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FRIDAY, JUNE 21, 1974
HOUSE OF REPRESENTATIVES,
Washington, D.C. The committee met, pursuant to notice, at 10:21
a.m. in room 2141, Rayburn House Office Building, Hon. Harold D. Donohue presiding.
Present: Representatives Donohue, Brooks, Kastenmeier, Edwards, Hungate, Conyers, Eilberg, Waldie, Flowers, Mann, Sarbanes, Seiberling, Danielson, Drinan, Rangel, Jordan, Thornton, Holtzman, Owens, Mezvinsky, Hutchinson, McClory, Smith, Wiggins, Dennis, Fish, Mayne, Hogan, Butler, Cohen, Lott, Froehlich, Moorhead, Maraziti, Latta, and Rodino.
Impeachment inquiry staff present: John Doar, special counsel; Albert E. Jenner, Jr., special counsel to the minority; Samuel Garrison III, deputy minority counsel; Bernard W. Nussbaum, senior associate special counsel, Evan A. Davis, counsel; Richard H. Gill, counsel; R. L. Smith McKeithen, counsel; James B. F. Oliphant, counsel; George Rayborn, counsel, Hillary D. Rodham, counsel;
Gary W. Sutton, counsel; William A. White, counsel; Robert McGraw, investigator; Fred G. Folsom, tax consultant; and Jonathan Flint, research assistant.
Committee staff present: Jerome M. Zeifman, general counsel; Garner J. Cline, associate general counsel; and Franklin G. Polk, associate counsel.
Also present: James D. St. Clair, special counsel to the President; John A. McCahill, assistant special counsel.
Mr. DONOHUE. The meeting will now be in order. The Chair will recognize Mr. Doar. Do you have any comments?
Mr. Doar. Mr. Donohue, members of the committee, there were some members who had further questions with respect to the IRS and the President's income tax returns for the years 1969–73, and we are prepared to respond to the committee members about that this morning, prior to moving on to the next business.
Mr. DRINAN. Mr. Chairman?
Mr. DENNIS. Mr. Chairman, if we are on that, I have two points
Mr. DENNIS. The first item, these points are fairly clear, but I want to be sure about them. First, in tab 9 of your book, which is the letter from Commissioner Alexander to the special prosecuting attorney saying that Mr. DeMarco, Mr. Newman, and Mr. Morgan and so on should be investigated by the grand jury for possible violation of section 7206 (2) of the Code, if I am correct, that is a section which contends with those who willfully aid or assist in or procure counselor advice—this is tab 8. I am sorry, I said 9. If I confuse you, I am talking about the letter at tab 8 from Commissioneer Alexander where he asked the grand jury to look into violations of section 7206(2) by the named individuals
. Now, as I read that section, it applies to those who willfully aid, assist, procure counselor advice in the preparation or presentation of the return, whether or not such falsity or fraud, whether any material matters false and so on, whether or not such falsity is with the knowledge or the consent of the person authorized or required to present such return.
In other words, as I read it, that section deals completely and only with the preparer and not with the taxpayer himself. Is that correct?
Mr. DOAR. That is correct.
Mr. DENNIS. And in fact, 7206(1) above will deal with the taxpaver; right?
Mr. Doar. That is correct.
Mr. DENNIS. OK. Now, one other question if I may. Turning over to the tab which shows the negligence deficiency or penalty, whatever tab that is, tab 9, the last page of tab 9, the 5-percent negligence penalty, if I understand it correctly, that is assessed under section 6653 where it says if any part of any underpayment is due to negligence or intentional disregard of rules or regulations, but without intent to defraud, the 5-percent penalty is applied; is that correct?
Mr. DOAR. That is correct.
Then the next section, B, which does deal with fraud, applies a 50percent penaltv; is that correct?
Mr. Doar. That is correct.
Mr. Doar. Mr. Chairman, could I make a statement because I think this might be helpful with respect to the questions. I was thinking after the presentation yesterday that committee members might consider that there may be three ways that they can think about this particular matter.
First, they can consider it as if the President were just an ordinary citizen like one of yourselves, or myself or Mr. Jenner, or anyone else, and consider the presentation as if it were strictly a question of whether or not there was evidence or sufficient evidence to support going forward with a criminal fraud case. That is one way you could look at it.
The second way to look at this matter or inquiry is whether or not there is any reason to believe that the President used his position as President wrongfully in connection with the audit of his income tax returns.
Now, to summarize the material, you recall yesterday the President got a complimentary letter from the IRS in 1972 saying that his 1971 and 1972 returns had been cleared, or he got the letter in 1973, and then later on in connection with this subsequent audit, there was no effort made as far as we can tell to interview the taxpayer. The IRS subpenas were not used, as far as we could tell.
But, as far as we have been able to find, there has been no indication that the President used his position to bring this somewhat favorable treatment as a taxpayer about. And the inference at the moment seems to be that you may have had a situation where the IRS just had been in the habit of treating Presidents more favorably with respect to their tax returns than other taxpayers.
And then the third situation that you could have is whether or not the President failed to meet his responsibility to take care that the laws were faithfully executed in taking no action with respect to the preparers of his returns once the preparers of the returns, or it became clear that there was evidence, indeed substantial evidence that they had engaged in a plan and put it in operation in order to permit the President take an illegal and improper deduction.
Now, with respect to item No. 1, I think it would be helpful for the committee if Mr. Folsom, who is a reliable and impartial source, could advise the committee as to what the criteria would be, and what the factors would be, what factors would be taken into account in the ordinary case, an ordinary case by any taxpayer if these facts were presented for review. I do not suggest that Mr. Folsom express his opinion one way or the other, but I think the committee members are entitled to have the best judgment and the best professional advice on the criteria and the procedures that would be followed and have been followed with respect to this particular matter.
And I say that because I think I have a responsibility to say to you that in this particular matter of whether or not the matter has been resolved, there is some support for the suggestion that every other constitutional body has ducked the question. The Joint Committee ducked it, the IRS ducked it, and I am not saying there is positive proof of that, but there is enough that I think this question needs your attention and I owe it to you to say that, and I have after 6 months a great affection for this committee and for the House of Representatives, and I think that I owe it to you to say that I think this committee might well want to consider just for a few more minutes some of these questions about criteria and factors in connection with this deliberation.
Mr. RANGEL. Mr. Chairman?
Mr. MARAZITI. Mr. Chairman, may I make a request before we leave this particular subject?
Mr. DONOHUE. Why don't we hear from Mr. Folsom and then you may proceed.
Mr. Folsom. Gentlemen, very briefly, the ordinary criminal tax case of the ordinary taxpayer who is in trouble takes a course in the Internal Revenue Service of referral from the Audit Division, or from some outside source that arouses suspicion, it is referred to the Intelligence Division. A special agent is assigned to the case, a revenue agent is assigned to the case. There is a joint investigation conducted.
The special agent prepares a special agents report, which is a detailed analysis of the investigation he has conducted, his conclusions and his recommendation. Then that report is reviewed by a regional counsel of the Revenue Service, and if it is approved for prosecution it is referred across the street to the Department of Justice where it lodges in the Criminal Section in the Tax Division of the Justice Department.
In that section it is assigned to a line attorney who is charged with determining if the evidence is sufficient to support the recommended charges, and to determine if that evidence would be likely to persuade a jury.
With that background, in this instance, there is no special agent's report. The report of the Joint Committee has to suffice for the most part as supplemented by the investigation of your staff to provide the basis for consideration. If this were being investigated or being considered by the Tax Division at the Justice Department, they would be looking at such matters as the evidence to establish that the papers gift was an untimely effort, and that it was falsely included on the tax return for 1969. And then, of course, if it was included wrongfully on the tax return for 1969, it was also included wrongfully as a carry forward item in 1970, 1971 and 1972.
The factors we would look to in that respect have been discussed at considerable length by Mr. Nussbaum yesterday, and I do not think it would serve any particular useful purpose to review them here. Suffice it to say that if Tax Division were considering this, we would be reasonably secure in concluding that the papers gift deduction was improperly included on the 1969 return.
Then we would be looking for proof of the taxpayer's complicity, his mens rea, willful intent to falsify his return. In this case you will readily recognize that this is a built-in reliance on counsel, reliance on others that insulates the taxpayer almost automatically from much of what was done in respect to the papers gift deduction.
However, we would be looking at other criteria. And one of the matters that you should bear in mind is that the law in this area says that it is impossible to look into a man's mind and tell precisely what is there, and what went through his mind at a given time, and von have to determine this from circumstances and extraneous facts and an occasional glimmer from the taxpaper himself. In this case the taxpayer has never been interviewed. This would be very unusual in a criminal tax case coming to the Department of Justice, because ordinarily the first thing the agent does after he gets the preliminary information that there is a possibility of fraud in the case is to go to the taxpayer. Much information is secured from the taxpayer, and generallv a taxpayer is represented by counsel at interviews that are frequently quite extensive. There was no interview in this instance.
The Joint Committee sent a memorandum of questions to the President for response, and the best way to characterize it, I think, is this was ignored and no response was made. This would be a factor that in the case of the normal taxpayer the prosecutor would consider.
Then there would be facts such as the rather startling discovery by Mr. Nixon in November 1968 that there was available to him a magnificent tax shelter. This would be something that we would con