1874 Ways and Means Report Urges Repeal of Private Tax Debt Collection Law

The Forty-second Congress, at its second session, repealed all laws which provided for the payment of moieties to informers, so far as related to internal-revenue taxes; but in the last hours of the same session, and by means of a committee of conference, there was ingrafted on the legislative, executive, and judicial appropriation bill a provision of seemingly so slight significance as to have been added as the last half of a sentence in one of the usual paragraphs relating to the Internal Revenue Bureau, wherein appropriations have been annually made for the support of said Bureau. This provision is in the following words:

"and from and after the passage of this act the Secretary of the Treasury shall have power to employ not more than three persons to assist the proper officers of the Government in discovering and collecting any money belonging to the United States whenever in the same shall be withheld by any person or corporation, upon such terms and conditions as he shall deem best for the interests of the United States; but no compensation shall be paid to such persons except out of the money and property so secured; and no person shall be employed under the provisions of this clause who shall not have fully set forth in a written statement, under oath, addressed to the Secretary of the Treasury, the character of the claim out of which he proposes to recover, or assist in recovering, moneys for the United States, the laws by the violation of which the same have been withheld, and the name of the person, firm, or corporation having thus withheld such moneys; and if any person so employed shall receive or attempt to receive any money or other consideration from any person, firm, or corporation alleged thus to have withheld money from the United States, except in pursuance of the written contract, made in relation thereto with the Secretary of the Treasury, such person shall be deemed guilty of a misdemeanor, and upon conviction thereof shall be fined not less than one thousand dollars or imprisoned not less than two years, or both, in the discretion of any court of the United States having jurisdiction; and the person so employed shall be required to make report of his proceedings under such contract at any time when required to do so by the Secretary of the Treasury.

Under the provisions of this law contracts were made, the first of which bears date the 8th of June, 1872, and was made with W. H. Kelsey, late a member of Congress from the State of New York, who appears to have been mainly instrumental in securing the passage of the law. Kelsey made but little progress after securing a contract, and on the 3d of August, 1872, requested that his contract be revoked, and that Malcolm Campbell, of Philadelphia, should succeed him. Accordingly on the 9th of August, 1872, said Campbell obtained a contract which was virtually a transfer of Kelsey's contract.

Campbell, making but little progress, surrendered his contract on the 23d day of November following, when J. Nicholson Elbert succeeded him, obtaining a contract, two days later, on the 25th of the same month, Kelsey retaining an interest through the several successions and changes.

Under date of July 29, 1873, John Clark, of Philadelphia, made application for, and, on the 1st of September following, obtained, a contract, out of which some $3,000 have been collected. It appears that the collections under the foregoing contracts up to the date of this investigation amount in the aggregate to about $5,000. The two last named contracts are still in force.

John D. Sanborn, a resident of Massachusetts, who is represented as having been personally acquainted with Secretaries Boutwell and Richardson, on the 15th of July, 1872, applied for and, on the 13th of August following, obtained a contract, which is signed by W. A. Richardson, Acting Secretary of the Treasury, for the collection of taxes illegally withheld by thirty-nine distillers, rectifiers, and purchasers of whisky. At this time, Sanborn was in the employ of the General Government as a special agent of the Treasury Department, his service as such agent commencing in the year 1869 and ending May 31, 1873.

The committee find, by the testimony of Warwick Martin, of New York, that Sanborn employed him under his authority, and while he himself was special agent of the Treasury, "to work up" certain whisky cases in the year 1871, and for these services he gave Sanborn vouchers, which were passed to his credit and paid by the Government, to the extent of about $3,000. This employment probably assisted in securing the indictment, about the 1st April, 1872, of a large number of distillers of and dealers in whisky, in United States court for New York, and the identical cases so worked up and paid for out of the Public Treasury, and against whom indictments were procured about the 1st of April, 1872, are to be found in this first contract subsequently obtained by Sanborn.

Following this, on the 25th of October, 1872, Sanborn made application to have added to his contract the names of 760 persons, alleged to have withheld taxes imposed on legacies, successions and incomes; and on the 30th of October, five days later, these names were added to his contract, the additional contract being also signed by W. A. Richardson, Acting Secretary of the Treasury. On the 19th of March, 1873, Sanborn applied for and had added, on the same day, to his contract the names of some two thousand persons, alleged also to have been guilty of withholding taxes imposed upon legacies, successions and incomes, including the names of 350 foreign residents. On the 1st of July, 1873, Sanborn again asked to amend his contract, and Mr. Richardson, then Secretary of the Treasury, on the 7th of July following, added to his contract the names of 592 railroad companies alleged to be indebted to the Government "for taxes upon dividends and interest paid upon bonds.

The following is a transcript of the proceedings from the records of the Treasury Department by which this remarkable railroad contract was attached to the original contract:

I would respectfully ask that the inclosed list be added to my said contract made with the Secretary of the Treasury, said contract bearing date August 13, 1872, and as amended October 30, 1872.

Subscribed and sworn before me, a legally-appointed notary public for the city and county of New York, this third day of July, in the year eighteen hundred and seventy three.

[SEAL]

The committee find that the information furnished by the paid officers of the Government, on which collections were made, was placed at the disposal of Sanborn, who, availing himself of information paid for by the Government, obtained a contract for the collection of the very claims thus brought to light and found to be due the Government. It further appears from the testimony of Sanborn that, when he applied for this railroad contract, he furnished a list of railroads, taken from a railroad manual or guide, comprising the names of five hundred and ninety-two railroad companies, being substantially the entire list of railroads within the United States; that while he had knowledge of the delinquency of only one hundred to one hundred and fifty of them, he had no knowledge whatever of the delinquency of the remaining four hundred or four hundred and fifty. It also appears that when he so represented it to the officers of the Treasury Department, he was there told that "it didn't make any difference, and to put them all in;" where-upon he made affidavit that the entire five hundred and ninety-two railroad corporations were delinquent and were indebted to the Government. They were accordingly added to his contract.

In this connection it may be proper to add that the officers of the Treasury Department, including the Secretary of the Treasury himself, seem to have no recollection of this fact as sworn to before the committee by Sanborn in reference to the list of railroads included in his contract. The following is a copy of the contract made between the Secretary of the Treasury and Kelsey, being the first one made under the law:

An agreement made this eighth day of June, A.D. 1872, by and between George S. Boutwell, Secretary of the Treasury, party of the first part, and William H. Kelsey, of Genesco, in the county of Livingston and State of New York, party of the second part.

The said party of the second part having been designated by the Secretary of the Treasury as one of three persons to assist the proper officers of the Government in discovering and collecting moneys belonging to the United States, withheld by certain persons or corporations, under one of the provisions of the legislative, executive, and judicial appropriation bill approved May 8, 1872; and the said party of the second part, having fully set forth, as therein required, in a written statement, under oath, addressed to the Secretary of the Treasury, and filed in his office, that he proposes to recover or assist in recovering for the United States from the following * * *

Now, it is agreed by and between the said parties --

First. That the said party of the second part may proceed to collect the said taxes, so alleged to be due to the United States by the said corporations.

Second. That in case any legal proceedings are required to be had in the premises, the same shall be conducted by the proper United States attorney, but no such proceedings shall be taken without the written consent of the Secretary of the Treasury first being obtained.

Third. No settlement of such claims shall be made, except under the provisions of section ten of the act of March 3, 1863.

Fourth. All the costs and expenses which shall be incurred by the party of the second part in investigating and prosecuting the said claims, of every name or nature, shall be paid and borne by said party of the second part, and no part of the same shall be paid out of that portion of whatever shall be realized from said claims under this agreement, which is to be retained by the United States.

Fifth. The said party of the second part shall, whenever required by the Secretary of the Treasury, make a full report in writing of all his acts and proceedings under this contract.

Sixth. Whenever any money shall be collected from said corporations, upon said claims, either by legal proceedings or by settlement or compromise of said claims, such money shall be paid by said corporations to the credit of the Secretary of the Treasury, and out of any money so collected and received there shall be paid to said party of the second part, in full for his services, and for all the costs and expenses of such collection, a sum equal to 50 per cent of the gross sums so collected and received, which said 50 per cent shall be paid to the party of the second part as fast as the money is collected and paid to the credit of the Secretary of the Treasury, the balance of said money to be paid into the Treasury of the United States.

Seventh. This contract may be revoked at any time at the pleasure of the Secretary of the Treasury.

In witness whereof the said parties have hereunto set their hands and seals the day and year above written.

The committee call attention to the fact that the law provides for the "employment of three persons to assist the proper officers in discovering and collecting," while the contracts provide that the contractors "may proceed to collect," thereby ignoring the internal-revenue officers altogether, while it should have been stipulated merely that they should assist the officers. Sanborn, under his contract, was allowed one-half of the gross sum collected. The committee further call attention to the fact that the law provides that no person shall be employed who shall not have fully set forth, in a written statement under oath, the character of the claim out of which he proposes to recover or assist in recovering the moneys for the United States, the laws by the violation of which the same has been withheld, and the name of the person, firm, or corporation having withheld such moneys.

Under this provision, Secretary Boutwell, on the 8th of June, 1872, by the first order of the Treasury Department, issued in relation to the employment of persons under this act, directed that parties applying for contracts shall, to his satisfaction, set forth in a written statement, under oath, to be filed in his office, the character in detail of the claim, the name of the person, firm, or corporation withholding the money, the laws by the violation of which the money has been withheld, and the evidence by which the claim is to be supported; upon doing which a written contract will be made, upon such terms and conditions as he shall deem best for the interests of the United States.

The committee believe that this requirement of Secretary Boutwell was in exact conformity to the law, but they are unable to find in any case that the conditions, as set forth by the Secretary, have been complied with. It is evident that the proper officers of the Government, referred to in the law, could only have been taken to mean officers of the internal revenue.

The committee cannot ascertain that the Commissioner of Internal Revenue, or any officer of his Department, was consulted before, at the time, or since the contracts were made, or that he was advised as to the making of the contracts or of the character of the claims it was intended thereby to be collected.

No communication on the subject ever passed from the office of the Secretary to that of the Commissioner. No order in regard to it was ever issued through the Commissioner's Office, nor were any collections or other actions of his subordinates ever reported to him until after action was taken in the House, calling upon the Secretary for information in relation to these collections. In fact, it is shown that the Commissioner wrote a letter, protesting against the manner of these collections, to the Secretary, which has never been answered. Indeed, this very important officer, to whom belongs exclusively the collection of these taxes, appears to have been studiously ignored by the Secretary of the Treasury and the officers in the office of the Secretary. And without the knowledge of the Commissioner, his subordinates were directed to assist these contractors; and in no case can the committee find that the contractors assisted this officer.

The whole power of the Internal Revenue Bureau, as well as the entire machinery of the Government for the collection of taxes, was placed at the disposal of Sanborn, as the following proofs conclusively show. It appears that Secretary Boutwell issued the following order:

Mr. Sanborn is acting under an appointment from me, and may need some information from the offices of collectors and assessors, for the purpose of verifying his claims.

Very respectfully,

And, again, Secretary Richardson issued the following:

You are requested to assist John D. Sanborn, of Boston, in the examination of such cases of alleged violations of the internal-revenue laws as he may ask for your co-operation.

Mr. Sanborn is acting under an appointment from the Treasury Department, and may need some aid and information from your district for the purpose of verifying his claims.

Please render him such assistance as he requires.

Very respectfully,

It is the opinion of the committee that a very large percentage, if not all, of the $427,000 of taxes collected by Sanborn were not a proper subject of contract under the law, and these taxes should and would have been collected by the Internal Revenue Bureau in the ordinary discharge of their duty.

It is clear that legacy and succession taxes should not have been made a matter of contract. They are not a class of taxes that would need to be discovered, if the internal-revenue officers do their duty under the law and instructions of the Department, making all cases of legacy and succession taxes matter of record in the internal-revenue offices of the country. Even if it were not so, they are certainly matters of record in the probate and surrogate courts of the country, so that they could not be matters in the discovery of which aid was necessary.

Supervisor Tutton, of Pennsylvania, testified before the committee that he required the officers under him to keep lists, as required by law and the instructions of the Internal Revenue Department, of all cases of this character, and they were so kept; and from time to time, as these taxes fell due, large sums have been collected in his collection district. The presumption ought to be that the other internal-revenue officers of the country did their duty as did Supervisor Tutton. Of this class of taxes about $100,000 has been collected under these contracts.

It is shown by the evidence before the committee that about $10,000 was collected by Supervisors Hawley and Simmons from taxes imposed by Schedule C of the internal-revenue laws, for the collection of which no contract was made with Sanborn or any one else.

Nevertheless Sanborn claimed and was allowed 50 per cent thereof. By the testimony of Mr. Odell, treasurer of the Delaware, Lackawanna and Western Railroad Company, and that of Supervisor Hawley, it very clearly appears that the sums collected from the Delaware, Lackawanna and Western Railroad Company, being about $100,000, were well known to the internal-revenue officers and were collected by them, which collection should have been made in the ordinary discharge of their duties and without cost to the Government.

In this collection a very singular circumstance occurred indicating that some one in the Treasury Department must of necessity have advised Sanborn of the remittance of the check which was made payable to the order of the Secretary of the Treasury and was sent directly to him on the 6th of January last. The committee find that the day after its remittance in New York it was received by the Secretary of the Treasury in Washington; and on the following day Mr. Sanborn wrote to the Secretary from New York giving the amount and number of the check and asked that one half of the sum be paid to him. Treasurer Odell testifies that no one in New York but himself and his clerk could have possibly know the number of the check.

The committee do not consider it important to give in detail the different circumstances under which the different collections were made by Sanborn. The foregoing are simply samples of many others shown by the testimony.

If this law is not repealed and these contracts are to remain in force, the contractor, armed with the power that he now possesses, will collect all the taxes due the Government under repealed laws. These taxes amount to several millions of dollars, and this misplaced power will take it all out of the hands of the proper officers of the Government, virtually displacing them by the creation of a new bureau for the collection of this class of taxes, with some such person as one of these contractors at its head, and at the cost of one-half of this large sum.

The theory of the law as administered, is completely reversed, and instead of these three persons being employed to assist the proper officers of the Government, the proper officers of the Government have been made to assist them.

By the terms of the contract, and by the orders of the Treasury Department, the taxes collected by Sanborn could not be paid through the offices of the Internal Revenue Department, as required by law. While the committee have no direct evidence that any internal revenue officer has had a corrupt connection with Sanborn in the collection of taxes, yet the circumstances are such as to show that certain internal revenue officers were willing to obey the orders of Sanborn, and, in doing so, did not communicate the fact to the Commissioner of Internal Revenue, and through their agency very large sums have been collected.

It is certain that a continuance of this system must work to a greater or less extent a demoralization of the entire outside working force engaged under this Bureau, in the collection of the revenues.

The committee feel it their duty to bear testimony to the fidelity of Supervisor Tutton, of Pennsylvania, and to his faithfulness, not only to the Internal Revenue Department but to the best interests of the Government he was sworn to protect. In his district, owing to his energy and vigilance, these contractors marauding upon the public treasury were unable to take these collections out of his hands, notwithstanding the fact that all of them attempted it. He steadily resisted them, and through his own efforts, aided by his subordinates -- officers of the Government -- he has during the continuance of these contracts succeeded in collecting large amounts of taxes of the very class of cases for which contracts have been made.

The committee, feeling alarmed at the apparent looseness with which the law has been administered, were desirous of ascertaining where the responsibility rested, where it would seem to belong, somewhere in the Treasury Department. They have had before them the Secretary, Assistant Secretary Sawyer, and the Solicitor of the Treasury. The Secretary gave but little information and exhibited an entire want of knowledge as to the manner of making the contracts, administering the law, or of the provisions of the law itself. His only connection, so far as he could remember, with these transactions, was in affixing his signature to the various papers presented to him as a mere matter of office routine, without knowing their contents.

The Assistant Secretary disclaimed any particular knowledge of the law or contracts, and he in like manner affixed his signature as a matter of office routine. The Secretary and the Assistant Secretary, by their testimony, show that the papers were prepared by the Solicitor, thus indicating the responsibility upon him. The Solicitor, in turn, testified that he is simply the law officer of the Treasury Department, and a subordinate of the Secretary of the Treasury, without any power in regard to the administration of this law, except that expressly given by the Secretary; that he had consulted in every instance with the Secretary or Assistant Secretary of the Treasury; that he had in all cases simply obeyed the directions of his superior officers, and that the contracts and the various orders of the Department were well known to the Secretary and Assistant Secretary.

The disagreements and contradictions given respectively by these gentlemen, as appears from their testimony, is a matter greatly deplored by the committee, as by it they are unable to fix upon any one, or anywhere, the responsibility for the maladministration of this law; and they look with serious apprehension upon the apparent effort of these gentlemen to transfer the responsibility each from himself to the other.

While the committee, therefore, are unable to determine where the responsibility rests, they cannot in justice to themselves ignore the fact that these three persons deserve severe condemnation for the manner in which they have permitted this law to be administered. While the committee thus severely criticise these officials of the Treasury Department directly charged with the administration of this law, they find nothing impeaching the integrity of Secretary Boutwell's or Richardson's action; and the testimony does not prove that the Secretaries or any of their associates were influenced by corrupt motives. It is due to the Treasury officials to say that, as far back as the administration of the Treasury Department by Secretary Guthrie, such contracts were made for the collection of moneys due the United States in extraordinary cases, and that this practice was continued up to the time Mr. Boutwell became Secretary of the Treasury. When he came into office he found a number of contracts in existence, and his Solicitor testifies that, after a thorough and exhaustive examination, he found no authority in law permitting them to be made, and the Secretary of the Treasury at once annulled them, and that nothing of any consequence was ever collected from this class of contracts. Under the act of 1870, a number of contracts were made by Secretary Boutwell, and although it was represented to the Secretary that large sums were due the Government, and the parties making the contracts professed to be able to collect what was due, the amount collected was very small. With the light of the experience of the Treasury Department in the contract, business here referred to, the officers, we are told, concluded that the parties proposing to take contracts under the law of May 8, 1872, would fail to make collections in any considerable amount, and this fact may account for the apparent neglect of this Department to carefully and strictly enforce the law.

And it is further due to the present Treasury officials to say that not only was this law enacted while the predecessor of the present Secretary was in office, but that the first contracts were made by him, and the general policy of administration subsequently pursued determined upon while Mr. Boutwell was Secretary of the Treasury.

The committee are of opinion that any system of farming the collection of any portion of the revenues of the Government is fundamentally wrong; that no necessity for such laws exist, for the reason that the Secretary of the Treasury and the head of the Internal Revenue Bureau are fully empowered by law to make all collections of taxes including taxes due on account of repealed laws.

The Internal Revenue Bureau is possessed of full knowledge of the laws relating to the collection of the revenue; has all the machinery necessary for their full and complete enforcement, and has full authority in extraordinary cases to pay at discretion, for information, Congress actually making appropriations therefor. Any law that provides for any other method of collecting taxes, the duty of which collection is imposed on any Department of the Government, is in fact a reflection on the Department charged with that duty.

The committee, in view of the facts herewith presented, believe that the law of May 8, 1872, should be repealed, and the contracts made thereunder should be revoked and annulled. They also believe that for every service rendered by these contractors exorbitant reward has been made. For every equity which they might claim more than enough has already been paid. For every legal claim settlement has been perfected on the most liberal scale. In some cases the committee are satisfied moneys have been paid to the contractor to which he was not entitled under the law. Now, when the whole subject has been investigated, in order to end forever all demands against the Treasury on this account, and to avoid the danger that lax administration under careless officers may at some future time afford new opportunity to assail the Treasury under color of these contracts, the statute should in terms exclude all further claim on their part.

To accomplish the purposes here indicated, the committee report to the House the accompanying bill, and recommend its passage.

H. Rep. 559___2