Fifty years ago this week, on June 1, 1973, the IRS sent President Nixon a letter that managed to be both routine and obsequious. The agency would soon regret both its substance and its tone.
“Our examination of your income tax returns for the years 1971 and 1972 revealed that they are correct,” wrote IRS Baltimore District Director William D. Waters in a letter to Richard and Patricia Nixon. “Accordingly, these returns are accepted as filed.”
Had Waters stopped at that point, the letter would still have proved awkward. Less than two weeks later, reporter Nick Kotz of The Washington Post would raise important questions about the Nixon returns — without having access to the returns themselves.
But Waters made a bad situation worse by ending his letter with an obsequious pat on the back. “I want to compliment you on the care shown in the preparation of your returns,” Waters wrote. “Thank you for the cooperation of your representatives.”
On its face, this sort of compliment might also seem routine and unremarkable. But viewed against the backdrop of a fast-unfolding scandal, it would soon prove deeply embarrassing. By the end of the summer, IRS leaders would have ample reason to doubt the “care” that Nixon had taken in the preparation of his returns.
And those presidential representatives who had cooperated so nicely? Three were headed for indictment, two for convictions, one for a substantial fine, and one for a four-month stay in prison.
Clearly, the IRS dropped the ball during its initial audit of Nixon’s tax returns in the spring of 1973. To some extent, the agency’s failures may have been personal as much as institutional. When given a chance to assess the IRS’s performance, Commissioner Donald Alexander recommitted the agency to enforcing the law — even against the taxpayer in chief. But the failures of the first Nixon audit also reflected a systemic incapacity to audit presidential returns.
The Deduction
Nixon’s tax scandal focused principally on a single deduction that the president claimed on his 1969, 1970, 1971, and 1972 returns. According to Nixon, he had twice donated large portions of his pre-presidential official papers to the National Archives. He made the first donation, valued at $80,000, on December 30, 1968. Nixon’s second donation occurred on March 27, 1969, according to his 1969 return, and was valued at $576,000. As allowed by law at the time of both donations, Nixon claimed charitable deductions for the value of both gifts.
In broad strokes, Nixon’s donation and the resulting deductions were routine. Since the earliest days of the republic, U.S. presidents had treated their papers as private property — an arrangement that “led to priceless materials being burned, sold, or otherwise scattered,” in the words of one scholar. Some presidents donated their papers to libraries and archival institutions, and the Presidential Libraries Act in 1955 encouraged donations to the National Archives and its new system of privately built, federally maintained presidential libraries.
In return for donating their papers, presidents were allowed to claim tax deductions for charitable contributions. For the purposes of these deductions, donated papers were appraised at their fair market value — essentially, what collectors would be willing to pay for rare historical documents. Presidents commissioned private appraisals and then claimed deductions to the extent permitted by law, often carrying forward significant portions of the deductions when they were too large to use in a single year.
After passage of the Presidential Libraries Act, Presidents Harry S. Truman, Dwight D. Eisenhower, and Lyndon B. Johnson all made donations to the National Archives. (President Kennedy died before completing arrangements for his own donations.) Shortly after winning the 1968 election, Nixon paid a courtesy call on Johnson, who advised the president-elect to make a donation to the National Archives. Johnson even recommended an appraiser, Ralph Newman, who had provided valuations for several presidents, including Truman, Eisenhower, and Johnson himself.
Nixon proceeded to make a last-minute donation in 1968 and arranged for another in 1969. These gifts allowed for extremely large deductions and helped shrink Nixon’s tax liability to levels that shocked many observers. In October 1973 The Providence Journal-Bulletin reported that Nixon and his wife had paid just $1,670.84 in federal income taxes in 1970 and 1971 combined, while also receiving $131,503.84 in tax refunds for overpayments made during those two years.
More specifically, according to information leaked by a source at the IRS national computing center in Martinsburg, West Virginia, the Nixons paid $792.81 in federal income tax in 1970, while receiving a $72,614.43 refund. In 1971 they paid $878.03 in taxes and received a $58,889.41 refund. The Nixons’ tax payments, according to the Journal-Bulletin’s widely quoted comparison, were roughly equal “to taxes paid by someone who earns about $7,000 a year, claims one exemption and does not itemize deductions.” Nixon, by contrast, earned $200,000 from his salary alone.
Ultimately, the uproar over Nixon’s taxes would prompt a congressional investigation — and even talk of resignation. But initially, Nixon’s taxes remained a private matter, protected by the confidentiality shielding all tax returns from public view.
And even behind closed doors, Nixon’s outsize deductions attracted little attention. As noted above, the IRS examination of Nixon’s 1971 and 1972 returns — both of which included large carryovers from that giant 1969 deduction — found nothing amiss.
The Discovery
On July 10, 1973 — less than two weeks after the president received his “no change” letter from the IRS — The Washington Post published a story raising questions about Nixon’s gift to the National Archives. In particular, Kotz noted the problematic timing of the donation. The generous tax treatment afforded to such gifts had been abolished by the Tax Reform Act of 1969. The effective date for new, much tighter rules (which limited the deduction to the physical value of the records at the time of their creation, such as the paper on which they were printed) was July 25, 1969. Had Nixon made his second donation before the deadline?
Possibly not, Kotz suggested. Through a series of interviews with key players (and without access to any tax returns), Kotz outlined several problems:
The circumstances of this gift varied significantly from the handling of the earlier gifts [Nixon had made to the Archives]. The deed of gift was not signed by the President; the Archives did not receive the deed until more than a year after it was signed; officials at the Archives refused to acknowledge receipt of the deed since it didn’t contain the President’s signature; and some officials at Archives contend that the items actually gifted to the country were not selected until November or December, 1969.
In this passage, Kotz identified almost all the key problems that would later lead congressional investigators (and the IRS) to conclude that Nixon’s deduction should be disallowed. And while Kotz did not directly accuse anyone of criminal behavior, his questions implied the possibility. In particular, Kotz raised issues about the dates attached to key documents. The White House “flatly denied” any suggestion that documents had been backdated.
New Commissioner
On May 25, 1973, the IRS got a new commissioner. Donald C. Alexander was Nixon’s third appointment to head the agency; his first two commissioners, Randolph W. Thrower and Johnnie Mac Walters, had clashed with the White House after being pressured to use the agency for political purposes. (Prior analysis: Tax Notes Federal, Mar. 27, 2023, p. 2074.) Alexander would also prove a disappointment to Nixon, who measured people by their willingness to sublimate moral and ethical responsibilities to the demands of personal fealty.
As Kotz and other reporters uncovered and publicized details about Nixon’s donation of his papers, Alexander watched with growing concern. He later explained to congressional investigators that he began to question whether the original IRS audit of Nixon’s 1971 and 1972 returns had been “in depth.” On November 28, 1973 — just 11 days after Nixon assured Americans, “I am not a crook” — Alexander informed Treasury Secretary George Shultz that he was planning to take a fresh look at the president’s returns.
The IRS couldn’t avoid reopening Nixon’s case, Alexander explained to Shultz. “The information which had been reported would have caused the examination of the returns of any other taxpayer,” he later recalled. Moreover, Congress was preparing to force the issue, with at least two committees preparing to investigate the president’s taxpaying behavior. Ultimately, Alexander insisted, things would go better — for both Nixon and the IRS — if the agency reopened its examination.
In their official reopening memorandum, IRS officials acknowledged that Nixon’s 1971 and 1972 returns had been audited once already. That examination had ended in a “no change report,” and the agency had accepted the returns as filed. But now, citing “serious administrative omission resulting in criticism, undesirable precedent, or inconsistent treatment,” the agency believed that these returns needed more scrutiny.
The initial IRS examination had considered Nixon’s charitable contribution deduction, but the agent conducting the audit found no problems — mostly because he didn’t look for any. “The agent accepted that deduction as proper as the facts indicated that the appraiser was eminently qualified, the fair market value appeared to be proper, and that the contribution was made prior to the change in the law,” the memo noted. More specifically, the agent did not question the details of the gift or “verify the circumstances concerning the actual contribution of these papers to the United States Government.”
Those circumstances, however, were central to the validity of the deduction. In justifying their interest in reopening the Nixon examination, IRS officials cited all the reasons that Kotz and others had already identified in the press:
“The taxpayer may not have made a completed gift of the papers prior to July 25, 1969, and would, therefore, not be allowed a deduction for this contribution of $570,000.00.”
“The deed used to transfer these documents may not have been forwarded to the National Archives until April 1970.”
“The General Services Administration may not have signed the deed transferring title to the papers transported to the Archives in 1969.”
“The documents which were selected to be donated to the Archives may not have been detailed until early 1970.”
“The deed was signed by a counsel to the taxpayer. The taxpayer did not sign the deed, although his name was typed in at the appropriate place in the deed for his signature.”
Not all these problems were easy to spot, and it might seem initially reasonable that the agent assigned to the initial audit had missed them. On the other hand, Kotz and his editors at The Washington Post had somehow managed to identify them within two weeks of the IRS completing its audit.
In other words, Kotz was investigating Nixon’s tax deduction at precisely the same time that the IRS was auditing Nixon’s return. Yet Kotz was able to spot the key problems, even without access to the returns themselves. The credulous IRS agents, by contrast, found nothing suspicious enough to probe more deeply.
Clearly, the IRS had not done an “in-depth” job, as Alexander put it.
But having settled into his job, the new commissioner was determined to make things right. Alexander moved to reopen Nixon’s examination at the end of November. On December 7, 1973, Waters officially informed the president that the IRS was conducting a new audit, noting that “information that may affect your tax liability has been developed since our last examination of your books and records.”
Notably, Alexander’s decision to reopen the Nixon examination came before Nixon asked the Joint Committee on Internal Revenue Taxation to conduct its own investigation of his returns. It seems likely that Alexander’s move precipitated Nixon’s decision to release his tax returns to the public and request a congressional investigation.
Alexander understood that more was at stake than simply Nixon’s personal tax bill. The misbehavior of the nation’s taxpayer in chief posed a threat to the tax system as a whole — and to the IRS. Nixon’s dubious deduction, in particular, was a serious danger. “The propriety of this transaction is being questioned by members of the news media, public officials, and the general public,” the IRS noted in its reopening memo. “Our failure to reopen this case to determine the propriety of this deduction could result in serious criticism of the Service’s administration of the tax laws.”
After reopening the audit, the IRS went on to conclude that Nixon had not made a deductible contribution to the National Archives. Citing all of the reasons first identified by Kotz, the IRS disallowed the deductions claimed in both 1968 and 1969.
The IRS also suggested that key Nixon advisers had been dishonest during the first audit of the president’s returns, providing agents with false and misleading information. The agents were too credulous in reviewing the returns, to be sure. But Nixon’s representatives had also lied, backdated documents, and otherwise misled IRS officials.
Ultimately, Alexander’s decision to open a second audit helped rescue the IRS from its poor performance in the initial Nixon audit. And he decided to reopen the examination before Nixon asked Congress to intervene. Clearly, Alexander was keen on preserving the IRS’s reputation for fair and evenhanded administration of the tax laws.
But the entire episode still raised questions about the IRS’s ability to enforce the tax laws against the nation’s taxpayer in chief — as head of the executive branch, he also happened to be its tax collector in chief. Can the IRS effectively enforce the law against its boss?
With strong leadership, like Alexander’s, the answer seems to be yes. But strong leadership is a fragile guarantee for the integrity of the tax laws. After all, Nixon’s first two IRS commissioners were not bad. Either one of them, had they still been in office after Nixon’s tax behavior was made public, might have behaved like Alexander and moved quickly to take a second look at the president’s returns.
But the real concern is that the first look was insufficient. When reporters are able to spot issues before IRS agents, then some sort of systemic failure would seem to be at work.