The Law Does Not Forbid a Helpful Internal Revenue Policy

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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.


  1. There were a number of lawyers listed on the case. Per the case printed here:

    the lawyers were (copy and paste):

    Joseph E. Davies, Esq., John W. Davis, Esq., Arthv/r J. Lacy, Esq., Glarence E. Wilcox, Esq., Franklin D. Jones, Esq., Sidney T. Miller, Esq., Herbert Pope, Esq., E. Barrett Prettyman, Esq., Lewis H. Paddock, Esq., Raymond H. Berry, Esq., Montgomery B. Angelí, Esq., Luman W. Goodenough, Esq., and Russell A. McNair, Esq., for the petitioner.

    Note that all are names are identified as attorneys for the “petitioner.” The opinion indicates that there are petitioners (plural). So I am sure Kamman is right in saying that Prettyman represented one of the petitioners other than Couzens.

    Besides Prettyman, there is at least one other famous lawyer – John W. Davis. His Wikipedia page is here:

  2. Bob does a great post. I only want to clarify something for those who have not read the Dubroff and Hellwig book on the history of the Tax Court and BTA (the one found on the history page of the Tax Court’s website). You may recall that the current IRC speaks of “divisions” of the Tax Court deciding cases, not judges. That is because originally, the 1924 act establishing the BTA also spoke of divisions. For the first few years of the BTA, it had 3-judge divisions. That practice was quickly abandoned and has never been reestablished. Instead, the Tax Court has divisions in which a single judge sits. But, this is the reason why Bob writes that 3 BTA Commissioners decided the Couzens case.

  3. George K. Yin is professor emeritus at the University of Virginia Law School and former chief of staff for the Joint Committee on Taxation. In 2012 he wrote a 79-page history of the JCT’s creation that provides extensive background on the Couzens-Mellon feud. Read it here:

    Since the aspect of this case that got me started on it was the jeopardy assessment, I should have developed that topic at greater length. The plaintiffs argued that this procedure was inappropriate. The BTA had already ruled, in the California Raisins Case (1 BTA 1251) that “the Board is without power to adjudicate whether the circumstances upon which the Commissioner acted were such as to denote jeopardy and justify his belief. We adhere to that decision.” But it really wanted to say something about it anyway. So Judge Sternhagen wrote,

    “But since it may still be doubtful, notwithstanding our own view, whether the Board is required to review the evidence to determine whether in fact ‘the assessment or collection of a deficiency [would have been] jeopardized by delay,’ we have examined the question. Our conclusion is that, since the expiration of the period limited by the statute does indubitably destroy the right of assessment and collection, its imminence within a time too short for the normal operations of the Bureau of Internal Revenue is a fact which may reasonably cause the Commissioner to believe that assessment and collection will be jeopardized by delay and justify him in making an assessment. We find no occasion to construe section 274(d) as excluding such a situation from its ambit.”

    The decision can be found at .

    Fans of Chief Counsel history may want to note that the government in the Couzens case was represented by Alexander W. Gregg, a Mellon protégé. The Battle Creek Enquirer described him as 27 (which was true) and “looks as young as he is.” Three years earlier, a Pittsburgh newspaper called him a Treasury Department “boy wonder,” responsible for drafting Mellon’s tax plan, and reported his age as 29 (which was false). His father was a Texas congressman of the same name who died in 1919.

    Jack Townsend has a sharper eye than mine, to recognize John W. Davis as the losing presidential candidate in 1924 and the loser on the wrong side of “separate but equal” at the Supreme Court in 1954. I confess that my reference to Judge Prettyman was inspired by my colonial ancestors of that surname in Maryland and Virginia. The oldest standing house in the Cincinnati area was built across the Ohio River by my Revolutionary War ancestor Prettyman Merry, around 1790. At one time he owned the land on which the IRS Cincinnati Service Center is now located. Or if not, at least close to it.

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