You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

The Tax Thieves of 1951

Andrew W. Mellon “planned, schemed, contrived and devised a comprehensive scheme and plan of tax evasions and tax avoidance while he held the office of the Secretary of the Treasury of the US.” That was the charge of the Treasury Department when Mellon left. Treasury officials claimed that Mellon defrauded the government of about $2 million in taxes owed by him for 1931, his final year as Secretary. Mellon answered simply that he had computed his own return. He added: “The result was what I think was a fair amount for me to have paid the government in that year.”

No such bald-faced admission has come from the big and little crooks caught in the exposures of corruption in the Bureau of Internal Revenue. But these men have grown rich by plundering the Treasury, just as Mellon, Jay Gould and Collis Huntington grew rich by plundering our natural resources in the Robber Baron Days. Their methods are those once used by Mellon.

IN THE ERA of Normalcy, as one historian of the period records, “the flowers of federal spending attracted the bees,” even as they do today. “Men brought other men money in little black bags, paid their hotel bills, sent them cases of liquor or bevies of women, gave them Liberty Bonds.” Gifts from the government to the favored few from “the greatest Santa Claus in History,” as Sam Rayburn dubbed Andy Mellon, “took the form of tax refunds in accordance with esoteric regulations evolved by officials of the Bureau [of Internal Revenue]. A surprising number of the men who drafted the rules retired quickly to become highly fee-ed advisers on tax matters, and their pleadings won for their clients more than a billion dollars in refunds.”

Democratic office-holders in recent years have taken a large leaf from that Republican book. While Henry Morgenthau Jr., as Secretary of the Treasury, supervised the Internal Revenue System, our tax-collection machinery appears to have been free from taint. Franklin Roosevelt followed the sound principle that the two most sensitive points in government are where taxes are collected and criminals brought to justice. While he could he kept an eye on the Department of Justice and the Bureau of Internal Revenue. It was only toward the end of Roosevelt’s third term, when war took all his energies, that his vigilance slackened. Then, late in 1943, when the long-time Revenue Commissioner Guy T. Helvering retired to a seat on the federal bench, Roosevelt allowed the Chairman of the Democratic National Committee, Frank C. Walker, to pick the new Commissioner.

Sen. Bennett Champ Clark and his junior colleague from Missouri, Sen. Harry S. Truman, had a candidate.

The Missouri Democratic organization was in a sad state at that time as a result of an unsuccessful attempt to “steal” the governorship from Republican Forrest C. Donnell. That effort had wrecked the Dickmann-Hannegan St. Louis machine, and ward-heeler Robert E. Hannegan had been bailed out with an appointment as local Collector of Internal Revenue. This step was taken over the violent protest of the St. Louis Post-Dispatch, which called it “an affront to thousands.” Advancement of Hannegan to an important national post was a means of bringing credit to the discredited machine, and in true clan spirit, Senators Clark and Truman urged Hannegan on Walker.

Walker agreed, and the trail of the tax scandals now in the headlines leads back to Hannegan’s appointment as US Revenue Commissioner in October, 1943.

The young Missouri Irishman was the most energetic politician to hit Washington since Jim Farley. He set about reorganizing the Bureau, which he said had a “bad case of hardening of the arteries.” Helvering, an old-fashioned politician, had run the Revenue organization in strait-laced style, with Morgenthau always peeping over his shoulder. Hannegan, knowing more about patronage than public service, began to reshape the Bureau in his own image. Every one of the eight most notorious characters in the current exposés concerning the tax bureau – James Smyth of San Francisco, Norman Collision of Delaware, James Finnegan of St. Louis, Denis Delaney of Massachusetts, Joseph Marcelle, J.B.E. Olson and James Johnson of New York – were named to their jobs in the two years after Hannegan took office.

HANNEGAN HAD MAINTAINED a private law practice on the side while serving as St. Louis tax collector, and he actually encouraged his new collectors to do the same thing, one of them has testified. Hannegan saw nothing wrong in that. To him it seemed natural to encourage the closest kind of ties between the Collectors’ Offices and the various State Democratic organizations. He was in a key position to offer favors in the boom years of war, and the friendships which he formed with wealthy taxpayers made him potentially very valuable to those who had the responsibility for financing and directing Roosevelt’s fourth-term campaign.

In that year the Democratic Party needed a new manager. Frank Walker, and his predecessor as Chairman, Bronx Boss Ed Flynn, decided that Hannegan was the man to raise funds to match the lavishly financed Republican campaign that could be expected in 1944. So Hannegan became National Democratic Chairman. However, the continuity of his policies at the Bureau was unbroken. He personally selected Joseph D. Nunan Jr. to take over. Nunan, who had become Revenue Collector for the First District of New York after being defeated as a State Senator, also was experienced as an organization man and Democratic fund-raiser.

 THE HANNEGAN-NUNAN TEAM worked as smoothly in Washington as the Dickmann-Hannegan combination had worked in St. Louis. The full extent to which contributors to Democratic campaign funds, nationally and in the states, received special treatment in tax matters is impossible to determine.

Perhaps much will be revealed as the King subcommittee pursues its investigation of the Bureau. But favors can take so many forms and political finances keep so close to the wall of back alleys that we may never know how much Hannegan’s experience in tax collection contributed to the building of Democratic campaign bankrolls.

In the 1947 Hannegan left Washington to become president of the St. Louis Cardinals and pursue other business connections he had made since coming to Washington; Nunan resigned to establish what is thought to be one of the most lucrative tax practices in the East. Revenue Bureau files indicate that George J. Schoeneman, who was then appointed Commissioner, was the Nunan-Hannegan choice. The machinery they had established over the previous four years continued to function. Schoeneman, liked and respected in Washington as an honest gentleman, was reluctant to question the activities of the local collectors. He appears, from the record, to have been overly gentle in dealing with misconduct in the Bureau. For by then, minor officials in the organization keyed their morals to the lowering of standards set by their superiors. The ablest officials of the Bureau had left the service for the much higher pay available outside. And a great many of those who remained had done so because they were approaching pension age and hoped soon to retired. Those in this group were inclined to be timid and compromising in their handling of cases in order to run no risk of jeopardizing their status.

Unprincipled businessmen and gangsters alike sensed the new opportunities for corruption and plied Bureau employees, hard hit by inflation, with attractive presents. Technically reputable tax lawyers, consultants and accountants devised new techniques of legal evasion for their clients. The Administration took almost no notice until the one-man crusade of Sen. John J. Williams (R, Del.) against the Bureau, and the investigation by a special House Subcommittee on Administration of the Internal Revenue Laws, under Rep. Cecil King (D, Calif.), brought out facts which forced it to act.

Last July, Schoeneman was permitted to resign on grounds of ill health. Since then, the Administration has slowly roused itself to the burgeoning tax scandal. John B. Dunlap, the new Commissioner, an energetic career man, formerly the collector in Dallas, is under instructions from President Truman to “clean up the situation.”

The “situation” he faces is indeed a dreadful one. In less than 10 years the Bureau of Internal Revenue has degenerated from one of the points of pirde in federal administration into a chaotic organization. Taxpayers find it difficult to do even routine business with the Bureau in the current atmosphere of confusion and suspicion. There is grave fear in government of the effect which further disclosures of crookedness may have on the willingness of millions of citizens to pay taxes they owe their country.

The Republicans see in the present scandals a sure-fire campaign issue for 1952. The Democrats are understandably torn between driving to secure a basic function of government and endeavoring to shovel earth over the political roots of the scandal that has brought shame onto our government today. A few weeks ago President Truman was cool toward the suggestion that Revenue Collectors be brought under Civil Service. At the request of the new Democratic National Chairman, Frank McKinney, he has agreed to ask Congress to do so. But the Senate is not likely to give up its power to name Revenue employees easily.

 IN 1903, WHEN Lincoln Steffens was reporting on the “cohesive power of public plunder,” he commented that “reform with us is usually revolt, not government, and is soon over.” The Republicans will content that the answer to the tax scandals is merely to vote the Democratic rascals out. But without basic and continuing reform, a change of administration would insure only a change in the cast of characters in the present tragedy. The first step toward curing the illness in our tax-collection system is to understand the nature of the disease and to discover the ways in which it has spread across the nation.

In the pages that follow, and in successive stories during the next few weeks, the New Republic will present the facts in detail. A few weeks hence, we shall outline as we see them, the steps which must be taken to restore integrity in the federal tax service.