the Bureau of Internal Revenue. It is not unusual. We have many requests from people who come into the Treasury Department, and if it is a question as to either advice or rulings, we feel that the proper and the only orderly thing to do, and the only way you can run an establishment with some order, is to suggest to them that they take it up with the people who handle such matters.

Mr. Kean. Then you and Mr. Foley told the legal adviser on the Democratic National Committee that he should advise Mr. Reynolds that he should take it up with the Bureau of Internal Revenue?

Mr. LYNCH. The matter should be taken up with the Bureau by the principals or their representatives.

Mr. KEAN. Now, this was on December 27? Mr. LYNCH. On December 27. Mr. KEAN. In 1948? Mr. LYNCH. Yes, sir. Mr. Kean. Then what happened? Mr. LYNCH. The next day, on December 28, Judge Mayock called Mr. Foley to ask whether or not the matter had been taken up

with the bureau, whether any arrangements

Mr. KEAN. You told him that you would take it up? Mr. LYNCH. That is what I am coming to. He called to ask whether arrangements had been made with the Bureau. We told him that the principal should make the arrangements to take it up with the Bureau. He said the principals were in town and prepared to do so, and we suggested to him that the thing to do was have them

go ahead and take it up with the Bureau. That is where it ends as far as the aspects I am giving you are concerned.

Mr. KEAN. Did you make the appointment for him at the Bureau ?

Mr. LYNCH. No. I did at that time call Mr. Oliphant on that day and tell him that Judge Mayock had called about taking this matter up with the Bureau and I had told Judge Mayock that the principals should themselves take it up or the representatives should take it up before the Bureau.

Mr. KEAN. In other words, you paved the way for the meeting?
Mr. Lynch. That was not the purpose of it; no.
Mr. KEAN. I am not criticizing you for paving the way for it.
Mr. Lynch. Well, no, but-
Mr. KEAN. If you did.

Mr. LYNCH. Neither expressly nor by implication, I hope you will be gracious enough to say.

The point I want to make is, I wanted to reiterate the point that the matter should be taken up in the Bureau in the regular order through regular channels by the principals or by their representatives.

Mr. KEAN. You did not ask them to ask Mr. Oliphant to expedite matters in any way?

Mr. LYNCH. No, I did not.
Mr. KEAN. You do not know whether Mr. Foley did or not?
Mr. Lynch. I am sure he did not. That is the end.
Mr. KEAN. Then what happened?
Mr. LYNCH. Then we come to the Bureau.
Mr. KEAN. Very well, will you give your name?

STATEMENT OF FRED S. MARTIN, ASSISTANT COMMISSIONER,

BUREAU OF INTERNAL REVENUE, WASHINGTON, D. C. Mr. MARTIN. My name is Fred S. Martin, Assistant Commissioner, Mr. KEAN. Very well, proceed.

Mr. MARTIN. Mr. Congressman, there was a meeting in my office, and I did not remember the dates but I have had my memory refreshed, and I understand it was on December 28, 1948, at which the Chief Counsel's Office and the Income Tax Unit was represented as well as myself, and I do not recall how the conference was arranged. I presume my secretary arranged it. At this conference there was a unanimous agreement that on the basis of the facts submitted, this loss was allowable.

Mr. Kean. Who was present at the meeting? Mr. MARTIN. I have searched my records and I find no record of who was there. I remember that Mr. Oliphant, chief counsel, was there, and there were, as I remember it perhaps seven or eight people there. I am sorry I cannot tell you who the others were.

Mr. KEAN. Was Mr. McLarney there!
Mr. MARTIN. I do not recall whether or not he was there.

Mr. KEAN. Who represented the taxpayer? Was the taxpayer himself there?

Mr. MARTIN. I believe Mr. Reynolds was there. I am not sure of that. The only one I can remember for sure was Mr. Oliphant.

Mr. KEAN. Was Mr. Reynolds lawyer there?

Mr. Martin. I do not recall. Something has been said about the fact of whether the ruling was made on the basis of representation of the attorney, and I want to say, Mr. Congressman, that that is the usual procedure, that these rulings on contemplated transactions are made always or nearly always, and it is customary to make them, on the basis of the representations of the taxpayer without verification of the facts. It is the duty of the revenue agent when he examines the case to determine whether the facts are as represented at the time the ruling was made, and if there was a misrepresentation of the facts the ruling is of no effect.

Mr. KEAN. Of course you are right.

Then the meeting was held there and there was discussion probably with Mr. Reynolds and his lawyer as to whether these loans were deductible under section 23 (k) (4).

Do you know if Mr. Reynolds at the time he originally made these loans had an official position with the Democratic Party? I think he

money would

did, I think he was treasurer of the Democratic National Committee at the time. I have a vague idea that he was.

Mr. MARTIN. I do not know, Mr. Congressman. All I know about this transaction is what I have seen in the record and refreshed my memory that there was such a conference, and it regarded the bad debt in the case of the New York State Democratic Committee. That is all I remember about it.

Mr. KEAN. Now, these loans that were made in 1940 may have been made it seems to me, in good faith with a hope that the be paid back. However, the $96,000 was loaned in 1944 with the record that there were several hundred thousands of dollars outstanding that had not been paid, and I cannot see the slightest justification for your ruling that such a loan was made in good faith. Did

you consider that matter at the time? Mr. McLARNEY. I think, Mr. Congressman, that matter surely must have been considered. Whether or not Mr. Reynolds as a prudent businessman made a wise choice in making a further loan to the New York State Democratic Committee is something for him to decide. What we were primarily interested in is whether or not it was all made in good faith.

Mr. KEAN. I do not think it could have been.

Mr. McLARNEY. Well, there again, Mr. Congressman, I think it becomes a matter of opinion.

Mr. Kean. Because you know the situation in a political committee. A political committee is always broke in between elections. The only one that is not is probably the national committee, the national committees of the two parties. But the State committees and your local committees are always insolvent, practically, between elections. Then when the elections come up they get money from the contributors and then they have the money to spend for the support of the candidates and if they do not spend all of the money that they have and they, by chance, lose the election at that time, they would be subject to a great deal of criticism for not using all of the money that they had to push that election.

Here you have the Bureau deciding that a loan of $96,000 lent to this New York State committee which had defaulted on $200,000 in loans, was made in good faith, and that is beyond my thoughts to see how it could have been. In the first place, you talk about loans made by a businessman. A businessman does not make a loan without asking for interest. That certainly was not a business loan, unless he or his company expected to get favors out of the Democratic Party. And certainly I would not want to suggest that. That would be the only reason why, it seems to me, the loan would be deductible for business purposes, if he expected to get favors.

Mr. Lynch. I would like to suggest, Mr. Congressman, that perhaps if that test were invoked as to the section, we might find ourselves up here in just the obverse situation of what we are today. We would doubtless be up explaining to the committee why we imposed our judgment retrospectively instead of accepting the judgment of the persons that made the loan. The statute, and I think the cases, give no such test of retrospective judgment as to whether it was prudent or whether it was not prudent. The test that the statute carries: forth is whether or not there was a valid debtor-creditor relation, a

valid one, and whether it was intended for a debt or not as opposed to whether it was intended as a donation. And I do not think it is expected of the Bureau of Internal Revenue to take such a detached look in interposing its own judgment, whether it be a loan to a political committee or whether it be a loan that a person made on bad securities or some other way. And again I want to reiterate that we would be very happy to get out of this business if the Congress passes this statute.

The statute sets forth the test. The first test is whether it is intended as a valid debtor-creditor relationship.

Now, I do not at all suggest any resistance to your inquiry in line of what we think our obligations are under the statute, if it goes to the test of whether it is a valid debtor-creditor relationship. But as to the question of whether or not we should presume our judgment, this is a statute of general application, whether it be a loan to a political committee or whether it be a loan to a charitable organization or whether it be a loan to a risky business enterprise, to say that we should interpose our judgment as to whether if we stood in the shoes of the person we would think in any good sense he could expect it to be a debt that would be repaid, I suggest to you, Mr. Congressman, that that is not what the statute contemplates.

Mr. KEAN. You feel, then, that as long as Mr. Reynolds made this in the form of a loan

Mr. Lynch. Not in the form of, but validly intended as.
Mr. KEAN. That is what I was saying.
Mr. LYNCH. Validly intended.

Mr. KEAN. In good faith. When you make a loan, do you not have to have the intention or the hope that it will be paid back?

Mr. LYNCH. But I do not think we can use retrospective judgment as to whether it looks in 1948, when he made the loan in 1940, that if we were doing it ourselves we would probably have been convinced of the imprudent judgment when you take a look at it in the circumstances of 1948. I mean only to suggest that the test is whether the loan when it was made was intended to create a valid debtorcreditor relationship, whether it would give rise in a suit for repay. ment to a valid claim for repayment, whether it could not be defeated by the fact that it was not a loan at all.

Mr. Martin. There was a repayment of part of it, which is pretty good evidence that there was some intention of a loan. Otherwise, there would be no repayment.

Mr. KEAN. There was a 10-percent repayment.

Mr. MARTIN. At least to that extent it must be admitted that it had been a loan.

Mr. KEAN. Now, your first discussion of this matter was on December 27, and on December 30 the ruling was made. Is that the usual course of procedure to get rulings made as quickly as that, or isn't that unusual?

Mr. MARTIN. Mr. Dunlap has been insisting on us making them that quick recently.

Mr. KEAN. We are talking about 1948.

Mr. MARTIN. All the way back through my service there have been times at the end of the year where taxpayers wanted to carry out some transaction in order to have it reflected in that year. We have had

rulings that have been rushed through at the end of the year. It is quite customary at the end of the year to make rulings that fast.

Mr. KEAN. You have intimated that the reasons they wanted this ruling made was that the taxpayer may have had some transaction in mind. Of course, you are not able to tell us, and should not tell us whetlier he had anything in mind. But taking the hypothetical case, if Mr. Reynolds had had a capital transaction which would have involved a capital gain, in the amount of this loss that you allowed, how much of a loss to the Federal Government would have occurred owing to that ruling?

Mr. McLARNEY. My impression, based upon the hypothetical question posed, is that the loss would have been around $100,000.

Mr. KEAN. Then this ruling is a ruling that would cost the Treasury Department $100,000 whether it was right or not?

Mr. McLARNEY. Based upon your hypothetical question.

Mr. KEAN. So that it was a pretty important decision that had to be made.

Mr. MARTIN. There would be no loss if the taxpayer did not carry out another transaction which would result in a capital gain to have an offset, because this capital loss cannot be deducted against anything but capital gain.

Mr. KEAN. That is right, but you are suggesting that perhaps the capital gain, if it was made, would not have been made if this other transaction concerned in your decision had not been decided as it was.

Mr. MARTIN. That is right.

Mr. KEAN. You cannot read a man's mind. You do not know whether he made any capital gains or not.

Do you know if there is any record in the Treasury Department or in the Bureau of your call to Mr. Oliphant, Mr. Lynch?

Mr. Lynch. My call?
Mr. KEAN. Yes.
Mr. LYNCH. I have a note of it here. I would be glad to read it.
Mr. KEAN. This is the note from Mr. Oliphant's files or yours?
Mr. Lynch. No; this is my note.
Mr. KEAN. Your note?

Mr. LYNCH. This is the substance of it, that the people may be in on this Reynolds matter and may want some sort of a ruling before the end of the year. This is what I told him. I had suggested that it would be much better if the Reynolds attorneys would take it up

themselves with the Bureau.

Mr. KEAN. Much better? You did not say

Mr. Lynch. This is my secretary's transcription. Please let us not quibble about words. The effect of it is that I said here, I told Judge Mayock to take it up themselves with the Bureau, for the principals to take it up. That was the whole purpose and intent of it.

Mr. KEAN. Do you know if there is any record on the other side? Mr. LYNCH. I do not know. Mr. KEAN. Of a receipt? Mr. LYNCH. I do not know. Mr. KEAN. That is, in Mr. Oliphant's records. Mr. LYNCH. I have not looked and I have not concerned myself with it. I know my own part in the transaction, and I know the matter when taken up at the Bureau of Internal Revenue conference, and

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