Couzens v. Commissioner

JAMES COUZENS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Couzens v. Commissioner

Docket No. 10438.

United States Board of Tax Appeals

11 B.T.A. 1040 ; 1928 BTA LEXIS 3663 ;

May 5, 1928 , Promulgated

*3663 1. The function of the Board is not primarily to declare a rule but to determine the issues presented in each case in the light of the evidence therein, to the end that the present tax liability of each petitioner may be settled.

2. Where, during the negotiations for the sale of property by a taxpayer, a valuation of the property was sought from the Commissioner of Internal Revenue in order that the taxpayer could ascertain the extent of his tax liability in the event of sale, and the Commissioner stated a valuation, whereupon the sale was consummated and the tax computed and paid on the basis of the value stated by the Commissioner, the taxpayer's contention that the United States is prevented by equitable estoppel from asserting a claim for additional taxes based upon a different valuation must be treated with the utmost caution, since its sanction would result in having individual tax liability depend, not upon the tax statutes applicable to all, but upon the statements and conduct of the particular Government officer in respect of each individual.

3. The defense of estoppel against a claim by the United States for additional taxes is not available to a taxpayer in a case *3664 where the Commissioner had no duty to make the alleged representation relied upon.

4. Where there is no clear evidence that a taxpayer actually relied upon such alleged representation and only slight evidence from which such reliance can be inferred, such reliance may not be assumed.

5. A stockholder of a corporation, having the right to examine the books of the corporation and make other investigations to ascertain the value of his stock and otherwise to protect himself against adverse results of a mistake in calculating the taxable gain derived from a sale by him of his stock, may not so far rely upon an expression by the Commissioner as to lay the basis for the defense of estoppel against a determination of deficiency in tax resulting from a change in the gain.

6. The duties of the Commissioner as prescribed in section 321, Rev. Stats., or more recent revenue acts, do not include an appraisement of property before a tax has been assessed or before there has been a transaction in respect of such property within the purview of the taxing statute.

7. An unauthorized expression by the Commissioner as to the value of property derives no force from evidence that contemporaneously *3665 there was in the Bureau of Internal Revenue a policy of being helpful to taxpayers.

8. There is no duty of the Commissioner to create revenue, or to promote transactions from which revenue will result, or to supervise activities of private citizens except to see that taxes are properly assessed and collected.

9. A statement by the Commissioner that the Bureau "is disposed to regard $9,489.34 as a fair valuation of the stock on March 1, 1913, and one which should be used in computing any profits made from the sale" does not, under the circumstances in evidence, amount to a definitive valuation.

10. Estoppel must always depend upon the particular circumstances, and, irrespective of what the rule may be in other cases where the government deals on an equality with the citizen, it resists the sovereign power of taxation in only the most extraordinary case.

11. There is no general rule which gives judicial finality to a valuation made by the Commissioner outside the scope of his official duty or prevents his successors in office from considering the value de novo.

12. The formal assessment by the Commissioner of the amount of tax shown on the face of the taxpayer's *3666 return is a perfunctory act and does not amount to a final adoption of any item stated or implied in the return.

13. A "superficial audit" or "desk audit," correcting one item in a return, which was made so that revenue clearly due would be quickly made available and which purported not to consider or adopt doubtful items but only to lay them aside for future attention, is not a final determination as to the correctness of other items or of the return as a whole.

14. The audit of a return by one Commissioner does not preclude a modification by his successor in office of the facts upon which the computations were based.

15. Congress has provided in the revenue acts a system for assuring certainty and terminating disputes by way of a limitation period, a voluntary agreement, or a proceeding before the Board, and this system must be held to be complete, leaving no room for a judicial standard like that recognized as to other executive departments.

16. A calculation which appears to the Commissioner to be based upon an incorrect formula and to deprive the government of strikingly large taxes reasonably justifying immediate inquiry may properly be reopened.

17. Where *3667 the practice within the Bureau under a departmental order was in great confusion and the practical construction of such order was ambiguous, the Board should refrain from interpreting such order as applying to a situation not clearly within its terms.

18. A departmental order may not, by purporting to require that cases be closed, either impose upon a taxpayer more than his statutory tax or relieve him from its full burden.

19. The provisions of sec. 1312, Revenue Act 1921, and sec. 1006, Revenue Acts 1924 and 1926, providing for closing agreements, require a clear, unequivocal agreement manifesting the intention finally to dispose of all tax controversy as to the years in question, and do not admit the construction that some items as to such years are finally closed and other items remain open for contest by the taxpayer.

20. In a proceeding before the Board upon a claim in abatement resulting from a jeopardy assessment under section 274(d), Revenue Act 1924, the Board is without power to adjudicate whether the circumstances upon which the Commissioner acted were such as to denote that the assessment or collection of the deficiency would be jeopardized by delay. California Associated Raisin Co., 1 B.T.A. 1251 , *3668 followed.

21. Since the expiration of the period limited by the statute for the assessment and collection of a tax destroys the right of assessment and collection, the imminence of such expiration within a time too short for the normal operations of the Bureau may reasonably form the basis for a jeopardy assessment under section 274(d), Revenue Act 1924.

22. In redetermining a deficiency or adjudicating the validity of the Commissioner's action on a claim for abatement, the Board is not sitting in judgment upon the incumbent of the office of Commissioner and will not consider his intent, motive or method of reasoning, and will assume without inquiry the bona fides of the determination.

23. The determination of questions of tax liability is in the first instance to be made by the Commissioner, and it was not intended by Congress in creating this Board that by means of a perfunctory determination or assessment this function should be transferred to the Board.

24. The Board and its Members do not have, and are not expected to have, peculiarly expert knowledge upon the value of securities or other questions of fact in proceedings before them, and can only decide issues *3669 by giving judicial consideration to the evidence properly in the record.

25. In determining the fair market price or value of shares of stock for the purpose of computing gain on the sale thereof, evidence tending to establish that such shares had a different value when grouped with a minority interest from that of shares grouped with a majority interest is admissible.

26. Under section 202, Revenue Act 1918, the fair market price or value to be ascertained is, in terms, absolute, the only purpose being to measure the tax by the gain above the value on March 1, 1913 (where higher than prior cost), which value the taxpayer is entitled to treat as capital reserved from tax.

27. The method of valuation is in itself unimportant, so long as it gives due regard to all the facts and relevant evidence and results in a value which has a reasonable relation thereto. Slavish adherence to a formula is not necessary, and whether the method should proceed from a definite study of original cost, cost of reproduction new less depreciation, general opinions of qualified witnesses, book value, recognized market quotations, or other data, depends upon the nature of the property under consideration *3670 and the extent to which such evidence bears a relation to its value.

28. In determining the fair market price or value of stock on March 1, 1913, as the basis for computing gain or loss from its sale, the Board is not directly concerned with methods adopted for valuing good will or other intangibles separately from the tangible or other assets of the corporation, or for classifying or segregating the constituent parts which are reflected in the value of the stock representing the whole.

29. In determining the fair market price or value of corporate stock on March 1, 1913, as the basis for computing gain or loss from its sale in 1919, the Board placed itself on March 1, 1913, - recognizing all the facts in existence or in contemplation on that date as shown by the evidence, and from them attempting reasonably to predict those to come, being neither unduly skeptical nor unduly optimistic, it sought to determine what an intelligent and reasonable seller and an intelligent and reasonable buyer would in their fairly mercenary interests have been most likely willingly to agree upon as a price for the property in question.

30. Where on March 1, 1913, no attempt had been made to *3671 list the stock in question on an exchange and the evidence shows that, if an application had been made to the New York Stock Exchange, such listing would have been refused because of certain restricting provisions as to the stock, the problem of valuation is, and the evidence to be considered may be, different from that applicable to a listed stock.

31. A provision in a stock certificate which does not prohibit the owner from selling or limit the selling price, but merely gives priority to certain persons (then stockholders) to purchase at the best price obtainable, is, as shown by the evidence, more likely to leave the value unaffected than it is to reduce it.

32. A fair market does not mean that the whole world must be a potential buyer, but only that there are sufficient available persons able to buy to assure a fair and reasonable price in the light of the circumstances affecting value.

33. In valuing the stock of a closely owned manufacturing corporation, no particular method of valuation or reasoning is controlling, and no particular class of persons may be recognized as experts; the independent judgment of the Board must be derived from the facts and circumstances *3672 in each case together with any available evidence of their interrelation and importance.

34. Value on March 1, 1913, is not to be judged by subsequent events, but the judgment must take into consideration the reasonable and intelligent expectations entertained on that date, and subsequent events may be considered for the purpose of ascertaining whether such expectations were entertained and whether they were reasonable and intelligent.

35. Value on March 1, 1913, may not be arrived at by looking at subsequent events known at the time of the decision and finding what the value would have been had such subsequent events been definitely known on March 1, 1913, but should be predicated upon the facts reasonably known on that date, including not only those which had completely occurred, but also those which were in process and those which were reasonably in contemplation.

36. Upon consideration of all the evidence contained in a voluminous record - including, among other things, varying opinions of executives, accountants, engineers, economists, statisticians, bankers, and others, statements of earnings prior to 1913 showing a rapid increase in earnings in each year, and many *3673 historical facts demonstrating the constant and greatly increasing success of the corporation, the efficiency of its managers and the progressive and sound policies and methods pursued by them toward development and expansion of the business, the position occupied by the corporation in the industry in 1913, its stability, and the demand for its products, and the reasonable expectation at that time of continued and growing prosperity - but without assigning to any fact a precise weight or defining its relative emphasis or importance, the fair market price or value on March 1, 1913, of certain shares of stock in the Ford Motor Company sold by the taxpayer in 1919 is determined to be $10,000 per share.

Joseph E. Davies, Esq., John W. Davis, Esq., Arthur J. Lacy, Esq., Clarence E. Wilcox, Esq., Franklin D. Jones, Esq., Sidney T. Miller, Esq., Herbert Pope, Esq., E Barrett Prettyman, Esq., Lewis H. Paddock, Esq., Raymond H. Berry, Esq., Montgomery B. Angell, Esq., Luman W. Goodenough, Esq., and Russell A. McNair, Esq., for the petitioner.

A. W. Gregg, Esq., W. Hall Trigg, Esq., Floyd F. Toomey, Esq., E. C. Lake, Esq., and ,J. F. Greaney, Esq., for the respondent. *3674

STERNHAGEN

*1043 BEFORE STERNHAGEN, MARQUETTE, AND VAN FOSSAN.

This is one of nine proceedings each instituted by an individual taxpayer by filing a separate petition to which respondent duly made answer. The trial of the cases was consolidated, because a large volume of the evidence was appropriate for consideration in all, but each case is separately decided. So far as it is practicable, repetition will be avoided.

There are two issues common to all:

1. Whether, in the circumstances shown by the evidence, the question of the fair market price or value on March 1, 1913, of the stock of the Ford Motor Co., as the basis for computing the gain on its sale in 1919, was open for determination by the respondent Commissioner in determining a deficiency or rejecting a claim in abatement antecedent to this proceeding, and is open for redetermination in this proceeding; and

2. If so, what was the fair market price or value on March 1, 1913, of the Ford stock?

The respondent Commissioner, believing that he was authorized to do so, asserted in March, 1925, that these nine petitioners had paid less than their full liability for income tax for 1919. As to *3675 six of them he assessed the amount, acting upon the hypothesis that *1044 delay would jeopardize collection. Such taxpayers duly filed claims in abatement and gave bond as provided by statute; these claims were rejected, and the cases are here on such assessments and rejected claims. As to three taxpayers, no assessment was made but notice of deficiency was mailed, and the cases are here upon such notices of deficiency, with none of the issues as to jeopardy assessments.

The amounts in controversy as shown by the original pleadings are as follows: Docket No. Petitioner Amount

10438 James Couzens $9,455,303.10

10826 Rosetta V. Hauss 84,404.83

4640 John F. Dodge Estate 4,337,295.20

4641 Horace E. Dodge Estate 4,337,295.20

10825 Horace H. Rackham 4,337,295.20

10910 John W. Anderson 1,438,826.35

11007 Paul R. Gray 2,277,079.88

11008 David Gray 2,277,079.88

11009 Philip H. Gray Estate 2,277,079.88

By reason of modifications made before or during trial, these amounts were changed to some extent.

FINDINGS OF FACT.

1. The petitioner is a resident of the City of Detroit, Wayne County, Mich., and his address is 2123 First *3676 National Bank Building, Detroit, Mich.

2. On March 1, 1913, and prior thereto, and until September 2, 1919, the petitioner was the owner of 2,180 shares of the stock of the Ford Motor Co., a Michigan corporation, out of a total of 20,000 shares of such stock outstanding.

3. Shortly before April 15, 1919, Henry Ford and Edsel Ford, who were then the owners of approximately 58 1/2 per cent of the capital stock of the Ford Motor Co., desired to purchase the remaining 41 1/2 per cent of the stock owned by the minority stockholders, including that owned by the petitioner. Without the knowledge of the petitioner they engaged the services of the Old Colony Trust Co. of Boston and its representatives to purchase the stock for them as undisclosed principals. Pursuant to such arrangement and immediately prior to April 15, 1919, Stuart W. Webb, then an officer of and acting for the Trust Company and the undisclosed principals, accompanied by other representatives of the company, went to Detroit, Mich., to negotiate for the purchase of the stock of all the minority stockholders of the Ford Company, including the 2,180 shares thereof then owned by the petitioner.

4. Thereafter the *3677 Trust Company engaged the services of Arthur A. Ballantine, a Boston lawyer and a former Solicitor of Internal *1045 Revenue, who, on behalf of and under the direction of the undisclosed principals, Henry Ford and Edsel Ford, went to Washington and conferred with the officials of the Treasury Department and the Bureau of Internal Revenue.

5. On or about April 29, 1919, Ballantine wrote the following letter to Daniel C. Roper, then Commissioner of Internal Revenue:

HOTEL WASHINGTON,

Washington, D.C., April 29, 1919.

Hon. DANIEL C. ROPER,

Commissioner of Internal Revenue, Treasury Department, Washington, D.C.

SIR:

Confirming my conversation with you in behalf of the Old Colony Trust Company, Boston: The Old Colony Trust Company proposes to buy all of the 41% of the stock of the Ford Motor Company, of Detroit, not held by the Ford interests. It is believed that the purchase if consummated will tend to promote the interests of one of the largest industries in the country. The purchase cannot be effected unless it is possible first to ascertain the judgment of the Bureau of Internal Revenue as to the value of the stock as March 1, 1913. The Bureau *3678 presumably has at hand or readily available all figures necessary for such a valuation.

May I therefore ask that you advise me what valuation the Bureau places on the stock of the Ford Motor Company as of the date mentioned?

Respectfully,

ARTHUR A. BALLANTINE.

AAB:C

6. After the passage of the Revenue Act of 1909, imposing excise taxes on corporations, there came to the Bureau from over the entire country many and varied questions concerning it. This occurred again after the passage of the Revenue Act of 1913. Answers were made to as many inquiries as possible which appeared to be legitimate and proper, without regard to and usually without knowledge of whether they were before or after the filing of a return. Replies were made on the basis of the facts stated and these facts were recited in the answers. No attempt was made to investigate the facts stated in the questions. Answers were made to hypothetical questions and questions both of law and of fact.

7. The object was to be as helpful as possible to taxpayers in assisting them to make up their returns. Particularly was this so when they gave statements of fact which applied to their returns. Rulings on *3679 numerous hypothetical cases were published in the form of primers, so-called, for the guidance of the public. Commissioner Roper, discussing matters of policy, stated to the men holding the more responsible positions in the various units of the Bureau that the job was too big to be carried out without the cooperation of the taxpayers, and that cooperation could best be secured by giving to taxpayers *1046 all the aid and assistance they possibly and properly could in solving tax problems.

8. The practice of answering inquiries was later modified because the complexity of the later revenue acts brought about a volume of inquiries from taxpayers, lawyers and accountants, the work of answering which became so burdensome as to interfere with the ordinary duties of some of the sections of the Bureau. It was also found in some instances that after giving advice upon which the taxpayers had relied, the Bureau, when the returns were filed, reversed its position. Attempts were made to get away from the practice of answering hypothetical questions as early as the latter part of 1914, and in 1917 a further attempt was made to curb the answers to such questions and instructions were *3680 issued that hupothetical questions should not be answered. In 1919, shortly before the writing of the letter of May 19, 1919, hereinafter referred to, oral instructions structions were issued, for the purpose of checking the volume of inquiries, to refuse to answer questions that were not based upon accomplished facts.

9. On August 13, 1919, the following mimeograph was promulgated:

IT-Mim. 2228.

TO ADVISORY TAX BOARD, SOLICITOR, DEPUTY COMMISSIONERS, COLLECTORS OF INTERNAL REVENUE, REVENUE AGENTS, AND OTHERS CONCERNED:

Requests are being received daily for rulings and advice upon abstract cases or prospective transactions involving questions of income tax and profits liability. These requests are so numerous and the insistence on prompt action so great that it seems advisable at this time definitely to outline the Bureau's policy which will govern the consideration of these requests.

The Revenue Act of 1918 departs widely at many points from prior law or practice, and has given rise to new questions of such importance, complexity, and number that the resources of the Bureau are no more than adequate to advise taxpayers promptly of their present liabilities arising *3681 out of past transactions. It is impossible to answer every question which the invention or ingenuity of the inquirer may devise without neglecting the fundamental duty of determining tax liability upon the basis of actual happenings. Under these circumstances the administrative necessity is obvious of giving precedence over abstract or prospective cases to actual cases in which the taxpayer desires to know what are his immediate liabilities under the law.

It will be the policy of the Bureau not to answer any inquiry except under the following circumstances:

(a) The transaction must be completed and not merely proposed or planned.

(b) The complete facts relating to the transaction, together with abstracts from contracts, or other documents, necessary to present the complete facts, must be given.

(c) The names of all of the real parties interested (not "dummies" used in the transaction) must be stated regardless of who presents the question, whether attorney, accountant, tax service or other representative.

DANIEL C. ROPER,

Commissioner.

*1047 10. Similar mimeographs were promulgated after the passage of the Revenue Acts of 1921, 1924, and 1926.

11. *3682 The instructions in these mimeographs were followed and thereafter hypothetical questions relating to proposed transactions were not answered. The refusal to answer such inquiries became the settled policy of the Bureau. When such inquiries were received thereafter, a form letter was sent to the inquirer enclosing a copy of the mimeograph, or a letter was written stating that an answer could not be made unless the information required in the mimeograph was furnished.

12. Upon receipt of Ballantine's letter of April 29, 1919, Commissioner Roper directed Percy S. Talbert, Acting Deputy Commissioner of Internal Revenue, together with such assistants as he might need, to go to Detroit, to check up the books of the Ford Company, and to examine into its affairs with a view of ascertaining the fair market price or value of its stock as of March 1, 1913. These directions were conveyed to Talbert by Assistant to the Commissioner Callan.

13. Talbert was directed to make a valuation of the Ford stock in anticipation of a possible sale. He was informed that the minority stockholders were unwilling to sell their stock until they knew accurately, in advance, what their taxes were going *3683 to be, so that they would know how much of the purchase price would be left to themselves.

14. Talbert had been in the Treasury Department since 1896 in numerous positions of increasing responsibility, and was reputed to be a capable man with good judgment and integrity. He had made many valuations of stock for the purpose of computing capital-stock tax and income tax. He had never had any experience in valuing securities outside the Bureau of Internal Revenue.

15. Upon receipt of the above instructions from Commissioner Roper, Talbert selected four men, Burlingame, King, Masland, and Taylor, who were regarded as among the best in the service. He did not say anything to these men directly as to the purpose of going to Detroit, because Callan had told him that it might prove embarrassing to the negotiations if word got out of the contemplated action. He did, however, tell them to check up the past years' returns of the Ford Motor Co. and to get certain other information.

16. They went to Detroit and made an investigation. Upon arrival in Detroit, Talbert asked Collector of Internal Revenue Brady whether he had any idea of what the minority stockholders had in mind as *3684 the figure which would permit the sale to go through. Brady informed him that he did not know the exact figure they had in mind but that he thought it was $10,000. Talbert was also *1048 informed by some unidentified person that the sale price of the stock would probably be $12,500 a share.

17. The accountants entered upon an examination of the books and records of the Ford Company to ascertain all the facts in respect of income and possible taxes, and to get data in respect of earnings and other information which Talbert had requested. Talbert himself examined the minute books of the company for the period up to 1913, had conferences with the president, secretary and other officers concerning various phases of the company's business, particularly concerning the prospects of the company as of March 1, 1913, and made inquiries as to various conditions which seemed to him to have a bearing on the problem.

18. While in Detroit Talbert met Ballantine, with whom he was acquainted, in a corridor of the Ford office building. At that time he did not know that Ballantine had any connection with the matter, and the subject was not discussed by them.

19. Thereafter Talbert *3685 received a report of the accountants' investigation and the working papers containing all details. The report indicates that comparative balance sheets (not in evidence) were made for all years from 1908 to 1917, inclusive. The working papers show that an analysis was made of many of the accounts, including depreciation and reserves. An examination was made of the inventories. The papers include a description of the company's accounting procedure. They also disclose that data with reference to the tax liability of the Ford Motor Co. for various years were secured.

20. Included was the following memorandum from Burlingame to Talbert:

MAY 12, 1919.

Report on Company.

Compiled by

C. M. Burlingame Mr. P. S. TALBERT,

Head, Technical Division.

A report is submitted herewith, of the fair market value at March 1, 1913, of the capital stock of the Company.

The information on which the report is based, was secured at the office of the company at Detroit, Mich., on May 5, to 10, 1919, inclusive.

The original amount of paid-in capital stock was $100,000.00 and this amount was increased about November 30, 1908, by a stock dividend of $1,900,000.00, to a total *3686 of $2,000,000.00 at which amount it now stands. The surplus out of which this dividend was paid was earned from operations.

There is no record available, showing any transactions in this stock, so that a market value based on sales cannot be determined. The stock is not listed on any exchange, as far as known.

The basis used in computing the fair market value of the stock is an average of the book value, the earnings for five previous years and the dividends paid during the same period. Full details are shown on page 2 herewith.

*1049 Basis for computing Fair Market Value.

Explanatory

Book Value Basis:

Basis is purely speculative for the partial purchaser as he possibly may not benefit from a distribution of surplus. Net Earnings Basis:

Basis is speculative for the partial purchaser as only part or none of the earnings may be distributed and his return of profit will result from increased market value based on future possible distribution of profits. Dividends Paid Basis:

The actual distribution of profits influences directly the value of the stock as it is by this method that the stockholder receives his return on his investment.

Suggestion: Since *3687 the value of the stock is influenced by the three factors mentioned, the fair market value of the stock may very reasonably be computed thus: Book value March 1, 1913 $1,133.68

Value based on earnings of 10% for five years 3,617.00Value based on dividends of 10% for five years

1,416.70

6,167.38

Average 2,055.79

Basis for Computing Fair Market Value.

Statistics

Period, Oct. 1, 1908

to February 28, 1913

4 years, 5 months

Total net income $31,950,006.93

Average net income for one year 7,233,963.84

($31,950,006.93X12/53)

Capital stock 2,000,000.00

Surplus at February 28, 1913 20,673,560.33

Dividends paid during period $14,405,000.00

Less stock dividends 1,900,000.00 12,505,000.00

Book value per share of stock $1,133.68

($22,673,560.33/20,000)

Average earnings per share of stock 361.70

($7,233,963.84/20,000)

Value based on earnings of 10% per share of stock 3,617.00

($361.70X10)

Average dividends paid for one year, per share of stock 141.67

($12,505,000.00X12/53/20,000)

Value based on dividends of 10% per share of stock 1,416.70

($141.67X10)

Total $6,167.38

Average $2,055.79

*3688 C. M. BURLINGAME 21. Talbert entered upon the determination of a value. He considered the trend of earnings of the Ford Company from 1908 to 1913, the demand for the car, that the company had never been able *1050 to completely supply the demand and had carried over each year large numbers of unfilled orders, the competitive situation as of March 1, 1913, the policy of the company to reduce the price through volume production, its advantages over other manufacturers by reason of volume purchases whereby it could secure materials at lower prices, the nature and quality of the car and its place in the low-price field, the Ford selling organization, the plans under way for increasing production capacity, the plans as of March 1, 1913, for assembly plants at different points in the country, with consequent reduction in freight costs, the potential market for parts, and the difficulties confronting possible competitors. He further considered the earnings for the two months of January and February, 1913, which he understood to be about $2,000,000 a month, and the number of unfilled orders on hand as of March 1, 1913. He concluded that the line of stabilization of earnings *3689 was nearly the current rate. He estimated 1913 income as $24,000,000, six times the earnings for January and February. He averaged this with the earnings of 1913, divided by the total number of shares, and arrived at a result of $948.934 representing the earnings per share. He capitalized this earning at 10 per cent, a rate which he believed from his previous experience represented a correct ratio of earnings to capital, and thus determined a value of $9,489.34 per share. He considered that any risk in the automobile industry had been taken care of in estimating earnings.

22. Talbert considered the memorandum from Burlingame but rejected it as wholly unsound. He was aware of the restrictions on the certificates of stock (see Findings P317 and P318 herein), but gave them no weight in his determination of value.

23. Two or three days before the preparation of his written report, set out below, Talbert communicated his conclusions to Commissioner Roper in person. Several days later Ballantine went to Talbert's office, disclosed his connection with the matter, and asked how he was getting along. Talbert informed him that he had given the figures to Commissioner Roper. Together *3690 they went to Roper. Roper stated that he saw no reason for disagreeing with the conclusion reached, was ready to approve it, and directed Talbert to prepare a letter fixing the value.

24. Talbert prepared the letter and forwarded it to the Commissioner with the following report:

MAY 17, 1919.

IT:T.

PST

Mr. COMMISSIONER: -

In accordance with your instructions on May 4th, I proceeded to Detroit accompanied by Messrs. Burlingame, King, Masland and Taylor, arriving in Detroit on the morning of May 5th. We immediately proceeded to the offices *1051 of the Ford Motor Company and started an investigation of the books and records of that company, being afforded every possible facility and courtesy for the making of a complete check of their books. This check was finished on the night of Friday May 9th and the accountants returned to Washington, I myself returning, at the request of Mr. Callan, two days earlier.

The check of the books showed that the company's returns up to and including July 31, 1917, were correct, and that no additional tax was due for years prior to that date. The returns and records were also checked as to the July 31, 1918, tax, but no comparison *3691 made at the present time with the return for that taxable year, as it is the purpose of the corporation to make an amended return which it is understood will show considerable additional tax for that year. Necessary figures were obtained, however, to enable the office to check the amended return when received without reexamination in the field.

Data was also obtained, which is valuable in determining the value of the stock of the corporation on March 1st, 1913, my confidential instructions being to secure this information for the purpose of fixing a value in anticipation of the sale of a considerable portion of the stock of the company and the consequent income tax liability, because of the increase in value of such stock since March 1st. This office in 1917 placed a value for capital stock purposes upon the stock of the company as of June 30th, 1916, of $14,420.00. This figure was arrived at by the collector on the basis of capitalization at the rate of 10% of the earning capacity of the corporation over the five preceding years. The figures obtained by the collector differ somewhat from the figures that would be obtained by taking the amount of earnings as shown by this report *3692 for the five preceding calendar years and this discrepancy is probably explained by the fact that the corporation is upon a fiscal year basis and the collector undoubtedly took the earnings for five fiscal years, whereas in this report the figures have been adjusted from the books to a calendar year basis.

It will be seen from the attached memorandum of earnings from January 1st, 1909, up to the present date, that the company's period of greatest expansion began during the calendar year 1912. The method of arriving at value utilized for capital stock purposes, of capitalizing five years preceding earnings, is not, therefore, a fair or reasonable method of determining values as of March 1st, 1913. The company's earnings during the calendar year 1912 were something over $14,000,000. During this year apparently, as nearly as I could learn from the minute books of the company, plans for expansion of business were set in motion, properties were bought in many of the largest cities, and plants erected for assembling parts which would enable the company to ship a very much larger number of finished units. And during the first two months of 1913, up to March 1st, 1913, the results of *3693 this expansion were evidenced in earnings approximately of $4,000,000, or at the rate of $2,000,000 per month, a rate which has been maintained fairly constantly since with the exceptions of one or two years in which the earnings were considerably larger.

I think, therefore, that to be consistent with the valuation fixed in 1917, and with the facts known as of March 1st, 1913, with regard to the market for the output of the company, its producing capacity and the prospect of maintaining its rate of profit per unit for production, that a fair method of determining the value would be to capitalize the earnings of the year 1912, plus earnings through 1913 at the rate earned during the first two months of 1913 upon the basis of 10%. This gives an amount, $9,489.34 per share, as the value of March 1st, 1913, and is a figure which I believe, from what I can learn, is not too low to prevent the sale of minority stock by reason of the possible surtaxes such sale might involve, and is also not too high to deprive the Government of a *1052 very substantial revenue upon the difference between this figure and the price at which the stock will change hands.

I, therefore, recommend *3694 that the parties at interest be advised that this office will recognize $9,489.34 as the value of the stock on March 1st, 1913, in computing profits upon the sale of any of this stock held prior to that date.

I am submitting herewith a letter addressed to Mr. Ballantine, in behalf of the Old Colony Trust Company, making such ruling for the consideration of yourself and any of your advisiors you see fit to call into conference.

P. S. TALBERT Acting Deputy Commissioner.

25. Attached to the report Talbert transmitted the following statement: Period Net income Average per share Capital and surplus at beginning of period

Jan. 1 to Dec. 31, 1909 $3,176,033.18 $158.80 $2,022,246.36

Jan. 1 to Dec. 31, 1910 4,145,901.74 207.30 3,398,279.54

Jan. 1 to Dec. 31, 1911 7,541,493.01 377.07 5,544,181.28

Jan. 1 to Dec. 31, 1912 14,119,989.87 706.00 10,080,674.29

Jan. 1 to Feb. 28, 1913 3,972,896.17 19,000,664.16

Mar. 1 to Dec. 31, 1913 22,678,858.75 1,332.08 22,673,560.33

26,651,754.92

Jan. 1 to Sept. 30, 1914 25,271,254.63 1,263.56 34,452,419.08

Oct. 1 1914 to Jul. 31, 1915 24,519,341.78 1,225.97 50,823,673.71

Aug. 1 1915 to Jul. 31, 1916 59,017,892.04 2,950.89 61,143,015.49

Aug. 1 1916 to Jul. 31, 1917 27,843,999.72 1,392.20 113,960,907.53

Aug. 1 1917 to Jul. 31, 1918 51,245,337.75 2,062.26 133,604,907.25

U. S. Govt 592,483.26

244,125,481.90

*3695 26. On May 19, 1919, Commissioner Roper sent the following letter, which had been prepared by Talbert, to Ballantine:

TREASURY DEPARTMENT

Office of

Commissioner of Internal Revenue

Address Reply to

Commissioner of Internal Revenue

and Refer to

IT:T

PST

WASHINGTON, May 19, 1919.

Mr. ARTHUR A. BALL e NTINE,

84 State St.,

Boston, Mass.

SIR:

This office is in receipt of your letter of the 20th ultimo requesting, on behalf of the Old Colony Trust Company of Boston, which proposes to buy all of the 41% of the stock of the Ford Motor Company of Detroit not held by the Ford interests, what valuation the Bureau places upon the stock of the Ford Motor Company as of March 1st, 1913, in order that the parties at interest may have some definite idea as to the amount of taxes they will be required to pay upon the profits made through such sale.

You state that it is believed that the purchase, if consummated, will tend to promote the interest of one of the largest concerns in the country, and that *1053 the purchase cannot be effected unless it is possible first to ascertain the judgment of the Bureau of Internal Revenue as to the value of the *3696 stock on March 1st, 1913.

In reply, you are advised that while ordinarily it is not the practice of the Bureau to determine such questions in advance of actual transactions, in view of all of the particular circumstances surrounding this case, the Bureau feels justified in departing from that practice and you are accordingly informed that upon consideration of the figures shown by the books and returns of the company, it is disposed to regard $9,489.34 as a fair valuation of the stock on March 1st, 1913, and one which should be used in computing any profits made by the sale.

DANIEL C. ROPER,

Commissioner.

27. Ballantine acknowledged receipt with the following letter:

84 STATE STREET,

Boston, May 23, 1919.

HON. DANIEL C. ROPER, Commissioner of Internal Revenue, Washington, D.C.

SIR:

Acknowledgment of your letter of May 19th relative to the value of the stock of the Ford Motor Company as of March 1st, 1913, has been delayed owing to my absence from the city. We exceedingly appreciate your making a valuation at this time, in view of the large interests involved and the impossibility of procedure without ascertainment of the valuation by the Bureau.

*3697 Very truly yours,

ARTHUR A. BALLANTINE

AAB/C

28. The letter of May 19, 1919, from Commissioner Roper to Ballantine was deposited in June 1919, by Stuart W. Webb with the Detroit Trust Co., by which company it is still held.

29. In April, 1919, Henry S. Morgan, secretary to the petitioner, James Couzens, wrote a letter to John W. Anderson, another stockholder in the Ford Motor Co., who was then in California, asking if he was interested in disposing of his stock. He recited that a Mr. Webb, purporting to represent the Old Colony Trust Co., had been in Detroit, and that he had told Webb that he did not think any of the stockholders would be interested in selling in view of the tax situation and the uncertainty of fixing a March 1, 1913, value. To this Anderson replied by wire that the matter was one which he would prefer to allow to remain open until his return to Detroit early in May, and that in his judgment it was the worst time in the history of the country in which to sell anything involving the value represented by the Ford Motor Co. stock. On Anderson's return to Detroit, Morgan informed him that after he had talked with Webb as stated in his letter, Webb had *3698 disappeared and had not been seen since. Later Morgan showed Anderson a form of power of attorney, to be signed by the Ford minority stockholders, authorizing Morgan and Luman W. Goodenough to enter into negotiations with Webb for the sale of the stock on the basis of $12,500 a share. On *1054 several occasions, still later, Morgan, in response to inquiries from Anderson as to what petitioner Couzens had done, informed him that he had done nothing.

30. On or before June 14, 1919, the petitioner Couzens was informed that Henry Ford and Edsel Ford were the principals seeking to purchase the stock and he was shown a copy of the letter from Commissioner Roper to Ballantine.

31. Under date of June 14, 1919, the petitioner signed the following agreement:

JUNE 14, 1919.

In consideration of one dollar and other valuable consideration to me paid by Edsel B. Ford of Detroit Michigan the receipt of which I acknowledge I hereby give to siad Ford an option for the purchase of all my stock in the Ford Motor Co. of Michigan viz. 2180 shares and further agree that my sister Mrs. Hauss shall also sell at the same time if this option is exercised her holdings of 20 shares in said *3699 Company. The price to be paid is $13,000 [sic] ex any dividends actually declared prior to consummation of the purchase and also ex any dividends which may be decreed to be paid in the suit of John F. Dodge et al vs said Ford Motor Co. which dividend said Ford agrees if not declared prior to delivery of the stock to assign to us or to collect for us at my option.

Said option shall be exercised by written notice to me at my office Dime Bank Building Detroit Mich. and at the time fixed in said notice not less than three days after the delivery of said notice I agree to deliver all said stock to the Detroit Trust Co. of DetroitMichigan at its office in Detroit with proper transfers in blank to be delivered by said Trust Company to said Ford upon payment of the purchase price above stated.

In executing this option I recognize that it is desired by said Ford for special reasons particularly for the purpose of obtaining for himself and his father through personal ownership and stock controlled as nearly complete ownership of said company as may be possible and that its purpose can and is to be accomplished only by the specific performance of this agreement and not by damages for *3700 breach of agreement to deliver.

This option is not to be exercised before Sept. 1, 1919 and shall expire on January 1st 1920 pending the option including the entire time between its date and the exercising of the option I further agree as director and stockholder to cooperate with said Ford in all matters connected with said company and particularly to consent to the purchase by the company of any and all stock of the company except stock now owned by said Ford or his father or by Henry Ford & Son, Inc. of New York, and to the issue of notes by the company for such purchases and the use of the funds of the company.

My obligation hereunder shall enure to the bunefit of the assigns or executors or administrators of said Ford and sahll be binding upon me my executors and administrators.

I authorize said Ford his executors administrators or assigns to give any notices in relation to the sale which may be appropriate under the bylaws and I waive my right to receive notice of any proposed sale of stock to said Ford or any party approved by him prior to the expiration of this option and I agree upon request to procure for said Ford similar authority and waiver from my sister.

*3701 In witness whereof I hereto set my hand and seal

JAMES COUZENS

*1055 32. On July 1, 1919, Anderson called Morgan and again asked him what the petitioner Couzens had done. Morgan replied that he had seen Couzens, who had told him to tell Anderson to go ahead on his own hook, not to bother about Couzens at all, and that he would attend to his side of the transaction himself.

33. Thereafter, on or about September 2, 1919, the petitioner Couzens concluded a sale of his 2,180 shares of stock to the Ford Motor Co., a Delaware corporation, the assignee of the option of June 14, 1919, for the sum of $29,308,857.90, or at the rate of $13,444.43 per share.

34. On July 10, 1919, the petitioner Couzens received from the Ford Motor Co. a dividend of $2,101,017.07 and $167,505.74 interest thereon to July 10, 1919, pursuant to the court decree in the case of John F. and Horace Dodge v. Ford Motor Co. et al. He thereafter filed an amended return for 1917, reporting this dividend therein as 1917 income taxable at 1916 rates on the ground that such dividend constituted income as set apart out of earnings accumlated in 1916. He reported the interest in his 1919 income-tax *3702 return as 1919 income.

35. On March 15, 1920, petitioner Couzens filed in the office of the collector of internal revenue at Detroit, Mich., his individual income-tax return for the calendar year 1919 and included therein as taxable net income the sum of $8,622,096.70 as the profit derived on the sale of the Ford Company stock, this amount being the difference between the sale price of $29,308,857.90 and the March 1, 1913, value of the stock, $20,686,761.20, computed on the basis of $9,489.34 per share, in accordance with the letter of Commissioner Roper to Ballantine. This return reported his total charitable contributions for 1919 to have been $1,814,109.57, but a deduction of only $1,499,380.85 was taken, that being 15 per cent of his reported net income allowed by law as a deduction. This return was received in Washington, D.C., by the Bureau of Internal Revenue on May 11, 1920.

36. The total purchase price which the petitioner Couzens paid for the 2,180 shares of stock was less than the March 1, 1913, fair market price or value thereof. He acquired the stock as follows: On June 18, 1903, as one of the original incorporators of the Ford Motor Co. of Michigan, he subscribed *3703 for 25 shares for the price of $2,500, which he paid $1,000 in cash and $1,500 in four-month notes, which notes he thereafter paid in full. One share of this stock he held for his sister, Mrs. Rosetta V. Hauss, in consideration of $100 therefor paid to him by her. There was thus a net cost to the petitioner of $2,400 for 24 shares. On or about May 15, 1907, he acquired from Albert Strelow 50 shares of stock in the Ford Motor Co. together with 31 shares of stock in the Ford Motor Co. of Canada, for a total price of $25,000. On or about September 12, 1907, he acquired from Charles H. Bennett *1056 and Vernon C. Fry 35 shares for $17,500. On or about October 22, 1908, he received a stock dividend of 1,900 per cent, or 2,071 shares. This made a total of 2,180 shares then owned by him, and sold as aforesaid.

37. Commissioner Roper went out of office on March 21, 1920, and was immediately succeeded by Commissioner William M. Williams.

38. On June 8, 1920, Commissioner Williams assessed against petitioner an income tax for 1919 of $6,075,103.83, being the amount of income-tax liability shown by the return, and this was paid by petitioner as follows: March 15, 1920 $1,518,775.93

June 15, 1920 1,472,998.95

Sept. 15, 1920 1,518,775.95

Dec. 15, 1920 1,518,775.95

Sept. 26, 1923, credit of overpayment for 1915 486.83

Sept. 26, 1923, credit of overpayment for 1916 45,290.17

Total 6,075,103.83

*3704 39. Under date of June 11, 1919, Office Order No. 101, reading in part as follows, was issued within the Income Tax Unit of the Bureau:

TO HEADS OF DIVISIONS,

JUNE 11, 1919.

INCOME TAX UNIT.

INCOME TAX UNIT.

In view of the immediate and pressing need of the Government for funds, it becomes necessary to change the present practice of selecting returns for audit. Consequently, it is considered advisable to audit the returns for the year 1917 according to certain classifications, which will be explained hereinafter.

(a) Certain returns should receive a superficial audit for the purpose of immediately assessing additional taxes found to be due before sending to the field for an exhaustive audit.

(b) Other returns, after receiving a careful examination, shall be immediately forwarded to the field force, if necessary, for the ascertainment of the correct tax.

(c) Still other returns may receive a careful, intensive and final audit in this office.

The returns will be taken up for audit by classes, the basis of classification being the size of either the gross or net income.

INDIVIDUAL RETURNS

Classes.

1. Gross income of $1,000,000 or over.

2. Net *3705 income of $300,000 or over.

3. Net income of $100,000 to $300,000.

4. Net income of $50,000 to $100,000.

5. Net income of $25,000 to $50,000.

6. Net income of less than $25,000.

Selection.

The Statistical Division will furnish lists of the serial numbers of returns of individuals, under the first two classes.

*1057 The returns under the last four classes will be furnished by the Files Section, only one class being withdrawn at an operation, commencing with class 3, followed by class 4, etc.

Procedure.

(a) The returns of classes 1 and 2 will be withdrawn from the files first and given a superficial audit. The purpose is to assess whatever further taxes are clearly due on the face of the return. No correspondence should be started. When a further tax is found due the returns should be sent to the Revenue Agents Record Section for the purpose of preparing photostats or abstracts which are to be forwarded to the field. After this is done the Revenue Agents Record Section will return the case to the audit clerk discovering the further tax, who will have the tax listed on the summary sheet. The return and summary sheet then go to the Proving *3706 Section. Although no additional taxes may be discovered by the audit these classes of returns should be sent to the Revenue Agents Record Section, in order that transcripts may be prepared and sent to the field.

(b) The same procedure as outlined in (a) will be followed with respect to individual returns under class 3.

(c) The returns which fall within the last three classifications will be given a thorough examination by the auditors and, if their judgment so warrants, recommended for field examination.

The procedure above outlined also applies in case the return is stamped "transcript" in the case of individuals, or "synopsis for agent" in the case of corporations.

Audit suggestions.

The following inaccuracies frequently found on returns should be considered in a superficial audit of Forms 1040, 1065, 1101 and 1102:

1. Errors in calculations indicated by comptometer.

2. Failure to pay excess profits tax due at the 8% rate on salaries, commissions, royalties, executors' fees, reported in Blocks "A", "D" and "H".

3. Failure to file 1101 or 1102, as the case may be, for excess profits tax at graduated rates on incomes in excess of $6,000 from business having *3707 invested capital.

Note: A taxpayer is allowed a reasonable salary for his own services, in addition to an exemption of $6,000, plus the 7 to 9% deduction of his invested capital. When it appears that notwithstanding these allowances there will be due an excess profits tax, a return should be secured from the taxpayer through the Collector.

4. Failure to report tax due at proper rates on dividends and partnership earnings of previous years.

5. Failure to add to gross income the amount withheld by a debtor corporation on behalf of an individual owning tax-free covenant bonds.

6. Improper claims for deduction under Block "J".

CORPORATION RETURNS.

* * *

Chiefs of Sections.

Chiefs of Sections should use their best judgment in deciding the necessary action that should be taken with regard to cases which are now either on the desks of the auditors or in the suspense files. It is not desired to terminate abruptly the audit of a case which is nearly completed. It is believed best to conclude the audit of all returns which have been the subject of considerable *1058 correspondence and audit. In case a superficial audit reveals a refund the examination *3708 should be suspended at this time and the return passed for field audit.

If no additional tax is developed in connection with any of the returns falling within the classifications which are intended for field audit the return should be promptly, after consideration, forwarded to the Revenue Agents Record Section in order that a synopsis or photostat may be made.

GEO. V. NEWTON Head, Audit and Administration Division.

Approved:

J. H. CALLAN Assistant to the Commissioner.

40. Although this order was limited in its terms to 1917 returns, oral instructions to continue the practice were issued and the making of superficial audits was extended to returns for all years, until the order was rescinded on May 14, 1921, by Office Order No. 538, reading as follows:

OFFICE ORDER NO. 538

MAY 14, 1921

TO HEADS OF DIVISIONS, CHIEFS OF SUBDIVISIONS AND SECTIONS, INCOME TAX UNIT.

Certain Returns to be audited intensively.

In view of the fact that the field force has a sufficient quantity of work now on hand to keep it engaged for a considerable period of time, audit sections are instructed that until further notice all returns except those involving certain features *3709 not susceptible of explanation through correspondence, should be audited intensively.

As a check against possible erroneous audits, returns which are received back from the Review Division and which show a gross income of $500,000 or more should be routed to the Field Audit Control Section in order that photostat copies may be made for subsequent field investigations. When such returns, irrespective of the amount of gross income, are of a questionable character, or if suitable explanation cannot be obtained from the taxpayer by correspondence, in cases where the amount involved is of sufficient size to justify that action, the returns should be referred to the Field Audit Control Section for the preparation of photostats and field orders.

This order revokes any provisions of Office Order 101 or other previously issued office order in conflict.

C. B. ALLEN Head, Administrative Division.

Approved:

E. H. BATSON Acting Deputy Commissioner.

41. Under Office Order No. 101 the examinations of returns within its scope were superficial in nature, only a casual or cursory examination being made. The returns were referred to an auditor, and if any item thereon was *3710 apparently or clearly improper, it was disallowed, or if there was any item omitted which was known to belong *1059 on the return, it was placed there and assessment would follow. The following rubber stamp imprint was placed on the return:

Assessment

Tax $

Penalty $

Basis

Date

Page Line

42. The return was sent to the Technical Division where a review was made to ascertain whether the audit was correct. A photostatic was made to ascertain whether the audit was correct. A photostatic copy of the return was made and sent to the field for an intensive investigation and the return was sent back to the auditor. It was then sent to the Proving Section on a summary sheet for assessment. The assessment was then forwarded to the collector of internal revenue for collection.

43. After a copy of the return had been sent to the field, a revenue agent made an investigation and embodied the results thereof in a report. This report was forwarded to the Bureau and was sent for audit to the Field Review Section.

44. In the latter part of 1920 the return of the petitioner Couzens was referred to I. I. Phillips, Chief of Subsection No. 8, Personal Audit Section, for *3711 superficial audit. He made an examination of the return, found that the basis of the computation of gain on the sale of the stock was not set forth therein, and prepared the following letter which was sent to the petitioner:

Office of

Commissioner of Internal Revenue

Address Reply to

Commissioner of Internal Revenue

And Refer to

IT:G:P-8

IIP

TREASURY DEPARTMENT,

Washington, December 30, 1920.

Mr. JAMES COUZENS,

2239 Dime Bank Bldg., Detroit, Michigan.

SIR:

Reference is made to your income tax return, Form 1040, filed for the year 1919.

It is requested that you inform this office as to the manner in which you arrived at the profit of $8,622,096.70 from the sale of the stock held by you in the Ford Motor Co.

*1060 It is important this letter receive your prompt attention and that reference be made in your reply to the symbols at the beginning of this letter.

Respectfully,

G. V. NEWTON, Deputy Commissioner.

By I. I. PHILLIPS

For Chief of Section.

45. Under date of January 3, 1921, Henry S. Morgan replied as follows:

JAMES COUZENS

DETROIT Jan 3rd 1921.

IT:G:P-8

IIP

Mr G V NEWTON

Deputy Commissioner *3712

Internal Revenue Department Washington D C

Attention I I Phillips

DEAR SIR:

We have your letter of December thirtieth, and in reply thereto beg to advise that the profit referred to was arrived at by figuring the price received for the stock in question, when sold, as compared with the value of the stock on March 1, 1913, as set by Hon Daniel C Roper, Commissioner, in his letter of May 19, 1919, addressed to Mr Arthur A Ballantine, 84 State Street, Boston, Mass.

Very truly yours,

H. S. MORGAN, General Secretary to JAMES COUZENS.

46. Upon receipt of this letter, Phillips requested from the Bureau files all data pertaining to the Ford Motor Co. stock transaction together with the returns filed by all stockholders who had sold their stock, for the purpose of determining whether the profit on the sale had been properly returned. In response to that request the file containing Talbert's report was forwarded to Phillips and was examined by him. He accepted the March 1, 1913, value of the stock, as determined by Talbert, in checking the profit reported on the returns of the stockholders.

47. On February 8, 1921, the following letter was sent to the petitioner *3713 Couzens:

FEBRUARY 8, 1921.

IT:G:P-8

WHB-DU-801

Mr. JAMES COUZENS,

2239 Dime Bank Building,

Detroit, Michigan.

SIR:

It is disclosed that the dividend of $2,101,017.07, received by you through court decree on July 10, 1919, from the Ford Motor Company was reported in your amended income tax return for 1917 and was taxed on such return at the 1916 rates on the ground that such dividend constituted income set apart out of earnings accumulated in the year 1916.

*1061 Inasmuch as the Revenue Act of 1918 provides that dividends are income and are taxed at the rates for the year in which paid, regardless of when the earnings or profits out of which they were paid were accumulated, your net income for 1919 has been increased by the amount of this dividend.

This increase in your taxable net income also increases the amount of credit for contributions to charitable organizations, etc. The amount of $1,499,380.85, deducted for contributions in Block I, has accordingly, been increased to $1,813.084.57, representing the total amount of contributions made by you in 1919, exclusive of the contributions of $1,000.00 and $25.00, made to Wayne County Equal Suffrage *3714 and Patriotic Unit Order Eastern Star, respectively, which contributions are not allowable deductions for income tax purposes, inasmuch as they were not made to corporations or associations organized and operated exclusively for religious, charitable, educational or scientific purposes.

Credit for the amount of additional tax assessed on your amended income tax return for 1917 on account of the inclusion of the dividend item has been allowed against the further tax disclosed through the adjustments made on your 1919 return.

The following is a synopsis of your 1919 return as corrected, disclosing a further tax due of $877,430.59. Adjusted net income subject to normal tax at 1919 rates, Item J $7,428,771.89

Less personal exemption 2,800.00

Balance $7,425,971.89

Amount subject to normal tax at 4% 4,000.00

Amount subject to normal tax at 8% $7,421,971.89

Normal tax at 4% $160.00

Normal tax at 8% $593,757.75

Surtax at 1918-19 rates:

Net income item J $7,428.771.89

Dividends reported 730,163.11

Dividend adjustment 2,101.017.07

Taxable interest on United States obligations 23,852.80

Total net income subject to surtax at 1918-19 rates $10,283,804.87 $6,617,983.17

Total tax liability $7,211,900.92

Tax paid at source 139.70

Amount previously assessed on 1919 return $6,075.103.83 $6,075,243.53

Further tax due $1,136,657.39

Less: Amount of additional tax assessed on amended 1917 return due to inclusion of dividend in question 259,226.80

Further tax $877,430.59

*3715 Assessment of this amount will be entered on the next list. The Collector of Internal Revenue for your district will notify you as to the time and manner of making payment of this tax.

Respectfully,

G. V. NEWTON Deputy Commissioner.

48. On February 11, 1921, petitioner, by his general secretary, wrote a letter of protest against the proposed allocation of dividends as 1919 income instead of 1917 income taxable at 1916 rates, *1062 and informed the Commissioner that he had reported only sufficient items of his charitable contributions to cover his allowable deductions under the law on his reported income, and that if his income for 1919 was to be increased on account of the so-called Ford-Dodge dividends, there was, in addition to the $1,814,084.57 above stated, a further charitable contribution of $73,800 to the Harper Hospital which should be included. He further requested that inasmuch as T. G. Thurston, Internal Revenue Agent of the Treasury Department, Bureau of Internal Revenue, was at that time in the petitioner's offices checking his returns for 1915, 1916, 1917, 1918, and 1919, the additional assessment of $877,430.59 be deferred until his report thereon *3716 had been received and such further items of debit or credit be included as Thurston's audit might cause the Commissioner to feel should be included.

49. On February 16, 1921, counsel for petitioner Couzens wrote a letter to the Commissioner asking for a hearing on the Ford-Dodge dividend question before the making of an assessment. On February 19, 1921, the Commissioner in reply to petitioner's letter of February 11, refused to defer the making of the proposed assessment.

50. Commissioner Williams went out of office April 11, 1921, and Millard F. West became Acting Commissioner of Internal Revenue on that date.

51. On April 12, 1921, the Acting Commissioner assessed against the petitioner the additional tax for 1919 of $877,430.59.

52. The "assessment stamp" on the petitioner's return was filled in as follows:

Assessment

Tax $877,430.59

Penalty $ [*$

Basis Sup. Audit

Feb. 8, 1921.

I.I.P.

Date March 1921

Page 3, Line 1

"Sup. Audit" signified superficial audit, and February 8, 1921, was the date on which the audit was made. The date on the lower portion of the stamp and the page and line numbers are the means of identifying *3717 the assessment on a particular assessment list.

*1063 53. On April 25, 1921, the petitioner duly filed his claim for the abatement of the assessment made April 12, 1921, notice to pay the same having been received by him from the collector of internal revenue at Detroit on April 18, 1921. On April 25, 1921, the petitioner transmitted to the Commissioner his appeal to the Committee on Appeals and Review from the assessment of $877,430.59 made April 12, 1921, on account of the so-called Ford-Dodge dividends.

54. Under date of May 11, 1921, Phillips wrote a memorandum to Head of the General Audit Division Clute as follows:

MAY 11, 1921.

For Mr. Clute.

The confidential file of the Ford Motor Co. attached is being returned for your disposition inasmuch as it has served its purpose and is of no further use to this Subsection.

I. I. PHILLIPS Chief, Personal Subsection #8

55. When Phillips returned the file to Clute he considered that he was closing the case so far as Block D of the return was concerned.

56. Under date of May 12, 1921, Clute wrote the following memorandum to Deputy Commissioner Batson:

MAY 12, 1921.

Mr. BATSON:

Attached is a confidential *3718 file covering the transfers of stock by Ford. This file was sent down to the General Audit Division for use in connection with the adjustment of various stock transfers. All adjustments have been made and the file is no longer necessary in this Division. It is presumed that you desire to file it in your own files in view of the fact that it is confidential matter.

F. R. CLUTE, Head, General Audit Division.

Papers attached.

57. Commencing on February 1, 1921, Internal Revenue Agents T. G. Thurston and J. L. Chatterton, continuing until February 17 and February 3, respectively, made a field investigation concerning the income-tax liability of the petitioner Couzens for 1916, 1917, 1918, and 1919. On February 17 they made their written report thereof to C. M. Justice, Internal Revenue Agent in Charge, Detroit, Mich., who approved it and duly transmitted it to the Commissioner. On March 7, 1921, Justice transmitted a copy of the report to the petitioner for his information. With reference to the profits derived by the petitioner on the sale of stock, the revenue agents reported that the sale price of the 2,180 shares was $29,308,857.90, that the March 1, 1913, value *3719 thereof as returned was $20,686,761.20, that the March 1, 1913, value as adjusted by them was $20,686,761.20, and that the value of the stock as of March 1, 1913, had been placed at $9,489.34 a share in accordance with the letter of May 19, 1919, from Commissioner Roper to Ballantine.

*1064 58. In the report, the internal revenue agents disallowed as deductible charitable contributions the two items above mentioned aggregating $1,025, and refused to allow deductions for charitable contributions of stock at the actual value thereof at the time given, but allowed a deduction therefor in the amount of the March 1, 1913, value thereof, thereby decreasing the allowed deductions for charitable contributions made by petitioner from $1,814,109.57 to $452,140.75.

59. The petitioner, on March 18, 1921, sent to the Commissioner his written protest against the disallowance of the deduction for charitable contributions at the actual value of the gifts at the time given as being contrary to law.

60. In making the investigation, Revenue Agent Thurston approached the examination of the March 1, 1913, value of the stock with the understanding from his superiors that the valuation *3720 established by Talbert "created a strong presumption of being correct and acceptable," but that such valuation "was not binding upon the Government if material error could be shown." During his consideration of the question he several times discussed it with his superior officers, Justice and Kronk. He made what he considered at the time to be sufficient inquiry to enable him to reach a conclusion as to whether the valuation which had been placed upon the stock was acceptable to the Government. He obtained, in as brief a manner as possible, an outline of the history of the Ford Motor Co., and inspected the figures representing the net earnings of the company from its inception up to 1919. He considered the effect of the Selden patent litigation and reached the conclusion that since the Ford Motor Co. had been successful and was released from any obligation to "pay tribute under the Selden license agreements," a new phase was brought about in the history of the company. He considered that the successful conclusion of this litigation made it fair to omit prior years' earnings in the computation of the value of the stock. He considered the results of the Ford-Dodge dividend litigation *3721 which resulted, according to his understanding, in the threat of Ford to withdraw from the company, which he understood had induced or compelled the minority stockholders to sell in 1919 at what appeared to him to be a great sacrifice. He made several computations of value for the purpose of testing the Talbert valuation. He used in his calculations the earnings for 1912 and earnings for 1913 projected on the rate shown for January and February. Earnings for 1913 on that basis were used because the history of the company reflected a constant increase in net income for each successive year and it seemed to him reasonable to expect at least equal earnings for the balance of the year. He used the earnings as corrected for income-tax purposes rather than the original book figures. The average earnings produced by this method *1065 were somewhat lower than those used in the Talbert valuation. He used a capitalization rate of 10 per cent, because of the constant and unvarying increase in earnings from year to year. The conclusion he reached was that, since the "Talbert valuation had been given the official sanction of the Commissioner and created a strong presumption to overcome *3722 which required material evidence of error," and "considering all the various angles of the case," he "did not feel justified from his position as a field examiner in recommending a change in the figures." He had had no experience in valuing securities other than his experience in the Internal Revenue Bureau.

61. West's term as Acting Commissioner ended May 26, 1921, and he was succeeded by Commissioner David H. Blair, who has continued in office since.

62. On May 27, 1921, petitioner's attorney addressed a letter to the Commissioner, requesting a hearing after the auditor's report was checked. This letter was acknowledged on June 3, 1921. On June 3, 1921, petitioner's attorney addressed a letter to the Commissioner, for the attention of the Committee on Appeals and Review, asking for an early hearing on the Ford-Dodge dividend question for the reason that the amount of petitioner's allowable deductions for charitable contributions for 1919 could not be finally settled until there was an authoritative determination as to whether the dividend was 1916, 1917, or 1919 income.

63. On June 20, 1921, a hearing on the question was had before the Committee on Appeals and Review. *3723 By letter under date of April 24, 1922, the Commissioner advised the petitioner that the Committee had held that the dividend constituted income for 1919 to the stockholders, including the petitioner Couzens.

64. Thereafter the collector of internal revenue at Detroit made a written demand on the petitioner to pay the assessment of $877,430.59, together with accrued interest on the assessment for one year, $52,645.84, a total of $930,076.43, which amount petitioner paid on May 1, 1922, under written protest.

65. In a letter under date of May 9, 1922, the Committee on Appeals and Review declined to furnish the petitioner with a copy of the decision of the committee on the Ford-Dodge dividend question.

66. On June 24, 1922, the petitioner filed with the collector of internal revenue at Detroit his claim for refund of the $930,076.43, in which he alleged that the assessment and imposition of such tax were illegal and contrary to law.

67. In the latter part of 1921 letters were received by the Bureau to the effect that Henry Ford owed some tax on account of the purchase of the stock of the Ford Motor Co. The agitation apparently being the result of a published article *3724 on taxation by Henry Ford, and it being evident that he did not owe any tax in connection *1066 with the transaction, the matter was dismissed lightly by Commissioner Blair, with little or no investigation.

68. On February 11, 1922, Senator James E. Watson, of Indiana, wrote Commissioner Blair as follows:

UNITED STATES SENATE.

COMMITTEE ON INTERSTATE COMMERCE,

February 11, 1922

Hon. DAVID H. BLAIR,

1614 21st St., N.W., Washington, D.C.

DEAR MR. COMMISSIONER: I am writing you at your home because I want you to get this letter. After you read the enclosed, return the whole thing to me as I want to use it in the future.

This refers to the subject of taxation insofar as it relates to Henry Ford, a matter I have hitherto taken up with you but which we did not run to a finality.

Look this over carefully, and, if you deem it worthy of further consideration, set somebody to work on it to find out just what there is to it. I shall be very glad if you will do this.

With all good wishes,

Sincerely yours,

JAMES E. WATSON

Attached to this letter was the following memorandum:

COPY

The minority stockholders of the Ford Company tied up by way of *3725 injunction in the state courts of Michigan. Henry Ford and all of the Ford properties from expending the surplus profits of the Ford Company for large extensions, which Mr. Ford had in mind, there was no way for Ford to turn except by eliminating the minority stockholders. Negotiations were opened for the purchase of the stock of the minority owners. Ford owned 58 1/2 per cent and the minority interests 41 1/2 per cent of the stock which was 20,000 shares of par value of $100 each. As the negotiations proceeded, it was at once apparent that unless some low valuation could be fixed on the stock as of 1913, no trade could be made for the federal income tax would practically absorb the value of the stock when turned into cash by the minority stockholders. Application was made to the Treasury Department, U.S. to fix the valuation of the stock as of 1913, which after some investigation on the part of the Treasury Department was fixed at a valuation of $9,000 a share. A trade was then arranged with the minority stockholders at $12,000 a share, approximating a total purchase price of $100,000,000. By this method 3/4 of the value of the stock or $75,000,000 escaped any federal tax. *3726 James Couzens had 2500 shares for which he received approximately $30,000,000 of which $22,500,000 escaped taxation. On the balance, $7,500,000 the federal government made its regular large tax. It is estimated that James Couzens received as dividends on this stock while he held it approximately $6,000.000. In addition to a $30,000,000 he received as the sales price. It is a well known fact in the motor industry and the information obtainable that in the year 1913, the Ford Motor Company did not manufacture (a) tractor, (b) trucks, and (c) not more than 225,000 passenger cars at which time a valuation is now fixed on the stock at $9,000 a share.

That for the fiscal year 1920, Ford and Company manufactured practically (1) a million passenger cars: (2) a larger number of tractors: (3) a large number of trucks and (4) they had developed a repair business that exceeded the profits on that item alone of more than the profit on their entire 1913 sales, *1067 through the great number of Ford cars in use in 1919 and 1920 (approximately 3,500,000 Fords in operation). It is estimated that one-half of the passenger cars in America today are Ford cars. The repair from this *3727 source alone is terrific. There was no such element in 1913. It will at once be apparent that the stock of this corporation in 1913 was of a value greatly less than $9,000 a share and that its rise in value from 1913 to 1919-1920 was greatly in excess of $3,000 a share. In a word, by a friendly decision of the Treasury Department of the U.S. a trade was made possible and the Treasury of the U.S. lost a very large sum of money. The attached copy of the New York Journal of November 21, 1921, shows the story of Mr. Couzens, investment of $1,000 from which he is allowed to escape taxation on $22,500,000 of the purchase price after having received five or six million in profits.

Frank L. Klingensmith, formerly one of the executive officers of the Ford Company, now president of the Grays Motor Company of Detroit, will undoubtedly give you the details on the development of the Ford business.

Alfred Reeves, executive manager of the Automobile Association of America, with a large executive publicity office in Madison Avenue in New York today, can aid, while the Automotive Industries of 239 West 39th Street, New York, have published many automobile statistics. The Wall Street Journal *3728 carried the Ford development story last spring in five or six of its issues at four or five columns each.

ANNUAL PRODUCTION OF MOTOR VEHICLES

Leonard P. Ayres, Vice President of the Cleveland Trust Company issued about three months ago an analysis of "The Automobile Industry and its Future". He published a table on page 8, known as "Table 3" in which he shows that the production of Ford cars made by the Ford Company from 1903 to 1920, and other American made cars from 1895 to 1920, is as follows: YEAR FORD CARS MADE OTHER CARS MADE

1895 300

1896 600

1897 1,200

1898 2,400

1899 3,874

1900 5,000

1901 7,000

1902 9,000

1903 708 10,292

1904 1,000 21,830

1905 1,695 23,305

1906 1,599 32,401

1907 8,423 35,577

1908 6,398 58,602

1909 10,607 116,680

1910 18,664 168,336

1911 34,528 175,472

1912 78,440 299,560

1913 168,220 316,780

1914 248,307 324,732

1915 308,213 584,405

1916 523,929 1,059,588

1917 735,256 1,133,691

1918 706,584 447,053

1919 790,954 1,085,402

1920 1,027,677 1,177,520

The National Automobile Chamber of Commerce, Inc., 366 Madison Avenue, New York City, in their annual *3729 publication for 1921, publish the following as the number of cars made in America: Year Number

1899 3,700

1903 11,000

1904 21,975

1905 25,000

1906 34,000

1907 44,000

1908 65,000

1909 127,731

1910 187,000

1911 210,000

1912 378,000

1913 485,000

1914 569,045

1915 892,618

1916 1,583,617

1917 1,868,947

1918 1,153,637

1919 1,974,017

1920 2,205,197

*1068 MEMORANDUM ON AUTOMOBILE PRODUCTION

You will note that prior to 1913, there were only a few cars in operation in America, and it has been estimated that Ford has been making about 50% of all the cars in America. You will note that his repair business in 1913 was practically nil and his production did not exceed 170,000 cars; that he had no tractor; that he did not manufacture a truck, and in that year no one knew what the future of the motor business was. You will also note that in the year 1919 he did have a tractor; a truck was produced and approximately 800,000 cars were manufactured; that he had a terrific repair business and that he, and all those trading with him, worked from the vantage point of a knowledge of the size of the motor industry and when you fix a value *3730 of $9,000 a share for this stock in 1913 and $12,000 a share for the stock in 1919, you can easily see that the way they went at it was by fixing a valuation from a retrospective standpoint; in a word say - "Well, this is what happened in those years and 1913 had this value in it" - instead of establishing the value from the standpoint of 1913 "as was" in that year. No one would have paid $9,000 a share for his stock in 1913. It would be interesting to find out what the total net investment of his corporation was in 1913. The Tax Officers of the U.S. Government said that his property in 1913 was worth 20,000 times $9,000 or $180,000,000.

69. Commissioner Blair made no personal investigation but turned the letter over to Deputy Commissioner Batson and asked him to look into the matter. Commissioner Blair replied to Senator Watson as follows:

HON. JAMES E. WATSON, FEBRUARY 15, 1922.

United States Senate.

MY DEAR SENATOR: I am returning the paper which I received from you yesterday. I have made a copy of the statement so as to make another investigation. I shall trace it this time through entirely different channel, and if we get any results, we shall let you know.

*3731 I thank you for calling my attention to it.

Sincerely yours,

D. H. BLAIR Commissioner.

70. Under date of February 27, 1922, the following memorandum was addressed to Chatterton, assistant to Deputy Commissioner Batson, by Paul F. Cain, assistant head of the Special Audit Division:

FEBRUARY 27, 1922.

In re: Ford Motor Company, Detroit, Michigan.

Mr. CHATTERTON: With reference to the case mentioned above, which we have been discussing and in which the point as considered by us was the value of March 1, 1913 of the stock of this corporation, you are advised that I find a memorandum dated May 17, 1919, signed by Mr. P. S. Talbert, Acting Deputy Commissioner, in which he arrives at a value of $9,489.34 per share as of March 1, 1913, and in this connection I have worked up three possible methods which might be used in determining the value as of March 1, 1913.

The first and usual method of determining the March 1, 1913 value, would be to take the earnings of five years prior to March 1, 1913 and capitalize these earnings on the basis of 10% and consider this as the March 1, 1913 valuation.

*1069 In this case it is not possible to secure earnings for *3732 the entire five years prior to March 1, 1913, but earnings for four years and five months from October 1, 1908 to February 28, 1913 were secured and show the value of $3,617.00 as the value of one share of stock of this corporation as of March 1, 1913. The exact means by which this value was determined may be shown as follows: Earnings October 1, 1908, to February 28, 1913 - 4 years, 5 months $31,950,006.93

Earnings 1 month (average) 602,830.32

Earnings 1 year (average) 7,239,963.84

Earnings per share (based on 20,000 shares of capital stock) 361.70

Value based on 10% capitalization 3,617.00

This method of course presupposes that average conditions were prevailing from the four years and five months, and does not take into account any unusual changes that might have taken place in any period during this period. Since there was a marked change in the general policy in the expansion of the business during the year 1912, it seems to me that it is entirely unfair to use the years prior to 1912, and average the earnings for those years along with 1912 and 1913, when entirely different conditions were prevailing. It seems that in 1912, plans for expansion of *3733 the business were set in motion, properties were bought in many sections of the country, assembling plants were constructed and various other similar factors became a part of the policy of the corporation, all of which would have a decided effect upon the earning capacity and value of stock of the corporation. That such a change did have a decided effect, is shown from the fact that the average earnings for the four years and five months prior to March 1, 1913 (even considering 1912 as a part of the period) showed $7,233,963.84, whereas the earnings for the year 1912 were $14,119,989.87 and for the year 1913, $26,651,754.92, and this rate of earnings was continued subsequent to 1913, increasing rather than decreasing. I therefore feel that while it is unusual, at the same time it is entirely reasonable to work on that short period from January 1, 1912 to March 1, 1913, and determine, if possible, a fair value for the stock. Two possible methods may be used. In the first place, we may proceed as follows: Earnings, January 1, 1912, to December 31, 1912 $14,119,989.87

Earnings, January 1, 1913, to February 28, 1913 3,972,896.17

Total earnings for 14 months $18,092,886.04

Average earnings for one month $1,292,349.00

Average earnings for 12 months $15,508,188.00

Earnings per share (20,000 shares) $775.40

Value per share based on 10% capitalization $7,754.00

*3734 A second method and that used in values which are now under consideration, is one slightly different from the one used above, and is as follows: Earnings, January 1, 1912, to December 31, 1912 $14,119,989.87

Earnings, January 1, 1913, to February 28, 1913, $3,972,896.17.

Assumed earnings for year 1913 based on earnings for the first two months of 1913, ($3,972,896.17 X 6) 23,837,377.02

Total $37,957,366.89

Average for one year $18,978,683.44

Earnings per share (20,000 shares) $948.934

Value per share based on capitablization of 10% $9,489.34

Of the two methods outlined above, it would seem to me that the method that has been used in this case is the preferable one, although it does not conform *1070 exactly to A.R.M. 34, in that to a certain extent it might be said to take into consideration subsequent years, although I feel this is true only in a slight degree. It will be noted that the earnings for the full year 1912 were considered and then the earnings for 1913 were determined as an estimate based on the earnings which had accrued to March 1, 1913. It would seem reasonable to suppose that a purchaser of this stock could take into consideration *3735 that the earnings for 1912 (since the marked change in financial policy and expansion of business) were approximately $14,000,000.00, and that an amount had been earned during the first two months of 1913 which if continued during 1913 would show an earning of a little less than $24,000,000.00; that the estimate for the year 1913 based on the first two months was conservative is shown when the earnings for the entire year arefinally determined, in that the total earnings for the year are found to be approximately $26,650,000.00. In view of the fact shown above, and the general study I have made of this case, I feel that a fair estimate of the value of this property was arrived at in the figure of $9,489.34, and that this is more nearly correct than either the figure of $3,617.00 or $7,754.00, and that the value which has already been used is a fair value.

PAUL F. CAIN.

Assistant Head, Special Audit Division.

This memorandum was initialed by Chatterton.

71. Under date of September 29, 1922, N. T. Johnson, Chairman of the Committee on Appeals and Review, sent the following memorandum to the Solicitor of Internal Revenue, Carl A. Mapes:

COMMITTEE ON APPEALS AND REVIEW,

*3736 September 29, 1922.

Mr. CARL A. MAPES,

Solicitor of Internal Revenue.

In re: Tax liability of Henry Ford, et al.

In accordance with your request I have reviewed the attached file in re tax liability of Henry Ford and others concerned, which grew out of the sale of the Ford Motor Company stock in June, 1919. It is probable that the attached file has reference to the tax liability of the Ford Motor Company rather than that of Henry Ford. I can not see how Mr. Ford realized any gain through the purchase of the minority interest in the Ford Motor Company in June, 1919.

Under date of May 17, 1919, Mr. Talbert, then Chief of the Technical Division of the Income Tax Unit, made a report upon an investigation made by himself, Mr. Burlingame, Mr. King, Mr. Masland and Mr. Taylor in Detroit with a view to establishing the March 1, value of Ford Motor Company stock. This report was addressed to the Commissioner of Internal Revenue and was evidently approved by him as the basis for computing gain upon the subsequent sale of such stock. The March 1 value fixed by Mr. Talbert in his report was $9,489.23 per share. The attached file contains the original report addressed *3737 to the Commissioner and I am inclined to think that the basis used in fixing the March 1 value is sound. It is understood that this stock sold in June, 1919, for $12,000 per share, thereby showing a profit of approximately $2,500 per share upon which it is assumed the stockholders have paid tax.

I am attaching hereto a copy of the net income, average earnings per share, capital and surplus for the period January 1, 1909 to July 31, 1918. This is a copy of the report in our file in this case.

In view of the consideration which has been given to fixing the March 1 value of this stock for the purpose of computing gain or loss upon the sale thereof in *1071 1919, I believe that the valuation so fixed and approved by the Commissioner is fair both to the taxpayer and to the Government and that the case should be considered closed.

N.T.J.

Enc.

Attached to this memorandum was a copy of the statement forwarded by Talbert with his memorandum to Commissioner Roper.

72. On this memorandum Solicitor Mapes wrote "Approved, C. A. Mapes," and he also wrote the following note to Commissioner Blair:

MR. COMMISSIONER - In the light of Mr. Johnson's memo. I concur in the recommendation.

*3738 C.A.M.

73. The memoranda of Cain, Johnson, and Mapes came to the personal attention of Commissioner Blair. No action on the subject was taken at that time, the memoranda were filed, and the matter was dropped.

74. On May 22, 1922, Special Intelligence Officer Roche addressed a report from Detroit to the Chief of the Special Intelligence Unit, Elmer L. Irey, calling attention to the sale of Ford Motor Co. stock by minority stockholders in 1919 and suggesting an investigation. This was transmitted to Washington by Acting Special Agent in Charge David Nolan. Under date of June 22, after a preliminary investigation Irey replied to Nolan that information similar to that furnished by Roche had been furnished to the Bureau previously, that the Bureau was fully conversant with all details concerning the matter, and that under the circumstances there was no necessity for any further investigation by special agents at that time.

75. On July 18, 1922, the following letter was sent to the Internal Revenue Agent in Charge at Detroit:

JULY 18TH, 1922.

IT:PA:FIWCR-704.

INTERNAL REVENUE AGENT IN CHARGE,

Detroit, Michigan.

Reference is made to your report of May 13th, *3739 1918, relative to the examination made by Income Tax Inspector Frank McCann to your report of February 17th, 1921, relative to the examination made by Internal Revenue Agent T. G. Thurston, and your Report of March 7th, 1921, relative to the examination made by Revenue Agents, T. G. Thurston, and J. L. Chatterton, covering the verification of returns for the years 1915 to 1919, inclusive, filed by James Couzens, 2339 Dime Bank Building, Detroit, Michigan. A supplemental report is requested covering the following points:

Profit on sale of stock should be arrived at in accordance with O.D. 1035, Bulletin 38-31 for the years involved.

For 1916 ordinary and necessary farm expenses are shown as $55,976,86 whereas the total of the figures listed is $58,608.28. Please explain the discrepancy.

*1072 For 1919 personal tax is reported in the amount of $24,097.88. An explanation of this item is requested.

You are requested to give this immediate attention in order that the adjustment may be expedited.

E. H. BATSON, Deputy Commissioner.

By ,

Head of Division.

HNR:RAR-2

76. The matter was referred to T. G. Thurston, who, after making a further field examination *3740 occupying two days, made a supplemental report dated September 19, 1922. This report refers to the sale in 1919 by petitioner of his Ford stock without any adjustment as to the March 1, 1913, value thereof, and reports that the "original cost was par or less and therefore less than value at March 1, 1913." On November 24, 1922, Thurston furnished a copy of this report to the petitioner Couzens.

77. Under date of November 2, 1922, the Commissioner sent to petitioner the following letter:

TREASURY DEPARTMENT

Washington

Registered Letter

Nov. 2, 1922

Office of

Commissioner of Internal Revenue

Address reply to

Commissioner of Internal Revenue

And refer to

IT:PA:FR

WHW-704

Mr. JAMES COUZENS,

2239 Dime Bank Bldg.,

Detroit, Mich.

Sir:

The audit of your individual income tax returns, filed for the years 1915 to 1919, inclusive, and verified by your books of account and records, indicates changes in tax liability as follows: Additional tax Overassessment

1915 $659.89

1916 45,290.17

1917 189,723.70

1918 $5,498.26

1919 1,270,864.57

$1,276,362.83 $235,673.76

Net additional tax $1,040,689.07

*3741 The audit as made has been approved by this office with the following exceptions:

*1073 1916

Net profit from stock transaction is $6,319.10, instead of $6,155.85. This change is in accordance with the additional information contained in the report of the Internal Revenue Agent in Charge, dated September 19, 1922. Taxes paid are increased to $142,083.90, on account of allowing income tax paid for 1916. The tax liability, as adjusted, is $14,004.98, and as $59,295.15 has been assessed, there is an overassessment of $45,290.17.

1917

From information on file in this office, the correct allocation of dividends is found to be $108,327.34, and $974,971.88 for 1916 and 1917, respectively. Tax paid at source in the amount of $292.60 is eliminated from Item 31, as there is no normal tax due from which it may be deducted. In accordance with additional information furnished in the supplemental report of the Internal Revenue Agent in Charge, dated September 19, 1922, there is allowed a stock loss of $3,250.00 and taxes paid are reduced from $38,762.42 to $38,742.19, as the difference was allowed in 1916. The tax liability as adjusted is $418,537.39 and as $608,261.09 *3742 has been assessed, the overassessment is $189,723.70.

1918

In accordance with additional information furnished in the supplemental report before mentioned, profit from sale of stock is changed to $15,719.35, rental income is changed to $11,655.49 and contributions are changed to $97,442.60. The tax liability as adjusted is $312,047.25, and as $306,548.99 has been assessed, there is a further tax liability of $5,498.26.

1919

Income from stock transactions is changed to $9,172,667.37 in accordance with the supplemental report previously referred to and credit is allowed for the additional assessment of $877,430.59. The tax liability as adjusted is $8,223,398.99, and as $6,952,534.42 has been assessed, there is an additional tax due of $1,270,864.57.

The overassessments shown herein will be made the subject of certificates of overassessment which will reach you in due course through the Collector of Internal Revenue for your district and will be applied by that official in accordance with Section 252 of the Revenue Act of 1921.

In view of the fact that the principal points upon which this additional tax is based have been fully considered by the Commissioner *3743 and by the Committee on Appeals and Review and final decision rendered thereon, this assessment will be made upon the next list going to the Collector or Internal Revenue for your district and you will be notified by that official as to the time and manner of payment.

Respectfully,

E. H. BATSON Deputy Commissioner.

78. On November 15, 1922, the petitioner Couzens by telegram requested the Commissioner to grant a hearing on the items involved in the deficiency letter of November 2, and on the same day the petitioner's counsel by letter repeated the request. On November 17, 1922, Deputy Commissioner Batson replied by telegram setting the date for a conference on November 22, and notifying the petitioner that assessment would be withheld pending the conference.

*1074 On November 22, 1922, the conference was held, petitioner being represented by his attorney.

79. On November 23, 1922, the petitioner made and filed his appeal to the Commissioner from the additional assessment proposed in the letter of November 2, 1922, the appeal involving, as to the year 1919, the question of whether a charitable gift in property is deductible at the value at the time given *3744 or at the March 1, 1913, value thereof. The Commissioner thereupon referred the matter to the office of the then Solicitor of Internal Revenue as the appeal agency.

80. On December 11, 1922, petitioner's attorney wrote a letter to the Commissioner referring to the conference held, and reading in part as follows:

The main item involved was that of the amount of allowable deductions for charitable contributions for the year 1919, and the file has been transmitted by your office to the office of the Solicitor of Internal Revenue on an appeal under T.D. 3409 (Nov. 13, 1922) for a disposition of that phase of the matter.

You will recall that at our conference we went over the remaining questions involved, and that it was your decision to sustain the audit as to all items questioned excepting the one regarding the Highland Park Land Company and the Minnesota Sugar Company dividends involved in 1917 return, and as to those, you stated that you would investigate the same and give consideration to our claims. As soon as you have done this and determined what position you should take, I would be pleased to have you advise me accordingly.

Your A-2 letter did not tie *3745 in your proposed assessment with the Thurston-Chatterton audit, and while I was there, I took some data, hoping to be able to report to my client the manner in which you reached the variances; and I herewith with send you copy of my office memorandum regarding the same. This, however, is not sufficiently detailed to meet the necessities of my client's bookkeeping record, in that it does not disclose the particular items of stock affected by your changes in figures from the Auditors report. Our client keeps a specific record of each stock certificate and bond, and these losses and gains as you have allowed them, he must on his books allocate to the several stock certificates and bonds and other items of property to which they pertain, else there will be confusion in his books and also confusion in making returns for the years following the audits involved herein.

We, therefore, desire that you furnish us a statement specifically indicating the changes made in the report of the auditors Thurston-Chatterton, tying the same in with the amount you propose to assess.

On one of the memoranda attached to this letter was the following notation:

1919

The auditors computed stock *3746 transaction profits at $9,171,172.87, whereas the government computes them at $9,172,667.37, or an increase of $1,494.50 in the income for 1919, which at 73% means an increase of the tax of $1,090.99.

81. On January 11, 1923, Commissioner Blair replied, advising petitioner's attorney that the information requested would be furnished in a communication addressed to the petitioner after the Solicitor had ruled on the question of charitable contributions and that *1075 all of the adjustments affecting the tax liability of the petitioner would be covered at that time.

82. On January 5, 1923, a hearing was had and oral arguments presented on behalf of the petitioner and others before the Solicitor of Internal Revenue and his associates on the question of allowable deductions to be made in the case of charitable gifts of property, and on or about January 30, 1923, counsel for petitioner transmitted to the Commissioner and Solicitor of Internal Revenue a printed brief of ninety pages on the question. Thereafter, on May 1, 1923, the Solicitor of Internal Revenue, by Solicitor's Opinion No. 1118, sustained the contentions of petitioner and held that under the law the value of *3747 the gifts at the time given was the lawful basis for their deduction as charitable contributions. On July 13, 1923, the Solicitor of Internal Revenue declined to send petitioner's attorney a copy of Solicitor's Opinion No. 1118.

83. On May 24, 1923, a letter was sent to petitioner Couzens notifying him of the decision concerning the deduction for charitable contributions and that his adjusted tax liability for 1919 was $276,627.33. It was stated in the letter that the adjustments set forth in the letter of November 2, 1922, had not been changed as to the year 1919 except for those necessary on account of the change in the amount of allowable charitable contributions. The computation shown in the letter gave effect to changes only on this one item. The petitioner was granted 30 days in which to file an appeal.

84. On June 11, 1923, counsel for the petitioner sent the following telegram to the Commissioner:

COMMISSIONER OF INTERNAL REVENUE

WASHINGTON D C

ATTENTION MR. CALLAHAN DEPUTY COMMISSIONER YOUR INDEX NUMBER IT: PA: FR: WHW-704 REGARDING JAMES COUZENS REFERRING TO YOUR LETTER OF MAY TWENTY FOURTH TO HON JAMES COUZENS REGARDING GOVERNMENTS ADJUSTMENTS ON HIS NINETEEN *3748 NINETEEN RETURN OUR JUDGE LACY WILL ON REHALF OF MR. COUZENS BE IN WASHINGTON NEXT MONDAY JUNE EIGHTEENTH FOR CONFERENCE REGARDING GOVERNMENTS ADJUSTMENTS FOR THE YEAR NINETEEN NINETEEN AS SET OUT IN YOUR LETTER OF MAY TWENTY FOURTH AND ALSO GOVERNMENTS ADJUSTMENTS FOR THE YEARS NINETEEN FIFTEEN TO NINETEEN EIGHTEEN INCLUSIVE AS SET OUT IN YOUR LETTER OF NOVEMBER SECOND NINETEEN TWENTY TWO SENATOR COUZENS DESIRES TO HAVE ADJUSTMENTS COVERING THE YEARS NINETEEN FIFTEEN TO NINETEEN NINETTEN INCLUSIVE CONCLUDED AND DISPOSED OF FINALLY IN THIS CONFERENCE SO THAT HE MAY MAKE IMMEDIATE PAYMENT OF WHATEVER NET BALANCE THERE IS DUE TO THE GOVERNMENT ACCORDING TO THE RULINGS OF THE DEPARTMENT SAVING HIS RIGHTS UNDER THE ADVERSE RULINGS HERETOFORE MADE PLEASE CONFIRM THIS BY WIRE ADDRESSED TO US AND INSTRUCT WHEN AND WHERE JUDGE LACY REPRESENTING HIM MAY MEET CONFEREES ON MONDAY OR TUESDAY NEXT

ANDERSON WILCOX LACY AND LAWSON

623 MOFFAT BUILDING

DETROIT MICHIGAN

*1076 85. On June 14, 1923, Deputy Commissioner Chatterton made an appointment for a conference on June 18. Petitioner's attorney went to Washington and conferred from June 17 to June 20 with McMannis, Bennett, Lewis, *3749 and Yagle, conferees and auditors in the Income Tax Unit. In this conference the computations and changes were examined and reconciled, and the net balance of the income-tax liability of the petitioner for the years 1915 to 1919, inclusive, was found to be $92,228.83. It was arranged that the additional assessment for 1919 and the certificates of credit for 1915, 1916, and 1917 would be sent through accordingly. All of the adjustments and computations made by the Income Tax Unit in determining the tax liability for the year 1915 to 1919, inclusive, including those relating to profits and losses on sales of stock reported on Block "D" of the 1919 return, were explained to petitioner's attorney, but no adjustment or change was proposed or mentioned with reference to the profits derived on the sale of the stock of the Ford Motor Co. of Michigan.

86. On July 23, 1923, an additional assessment for 1919 of $276,627.33 was made, which, together with the amount previously assessed for 1919, but not paid, of $45,777, made a total unpaid income tax for 1919 of $322,404.33. Against this liability there was credited to petitioner on September 26, 1923, for overpayment in 1915, $486.83, *3750 for overpayment in 1916, $45,290.17, and for overpayment in 1917, $184,398.50. This left a net balance unpaid, according to the rulings of the Department, of $92,228.83. The balance of the over-payments for 1915 and 1917 in the amounts of $173.06 and $5,325.20, respectively, as shown in the letter of November 2, 1922, were credited in the discharge of the additional tax for 1918 in the amount of $5,498.26.

87. The difference of $92,228.83 between the tax liability for the years involved as reported by the petitioner and that as determined by the Commissioner was due principally to the following adjustments:

For 1916:

Increasing the net profits on the sales of securities by $163.25, due to changes in the loss or gain of seven transactions in stock of five corporations.

Reducing taxable dividends by $435,650, representing stock dividends from American and foreign corporations, and by $736.40, an error in calculation.

Disallowance of $3,407.04 as business expense and allocation thereof to tax-exempt income, and transfer of $450, claimed as business expense, to depreciation.

Disallowance of $46.46, water rates paid, deducted as taxes.

Increasing depreciation charges *3751 by three items totaling $1,382.37.

For 1917:

Treating $2,101,017.07, Ford-Dodge dividend as 1919 income.

Increasing salary by $33.33, tax withheld from salary by Highland Park State Bank.

*1077 Reducing farm loss by disallowing depreciation of $1,055.84.

Reducing rental income by $400.

Increasing 1917 dividends taxable at 1917 rates by $151,543.51 and reducing 1917 dividends taxable at 1916 rates by $151,553.91.

Disallowance of $35.21, water rates paid, deducted as taxes.

Allowance of loss of $3,250 on certain securities.

Disallowance of $1,995.88 as business expense and allocation thereof to tax-exempt income.

Increase of $2.67 in the allowable deduction for excess profits.

A net reduction of $4,813.48 in the allowable deductions for charitable contributions, by disallowing some items and allowing others.

For 1918:

Decreasing depreciation on farm furniture and improvements $1,327.92, and allowance of $375, paid in settlement of a damage claim, as an operating expense.

Increasing by $1,200 the profit on the sale of certain New Jersey property, by reason of depreciation.

Increasing by $295.97 the gain derived from the sale of *3752 bank stock.

Increasing income by $288.80, tax paid at source.

Allowance of $12.26, interest paid for carrying Liberty bonds.

Disallowance of $46.94, water rates paid, deducted as taxes.

Reduction in the allowable deductions for charitable contributions by disallowing certain items.

Disallowance of $5,601.56 as business expense and allocation thereof to tax-exempt income.

For 1919:

Decreasing depreciation on farm furniture and improvements $451.68.

Increasing salaries by $250 received in January, 1919, for last half of December, 1918.

There was a net increase of $24,162 in the profit on sales of stock, resulting from increasing or decreasing various items. The profit from these transactions was reported in Block D of petitioner's return for 1919, which also included the reported income from the sale of the stock of the Ford Motor Company.

Reduction of $948.02 in depreciation on building.

Disallowance of $23.89, water rates paid, deducted as taxes.

Increasing the allowable deduction for charitable contributions from $1,499,380.85 to $1,814,109.57, as set forth above.

Disallowance of $3,066.60 as business expense and allocation thereof to tax-exempt *3753 income.

Increasing income from dividends by treating $2,101,017.07, Ford-Dodge dividend, as 1919 income.

In addition to the above, there were several other minor adjustments.

88. On August 11, 1923, petitioner's attorney sent a telegram to the Commissioner, and a letter on the same day for the attention of Bennett, McMannis, and Yagle, quoting and confirming the telegram, directing attention to a certain charitable contribution of $6,271.38 made by petitioner in 1918, which had been disallowed in the conference and by the Commissioner under what the attorney believed to be a misapprehension of the facts. He enclosed with the letter the affidavit of petitioner's secretary as to the facts. On *1078 August 30 the Commissioner replied, advising the petitioner that the contribution did not, under the rulings of the Department, represent an allowable deduction, that the adjustments previously made were correct, and that case had been closed accordingly.

89. Immediately prior to October 20, 1923, the collector of internal revenue at Detroit notified the petitioner that the net balance of his income-tax liability was $92,228.83, and demanded payment thereof.

90. On *3754 October 22, 1923, the petitioner paid the sum under written protest, the protest reading as follows:

DETROIT, MICHIGAN, October 16, 1923.

COLLECTOR OF INTERNAL REVENUE,

Detroit, Michigan,

and

COMMISSIONER OF INTERNAL REVENUE,

Washington, D.C.

Re JAMES COUZENS,

2123 First National Bank Bldg.,

Detroit, Michigan.

GENTLEMEN: Herewith I hand you Ninety Two Thousand Two Hundred Twenty Eight and 83/100 Dollars ($92,228.83) in full payment of assessment of balance of my income taxes for the years 1915 to 1919 inclusive, as computed by the government and per your notice of demand for payment dated October 10, 1923.

Entering into the computations upon which such additional assessment is based are the transfers from 1917 income at 1916 rates to 1917 income at 1917 rates of (a) the Ford Motor Company special dividends, viz: 69.15% of $218,000 paid Jan. 19, 1917, and all of $109,000 paid May 17, 1917, and $218,000 paid June 21, 1917; and (b) a like transfer of $807.50 of Minnesota Sugar Company dividends paid in 1917; and (c) a like transfer of the item of $2,101,017.07 distribution of Ford Motor Company from 1917 income at 1916 rates to 1919 income at *3755 1919 rates; and (d) the disallowance as deductible expense of that portion of the taxpayers office and administrative expense which his tax exempt income bears to his total income, viz: $1,995.88 in 1917; $3,857.04 in 1916; $5,601.56 in 1918; and $3,066.60 in 1919; total, $14,521.08.

This taxpayer pays the additional tax due to such erroneous transfers and disallowances, but under this formal protest for the following reasons: The said disallowances were made contrary to law; the said transfers were made contrary to law; the taxpayer has heretofore paid the full lawful income tax in respect to all of said items of income; and all the other reasons more fully set forth in his protest dated May 1, 1922 and claim for refund filed May 26, 1922 respecting the transfer of said Ford Motor Company distribution item of $2,101,017.07, which protest and claim for refund are hereby renewed. The taxpayer further protests against the foregoing departmental rulings and the action in offsetting against lawful refunds due taxpayer for 1915, 1916 and 1917, the consequent additional debits of $5,498.26 for 1918 and $322, 404.33 resulting in the assessed balance of $92,228.83 herewith paid under protest, *3756 and further protests against the failure of the department to allow said refund claimed in respect to said Ford Motor Company distribution item of $2,101,017.07, and to credit it to this taxpayer in making said final computations. For greater particularity as to facts and reasons, reference is hereby made to *1079 the claims for abatement, protests, appeals, briefs, claims for refund and supplemental data heretofore filed in the department by this taxpayer respecting said items.

Yours Respectfully

JAMES COUZENS

By H. S. MORGAN

General Secretary

91. Petitioner received from the collector a receipt for the payment which recited that the payment of $92,228.83 was in full for the petitioner's 1915, 1916, 1917, 1918 and 1919 income and excess profits taxes, paid under protest.

92. Under date of October 31, 1921, Treasury Decision 3240 was promulgated by Commissioner Blair with the approval of the Secretary of the Treasury. This Treasury decision is as follows:

REOPENING OF CASES

TREASURY DEPARTMENT,

OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D.C. To Collectors of Internal Revenue and Others Concerned:

Where any case in the Bureau *3757 of Internal Revenue has been finally closed after the taxpayer, or other party thereto, has had a hearing or has been afforded by written notice an opportunity to present oral or written arguments or statements of fact in support of his contentions, the case will not be reopened except (1) where a showing is made of new and material facts, accompanied by an explanation, satisfactory to the Commissioner of Internal Revenue, of the failure to produce such facts prior to the closing of the case, or (2) where the case is materially affected by the change of regulations or by the final decision of another case either by the Commissioner of Internal Revenue or by a court of competent jurisdiction. The application for reopening a case should be addressed to the Commissioner of Internal Revenue, should state succinctly the facts and circumstances upon which the application is based, and must be supported by the affidavit of a person having knowledge of the facts.

This decision is not to be construed as modifying the regulations relating to the filing of claims in abatement or claims for refund, nor as denying the right of a taxpayer to a hearing or to an appeal at any stage of his case *3758 until the case has been finally closed. After the taxpayer has exhausted his remedies within the Bureau, however, and the case has been finally closed, it will be reopened only under the conditions stated in the decision.

D. H. BLAIR, Commissioner of Internal Revenue.

Approved October 31, 1921.

A. W. MELLON, Secretary of the Treasury.

93. Treasury Decision 3240 was promulgated because there were so many cases reopened upon the application of taxpayers. First one attorney and then another would endeavor to reopen a case to secure a refund. It was designed to "stem that tide" and prevent the *1080 reopening of so many cases. In the absence of new and material facts a closed case was, under this order, at an end so far as the taxpayer was concerned.

94. On December 3, 1923, the Tax Simplification Board made a report to the Speaker of the House of Representatives. Included in the report was the following:

In surveying the work of the income tax unit it was discovered that even after the return of a taxpayer had been audited, and additional tax liability found, the amount thereof assessed and subsequently paid by the taxpayer, and the case marked *3759 closed, it frequently happened that the case was reopened by an auditor or other official of the income tax unit, of his own motion on account of some new ruling or decision. The taxpayer was, thereupon, notified and the questions of additional tax liability or overpayment were again gone into, although the amount thereof had been previously settled. As long as such procedure prevailed the work of the income tax unit was materially increased and there was no chance of the taxpayer knowing definitely what his tax liability was short of the period of the statute of limitations, and, indeed, not even then, for in many cases he had been induced to sign a waiver of the statute. This practice appeared to our board to be disastrous to the orderly procedure of the administration of the revenue law, grossly unfair to the taxpayer, and productive of little, if any, benefit to the Government.

Our board brought this situation to the attention of the commissioner, and, in pursuance of our recommendation, he issued an order that cases once closed should not be reopened except in case of fraud or gross error.

95. The order issued by Commissioner Blair relative to reopening closed cases *3760 was as follows:

JANUARY 20, 1923.

Numerous complaints from various sources have reached me that taxpayers are being subjected to examinations and requests for information concerning cases in which the audits have been completed and the cases closed. Such examinations are not advisable and are clearly contrary to the spirit of the act and the regulations of the department. The reopening of closed cases should be the rare exception and not the rule. In the absence of evidence of fraud or gross error, cases once closed are not to be reopened.

96. In the Bureau of Internal Revenue there is no hard and fast rule nor is there any generally accepted definite understanding as to what constitutes "gross error" within the meaning of this order, except that the amount of tax involved would be the principal factor. It is apparently a matter of judgment in each case. Gross error did not exist unless there was some mistake in computation or some new or material fact.

97. The word "closed," as applied to cases, had three distinct meanings in the Bureau of Internal Revenue.

98. It had, first, a very restricted meaning and was used to denominate those cases in which a final agreement *3761 had been entered into between the taxpayer and the Commissioner pursuant to section 1312 *1081 of the Revenue Act of 1921, section 1006 of the Revenue Act of 1924, or section 1106(b) of the Revenue Act of 1926.

99. Secondly, the word "closed" was applied to all cases on which the statute of limitations had tolled. In this sense of the word, it was not considered that a case was closed prior to the running of the statute.

100. There are two classes of files in the Bureau of Internal Revenue - the active files and the inactive or closed files. The active files contain all returns on which the statute of limitations has not tolled. The inactive files contain the cases on which the statute of limitations has tolled and which are considered "closed" within this meaning of the word. All returns are filed in groups by years and are transferred for storage purposes from the active to the inactive file by such groups. The file of 1919 returns was transferred to the inactive or closed file some time after March, 1925.

101. It has been the practice of the Bureau of Internal Revenue since 1913, soon after the enactment of the Revenue Act of 1913, to examine returns as soon *3762 as they arrived, to make a desk audit, and if additional tax was found to be due about which there was no doubt at the time, to make an assessment. Prior to the passage of the Revenue Act of 1921 it was the view in the Bureau that tax bore interest only after notice and demand and accordingly tax was assessed as soon as possible after the returns were received.

102. The returns were audited as carefully as possible from the information at hand. Originally the audits were not as intensive as later, a great many being made on the face of the return, and the return passed for the time being. In those cases where it was not clear whether additional tax was due, the matter was referred to field agents for further investigation. Generally there was only one field audit. Frequently, however, where taxpayers sent in additional evidence, or where it was otherwise found necessary, the matter was referred to the field agent for further investigation.

103. It was customary to make more than one audit. If all the tax due was not found at once, further assessments were made. If, after a case had been sent to the general files, information was received affecting the tax liability - *3763 that there were more taxes due than had been determined or that more tax had been determined than was actually due - the entire file was examined if the circumstances justified it. If additional tax was found to be due, the necessary adjustments were made and assessment was made if within the statute of limitations.

104. Additional assessments were often made as a result of information received from information certificates as to dividends, salaries, wages, interest and other items paid to taxpayers. In some cases *1082 the procedure necessitated as many as three or four separate assessments. It was considered that tax could be assessed at any time prior to the toll of the statute, as often as additional facts were developed, and that there was no limitation as to the number of assessments which could be made on the same subject matter prior to the running of the statute.

105. It made no difference whether the error relied upon to justify reopening the case was brought to the attention of the Bureau by the taxpayer or by governmental subordinates, and no distinction was made between additional tax due as a result of a change in law and tax due as a result of a change *3764 in facts.

106. The practice of making more than one assessment in a case was followed under Revenue Acts of 1913, 1916, 1917, 1918, 1921, 1924, and 1926.

107. Finally, the word "closed" was used to describe a case where the taxpayer's liability had been determined to the extent of and in accordance with the available data, assessment made, the case closed in the usual office way and sent to the general files. It was this type of "closed" cases to which the office order of January 20, 1923, referred.

108. Under the practice in the Bureau of Internal Revenue, after a case had been audited, letters sent to the taxpayer, conferences held, revised assessment letters sent out, and the tax assessed, the file was returned to the general files and disassembled, the returns placed in one file and the revenue agents' reports and correspondence in another file. The case was then considered "closed" in this sense of the word.

109. A case did not get into the general or closed files during the pendency of any question or until it had been closed for the time being. If it did get to the general files, it stayed there until there was a new reason to believe it should receive a further *3765 audit.

110. Under date of July 20, 1923, the Solicitor of Internal Revenue made the following recommendation to the Commissioner:

Solicitor's Recommendation on Appeal No.

In re: Appeal of Mrs. Gustava D. Anderson,

Detroit, Michigan.

JULY 20, 1923

Mr. COMMISSIONER:

(For Deputy Commissioner, Head, Income Tax Unit.)

This office has had under consideration the appeal of Mrs. Gustava D. Anderson, Detroit, Michigan, from the action of the Income Tax Unit in adjusting her tax liability for the year 1919.

After careful consideration of all facts presented, oral hearing having been had by the taxpayer, this office concludes:

*1083 That the claim that the valuation of $14,420 per share placed upon the stock of the Ford Motor Company by the Bureau as of January 1, 1917 for capital stock tax purposes should be accepted as the fair market value of the stock of such company received by her January 29, 1917 by way of gift should be allowed.

Accordingly this office recommends that the appeal of Mrs. Gustava D. Anderson be sustained.

NELSON T. HARTSON

Solicitor of Internal Revenue.

111. Commissioner Blair endorsed his approval on this recommendation, and *3766 a copy of it was sent to attorneys for Mrs. Anderson. She was advised by letter of the adjustment made and the letter indicates that a refund of $64,020.73 was made as a result thereof.

112. In February, 1925, one M. W. Thompson, called on Secretary of the Treasury Mellon and stated that the Ford minority stockholders, including the petitioner Couzens, then United States Senator, who had sold out to Ford in 1919, owed large additional taxes.

113. At that time the Finance Committee of the United States Senate was considering the extension of a committee which had been appointed by the Senate on March 12, 1924, with directions for the investigation of the Bureau of Internal Revenue, and of which the petitioner was Chairman. Secretary Mellon in a telegram dated March 14, 1925, to Senator Ernst, stated in part as follows:

I was unwilling to raise the question then, because I would be charged with attempting to intimidate Senator Counzens in his effort to have his committee extended.

114. On February 26, 1925, the Senate adopted a resolution extending the life of the committee to June 30, 1925.

115. On March 6, 1925, Thompson handed to Secretary Mellon the following *3767 memorandum:

Memorandum

re

Over-Appraisal of 1913 value of Ford Motor Co. "minority stock" in an advance appraisal made by the Bureau of Internal Revenue in 1919,

resulting in a large under-assessment of income- and sur-taxes

March 15, 1920

1. In the summer of 1919, following a court decision in a minority stockholders' suit requiring the Ford Motor Co. (contrary to the previous lowdividend policy of its majority shareholder, Mr. Henry Ford), to pay dividends proportionate to its earnings, Mr. Ford offered to buy out all the minority shareholders of the company at a price of $12,500 per share. These minority holders owned 41% of the 20,000 shares of the company's stock, Mr. Ford holding the remainder.

2. The minority shareholders agreed to sell out at this price, provided the Treasury could be induced to state in advance a figure, satisfactory to them, *1084 at which it would appraise the market value of their stock as at March, 1913. They could then take that amount into their accounts free of tax: their taxable profit would be the difference between that figure and the selling price.

3. The Treasury was accordingly procured contrary to its rule in such *3768 cases to meke the advance appraisal desired. In the absence of actual sales in 1913, its statisticians proceeded to make sundry computations and estimates, and shortly it fixed the 1913 market value of the stock at approximately $9,000 per share ($8,900), nearly three-quarters of the 1919 value established by the offer of $12,500 mentioned. Thereupon the trade was closed and Mr. Ford paid the price stated, in cash.

4. It will be instructive to compare the artificial figure of $9,000 for 1913, with the true value for 1919 disclosed by the actual sale for $12,500. For the latter was tangible, an actual transaction for cash money between men dealing at arm's length; but the former was a mere estimate or guess. From the actual sale we may learn what the estimate ought to have been.

5. For we can take the volume of business and the net earning power of the company in 1919, and see their relation to the 1919 selling price of the stock whose purchase conveyed 41% thereof. We then can apply this index or ratio to the volume of business and the net earning power in 1913. The result will be a stock value for 1913 which, being directly related to the 1919 actual selling price by *3769 the same formula, will probably be not far off from the truth. And if any corrections are required because of changed conditions of special kind, it will then be simple to make them.

6. Proceeding thus, it appears that the Ford Motor Co. produced 165,000 cars in 1913; and in 1919, 850,000 cars, five times as many - Poor's Manual publishes the figures. Passing from physical to financial results, the comparison is not dissimilar. In 1913 the Company's annual profits were reaching the twenty five million dollar class; and in 1919, the hundred million dollar level, which is four to one. But the true growth in market value of the stock was greater. For in 1913 the Company had been on its feet barely six years and had made really large profits, ten millions or more, only two years. But by 1919 it had a dozen years of unparalleled growth behind it; it had become an institution, whose stability and continuity were assured. In fact, the Prospective future growth was greater in 1919 than it had been in 1913. Consider also the enormous growth of the steady and exceedingly profitable business in repair parts. In the meantime, there had been no change in the issue of capital stock, *3770 which stood at 20,000 shares as before. The earning power per share thus rose from $1,250. per share per annum in 1913, to $5,000. per share per annum in 1919.

7. That is to say, the 1919 selling price of $12,500 per share was 2 1/2 times the 1919 earning power of $5,000 per share. On the same basis the 1913 earning power of $1,250 per share discloses a market value of $3,125 per share.

8. This last figure is however too high. For it does not allow any discount for (1) the relatively unproven condition of the Company in 1913, or again for (2) the difference in the expectation of dividends to be paid in 1913, and in 1919. It is elementary, that the market value of stock in the hands of minority shareholders is adversely affected by a small-dividend policy on the part of the majority in control. So in 1919, the actual sale reflects the bulge in the value of the stock due to the victory of the minority shareholders in the litigation before mentioned; whereas in 1913 the minority faced a period of low dividends. *1085 In view of these considerations, if the stock in 1919 was worth $12,500 a share, its market value per share in 1913 cannot fairly be placed above one-fifth *3771 of that figure, which is $2,500. This is high, rather than low.

9. Let us nevertheless call it $2,500 and proceed to compute the difference in taxable profits resulting to the minority on 8,200 shares sold, thus: 1913 market value of 8,200 shares sold in 1919 for $112,400,000

As appraised by Treasury in 1919, $8,900 per share 72,980,000

By comparison with actual in 1919, 2,500 per share 20,500,000

Over-appraisal, free of tax, $6,400 per share $52,480,000

That is:

Tax was paid on $112,400,000 minus $72,980,000 or on $39,420,000

Should have been $112,400,000 minus $20,500,000 or on $91,900,000

The resulting underpayment of taxes by all minority shareholders together is around $35,000,000. The corresponding underpayment by the largest indidivual minority shareholder, who was Mr. James Couzens (now Senator Couzens) of Detroit, would be about $10,000,000 to $11,000,000.

10. But we may say, if the Treasury hadn't fixed the 1913 figure too high, the 1919 sale wouldn't have gone through. There are two answers to this. The first is, that it might have, for the shareholders might have concluded it was better to get what they could into tax-exempt securities *3772 at once rather than pay taxes on their future dividends. The other answer is, What if it hadn't gone through? Mr. Ford might have been disappointed, and the Treasury would not have at that time taken in the $20,000,000 or so that it actually collected in taxes on the understated profits of the sale instead of getting a larger sum later on the future dividends. But such considerations do not justify Mr. Ford as one party, Mr. Couzens and his fellow minority-stockholders as another party, and the Bureau of Internal Revenue as the third party, in making a three-cornered deal based on an appraised 1913 market value of Ford Motor stock manufactured for the occasion. Or if not made to order, then worked out by clerks inexperienced in large transactions, from whom the 1919 sale-price was sedulously concealed. The vast extra-legal authority which public officers became used to wielding during the war, and the ingrained habit of the Bureau of Internal Revenue to assess taxes to suit themselves (ordinarily with little regard to the taxpayers' proofs that they should be less), these things may explain, or even perhaps excuse, this sort of taxation by special ukase. But they do not justify *3773 it, and the unjustified actions of public officials do not bind their successors in office. And, after the special pleaders have all been heard, this fact remains: These stockholders owe the Treasury $35,000,000 which the Treasury should proceed to collect from them.

11. The present Treasury officials should be informed of the facts set forth above in order that they may corroborate (or disprove) them from the files of their predecessors. If the facts prove to be as stated, prompt attention will be necessary, as but a short time remains (before the statute of limitations runs out) for the Treasury to start action to recover the unpaid taxes, with interest and penalties, if any. And such action will accomplish far more than the collection of sundry millions of tax-money, for it will serve notice on wealth and influence that these things can't be done - or if they appear to get done, they won't stay done.

See next page for notes on product and income.

*1086 The notes referred to were as follows:

Notes

1. Ford Motor Co. product of cars, by years; from Poor's Manual of Industrials, 1917, and Poor's and Moody's 1924; 1923 corrected, and 1924, and 1925 estimated, *3774 from data derived from automobile trade sources; all, to nearest round figures: 1925 1,800,000 cars

24 1,800,000 cars

23 2,000,000 cars

22 1,350,000 cars

21 1,090,000 cars

20 1,145,000 cars

1919 850,000 cars

18 706,000 cars

17 735,000 cars

16 533,000 cars

15 308,000 cars

1914 248,000 cars

1913 164,500 cars

12 68,500 cars

11 34,500 cars

10 18,700 cars

1909 10,600 cars

8 6,400 cars

7 8,800 cars

6 1,600 cars

5 1,700 cars

1904 1,700 cars

2. Net income of Ford Motor Co.: published figures scattered and not always reliable; accurate figures should be taken from the Bureau's files. The figure of income before, rather than after, income and profits-taxes is the controlling factor in making comparative evaluations of the stock for 1913 and 1919, because the taxes had already been cut in two before the summer of 1919 and it was then manifest that they would soon be further greatly reduced, as in fact happened.

116. Under date of March 7, 1925, Commissioner Blair wrote the following letter and personally delivered it to the petitioner in Washington on that date:

MARCH 7, 1925.

Hon. JAMES COUZENS,

United States Senate. *3775

MY DEAR SENATOR COUZENS:

I enclose herewith a copy of a memorandum which has been received in the Treasury Department in connection with your 1919 income taxes. All examination of your return for that year shows that the figure mentioned in the memorandum as the March 1, 1913, market value of the stock for taxation purposes approximates the value upon which the tax was originally assessed, but there appears nothing in the files of the Bureau to sustain the correctness of this value. The memorandum, on the other hand, makes out a prima facie case of too low a March 1, 1913, value. Being put upon notice the Bureau necessarily must take action to establish the correct value.

The Bureau records show that your return for 1919 was filed on March 13, 1920; the statute of limitation will, therefore, run on March 13, 1925, less than a week from today. In order that the Bureau may have time to investigate the information contained in the memorandum and that you may have an opportunity to present to the Bureau evidence tending to justify the figure taken for the March 1, 1913, value, it is suggested that you sign and return to me the enclosed waiver upon receipt of which you will *3776 be given ample opportunity to present your case to the Bureau.

In the event, however, that the Bureau does not receive the waiver promptly, in order to protect the United States it will be necessary to assess against you an additional tax based upon the information now available to the Bureau.

*1087 Under the practice in force hearing to review such an assessment may be had in the Solicitor's Office, and in the event the assessment is there confirmed you will, of course, have your appeal to the Board of Tax Appeals.

Very truly yours,

D. H. BIAIR Commissioner.

Attached to the letter were a copy of the memorandum filed with Secretary Mellon by Thompson on March 6, and a waiver form.

117. Commissioner Blair was accompanied by his assistant, Charles R. Nash. Commissioner Blair wanted to persuade the petitioner to sign a waiver because it was not clear in his own mind that a tax was due. He stated to petitioner that he did not want an assessment to be made unless there was a tax due, that he wanted to do it quietly with no publicity about it, and that if petitioner would sign the waiver he would put some of the best men in the Bureau on it, and that if they *3777 could satisfy themselves that no tax was due they would notify petitioner, and if there was he would be given a hearing.

118. The petitioner told Blair and Nash that they "were after the wrong man and that they should go after Mr. Ford because he had a contract with him to pay the additional tax if there should be any."

119. The petitioner refused to sign the waiver.

120. On March 11, 1925, Acting Commissioner of Internal Revenue Nash made an assessment against the petitioner of income and profits tax of $10,861,131.53 for 1919. On March 13, 1925, there was made a further assessment against petitioner of income and profits tax of $48,456.55 for 1919.

121. These assessments appeared on special lists for March, 1925, each of which contains the following certificate in the usual form:

I hereby certify that I have made inquiries, determinations, and assessments of taxes, penalties, etc., of the above classification specified in these lists, and find that the amounts of taxes, penalties, etc., stated as corrected and as specified in the supplementary pages of this list made by me are due from the individuals, firms, and corporations opposite whose names such amounts are *3778 placed, and that the amount chargeable to the collector is as above.

Each of these certificates was signed "C. R. Nash, Acting Commissioner of Internal Revenue."

122. Nash had been informed by those who were investigating the cases that the statute of limitations would expire on March 13. No jeopardy except the imminent tolling of the statute existed in his mind when he made the assessments against this and the other petitioners in these cases.

123. Commissioner Blair had left Washington for North Carolina soon after the conversation with the petitioner and was not in Washington when the assessment were made.

*1088 124. On January 27, 1925, the following memorandum was issued:

I.T.U. MEMORANDUM NO. 21

January 27, 1925.

TO HEADS OF DIVISIONS, CHIEFS OF SECTIONS, AND MEMBERS OF INCOME TAX UNIT CONCERNED.

Cases for Solicitor to be Protected from Running of Statute of Limitations and Jacketed.

Effective immediately, cases moving to the office of the Solicitor of Internal Revenue, where the statute of limitations is about to run, must be protected and jacketed in accordance with the provisions of this memorandum.

Procedure Where a Deficiency Only is *3779 Involved.

1. Where a deficiency in tax is found and the case is to be referred to the Solicitor for any reason whatever, if there are less than thirty days before the statute of limitations or statute as extended by a waiver will expire, an immediate assessment shall be made under the provisions of Section 274(d) of the Revenue Act of 1924, and the taxpayer notified of such action using form letter NP-3 for this purpose. However, if the head of division or the chief of the independent section in which the case is pending desires to afford an opportunity to the taxpayer to file a waiver, he may do so, but he will be held responsible for any failure to assess a deficiency within the period, as a consequence of such action. WHERE THE HEAD OF DIVISION EXERCISES HIS DISCRETION AND GIVES AN OPPORTUNITY TO A TAXPAYER TO FURNISH A WAIVER, THE ASSESSMENT SHALL NOT BE DELAYED TO A DATE WHICH ALLOWS LESS THAN SIX WORKING DAYS TO LIST SUCH ASSESSMENT. WHERE A CASE IS SO HELD IT MUST BE SENT BY MESSENGER TO THE PROVING SECTION, RECORDS DIVISION, UNDER PROPER COVER MEMORANDUM IN ORDER THAT A SPECIAL LIST MAY BE AUTHORIZED.

2. If in any case to be referred to the Solicitor's office there *3780 are more than thirty days but less than 120, the taxpayer shall be requested to furnish a waiver. Waiver forms in duplicate (filled in and showing the symbols of the section making such request) shall be transmitted with the letter of request and the taxpayer advised that he may retain one copy.

a. Fifteen days may be allowed taxpayers within which to furnish waivers, if located east of the Mississippi River and twenty-five days if west thereof. Proper follow-up should be maintained in order that an immediate assessment may be made, and taxpayer advised of such assessment, using form letter NP-3, if waiver is not furnished within the time specified. Additional time for furnishing a waiver may be allowed in the discretion of the Head of Division, in which the case is pending, but he will be held responsible for any failure to have the deficiency assessed, and must follow the provision respecting six days of allowance for making assessment as set forth above.

(1) Waivers shall not be requested from executors or administrators, or guardians, or relied on if executed by such fiduciaries.

* * *

Distribution Units not to Move Cases Unless This Memorandum Complied With.

*3781 Distribution Units of the Distribution Section of the Records Division shall not accept for transmittal to the office of the Solicitor of Internal Revenue any case where the provisions of this order have not been complied with.

J. G. BRIGHT Deputy Commissioner.

*1089 125. It was considered that six days was the minimum time required for the clerical work incidental to making an assessment.

126. Between February 15, 1925, and March 15, 1925, over 3,000 jeopardy assessments on account of the running of the statute of limitations were made by the Bureau of Internal Revenue under I.T.U. Memorandum 21.

127. Under date of March 12, 1925, the following penciled note was sent to the Secretary of the Treasury:

On train

Pennsylvania Railroad System

The St. Louisan

The New Yorker

MAR. 12, 1925.

DEAR MR. SECRETARY:

I had to start for Oklahoma yesterday to be present at a Federal Court hearing Saturday. I woke up early this morning and got to thinking about what your Internal Revenue people would base their tax levy on in the Couzens case, and so I got up in time to mail a memo., herewith, at Columbus, so as to reach you Friday.

The train is now stopping *3782 at Columbus - please excuse haste.

Respy.,

M. W. THOMPSON. Attached to this letter was a pencil memorandum reading as follows:

Memo. Re Ford Minority Stock

MARCH 12, 1925.

1. The 1913 value of $2,500 per share arrived at in the preceding memor may prove to be too high, also as a round figure it is not in all ways ideally suited for the base of a definite calculation of taxes. Although in the absence of a more exact figure it would serve.

2. But time is not available for a precise determination in the case of a shareholder who refuses to sign a waiver.

3. In the absence of a satisfactory appraised value of stock, a taxing official will be justified in levying tax on the basis of the par value of the stock, leaving it to the taxpayer to prove another value in court if he can. There is ample precedent for such action and the income tax law itself provides that par value shall be presumed to be the true value in certain cases.

4. Conclusion: In the case of a Ford stockholder who refuses to sign a waiver, taxable profits on this sale of Ford Stock in 1919 should be computed upon the presumption that the value of the stock at March, 1913, was $100 per share.

*3783 5. If Senator Couzens takes his case into court, as the newspapers state he declares he will, the treasury will have no trouble in obtaining evidence of actual sales of stock that will be destructive of Mr. Roper's 1913 appraisal based on earnings. Mr. Ford increased his holdings from 25 per cent to 57 1/2 per cent of the stock by such purchases, but Mr. Roper's clerks appear not to have been informed of this fact or of the prices and dates of the transactions. All this can be brought out in Court upon documentary evidence and books of buyers and sellers.

*1090 128. Under date of March 13, 1925, Deputy Commissioner James G. Bright sent the following letter to the petitioner:

MARCH 13, 1925.

IT:PA-5

IIP

Sen. JAMES COUZENS.

2239 Dime Bank Building,

Detroit, Michigan.

SIR:

In accordance with the provisions of Section 274(d) of the Revenue Act of 1924, there has been assessed against you an income and profits tax amounting to $10,909,588.08, for the taxable year 1919, the details of which are set forth in the attached statements.

Under the provisions of Section 279(a) of the Act you have the right to file with the Collector of Internal Revenue, *3784 within ten days after notice and demand for payment, a claim for abatement of this tax or any part thereof. The claim should have attached to it all evidence and data upon which you rely in support thereof, and should be accompanied by a bond not exceeding double the amount of the claim, with such sureties as the Collector deems necessary. When the claim is received by the Collector it will be transmitted to the Commissioner of Internal Revenue, Washington, D.C., who will notify you of the action taken.

Deputy Commissioner.

Respectfully,

Inclosures.

Statements.

Attached to this letter was the following statement:

STATEMENT

IT:PA-5

IIP

In re: James Couzens,

2239 Dime Bank Building,

Detroit, Michigan.

1919 Deficiency in tax $10,909,588.08

An adjustment of your 1919 individual income tax return discloses the above deficiency, which is computed as follows:

Block D, as reported 2180 shares Ford Motor Company stock

Sale price $29,308,857.90

March 1, 1913 value 20,686,761.20

Profit reported $8,622,096.70

March 1, 1913 value reported $20,686,761.20

March 1, 1913 value corrected 5,742,120.00

Profit understated $14,944,641.20

Normal and surtax at 73%

Additional tax $10,909,588.08

*3785 This assessment is in addition to all other outstanding and unpaid assessments appearing upon the collector's lists.

Payment should not be made until a bill is received from the Collector of Internal Revenue for your district and remittance should then be made to him.

*1091 129. The additional assessments of $10,909,588.08 were based on the reduction of the March 1, 1913, value of the Ford stock from $9,489.34 per share, as returned by petitioner, to $2,634 per share.

130. Demand was thereafter made upon petitioner by the collector of internal revenue at Detroit that he pay the tax so assessed. Thereafter, within ten days, the petitioner filed in the office of the collector of internal revenue at Detroit a claim for abatement of the assessments, and filed therewith his bond as required by law in the sum of $12,000,000.

131. There are no notes, memoranda or letters of an interdepartmental character with reference to the memorandum submitted to the Secretary of the Treasury by Thompson. The only consideration it received is indicated in the letter of Commissioner Blair to the petitioner dated March 7, 1925.

132. Under date of April 20, 1925, petitioner's *3786 attorney in a letter to the Commissioner requested a hearing on the claim for abatement and asked for information as to the basis and method by which the March 1, 1913, value was fixed at $2,634 a share and further requested permission to examine the files of the Ford Motor Co. in the Bureau up to the date of the sale of the stock. By three letters dated May 16, 1925, petitioner's attorney renewed these requests, requested confirmation of a personally expressed refusal to petitioner to examine the Ford files, and further requested photostatic copies of certain papers relating to the matter. By two telegrams dated June 15 to the Commissioner the requests were again renewed. On June 15 the Solicitor advised petitioner's attorney by telegram that the data requested would be mailed on the following day.

133. Under date of June 16, Acting Commissioner of Internal Revenue Nash wrote a letter to petitioner advising him that the value of $2,634 was computed as follows: Average annual income for the years 1910, 1911 and 1912 $8,602,000.

Average annual income for the years 1916, 1917 and 1918 43,500,000.

Value upon the basis of the sale in 1919, 20,000 shares at $13,320 266,400,000.

*3787 Average income prior to sale, $43,500,000, is to the total value as at the time of sale, $266,400,000, as the average income prior to 1913, $8,602,000, is to the fair market value of total stock as of March 1, 1913, ($52,680,000). Fair market value as of March 1, 1913, of 20,000 shares, (shown above) $52,680,000.

Fair market value of each share 2,634.

134. On the same day Acting Commissioner Nash wrote a letter forwarding photostatic copies of certain documents and advising petitioner that the basis used by Talbert in computing a March 1, 1913, value of $9,489.34 a share was as follows: Actual earnings for 1912 $14,119,989.87

Estimated earnings for 1913, based on earnings for 2 months (January 1 to February 28, 1913, $3,972,896.17) 23,837,377.02

37,957,366.89

Average annual earnings of 20,000 shares 18,978,683.45

Average earnings of each share 948.934

Capitalized at 10% 9,489.34

*1092 135. On the same day Acting Commissioner Nash in a letter to petitioner confirmed the Bureau's refusal to grant him permission to examine the returns of the Ford Motor Co. for the years prior to and including 1919.

136. On June 29 and *3788 30, 1925, the petitioner had hearings by the Bureau of Internal Revenue on his claim for abatement and on June 29, filed with the Commissioner evidence and data which petitioner claimed justified and required the sustaining of the claim for abatement.

137. Under date of November 3, 1925, the Commissioner sent to the petitioner the following letter, which letter forms the basis of this proceeding:

Nov - 3 1925

Hon. JAMES COUZENS,

2123 First National Bank Building,

Detroit, Michigan.

MY DEAR MR. COUZENS:

You are advised that your claim for the abatement of $10,909,588.08, additional individual income tax assessed for 1919, has been examined.

The basis of the claim is, in effect, that the value as of March 1, 1913, of the stock of the Ford Motor Company sold by you in 1919 is $9,489.34 instead of $2,634.00 a share as determined by the audit of this office as stated in office letter dated March 13, 1925.

You are further advised that a reexamination of the evidence on file in this office discloses the maximum fair market price or value of the said stock as of March 1, 1913, was not in excess of $3,547.84. You are further advised that a recomputation of the *3789 profit wherein the March 1, 1913, value of $3,547.84 is used in connection with determining the profit from the sale of 2,180 shares of the stock in question, discloses the amount to have been overstated $1,992,171.20 in the former audit, dated March 13, 1925. The normal tax at 8% and the surtax at 65% on the amount of decreased profit of $1,992,171.20 is $1,454,284.98.

In view of the foregoing, your claim will be allowed for $1,454,284.98.

You are further informed that in accordance with the provisions of Section 279(b) of the Revenue Act of 1924, you are allowed 60 days from the date of this letter within which to file an appeal to the Board of Tax Appeals contesting in whole or in part the correctness of this determination.

If you acquiesce in this determination and do not desire to file an appeal, you are requested to sign the enclosed agreement consenting to the deficiency in tax as assessed and forward it to the Commissioner of Internal Revenue, Washington, D.C. In the event that you acquiesce in a part of the determination, the agreement should be executed with respect to the items agreed to.

Sincerely yours,

D. H. BLAIR Commissioner.

Enclosure:

Agreement *3790 - Form B.

*1093 138. Under date of November 7, 1925, petitioner's attorney requested information as to the basis by which the March 1, 1913, value of the Ford stock was fixed at $3,547.84 a share, what factors were taken into account and figures were used in making the computation.

139. Under date of November 19, 1925, Commissioner Blair replied as follows:

NOVEMBER 19, 1925.

SOL:

Hon. JAMES COUZENS,

2123 First National Bank Building, Detroit, Michigan.

SIR:

Receipt is acknowledged of a letter, dated November 7, 1925, from Mr. Arthur J. Lacy, wherein it is requested that you be furnished with information as to the following:

The basis and method by which the March 1, 1913 value of the Ford Motor Company stock is now fixed at $3,547.84 a share, and what factors were taken into account and what figures were used in making that computation.

In compliance with this request, you are advised that the maximum value of $3,547.84 for each share of Ford Motor Company stock as of March 1, 1913, has been determined by the application of the method outlined in a memorandum of the Committee on Appeals and Review (A.R.M. 34, (third method), *3791 2 C.B., page 31 ) to the results of operations of the Ford Motor Company during the period January 1, 1909 to February 28, 1913.

The factors and figures taken into account are as follows: Average annual earnings $7,882,133.27

Deduct: 8% on average net tangibles of $7,704,973.94 616,397.92

Excess earnings attributable to intangibles $7,265,735.35

Intangibles - excess earnings capitalized at 15% $48,438,235.67

Add: net tangibles on March 1, 1913 22,518,635.02

Total value of 20,000 shares $70,956,870.69

Value of each share $3,547.84

D. H. BLAIR, Commissioner.

140. Stock in the Ford Motor Co. was also sold in 1919 by John F. Dodge, Horace E. Dodge, Horace H. Rackham, John W. Anderson, Rosetta V. Hauss, Paul R. Gray, David Gray, and Philip H. Gray, and the gain derived by each of these taxpayers from such sale as shown by his income-tax return was computed upon the basis of a value on March 1, 1913, of $9,489.34 per share. These returns were for various purposes examined and audited, and investigations in respect thereof made, by officers of the Bureau of Internal Revenue at various times and no determination of a value different from *3792 the so-called Roper valuation figure of $9,489.34 was made in respect of any of such taxpayers until 1925, after the receipt of the Thompson memorandum. In March, 1925, jeopardy assessments were made against Anderson, Rackham, and the Grays and a notice of deficiency was sent to Mrs. Hauss. In April, 1925, notices of deficiency were *1094 sent to the executors of the estates of Horace E. Dodge and John F. Dodge. In these assessments and notices of deficiency the March 1, 1913, value of the stock, the basis for the computation of the tax, was changed to $2,634 a share. Subsequently, after hearings within the Bureau, the March 1, 1913, value was changed to $3,547.84 a share. Claims for abatement of the jeopardy assessments were in part allowed on that basis, a revised deficiency notice on the changed basis was sent to Mrs. Hauss, and the revised value was stated in answers to petitions filed with the Board by the executors of the Dodge Estates.

141. The Ford Motor Co. is a Michigan corporation organized on June 18, 1903, with an authorized capital stock of $150,000, consisting of 1,500 shares of common stock having a par value of $100 each. One thousand shares were issued *3793 as fully paid in cash and property as follows: Cash $28,000

Notes and accounts receivable 21,000

Machinery 10,000

Contracts 1,000

Patents 40,000

100,000

142. The original stockholders, their shares, and payments were as follows: Stockholders Shares Payments

Machinery $10,000

Henry Ford 255

Alex Y. Malcolmson (A copartnership.) 255 Contract 1,000

Patents 40,000

John S. Gray 105 Cash 10,500

John F. Dodge 50 3-month note 5,000

Horace E. Dodge 50 4-month note 5,000

Albert Strelow 50 Cash 5,000

Cash 3,000

Vernon C. Fry 50 Note 2,000

Charles H. Bennett 50 Note 5,000

Cash 3,500

Horace H. Rackham 50 Open account 1,500

John W. Anderson 50 Cash 5,000

25 Cash 1,000

James Couzens 25 4-month notes 1,500

Charles J. Woodall 10 Two 4-month notes 1,000

143. The authorized capital stock was increased on November 9, 1908, to $2,000,000, and the number of shares to 20,000. Nineteen thousand shares were then issued as a stock dividend.

144. John S. Gray, Alex Y. Malcolmson, Henry Ford, John F. Dodge, and John W. Anderson constituted the first board of directors. The *3794 first officers were John S. Gray, president, Henry Ford, vice president, James Couzens, secretary, and Alex Y. Malcolmson, treasurer.

145. From April 1, 1909, to May 26, 1915, Henry Ford owned 58 per cent of the stock. From May 26, 1915, to July 1, 1919, he owned 57 per cent. He controlled the business.

*1095 146. The Ford Motor Co. began business on Mack Avenue, Detroit, Mich., in a two-story building 90 by 150 feet. The car first produced consisted largely of parts which had been manufactured elsewhere by others and which were assembled at the plant. Dodge Brothers manufactured the motors, frames and axles. The Ford Company did some painting of the assembled cars. It also carried on some experimental work, under the direction of Henry Ford, assisted by Harold Wills, Peter Martin and others.

147. Its business increased, and in the latter part of 1904 it moved to Piquette Avenue, into a four-story building 65 by 450 feet. In this plant the company manufactured some parts. The experimental division was four or five times as large as it had been at the Mack Avenue plant.

148. In the early days of its existence, the company experimented with various models, *3795 called A, B, C, K, N, R, and S, which were produced by it in the order named. Model K was a six-cylinder automobile.

149. From the beginning, it was Henry Ford's desire to manufacture one kind of car simply and cheaply, and in large quantities for sale to a large market. In 1903 he said to John W. Anderson, "The way to make automobiles is to make one automobile like another automobile, to make them all alike, to make them come through the factory just alike - just like one pin is like another pin when it comes from a pin factory, or one match is like another match when it comes from a match factory."

150. For about two years prior to 1908 the object of the experimentation had been to standardize one model, and make it a universal car. The purpose of this was to manufacture in large quantities, reduce costs and price, and thus increase demand. In that year, as a result of these experiments, the company brought out Model T, and thereafter, until the time of the hearing of this proceeding, production was confined exclusively to this model.

151. Model T was a small, light-weight car, the touring car having a capacity of five passengers and the runabout of two. It had a *3796 100-inch wheel base and a 56-inch tread; 20-horsepower, water-cooled motor with 4 cylinders of 3 3/4-inch diameter and 4-inch piston stroke all cast in one block; a Holly carburetor; a vertical tube radiator; a 10-gallon gasoline tank, which gave it a touring radius of from 160 to 180 miles; two sets of brakes, one operated by a foot lever acting on the transmission and the other by a hand lever acting on the rear axle.

152. The principal distinguishing features of Model T were the planetary transmission, a rear axle of unusual design, the magneto built into the flywheel as an integral part of the motor, the use of vanadium steel, and its relative lightness and power.

153. The planetary transmission provided two speeds forward and one reverse and it was easy to operate. The three-point suspension *1096 principle enabled the car to accommodate itself to inequalities in the road, distributing the strain, and avoiding fracture of the frame. This principle, however, was not unique to the Ford car. Incorporating the magneto as a part of the flywheel reduced the weight of the car. Vanadium steel was used in the car to make it stronger and lighter. This increased the ratio *3797 of the horsepower to the weight. No other company was using vanadium at that time. Decreasing the weight made the car cheaper to operate.

154. Model T was simple of design, and this made it easy to operate and easy to maintain and repair. The parts for it were so precisely manufactured that a number of cars could be disassembled, the parts mixed, and the same number of cars rebuilt from the parts. This could not be done with any other car in the low-priced field in 1913.

155. In April, 1907, the company had acquired a 57-acre tract of land at Highland Park, Mich., for $81,225. After the adoption of Model T as the company's standard product, plans were laid and arrangements made for the construction of a new plant on this property. Construction of this plant was begun in 1909. On December 18, 1909, the board of directors passed a resolution aut

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