Joseph J. Thorndike is a contributing editor for Tax Notes.
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In the spring of 1937, President Franklin D. Roosevelt launched a public campaign against tax avoidance. It was not his first. After taking office, the president raised the issue repeatedly. Indeed, the revenue acts of both 1935 and 1936 -- the crown jewels of New Deal tax reform -- had both been privately conceived and publicly defended as anti-avoidance measures. But in 1937, Roosevelt decided to take a more direct approach.
During his first term, Roosevelt generally used tax avoidance as a justification for tax innovation. In 1935, for instance, he proposed a new federal inheritance tax to backstop the existing estate levy. In 1936 he argued that a new tax on undistributed corporate profits would bolster the personal income tax, forcing companies to disgorge profits they had previously sheltered from steep individual rates by retaining earnings in corporate coffers.
By contrast, the 1937 anti-avoidance campaign was not designed to build the case for any sort of new levy. Rather, it was a simple and direct attack on popular avoidance techniques, and on the taxpayers who used them.
Roosevelt had always played rough in the tax game, attacking individual taxpayers for shirking communal responsibilities. Most of the time he did this in general terms, denouncing "the rich" or "the privileged few." But occasionally he chose to target his complaints more narrowly. The 1937 tax debate was one such time.
Like many great moments in American politics, the 1937 tax battle began with a memo. "The investigation of the income tax returns for each successive year reveals the increasingly stubborn fight of wealthy individuals and corporations against the payment of their fair share of the expenses of their Government," began Treasury Secretary Henry Morgenthau in a May 21 message to the president. "Although Mr. Justice Holmes said: 'Taxes are what we pay for civilized society,' too many citizens want the civilization at a discount."
The memo went on to identify nine specific methods of tax avoidance -- and the taxpayers making good use of them. The techniques included:
- multiple trusts for relatives and dependents (principal malefactors: Amoco founder Louis Blaustein and Merrill Lynch patriarchs Charles E. Merrill and Edwin C. Lynch);
- foreign personal holding companies (heiress Dorothy Whitney Elmhirst and electrical pioneer George Westinghouse Jr.);
- domestic personal holding companies (financier Charles Hayden and General Motors President Alfred P. Sloan); and
- incorporated yachts and country estates (Sloan again, as well as chemical titan Alfred I. du Pont, U.S. Steel chief Myron C. Taylor, San Francisco banker William H. Crocker, and numerous others).
The memo's selection of avoidance techniques was predictable, largely rehashing Treasury complaints from years past. It even included sections on percentage depletion and tax-exempt bonds -- longtime sore points for Treasury officials, but popular provisions on Capitol Hill.
Roosevelt was pleased with the memo and its roster of tax avoiders. "The time has come when we have to fight back," he told Morgenthau, "and the only way to fight back is to begin to name names of these very wealthy individuals." Cooler heads in the Treasury (notably Undersecretary Roswell Magill) urged the president to refrain from identifying individual taxpayers, and eventually he agreed. But soon enough, Congress began its own investigation (at White House prodding), and the names came out.
Congress established a Special Joint Committee on Tax Evasion and Avoidance. In a series of lurid hearings, held during the first two weeks of July 1937, the panel heard testimony on tax avoidance among the rich, powerful, and well connected. Revelation and justification mixed freely in the popular press, and lawmakers indulged their penchant for professional outrage.
Avoider in Chief?
One of the more colorful moments in an already colorful set of hearings came when Republican lawmaker Hamilton Fish, who represented Roosevelt's own district in Hyde Park, N.Y., asked to testify before the investigating committee. Fish, an ardent conservative and leading New Deal critic, accused Roosevelt of rank hypocrisy. The president was himself guilty of tax avoidance, Fish declared. And for that matter, so were his wife, sons, and Treasury secretary.
The tax avoidance investigation, Fish argued, had deliberately targeted prominent Republicans. "It is evident that most of the names that have been submitted by the Treasury Department thus far are opponents of the administration, and a large percentage of them contributed to Republican campaign funds," he said.
To be sure, there were many prominent Republicans among the names released to the public. But then again, many rich Americans were Republicans. Because rich taxpayers were disproportionately likely to use tax avoidance techniques, it seems almost inevitable that they would have been overrepresented in the investigation results.
But these explanations cut no mustard with Fish. He told the committee that Roosevelt himself deducted farm losses for his Hyde Park estate (a fact that FDR's personal tax returns, available at http://www.taxhistory.org/www/website.nsf/Web/PresidentialTaxReturns?OpenDocument, bear out). He also accused Eleanor Roosevelt of improperly deducting charitable contributions to the American Friends Service Committee. As for Morgenthau, Fish suggested that the secretary had made liberal and creative use of personal trusts, manipulating asset transfers among them to minimize taxes.
Roosevelt and Morgenthau marshaled a quick response. The president invited members of Congress to examine his personal tax returns (and several did). He also led newspaper reporters on a tour of his Hyde Park estate, pointing out the operations of his Christmas tree farming business.
Meanwhile, Elmer Irey, chief investigator for the Bureau of Internal Revenue, assured lawmakers that Morgenthau's returns included nothing questionable. And Assistant Attorney General Robert H. Jackson publicly defended the first lady's charitable contributions.
Still, Fish continued to call for the public release of FDR's tax returns, and he pleaded for a chance to testify before the committee. He was not seeking to accuse the president of illegal behavior. "I only wanted to be fair about it," he told the Chicago Daily Tribune. "If numbers of our citizens are to be accused of 'indecent and unethical' conduct because they took advantage of existing laws to reduce their income taxes, then I think it only fair that the record show that Mr. Roosevelt did the same thing."
Members of the joint committee were reluctant to give Fish a platform for his accusations. Eventually they agreed to let him speak, but not before exacting a promise that he would not mention the president's name. When he finally appeared before the panel on July 9, Fish offered up detailed accusations for the president's wife and sons. And in a statement to the press outside the hearing room, he returned to his complaints about the president's loss deductions for the Hyde Park farm.
But Fish was unable to offer much in the way of evidence. In response to committee questions, he indicated that a man named Darby from New York had offered to provide evidence that James Roosevelt used a foreign holding company to reduce his taxes. But the next day, Fred W. Darby, a public relations professional in New York City, denied having those documents.
Members of the joint committee chose to ignore Fish's accusations, dismissing them as little more than partisan invective. Which they were.
But at least in his central charge that Roosevelt was guilty of hypocrisy, Fish was right. The president's tax returns did reveal a certain amount of tax avoidance. He had done nothing illegal, or even questionable. But using the president's own standard of tax justice - - which demanded that taxpayers pay what they should owe, rather than what they did owe -- the president was guilty as charged.