Commenter in chief Bob Kamman returns with a colorful story following up on yesterday’s topic of jeopardy assessment.
The Fumo case, of course, is small potatoes. If you want a real jeopardy assessment involving a real politician, you have to go back to March 13, 1925, when Internal Revenue assessed James Couzens, United States Senator from Michigan, $10.9 million in tax based on his sale in 1919 of Ford Motor Company stock to Henry and Edsel Ford. Until 1915, Couzens had been vice president and treasurer of Ford Motor.
The assessment was announced on the Senate floor by Couzens himself, who accused Treasury Secretary Andrew Mellon of initiating the audit to discipline Couzens for his investigation of the Bureau of Internal Revenue. Couzens was a former mayor of Detroit who had been appointed to a vacant Senate seat in 1922 and then elected for a full term, starting nine days before the jeopardy assessment.
Couzens (pronounced “cousins”) was one of several minority shareholders in Ford who complained that Ford was not paying dividends even though its profits could support them. A state court agreed, so the Ford family agreed to buy them out. The shareholders were reluctant to sell without knowing how much they would owe in income taxes, which were at a post-war high of 73% (with no break for capital gains).
And the shareholders did not know their cost basis because it depended on the value of the stock on March 1, 1913, when the income tax went into effect. Ford was not publicly traded. At the time, Internal Revenue would audit a company to determine this amount. Henry Ford asked for an audit, and the Commissioner authorized it.
That “courtesy audit” placed the value at $9,489 per share. Couzens, who sold 2,180 shares for $29.3 million, used this audit result when he filed his 1919 return. But then, under a later Commissioner, his return was audited under a new Commissioner. (His return had also been audited in 1920, but for a different issue.) And this time, the valuation was reduced to $2,634 per share. A jeopardy assessment was required because the statute of limitations was about to expire on March 15, 1925, five years after the due date of the original return.
Couzens and the other shareholders negotiated in secret with Internal Revenue lawyers until their lawsuit was filed in December 1925. When it went to trial in January 1927 before the Federal Board of Tax Appeals (predecessor to the Tax Court), it was the largest income tax case in U.S. history. Government lawyers had reduced the claim by $1.5 million, allowing a value of $3,548 per share, so only $9.4 million was at stake.
The petitioners argued estoppel required use of the higher valuation, but the BTA disagreed, and explained in terms that might be useful today:
The evidence shows that at the time of the valuation there was in the Bureau of Internal Revenue a policy of being helpful to taxpayers in adjusting them to the new tax law, but that this policy interfered with the administration of the assessment and collection of taxes and was soon restricted. . . .It should not be understood that the law forbids a helpful policy. There is a public interest in the cooperation by the Bureau of Internal Revenue, and it should be given as freely as efficiency and good administration permit. But it cannot go so far as to fix a responsibility beyond that contemplated by the statute, and it would be unjustified to stifle a spirit of helpfulness with a caution against binding and irrevocable action.
In May 1928, the three participating judges of the Board decided the stock was worth $10,000 per share. Couzens owed nothing, and could collect a refund of the $92,000 in taxes he had paid in 1924, having filed a timely claim, because of the earlier audit on an unrelated issue.
Two other Ford shareholders involved in the case were the estates of John and Horace Dodge, also well known in the automobile industry. Another of the shareholders, John W. Anderson, was represented by E. Barrett Prettyman, who later became an Appeals Court judge and had a D.C. courthouse named after him.