The CHAIRMAN. That is not due to the rate or the fact that it is a mortgage, but it is due to the original valuation, or the fact that it is an excessive loan on the valuation.

Mr. EDDINGFIELD. Yes.

The CHAIRMAN. But it is a well-known fact that conservative mortgages, 50 per cent below valuation, can secure 6 per cent, and they are perfectly safe.

Mr. EDDINGFIELD. Are there any other features of it, Mr. Hartson, that you want taken up?

Mr. HARTSON. Mr. Chairman, Mr. Eddingfield was the engineer in the solicitor's office who handled this Border Island case, that Mr. Manson has referred to this morning. Until he arrived here this morning he did not know that this case would be brought up. He came up here in the expectation that the case that Mr. Manson referred to as being the one he had though he would take up this morning, but decided not to, would be heard. So Mr. Eddingfield has had no opportunity to go over his records. It has been six months, or probably a year, since he considered this Border Island case, and I would like to have him be given the opportunity of discussing it to-morrow with the committee, unless the committee desires now to ask him some questions in connection with the case.

Senator KING. Yes; I think we had better have it all at one time. The CHAIRMAN. I still think that Mr. Manson ought to have some information there as to the reason, which reason he should have taken from the records, as to why this change was made.

Mr. MANSON. The records do not state any reason. The records merely contain the following memorandum, signed by the solicitor: [Recommendation No. 582. In re protest of Border Island Co., Mutual Life Building, Buffalo, N. Y. Years 1917, 1918]

Mr. COMMISSIONER

OFFICE OF SOLICITOR OF INTERNAL REVENUE,
August 23, 1924.

(For Deputy Commissioner, head Income Tax Unit). This office has had under consideration the protest of Border Island Co. against the action of the Income Tax Unit in its determination of the value at March 1, 1913, of certain sand and gravel deposits.

Hearing was held August 15, 1924.

On March 1, 1913, the taxpayer's sand and gravel was under lease, having 13 years to run with a specified minimum of $24,000 a year and a royalty rate of $0.075 a ton in addition for all sand and gravel removed in excess of 320,000 cubic yards a year. A sale of the taxpayer's interest on March 1, 1913, would be made subject to this lease agreement and would be measured by the terms of the lease.

Less estimated expenses for 13 years (taxes, salaries, etc., at $2,000).

Cubic yards 4, 700, 000 266, 667

4, 433, 333 $0.075

332, 499.98

26, 000. 00

Net expected receipts_.

Present worth at 6 per cent and 4 per cent for 13 years, factor
Value of taxpayer's interest Mar. 1, 1913--
Unit of depletion per cubic yard___.

306, 499.98 64 196, 159.99 0.0442

It is, therefore, recommended that the action of the Income Tax Unit be modified to the extent of allowing a value at March 1, 1913, of $196,159.99 and a depletion unit of $0.0442.

Approved:

NELSON T. HARTSON, Solicitor of Internal Revenue.

D. H. BLAIR, Commissioner of Internal Revenue.

There is nothing further in the record to show on what ground the solicitor reversed the action of the unit. I submit that this is a straight redetermination of value.

Senator KING. Does that now involve a refund of the tax?

Mr. HARTSON. Not necessarily, Mr. Chairman.

Mr. PARKER. It relieves him of an additional assessment of $10,000.

Mr. MANSON. $10,959.

The CHAIRMAN. As a matter of fact, without impugning anybody's motives, those things can be done arbitrarily and automatically, if they are done in any such manner as that.

Mr. HARTSON. Now, Mr. Chairman, in answer to the question, the memorandum which Mr. Manson has read is the recommendation of the solicitor, which, as has been indicated, was approved by the commissioner. That memorandum constitutes the reply to the Income Tax Unit, to their letter of transmittal, when the case is referred to the solicitor's office on this taxpayer's protest. It advises the unit of the conclusion on the protest, and is the decision, of course, of the commissioner, that is finally made in the case. Now, the files of the solicitor, no doubt, have some memoranda which were prepared by Mr. Eddingfield, and which indicates his line of reasoning.

The CHAIRMAN. Well, as I understand Mr. Manson there is no such record.

Mr. HARTSON. Mr. Manson has not had access to the solicitor's files in this case--not because they are not available, but by reason of the fact that his engineers have gone over what we call the administrative files. We maintain a separate file in our office, of cases that come over to the solicitor. The only thing that goes back into the administrative files are the conclusions of the solicitor in such cases as these, and that file contains the decision.

Senator KING. Do you not think the decision should contain the reason for the reversal of the ruling of the engineers?

Mr. HARTSON. Of course, the decision does give the basis for it. You can take that decision and find out just exactly what was done. As to the reasoning in support of what was done, it probably would take a good many pages, and cases are being handled there by the hundreds. We are getting out something in excess of 200 a week of these cases--cases like these.

The CHAIRMAN. When the commissioner comes to accept that recommendation of yours, he just accepts your blank recommendation, without any argument? Now, it appears that there were two units or two divisions of his own department which differed, and he took your conclusion without making any inquiry as to the reason for it at all, and that, of course, could be done in little cases or in big cases, or in any case; is not that correct?

Mr. HARTSON. Well, it can be done in little cases and it can be done in big cases. It is done in little cases, but it is not done in all big cases. These other cases, Mr. Chairman, are handled in the bureau a good deal like the more important business that the Senator handles. He gives them a little different attention and more careful scrutiny than he gives to matters that do not amount to so much. When I am permitted to engage regularly in the business of my office, when these cases come, I take to the commissioner's personal attention different cases, cases that seem to me of tremendous importance, which I think he ought to go into personally, and I say to him, "I want to call your attention to the fact, Mr. Commissioner, that the Income Tax Unit and my office have opposite views on the question here. There is a sharp disagreement. This is my view, and this is why I think so." I think the commissioner might well call in the representatives of the unit and get from them what their view is. I can not tell you how many times that same thing has been done. The commissioner has heard both sides, and then he has approved one or the other. Not so long ago, a case running into several millions of dollars was one which I thought should be reversed; I thought the action of the Income Tax Unit should be reversed. The commissioner, upon my taking it to him, said, "I do not agree with you," and he sustained the Income Tax Unit.

So that, in these cases, each one is given the attention that the particular case seems to warrant; but it is true that, in the usual run of cases, these recommendations of mine go over on the commissioner's desk, and he signs them personally without going into them carefully at all, just as I have to sign things without going into them carefully myself.

In these review cases it so happens that, by reason of the large number of them, and by reason of the fact that there was an equally large number of other cases going through my office, straight out and out opinions on legal propositions, and by reason of our appearance in court, both in the Federal courts and before the Board of Tax Appeals, and by reason also of our handling penal cases and compromise cases, my name is signed to a good many cases that I never see. It so happens that my name was signed to the Border Island case, and I never heard of it until Mr. Manson mentioned it this morning. So, in the actual operation of the bureau's affairs, things have to be done by subordinates, by people whom we have chosen by reason of their qualifications and our confidence in them to make these decisions and make them properly, and yet they go out in the commissioner's name and in my name.

The CHAIRMAN. As I understand it, you desire to leave this case until you have an opportunity to make reply?

Mr. HARTSON. Yes; I would like to have an opportunity to-morrow morning of having Mr. Eddingfield tell you just what occurred here, and just what the files of our offices show, if anything, in addition to what Mr. Manson has called attention to. He can certainly give you the basis for his reasoning, and the committee can hear him at that time.

There is another request, Mr. Chairman, that I should like to make, and that is that to-morrow's session be devoted to the tying up and the closing up of some of these cases in connection with which the bureau

would like to introduce some additional evidence. In other words, if agreeable to the chairman and counsel for the committee, I would like to devote the entire session to-morrow to putting in the replies in two or three cases, and to gathering up some loose ends that I think ought to be definitely closed from the bureau's standpoint.

The CHAIRMAN. Will those matters deal with the case of the United States Steel Corporation?

Mr. HARTSON. I have this to say about the United States Steel Corporation case. I do desire to say something in addition in that

case

The CHAIRMAN. I think the committee ought to know, in addition to the reply that you made at the end of the cases, whether the bureau intends to take any cognizance of the findings in this case or the evidence that has been developed, in dealing further with that particular case.

Mr. HARTSON. I made the statement some time ago, Mr. Chairman, that the bureau would substitute actual figures for estimated figures in the postwar period of the steel company's production. I make the further statement that there will be an entire disallowance of amortization based on the cost of any transportation facilities that the steel corporation might own when such transportation facilities were used by common carriers. Those changes are already being made in the adjustment of the United States Steel Corporation

case.

The CHAIRMAN. Will the bureau please report to the committee just when that is completed and what the difference in the computation of their tax amounts to.

Mr. HARTSON. We shall be glad to, Senator.

The CHAIRMAN. Have you any further reply to make in connection with the Penn Sand & Gravel Co. case?

Mr. HARTSON. I have. I have had no opportunity to reply to that case, due to the fact that that was the last case that the committee had under consideration at its last session.

The CHAIRMAN. That is the type of case that you want to deal with at the session to-morrow?

Mr. HARTSON. Yes, sir.

Senator WATSON. Now, let me ask you a question there. You have said that you were going to make certain changes in the tax of the United States Steel Corporation. Are those changes the result of the testimony that has been adduced before the committee in its investigations, or would they have been discovered and made if this committee had not been organized?

Mr. HARTSON. That is hard to say, Senator, in definite terms. I did make the statement here, and this is correct, that there was a disagreement in the engineering division of the Income Tax Unit about this amortization allowance in the steel company case before the committee introduced any evidence on it here, and it was stated that the matter would have been referred to the solicitor's office for opinion.

Now, Mr. Manson developed, on examining one of the witnesses, that the exact points of criticism that the committee made formed no part of the reasons for the intended reference of the case to the solicitor's office; but notwithstanding the case would have gone

over to the solicitor's office, and what might have developed as the result of the scrutiny of the matter over there it is difficult to say. It would have gone there; the case would not have been closed forthwith, even had the committee not heard evidence on it.

The CHAIRMAN. Has the committee's work in connection with the Steel Corporation case been helpful?

Mr. HARTSON. I believe it has. I believe it has.

The CHAIRMAN. Where did Mr. Gary get the impression, as publicly stated, that the case was closed?

Mr. HARTSON. I have tried to explain that several times, Senator. I believe his statement was made in entire good faith, for this reason, that the engineer's report had been finally agreed upon in conference with the Income Tax Unit.

The CHAIRMAN. I understand, and he thinks that settles it? Mr. HARTSON. He thinks that is settled.

The CHAIRMAN. That is far enough. I think the committee understands it.

Mr. HARTSON. And, in the usual case, that would have settled it, but it so happened that some of the reviewers, in going over that after the conferees had finally agreed on it, thought that there were some questions that should be determined by the solicitor, and it would have gone over to my office in any event. It might have gone over on these other points that the committee has questioned about.

Senator KING. Mr. Hartson, will not the criticisms of the committee and the facts developed in that case, as well as any other cases that have been brought to our attention, require, in justice to the Government, in justice to the taxpayer, and in justice to the Income Tax Unit, a reconsideration of some other cases that may rest upon the same basis and be brought within the same category as some of the cases which have been brought to our attention? Mr. HARTSON. I think that the cases in which the committee has found things that we all have conceded should be corrected will develop information and corrections in other cases that are not specifically mentioned by this committee.

Senator KING. And will your unit, at as early a date as it is possible and I know the vast amount of work which devolves upon you-revert to those cases, so that none may escape or be lost in the shuffle, without due opportunity being afforded to consider them in some unit of the bureau?

Mr. HARTSON. It will be the conscientious effort of the unit to do that, Senator.

Senator KING. I would like to make one suggestion, if I may, Mr. Chairman. It is not germane to anything under discussion now, but a number of taxpayers-I shall not mention their names, and it has not been recently, either-have stated to me that they were allowed, they thought, more than they should have been by way of credits and what not because the department adopted a method of determining value on the 1st of March, 1913, which was not quite just. It took into account a great many factors and conditions which arose and developed subsequently, to the advantage of the taxpayer and to the disadvantage of the Government. In other words, they did not adhere to the value in 1913 as of the date fixed in the law;