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Marjorie E. Kornhauser, Tulane Law School, takes a look at the history of attempts to make corporate and individual tax returns public.
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More Historical Perspective on
Publication of Corporate Returns
To the Editor:
Publicity of income tax returns as a remedy for corporate misdeeds is not a new idea, as Joe Thorndike recently has reminded us in his discussion of the publicity feature of the Corporate Excise Tax of 1909 (“Historical Perspective: Promoting Honesty by Releasing Corporate Tax Returns,” Tax Notes, July 15, 2002, p. 324). In 1909 the specific issue was stock-watering, which caused the public to innocently invest in too thinly capitalized corporations. Stock-watering, however, merely illustrated a broader problem of a general lack of information. As George Wickersham, President Taft's attorney general-to-be, stated on the eve of Taft's inauguration, this lack of information fostered “the misrepresentation or concealment of material facts in soliciting financial aid for the corporation.”1 The publicity provision, according to its supporters, would solve this problem by revealing the critical information investors needed to make informed decisions.
In 1934, in the midst of the Depression, Congress once again turned to publicity of income tax returns as a means of curing business misdeeds. In contrast to the 1909 statute, the 1934 provision was not enacted to resolve corporate governance problems. Rather, it was motivated by revelations at the Senate Committee on Banking and Currency investigation of financial institutions in the wake of the 1929 stock market crash that showed many of the owners of these institutions, such as J.P. Morgan and his partners, had paid no income tax in the years since the crash. However, as with prior experiments with income tax publicity (in 1924 as well as 1909), the 1934 manifestation was short lived -- the provision was repealed the following year.
Although returns have been confidential since 1935, the concept of publicity has always retained some appeal. A decade ago Professor Marc Linder proposed publicity of tax returns for millionaires as a means of questioning the wide gap between high- and low-income taxpayers.2 Senator [Charles E.] Grassley's [R-Iowa] current proposal for publicity of corporate returns is only the most recent expression.
The major reason that publicity of income tax is both so attractive and repellent is that it sits at the intersection of two deep seated tenets of American democracy: the right to information as a means of ensuring good (and uncorrupted) government, and the right to privacy as an intrinsic part of liberty. In the corporate securities area, the securities regulation acts of the 1930s struck this balance generally by requiring publicity of information for public corporations but not for closely held ones. The roots of this balance lie in the publicity feature of the Corporate Excise Tax of 1909. Complaints about the publicity feature deluged Congress and the Treasury. Many were from small corporations who feared the release of information to competitors would severely injure their businesses. These small corporations acknowledged that publicity might be proper for public corporations since potential investors could use the returns to help determine the accuracy of the financial statements of corporations whose stock they wished to purchase. Publicity was inappropriate, however, for private corporations whose stocks and bonds were not purchased by the public. Many congressmen did not favor any publicity at all, but others agreed with this distinction.
In 1910, the publicity provision was amended to reflect these criticisms. Although the law left publicity subject to the discretion of the president, the ensuing regulations opened the returns of publicly held corporations to general inspection by the public. Returns of closely held corporations, in contrast, were not public records since there was no danger of promoters deceiving the public into purchasing the stock. Even the limited publicity of public corporate returns did not last long, however. Once the Sixteenth Amendment was ratified in 1913, privacy not publicity became the general rule for all income tax returns with brief exceptions in the 1920s and 1930s, as more fully described by Richard Pomp and Mark Leff.3
Whereas the 1909 publicity concerned only corporations (since individuals paid no federal income tax), the 1934 publicity feature covered both individual and corporate income tax returns. Indeed, since the original motivation for the provision was the revelation that wealthy taxpayers were not paying any income tax at all, public attention was focused on individuals. Although proponents often acknowledged that many of these wealthy taxpayers did nothing illegal, they believed it was wrong that these taxpayers paid no tax. Publicity, they believed, would change the situation in several ways. First, they believed that if wealthy taxpayers knew that their returns would be public, they would not engage in the transactions that reduced their tax liability, even if those transactions were legal. Second, they believed that publicity would help Congress close many of the legal loopholes that the wealthy used to reduce their tax liability, such as investing in tax-exempt securities. Third, publicity would keep the tax administration “honest” by preventing officials from showing favoritism to wealthy taxpayers. Finally, a few believed that publicity was necessary to insure that the income tax not only remained fair but was perceived as fair. The noted economist Carl Plehn expressed this sentiment in a letter read on the Senate floor: “it is very important to feel assured that all incomes -- my neighbors as well as mine -- are fairly and truly assessed, a thing that can never be if the final assessments never see the light of day.”4
Opponents of publicity argued that it was not only a gross invasion of privacy, but also a dangerous one. Echoing complaints from 1909, they argued that businesses would be ruined when competitors discovered their secrets through publicity. A new criticism was the assertion that con-men and other unscrupulous people would hawk shady products to widows and other unsuspecting citizens. Even worse, kidnappers and other criminals would use returns to pick their next (wealthy) victims. In light of the Lindbergh baby kidnapping two years before, this alleged consequence of publicity received an enormous amount of attention.
With the Banking and Currency Committee's revelations about wealthy taxpayers evading tax liability fresh in their minds, the Senate approved Senator Robert LaFollette Jr.'s publicity amendment to the 1934 revenue bill, one that he had been proposing for years, just as his father had done before him. The Conference Committee accepted the amendment as did the full House. Accordingly, section 55(a) was amended to require taxpayers to submit, in addition to their tax return, a form with their name, address, gross income, amount of deductions, net income, and tax liability. This form, called a “pink slip” because it was on pink paper, would become a public record. Under prior law, the Secretary of the Treasury (with presidential approval) had the discretion to open tax returns for public inspection, but had never done so. Under the 1934 amendment, the Secretary was required to open the returns to inspection; his only discretion lay in defining the reasonable regulations governing their inspection.
The clash between privacy and publicity was particularly intense in the debate over the 1934 provision because of the focus on wealthy taxpayers. In February 1935, one month before income tax returns were due, a campaign to repeal the publicity “pink slip” provision began. Thought at first to have no chance of success, this amazing campaign (about which I will have much to say in a forthcoming article) achieved its goal in April when President Roosevelt signed the repeal of the publicity provision into law. The key to the campaign's success was the same one used more than 60 years later to secure the repeal of the estate tax. Although in both instances fewer than 10 percent of the population were affected, opponents gained support by focusing on the damage done to the “common man” and the small businessman. The antipublicity campaign was orchestrated by one man, Raymond Pitcairn, the wealthy scion of the Pittsburgh Plate Glass Company and national chairman of a conservative group called the Sentinels of the Republic. He organized the distribution of hundred of thousands of copies of the pink slip and of green protest stickers, both stamped with the words “I Protest Against This Outrageous Invasion of My Right of Privacy.” The campaign urged people to send this protest pink slip plus other antipublicity letters and telegrams to their congressmen. Thousands of ordinary people who would never be touched by the publicity provision did so, often using form letters and/or sending in the mock pink slip emblazoned with the refusal to pay. They protested that publicity of income tax returns would, invade their privacy, reveal business secrets, create harassing sales pitches, and increase crimes targeted at the wealthy, especially kidnapping. These protests were effective; Congress repealed the publicity feature, despite the skepticism some showed toward these claims. Senator Norris, for example, mused that the claim about the
danger of kidnaping [sic] on account of information which might go out about a man's income-tax return . . . has been made very often. It has been made on the floor of the Senate by a number of Senators, and it has been made in the newspapers. Hundreds of letters have come to Senators containing that argument. In fact, it has had a great influence. I suppose that is what brought about the passage of the law repealing the “pink slip” provision because there have been so many cases of kidnaping lately. It was my idea, and it has been the idea, I think, of others, that we have now saved the country.5
Norris was justly cynical, but he overlooked another factor that may have influenced Congress. Specifically, most congressmen, unlike the general public, had large enough incomes to be subject to the publicity provision. Whatever the reasons for its demise, the 1934 experiment in publicity was over before it had even begun.
Amidst economic conditions and corporate scandals that are eerily reminiscent of the 1930s, it may well be the time to once again experiment with income tax publicity. Even if Senator Grassley's proposal passes, however, the question is, will it last any longer than prior publicity attempts. Although the tensions between the right to know and the right to privacy still exist, the dynamics may have shifted enough to create a longer life expectancy for publicity. We live in an age where all types of private information are now disclosed voluntarily and even disseminated widely via the Internet. Moreover, unlike the 1934 provision, Grassley's proposal is limited to corporate publicity. Not only is this less an invasion of privacy than publicity of individual returns, but there is now -- unlike in 1909 -- a substantial, decades-old precedent of corporate disclosure laws to support it. Corporations are as powerful and influential as in the era preceding both the 1909 and 1934 publicity returns. As in the 1930s, public confidence ebbs as more evidence of corporate misdeeds is revealed.
Despite the changed circumstances, however, any serious attempt to require publicity will generate much sound and fury. Whether it signifies nothing is the question. Let the game begin.
- Marjorie E. Kornhauser
Professor of Law
Tulane Law School
July 16, 2002
1 George Wickersham, “The Capital of a Corporation,” 22 Harv. L. Rev. 319, 338 (1909). I describe the publicity feature and corporate governance more fully in Marjorie E. Kornhauser, “Corporate Regulation and the Origins of the Corporate Income Tax,” 66 Ind. L. J. 53 (1990).
2 Marc Linder, “Tax Glasnost For Millionaires: Peeking Behind the Veil of Ignorance Along the Publicity-Privacy Continuum,” 18 Rev. of L. & Soc. Change 951, 977 (1990-91)
3 Mark H. Leff, The Limits of Symbolic Reform: The New Deal and Taxation, 1933-1939 (1984) and Richard D. Pomp, “The Disclosure of State Corporate Income Tax Data: Turning the Clock Back to the Future,” 22 Capital U. L. Rev. 374 (1993).
4 78 Cong. Rec. 6553 (Apr. 13, 1934)(Sen. LaFollette, author of the publicity amendment, speaking).
5 79 Cong. Rec. 54427 (Apr. 11, 1935).
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