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August 23, 2012
News Analysis: Tax Troubles of the Rich and Famous, 1930s Edition
Joseph J. Thorndike

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Living in the age of Us Weekly and TMZ.com, it's easy to forget that celebrities once had private lives. Stars have been the subject of popular fascination ever since Hollywood created them in the first place, but supermarket tabloids took awhile to refine their intrusive art. Before they did, the Tax Court sometimes had to fill the gap.

"Some of the most interesting commentaries on the more or less private lives of the famous stars of stage and the cinema are to be found in the income tax appeals which flow in a steady stream into the capacious mail box of your patient Uncle Sam," a Washington Post columnist wrote in 1932.1 Indeed, the 1930s were something of a golden age for celebrity tax gossip, thanks largely to the New Deal and its focus on taxing the rich.

Hearst and His Mistress

Actress Marion Davies was a frequent subject of tax gossip during the Depression, thanks largely to her relationship with newspaper baron William Randolph Hearst. Davies began her acting career during World War I, and she went on to star in several movies in the 1920s and 1930s. But she was probably best known for her romance with Hearst, a relationship that may well have complicated her tax situation.

The problems began in 1931 when Davies got a bill from the Bureau of Internal Revenue (BIR) for roughly $1 million in unpaid taxes. The agency claimed that Davies, the owner of several buildings in Manhattan, failed to report income from her real estate. Ultimately, she settled with the agency for $825,000.

Notably, Davies declined to take the 1931 case to the Board of Tax Appeals (BTA, forerunner of the Tax Court), presumably because the details would have been made a matter of public record. But reporters learned of her tax situation through unofficial sources, and Davies soon felt compelled to make a statement.2 "It was really the business of my real-estate agent to pay on my property here," she told reporters while disembarking from an ocean liner after a trip abroad. "I thought he had done so and was surprised to find that he had not. He told me that he thought I had paid the income tax due."3

The 1931 settlement was not the end of Davies's tax troubles. Five years later, she was back in hot water, and the New York properties were once again at issue. This time, Davies took the case to the BTA, where she agreed to pay $30,000 plus unspecified interest (down from the $52,044 that the BIR originally sought).4

Davies's tax problems may have been her own, but Hearst played a role in drawing attention to them. In 1934 President Franklin Roosevelt was advised that Hearst was planning to use his newspapers to launch a major attack on the New Deal and its economic policies. In response, FDR asked his Treasury secretary to take a close look at Hearst's taxes.

"I did subsequently look up his income tax and found that there was plenty there," Henry Morgenthau Jr. later recalled. For good measure, Morgenthau also examined Davies's tax record, and he advised FDR to mount a preemptive attack on both her and Hearst. Morgenthau later said that "if we started something after he attacked us," then Hearst "would say that we were doing it for revenge and spite." At the time, FDR chose not to proceed, but it seems likely that the BIR's continuing interest in Davies's tax record owed something to presidential interest in the matter.5

Dubious Deductions

Davies got plenty of press coverage for her tax problems, but the issues were mundane by Hollywood standards -- there wasn't much titillation to be found in unreported rental income. But other celebrities had more starlike tax problems, most of them associated with dubious business deductions.

In 1932, for instance, actress Lenore Ulric -- identified in tax documents as a "star actress in motion pictures" -- complained that the BIR had disallowed her 1929 deduction for "professional entertainment expenses." Ulric claimed deductions for theater tickets provided to "newspaper and magazine writers, critics, columnists, theatrical producers, managers, vaudeville agents, authors, directors and other persons connected with the theatrical profession." The tickets cost her $4,069.50, and associated meal expenses totaled $4,815.90.

"Persons so entertained were in a position to be helpful and useful to petitioner in her professional work as an actress, in the enhancement of her professional standing and reputation and in the procurement of professional engagements," Ulric wrote in her BTA filing. She claimed the expenses were "ordinary and necessary," but the BIR disagreed and denied those and other claimed deductions. "The flinty-hearted bureau also disallowed travelling expenses and transportation for her maid, secretary and motor car," The Washington Post reported.6

Similarly, in 1935, actress Anna May Wong asked the BTA to toss out a BIR bill for $880 on her 1932 income, insisting that the agency erred in rejecting her deductions for travel, costume, and "other vaudeville expenses."7

Actress Adrienne Ames, a popular but declining star, appeared before the BTA in 1937 to defend a deduction for her own clothing. She showed the board a bill for $8,696 in clothing expenses, which she hoped to deduct against her 1934 income. Ames and her husband, actor Bruce Cabot, said the agency wrongly disallowed the wardrobe expenses, as well as $5,170 used for travel and a maid's salary, and $1,380 paid in British taxes.8

In 1938 actress Madge Evans appeared before the BTA to defend her own clothing deductions, even offering photos from fan magazines to bolster her argument. The BIR disallowed her wardrobe deduction for $3,096, as well as other deductions for travel ($2,667), makeup ($583), entertainment ($338), and photography ($1,200). The BIR deemed payments in the last category to be gifts, because Evans had paid them to her brother, a photographer operating from a studio in the star's basement. The BIR was unconvinced that $459 spent on a tonsillectomy could be deducted as an improvement to her singing voice.9

"It's all a part of the business," Evans told the BTA. "That's how we keep our names before the public -- how we earn a livelihood. If we didn't we would soon be nobodies!" Evans claimed that she had actually spent more than $7,900 on her wardrobe in 1934 and that she had worn her own dresses in seven movies that year. "And I have had very little opportunity to wear my dresses socially," she claimed. "I had to get up every morning at 6 o'clock, hurry to the studio, work all day under hot lights, then go home too tired to do anything but go to bed."10

Of all the Hollywood tax scandals that garnered press attention in the 1930s, the most important featured English actor Charles Laughton. In 1937 Treasury singled out Laughton in congressional testimony over egregious (if legal) forms of tax avoidance. Laughton, according to BIR officials, had established a personal holding company in the United Kingdom and channeled most of his personal income through it ($190,000 in 1930, for instance). In exchange, the company paid him a comparatively modest salary ($20,000 in 1935). According to the BIR, the holding company paid U.S. taxes on Laughton's income, but at far lower rates than Laughton would have paid personally.11

For officials in the Roosevelt administration, even passing attention to high-profile tax avoidance was potentially useful. As the Laughton testimony made clear, New Deal officials -- and the president in particular -- hoped the tax behavior of the rich would create a teachable moment. If they could make a famous person the poster child for tax avoidance, they might have an easier time closing loopholes and other forms of tax avoidance. Laughton was not the only tax avoider to use a personal holding company in the 1930s (it was a common technique), but he was certainly the most famous.

Still, the vast majority of celebrity tax coverage in the 1930s focused less on the policy implications of tax avoidance and more on the privileged lifestyle of Hollywood's elite.


FOOTNOTES

1 Nelson B. Bell, "About the Showshops," The Washington Post, May 18, 1932, at 12.

2 "$825,000 Tax Paid by Marion Davies," The Washington Post, Sept. 11, 1931, at 3.

3 "Actress Admits She Paid Bureau $825,000," Los Angeles Times, Sept. 11, 1931, at 2.

4 "Marion Davies, Beck to Settle U.S. Tax Suits," The Washington Post, Mar. 21, 1936, at 9.

5 David Nasaw, The Chief: The Life of William Randolph Hearst 500 (2001).

6 Bell, supra note 1.

7 "Anna May Wong Asks for Slash in Tax Claim," The Washington Post, Apr. 18, 1935, at 11.

8 "Adrienne Ames Submits Dress Bill in Tax Appeal," The Washington Post, Oct. 12, 1937, at 3.

9 "Madge Evans Takes Stand to Fight Income Tax Claim," Los Angeles Times, June 17, 1938, at 3.

10 Id.

11 "Seven Called Tax Dodgers by Treasury: Charles Laughton and Financiers Named in Congressional Inquiry," Los Angeles Times, June 19, 1937, at 1.


END OF FOOTNOTES