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May 15, 2002
Not-So-Current But Still Quotable: IRS Disclosure in the 1920s
Joseph J. Thorndike

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Joe Thorndike is a contributing editor with Tax Notes.


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Not-So-Current but Still Quotable:
IRS Disclosure in the 1920s

By Joe Thorndike


[1] Complaints about IRS disclosure are nothing new. The agency has long been dogged by charges of excessive secrecy, especially since Congress enacted the modern income tax in 1913.

[2] Some of the most vigorous complaints came during the 1920s, when accusations of corruption and favoritism prompted a Senate investigation. A select committee, chaired by Sen. James Couzens, R-Mich., scrutinized the administration of depletion and amortization allowances, concerned that certain taxpayers were getting special treatment.

[3] According to the panel's 1926 report, the Bureau of Internal Revenue (as the IRS was then known) had indeed administered the income tax in a “highly discriminatory” fashion. Much of the problem, they contended, stemmed from the agency's failure to publish the vast majority of its income tax rulings.

[4] The following is an excerpt from the Senate Select Committee on Investigation of the Bureau of Internal Revenue, 69th Congress, 1st Session, Report No. 27, “Investigation of the Bureau of Internal Revenue: Partial Report,” pp. 7-8.

Publicity of Principles and Practices


    Many of the principles, practices, methods, and formulas applied in the determination of tax have never been reduced to writing, and only 15 1/2 pe cent of the formal written rulings applicable to income taxes have been published.

    This failure to promulgate and publish the principles and practices to be followed in the determination of tax liability has had the following results:


      1. Information for the guidance of the employees of the income tax unit is so incomplete that gross discrimination results from the failure to apply uniform principles to similar cases.

      2. Taxpayers, in many instances, have failed to claim allowances granted others similarly situated.

      3. To secure the benefit of unpublished precedents, taxpayers are forced to employ former employees of the income tax unit to advise and represent them in tax cases.

      4. Their exclusive possession of information as to the unpublished precedents and practices of the income tax unit has placed an artificial premium upon the value of the services of ex-employees which enables them to demand and receive immense fees for information which should be freely available to everybody.

      5. This artificial premium, thus placed upon the exclusive information possessed by the employees of the Income Tax Unit, and the opportunity thus afforded for highly lucrative outside employment, is the cause of the extraordinary turnover among the employees of the unit and of the difficulty experienced by the unit in retaining the services of competent employees at salaries within the range of the salaries paid by the Government for comparable service.

      6. The failure to consider closed cases as precedents and to publish the principles and practices followed in closed cases as precedents has deterred the formation of a body of settled law and practice. The unsettled state of the law and practice has encouraged the filing of claims for allowances and require the constant rediscussion and reconsideration of questions, which should be settled by precedents established by closed cases.

      7. The fact that a ruling will be published, and the benefit of its principles claimed by taxpayers similarly situated, is the strongest possible deterrent against making unsound rulings.

      8. During the course of the hearings there has been a great deal of evidence tending to show that it is the policy of the bureau to fix taxes by bargain rather than by principle. Rulings based upon bargains can not be published as precedents. The best and most persistent trader gets the lowest tax and gross discrimination is the inevitable result of such a policy.

Publicity of Records

    The unsatisfactory conditions developed by this investigation are the inevitable result of the delegation of almost unlimited discretion to be secretly exercised. It is believed that but few of the unsound settlements to which attention has been called would have been made if it were not for the belief that they would never become public.

    While the objections to throwing the records of the Income Tax Unit open to the public are recognized, the necessity for the opportunity for some outside scrutiny is imperative.

    Congress, in imposing a system of taxation the administration of which necessarily involves the exercise of so much discretion assumes some duty to the public to see that such discretion is not abused.