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The Making of a Tax Break: The Oil Depletion Allowance, Scientific Taxation, and Natural Resources Policy in the Early Twentieth Century

Published online by Cambridge University Press:  25 July 2011

Peter A. Shulman*
Case Western Reserve University


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Copyright © Donald Critchlow and Cambridge University Press 2011

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1. “The Hollywood Wildcats,” Time, 10 October 1949, 93–94. Other investors in Stewart’s venture included Sinatra himself, along with Hollywood figures Lou Wasserman and Leland Hayward and Continental Airlines president Robert Six. See Serling, Robert J., Maverick: The Story of Robert Six and Continental Airlines (Garden City, N.Y., 1974), 106.Google Scholar For perspective on the scale of the investment, $75,000 represented nearly twenty-five times the median income that year of $3,107. See U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970, Bicentennial ed. (Washington, D.C., 1975), 296.

2. “The Hollywood Wildcats.” Hope and Crosby were brought into the oil business by Texas wildcatter and fellow golfer Monty Moncrief and the Dallas geologist Paul C. Teas. Teas had initially advised Moncrief on the field. Bing Crosby, Call Me Lucky (New York, 1953), 254; Helgesen, Sally, Wildcatters: A Story of Texans, Oil, and Money, 1st ed. (Garden City, N.Y., 1981), 8890.Google Scholar See also “Bing and Bob Hit It Again—Oil This Time,” Los Angeles Times, 10 August 1949; “Bob Hope Gushes at Sight of His Texas Oil Well,” Los Angeles Times, 15 August 1949; “Don Ameche May Enter Oil Business,” Los Angeles Times, 23 August 1949; Bob Hope, “Inside Bob Hope,” Los Angeles Times, 22 January 1950; Philip K. Scheuer, “Expert Discloses Tax Silver Lining: Stars Can Keep out of Top Brackets by Using ‘Devices,’” Los Angeles Times, 3 February 1959.

3. “Oilmen” were often as attracted to Hollywood as actors were drawn to oil fields; see Carey McWilliams, “The Oil Men Invade Hollywood,” Nation, 16 October 1948 (in which McWilliams also makes a similar point about the similarities between the film and oil industries). On an earlier episode of the oil-film interaction, see Tygiel, Jules, The Great Los Angeles Swindle: Oil, Stocks, and Scandal During the Roaring Twenties (New York, 1994).Google Scholar Southern California’s first oil booms are described in Paul Sabin, Crude Politics: The California Oil Market, 1900-1940 (Berkeley and Los Angeles, 2005), which focuses on the political economy that made them possible, and White, Gerald T., Scientists in Conflict: The Beginnings of the Oil Industry in California, Huntington Library Publications (San Marino, Calif., 1968).Google Scholar For a fictionalized account by a literary celebrity and California resident who was himself drawn into oil speculation, see Upton Sinclair, Oil! (Berkeley and Los Angeles, 1997).

4. Freeman, Harrop A., “Percentage Depletion for Oil: A Policy Issue,” Indiana Law Journal 30, no. 4 (1955): 402Google Scholar; Senate Committee on Finance, The Revenue Act of 1950: Report of the Committee on Finance . . . To Accompany H.R. 8920, 81st Cong., 2nd sess., 1950, S. Rep. 2375, 6. A marginal tax rate of 80 percent represented the highest tax rate scheduled to apply to all income above a specified level. In 1949, this level was $200,000 for individuals. For the wealthiest earners, marginal rates could sometimes apply to the majority of income.

5. Scheuer, “Expert Discloses Tax Silver Lining: Stars Can Keep out of Top Brackets by Using ‘Devices.’”

6. New Republic, 14 May 1951, 4; Griswold, Erwin N. in Baker, Rex G. and Griswold, , “Percentage Depletion—A Correspondence,” Harvard Law Review 64, no. 3 (January 1951): 365Google Scholar, 378; Harry Truman, Message from the President of the United States Transmitting Request for a Revision of the Tax Laws, 81st Cong., 2nd sess., 1950, H. doc. 451, 4–5. Julian Zelizer notes that during World War II, House Speaker Sam Rayburn and Ways and Means chair Robert Doughton only placed Democrats on this critical committee if they toed the party line supporting issues such as the depletion allowance. Zelizer, Julian E., Taxing America: Wilbur D. Mills, Congress, and the State, 1945–1975 (New York, 1998), 36Google Scholar; Lichtblau, John H. and Spriggs, Dillard P., The Oil Depletion Issue (New York, 1959), 134–35.Google Scholar

7. Revenue Bill of 1926—Conference Report, 69th Cong., 1st sess., 1926, H.Rep. 356, 31.

8. Historians of the oil industry have typically concluded that the oil depletion allowance emerged, like other kinds of corporate subsidies, simply in response to political pressure from oil producers and to serve rationally determined policy ends, thus leaving out the historical messiness of determining what exactly was rational and who got to decide. See, for example, Nash, Gerald D., United States Oil Policy, 1890–1964: Business and Government in Twentieth Century America (Pittsburgh, 1968) 3435Google Scholar; Isser, Steve, The Economics and Politics of the United States Oil Industry, 1920–1990: Profits, Populism, and Petroleum (New York, 1996), 8283Google Scholar; Zimmermann, Erich W., Conservation in the Production of Petroleum (New Haven, 1957), 198200Google Scholar; Melosi, Martin V., Coping With Abundance: Energy and Environment in Industrial America (New York, 1985), 100101.Google Scholar

9. Seligman, E. R. A., “The Importance of Precision in Assessments,” in State and Local Taxation, Second International Conference Under the auspices of the International Tax Association, Held at Toronto, Ontario, October 6–9, 1908: Addresses and Proceedings (Columbus, Ohio, 1914), 213.Google Scholar

10. In analyzing these diverse group actors, I am largely relying on what political scientists have described as a pluralist model of policy development. However, while interest-group politics may well explain the persistence of the depletion allowance after 1926, only a historical examination of the administrative challenges surrounding the origins of depletion can explain the purposes to which it was put and the form it ultimately took. On the persistence of the depletion allowance, see Jon R. Bond, “Oiling the Tax Committees in Congress, 1900–1974: Subgovernment Theory, the Overrepresentation Hypothesis, and the Oil Depletion Allowance,” American Journal of Political Science 23, no. 4 (November 1979): 651–64.

11. Belkin, Gary S., “The Technocratic Wish: Making Sense and Finding Power in the ‘Managed’ Medical Marketplace,” Journal of Health Politics, Policy and Law 22, no. 2 (April 1997): 509–32.CrossRefGoogle ScholarPubMed

12. The literature on Progressive Era expertise is large and growing, much of it focused on how newly professionalizing groups (similar to the petroleum geologists and engineers discussed in this article) asserted the privileged status of their knowledge and training and crowd out competing views. This focus on expertise was vital to Progressive policy development. According to Linda Gordon, expertise was, in fact, the defining element of Progressivism, and she observes that despite their varied and conflicting policy goals, Progressives were unified in their belief that expertise and objective evidence “should form the basis of public policy—in fact,” she writes, “that expertise could resolve seemingly unresolvable political stalemates.” See Linda Gordon, “SHGAPE Distinguished Historian Address: If the Progressives Were Advising Us Today, Should We Listen?” Journal of the Gilded Age and Progressive Era 1, no. 2 (April 2002): 111. The classic statement of the progressive impulse toward a reliance on experts can be found in Samuel Haber, Efficiency and Uplift: Scientific Management in the Progressive Era, 1890–1920 (Chicago, 1964). James A. Morone emphasizes the failures of Progressive reform, emphasizing how new agencies designed to be administered by dispassionate experts were captured by interest groups and fell prey to the self-interest of state actors. See Morone, , The Democratic Wish: Popular Participation and the Limits of American Government, rev. ed. (New Haven, 1998), 115–23.Google Scholar For some exemplary works on the expert role of young professions and the claims to technical expertise in politics, see Bernstein, Michael A., A Perilous Progress: Economists and Public Purpose in Twentieth-Century America (Princeton, 2001)Google Scholar; Layton, Edwin T. Jr., The Revolt of the Engineers: Social Responsibility and the American Engineering Profession (Cleveland, 1971)Google Scholar; Ann Dzuback, Mary, “Women Scholars, Social Science Expertise, and the State in the United States,” Women’s History Review 18, no. 1 (February 2009): 7195CrossRefGoogle Scholar; Critchlow, Donald T., The Brookings Institution, 1916–1952: Expertise and the Public Interest in a Democratic Society (DeKalb, Ill., 1985)Google Scholar; Feingold, Kenneth, Experts and Politicians: Reform Challenges to Machine Politics in New York, Cleveland, and Chicago (Princeton, 1995)Google Scholar; Cittadino, Eugene, “Expert Testimony and the Red River Boundary Dispute,” Isis 95, no. 2 (June 2004): 183219.CrossRefGoogle ScholarPubMed Although the role of geologists and engineers in developing (or failing to develop) tax policy has not previously been recognized, Ajay K. Mehrotra has explored the roles of two other professional groups asserting expertise in crafting income taxation, economists and lawyers, in “Envisioning the Modern American Fiscal State: Progressive Era Economists and the Intellectual Foundations of the U.S. Income Tax,”UCLA Law Review 52 (2004–5): 1793–1866, and Mehrota, “Lawyers, Guns, and Public Moneys: The U.S. Treasury, World War I, and the Administration of the Modern Fiscal State,”Law and History Review 28, no. 1 (February 2010): 173–225.

13. Koppes, Clayton R., “Efficiency/Equity/Esthetics: Toward a Reinterpretation of American Conservation,” Environmental Review 11, no. 2 (Summer 1987): 127–46 (129).Google Scholar On how conservation policies had consequences for the development of the American state itself, see Schulman, Bruce J., “Governing Nature, Nurturing Government: Resource Management and the Development of the American State, 1900–1912,” Journal of Policy History 17, no. 4 (2005): 375403CrossRefGoogle Scholar; and Balogh, Brian, “Scientific Forestry and the Roots of the Modern American State: Gifford Pinchot’s Path to Progressive ReformEnvironmental History 7, no. 2 (April 2002): 198225.CrossRefGoogle Scholar The literature on conservation history is vast. For the classic statement of Progressive conservation as rational management, see Hays, Samuel P., Conservation and the Gospel of Efficiency: The Progressive Conservation Movement, 1890–1920 (Cambridge, 1959).Google Scholar When they discuss conservation, broader interpretations of Progressive Era policies have largely followed Hays; see, for example, Morone, The Democratic Wish, 120–21. For a succinct survey of conservation in the early twentieth century, see Pisani, Donald J., “The Many Faces of Conservation: Natural Resources and the American State, 1900–1940,” in Taking Stock: American Government in the Twentieth Century, ed. Keller, Morton and Shep Melnick, R. (New York, 1999).Google Scholar On the development of conservation into the 1920s, the best account remains Donald C. Swain, Federal Conservation Policy, 1921–1933 (Berkeley and Los Angeles, 1963). Federal water development in the West has seen extensive analysis; see Worster, Donald, Rivers of Empire: Water, Aridity, and the Growth of the American West (New York, 1992)Google Scholar; and Pisani, Donald J., Water and American Government: The Reclamation Bureau, National Water Policy, and the West, 1902–1935 (Berkeley and Los Angeles, 2002).CrossRefGoogle ScholarOn forest policy, see Langston, Nancy, Forest Dreams, Forest Nightmares: The Paradox of Old Growth in the Inland West (Seattle, 1995)Google Scholar; and Williams, Michael, Americans and Their Forests: A Historical Geography (New York, 1989).Google Scholar On the aesthetic, moral, and economic dimension of National Parks, see Alfred Runte, National Parks: The American Experience, 3rd ed. (Lincoln, 1997). Some of the best work to explore Progressive Era conservation and its aftermath has come from biographies of leading figures. See Worster, Donald, A Passion for Nature: The Life of John Muir (New York, 2008)Google Scholar; Miller, Char, Gifford Pinchot and the Making of Modern Environmentalism (Washington, D.C., 2001)Google Scholar; and Meine, Curt, Aldo Leopold: His Life and Work (Madison, 1988).Google Scholar More recently, historians have begun exploring the darker underside of Progressive conservation in ways that highlight both its failures and the people it harmed; see Karl Jacoby, Crimes Against Nature: Squatters, Poachers, Thieves, and the Hidden History of American Conservation (Berkeley and Los Angeles, 2001); Taylor, Joseph E., Making Salmon: An Environmental History of the Northwest Fisheries Crisis (Seattle, 1999)Google Scholar; Warren, Louis, The Hunter’s Game: Poachers and Conservationists in Twentieth-Century America (New Haven, 1997).Google Scholar While these innovative histories have revealed the human and environmental costs of conservation, they have left in place the emphasis on state and federal efforts to manage or protect natural resources.

14. The principle of the rule of capture in U.S. oil production is usually traced to the 1889 Pennsylvania Supreme Court decision Westmoreland Natural Gas Company v. DeWitt, in which the court, in an analogy to the wild animals of English common law, labeled water, oil, and natural gas “minerals ferae naturae” and subject to the ownership of whomever owns the land on which they are captured. See Robert E. Hardwicke, “The Rule of Capture and Its Implications as Applied to Oil and Gas,” Texas Law Review 13, no. 4 (June 1935): 391–422.

15. The best historical account of petroleum engineers, predominantly for the period after that described in this article, may be found in Edward W. Constant II, “Science in Society: Petroleum Engineers and the Oil Fraternity in Texas, 1925–65,” Social Studies of Science 19, no. 3 (August 1989): 439–72. Constant, however, argues that the prime motivators of the development of petroleum engineering after World War I were a Progressive Era impulse toward “stability, efficiency, rationality, and conservation” coupled with the anticipated shortage of oil supplies in the early and mid-1920s (see p. 445). He does not mention the central role of tax policy in promoting rationalization in the development of American oil fields and creating a demand for the activities of petroleum engineers.

16. The federal government also pursued antitrust action, most notably against Standard Oil, but this involvement focused on Standard’s grip on the interstate transportation of oil, not its role in production. See Standard Oil Co. of New Jersey v. United States, 221 U.S. 1. On the history of oil conservation, see Zimmermann, Conservation in the Production of Petroleum; Clark, John G., Energy and the Federal Government: Fossil Fuel Policies, 1900–1946 (Urbana, 1987), 3743Google Scholar, 81–109, 146–65; Nordhauser, Norman E., The Quest for Stability: Domestic Oil Regulation, 1917–1935 (New York, 1979)Google Scholar; Giebelhaus, August W., Business and Government in the Oil Industry: A Case Study of Sun Oil, 1876–1945 (Greenwich, Conn., 1980), 112–45Google Scholar; McDonald, Stephen L., Petroleum Conservation in the United States: An Economic Analysis (Baltimore, 1971)Google Scholar, esp. 34–42; Isser, The Economics and Politics of the United States Oil Industry, 3–60. Still useful is John Ise, The United States Oil Policy (New Haven, 1926), esp. 105–224, 274–90. On post–World War I oil diplomacy, see Randall, Stephen J., United States Foreign Oil Policy Since World War I: For Profits and Security, 2nd ed. (Montreal, 2005).Google Scholar The best survey of the most important state oil regulatory agency is found in Prindle, David F., Petroleum Politics and the Texas Railroad Commission (Austin, 1981).Google Scholar On state oil conservation and the limits imposed by federalism, see Brand, Donald R., “Corporatism, the NRA, and the Oil Industry,” Political Science Quarterly 98, no. 1 (Spring 1983): 99118.CrossRefGoogle Scholar

17. W. Elliot Brownlee has argued that the excess-profits taxes of World War I “thrust the federal government into the financial structures of corporations to a degree, and with a complexity, that was without precedent in the United States.” The depletion allowance, which developed, in part, as a response to excess-profits taxation, led to an especially substantial government involvement in natural resources industries in particular. See Elliot Brownlee, W., “Economists and the Formation of the Modern Tax System in the United States: The World War I Crisis,” in The State and Economic Knowledge: The American and British Experiences, ed. Furner, Mary O. and Supple, Barry (Washington, D.C., and New York, 1990), 408.Google Scholar Historians of taxation more generally have not emphasized the unusual and influential role of natural resources industries in shaping tax policy, or tax policy in shaping natural resources industries. Christopher Howard’s marvelous study of the “hidden welfare state” focuses on tax expenditures (exemptions to encourage some policy goal) in the realm of social policy, avoiding discussion of either the politics or policies of natural resources taxation. See Howard, Christopher, The Hidden Welfare State: Tax Expenditures and Social Policy in the United States (Princeton, 1997).Google Scholar I thank Julian Zelizer for drawing my attention to this book. John F. Witte simply notes that percentage depletion replaced discovery depletion based on revaluation in 1926 because the discovery approach “had proven an administrative nightmare.” See Witte, The Politics and Development of the Federal Income Tax (Madison, 1985), 94. Brownlee mistakenly claims that depletion allowances were introduced in the 1920s as a special favor to industry, rather than being introduced in the 1910s and with theoretical rationales behind them, gradually curtailed through most of the 1920s, and changed with unanticipated consequences in 1926. See Brownlee, Federal Taxation in America: A Short History (New York, 1996), 60. Other important works do not mention natural resources and depletion at all; see, for example, Buenker, John D., The Income Tax and the Progressive Era (New York, 1985)Google Scholar , and Stanley, Robert, Dimensions of Law in the Service of Order: Origins of the Federal Income Tax, 1861–1913 (New York, 1993).Google Scholar

18. Sabin, Crude Politics.

19. Hays, Conservation and the Gospel of Efficiency.

20. National Tax Association, Digest and Index, 1907–1925, ed. Blakey, Roy G. and Blakey, Gladys C. (New York, 1927)Google Scholar ; Lutz, Harley L., The State Tax Commission: A Study of the Development and Results of State Control over the Assessment of Property for Taxation (Cambridge, Mass., 1918).Google Scholar

21. Zander, C. M., “Report of the Committee on Taxation of Mines and Mineral Lands,” in Proceedings of the Seventh Annual Conference Under the Auspices of the National Tax Association (Madison, 1914), 387–92.Google Scholar Between 1907 and 1924, the National Tax Association produced thirteen separate reports on taxing mines and oil and gas wells. Fifteen more covered related challenges in forest taxation. National Tax Association, Digest and Index, 49–59. On the varieties and challenges of state mine taxation, see Emanuel Young, Lewis, Mine Taxation in the United States (Urbana, 1917), 122209.Google Scholar

22. Hoover, Herbert, Principles of Mining: Valuation, Organization, Administration: Copper, Gold, Lead, Silver, Tin, and Zinc (New York, 1909), 2.Google Scholar

23. Ibid. for quotation; on the role of price, 34–41.

24. Hoover saw both market and corporate reasons for mine valuation. “The valuation of mines arises not only from their change of ownership, but from the necessity in sound administration . . . that managerial and financial policy may be guided aright. Also with the growth of corporate ownership there is a demand from owners and stockholders for periodic information as to the intrinsic condition of their properties.” Ibid.

25. P. J. Miller and Charles R. Howe to T. S. Adams, 24 November 1913, Box 25, Thomas Sewell Adams Collection, Yale University.

26. C. S. Patterson to T. S. Adams, 24 December 1913, Box 25, Thomas Sewell Adams Collection, Yale University.

27. After years of debate, Wisconsin passed a constitutional amendment authorizing an income tax in 1908, and its first income tax law in 1911. An amended act in 1913 incorporated the principle of mineral depletion as discussed in this paragraph. Other states adopted similar or competing innovations in taxation during the first two decades of the twentieth century as well, notably California’s corporation tax of 1910. By 1915, various kinds of income taxes were on the books in Mississippi, North and South Carolina, Oklahoma, and Virginia, with several others permitting income taxation by constitutional amendment. See Ajay K. Mehrotra, “Forging Fiscal Reform: Constitutional Change, Public Policy, and the Creation of Administrative Capacity in Wisconsin, 1880–1920,” Journal of Policy History 20, no. 1 (2008): 94–112; R. Rudy Higgens-Evenson, The Price of Progress: Public Services, Taxation, and the American Corporate State, 1877 to 1929 (Baltimore, 2003), 77–91. On mine income taxation in particular, see Young, Mine Taxation in the United States, 131–33.

28. Armitage, Paul, “Distributions from the Depletion Reserve Under the Federal Tax Laws,” Report of the Proceedings of the American Mining Congress 25 (1922): 589.Google Scholar Armitage’s New York Firm, Douglas, Armitage & McCann, represented as counsel the Mining and Metallurgical Society of America, and Armitage himself served as secretary to the American Institute of Mining and Metallurgical Engineers’ Committee on Federal Taxation of Mines, which, according to the A.I.M.E., “should constitute a permanent organization to act and coöperate with the Treasury Department in matters of mining taxation under the Federal Income and Excess Profits Tax Laws.” See Bulletin (Mining and Metallurgical Society of America) 12, no. 1 (31 January 1919): 12; “Report of the A.I.M.E. Committee on Federal Taxation of Mines,”Mining and Metallurgy, no. 156 (December 1919): ix–xii.

29. Treasury Decisions Under Internal Revenue Laws of the United States 14 (1911): 132–34; Stratton’s Independence, Ltd. v. Howbert, 231 U.S. 399 (1913). Pitney’s decision against Stratton’s Independence’s radical tax claims is notable in the context of his reputation as a justice friendly to corporations on matters of tax law. In his most important tax case, Eisner v. Macomber 253 U.S. 189 (1920), Pitney ruled that corporate dividends could not be treated as income under the Sixteenth Amendment. See Michal R. Belknap, “Mr. Justice Pitney and Progressivism,” Seton Hall Law Review 16, no. 2 (1986): 406–7.

30. Ralph Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918,” 14 March 1919, Box 132, Ralph Arnold Collection, Huntington Library, San Marino, California (hereafter RAC-HL), and Seidman, J. S., Seidman’s Legislative History of Federal Income Tax Laws (New York, 1938), 998.Google Scholar Congress had actually acknowledged the principle of depletion before. During the Civil War, it debated including in a revenue measure a depletion deduction for extracting natural resources, but the provision was ultimately defeated. Blakey, Roy G. and McAlpine, GladysCampbell Blakey, The Federal Income Tax (New York, 1940), 5.Google Scholar

31. Williamson, Harold F. et al. ., The American Petroleum Industry: The Age of Energy, 1899–1959, vol. 2 (Evanston, Ill., 1959), 266–67.Google Scholar

32. Ajay K. Mehrotra, “Creating the Modern American Fiscal State: The Political Economy of U.S. Tax Policy, 1880–1930” (Ph.D. diss., University of Chicago, 2003), 443.

33. This tax was know as the War Excess Profits Tax Law, passed as part of the War Revenue Act on 3 October 1917 and applied to profits exceeding 7 percent to 9 percent (plus $3,000). An earlier Excess Profits Tax Law, passed on 3 March 1917, never in effect and repealed by the act of 3 October, would have assessed a surtax of 8 percent on net income above the sum of $5,000 plus 8 percent of the total capital invested by the taxpayer. See Brownlee, “Economists and the Formation of the Modern Tax System in the United States,” 407; Roy G. Blakey, “The War Revenue Act of 1917,” American Economic Review 7. no. 4 (December 1917): 795; Strachan, Hew, Financing the First World War (New York, 2004), 81Google Scholar; Seidman, J. S., Seidman’s Legislative History of Excess Profits Tax Laws, 1946–1917 (New York, 1947), 348–81.Google Scholar

34. Daniel C. Roper, “Report of the Commissioner of Internal Revenue,” in Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1918, 65th Cong., 3rd sess., 1919, H. doc. 1451, 929–30.

35. Ibid., 931. For more on U.S. war finance, see Brownlee, “Economists and the Formation of the Modern Tax System in the United States;” Elliot Brownlee, W., “Social Investigation and Political Learning in the Financing of World War I,” in The State and Social Investigation in Britain and the United States, ed. Lacey, Michael J. and Furner, Mary O. (Washington D.C., and New York, 1993)Google Scholar; Gilbert, Charles, American Financing of World War I (Westport, Conn., 1970).Google Scholar For an international assessment of war finance, see Horn, Martin, Britain, France, and the Financing of the First World War (Montreal and Ithaca, 2002)Google Scholar; Strachan, Hew, The First World War: To Arms, vol. 1 (New York, 2001), 815992.Google Scholar

36. R. C. Allen, “Mine Taxation,” Box 134, RAC-HL.

37. According to Williams, the West Virginia senator “who is thoroughly acquainted with the [oil] business,” William Chilton, drafted the revised depletion language. See Congressional Record 53 (1916): 13,286.

38. Seidman, Seidman’s Legislative History of Federal Income Tax Laws, 967–68.

39. Smaller operators in the south organized a sibling organization, the Texas Gulf Coast and Louisiana Oil and Gas Association.

40. “Report of Committee on Tax Hearing: Representatives of Oil and Gas Association State That Excess Profits Tax Contains ‘Atrocities’—Business Can’t Bear up under It If It Is Literally Applied—Brief Filed at Washington,” Oil and Gas Journal 16, no. 29 (1917); “Mid-Continent Oil & Gas Association: New Organization Makes Pertinent and Timely Suggestion in Reference to Fixing War Oil Tax by the Federal Government,” Oil and Gas Journal 16, no. 25 (1917).

41. “War-Profit Tax Is Viewed with Alarm: All Oil Interests but Very Big Ones Menaced by Proposed Government’s Tax Program,” Oil and Gas Journal 16, no. 26 (1917). This view was adopted by the Senate in its draft of the 1918 Revenue Act. See Senate Committee on Finance, Revenue Bill of 1918, 65th Cong., 3rd sess., 1918, S. Rep. 617, 6. How hazardous the oil business actually was provoked some dispute. In genuine wildcatting operations, where explorers drilled in geologically unknown territory, the risks were indeed great, with 90 percent of wells failing to produce oil. In proven territory, the risks were very different. When the oil industry began in Oklahoma in 1904, only 20 percent of wells failed; during the ensuing years of development there, the risk dropped to only 10 or 11 percent. Ralph Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918,” 14 March 1919, Box 132, RAC-HL.

42. Since the 1916 Revenue Act, operators could indeed take depletion based on cost, though discovery depletion was invariably more attractive.

43. “Committee Reports on War Tax Law: Gross Production Tax as a Substitute Is Not Recommended—Valuation Method Preferred,” Oil and Gas Journal 16, no. 31 (1918). The Mid-Continent Oil and Gas Association had first proposed a percentage depletion allowance of 25 percent, but the proposal failed to gain traction in Washington and within a few weeks the lobby began pressing for the geologically based valuation method. “War-Profit Tax Is Viewed with Alarm: All Oil Interests but Very Big Ones Menaced by Proposed Government’s Tax Program,” “Report of Committee on Tax Hearing.”

44. Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918.”

45. Roper had already disbanded an earlier advisory board, the Excess Profits Tax Advisers, that he had established to help interpret the meaning of the 1917 Revenue Act. Some of the membership of these two boards overlapped. Allen, “Mine Taxation”; Roper, “Report of the Commissioner of Internal Revenue,” 937–38, 940–41. On T. S. Adams’s chairmanship of the committee and role as Treasury tax adviser, see Brownlee, “Economists and the Formation of the Modern Tax System in the United States,” 408–21.

46. “Federal Tax Work an Illustration of Association Endeavor,” The Mid-Continent Year Book 4 (1921): 20–21.

47. Arnold, Ralph, “Oil Geology in Relation to Valuation,” Bulletin of the Geological Society of America 31, no. 4 (1920): 440.CrossRefGoogle Scholar Though written in 1918, this article was not published until 1920. Commissioner Roper abolished the ad-hoc board altogether in September 1918 and replaced it with a semipermanent bureaucracy for reviewing complicated tax returns. By the time it was disbanded, the War Excess Profits Tax Reviewers had “considered hundreds of appeals, held hundreds of hearings and rendered opinions in hundreds of difficult cases, filled many gaps and bridged many chasms and . . . enabled a more permanent organization to take shape behind it.” Allen, “Mine Taxation.”

48. “Making Appraisals for Depletion Allowance,” Oil and Gas Journal, 8 November 1918.

49. Arnold questionnaire for the U.S. Civil Service Commission, n.d., Box 49, RAC-HL; Arnold to Van H. Manning, 19 March 1917, Box 45, RAC-HL; Manning to Arnold, 20 March 1917, Box 45, RAC-HL; “Ralph Arnold: Bibliography and Summary of Autobiography,” 1 December 1956, Box 2, RAC-HL; Max W. Ball, Petroleum Withdrawals and Restorations Affecting the Public Domain, U.S.G.S. Bulletin 623 (Washington, D.C., 1917), 102–17; Arnold, Ralph, Macready, George A., and Barrington, Thomas W., The First Big Oil Hunt, Venezuela, 1911–1916 (New York, 1960).Google Scholar

50. Petroleum geologists often defined themselves as antiacademics, intellectual bricoleurs borrowing techniques of structural geology here, oil-field engineering there, all the while maintaining an entrepreneur’s eye toward verifiable results and the bottom line. The boundary between petroleum geology and petroleum engineering was porous and many professionals kept feet in both fields. As a pioneer explained, “The petroleum geologist is not a pure scientist who proclaims his theories and takes no heed whether they are right or wrong; he is an applied scientist who lives by what he produces. He is a trained engineer in a business now dominated by men of little training, but with a strong venturesome spirit.” Sidney Powers, “Petroleum Geology—Its Past and Its Future: Foreword,” Bulletin of the American Association of Petroleum Geologists 5, no. 4 (1921): 446. Like chemistry at the same moment and physics three decades later, petroleum geology offered the tools of science on behalf of extraordinary industrial growth. In turn, the field was rewarded with funding; as early as 1921, experienced geologists speculated that between 80 percent and 90 percent of all geological research in the United States was carried out by geologists working for the petroleum industry. See DeGolyer, E., “Debt of Geology to the Petroleum Industry,” Bulletin of the American Association of Petroleum Geologists 5, no. 3 (1921): 396.Google Scholar

51. In 1918, the overall annual median income was $1,140; for salaried professionals, $1,765. If $9 per day were projected over five days a week, fifty-two weeks a year, these government geologists would have received $2,340. Although many did not work with the program for a full year, their salaries from the program were clearly quite generous. Ralph Arnold to Prof. L. C. Glenn, 18 October 1918, Box 49, RAC-HL; J. O. Lewis to Ralph Arnold, 15 October 1918, Box 49, RAC-HL; Mabel Holloway Eirich to Ralph Arnold, 19 October 1918, Box 49, RAC-HL; Ralph Arnold to C. G. Smith 30 September 1918, Box 48, RAC-HL; “Typed List of Revenue Agents,” n.d., Box 57, RAC-HL. For 1918 median incomes, see Brown, Clair, American Standards of Living, 1918–1988 (Cambridge, Mass., 1994), 10.Google Scholar

52. Arnold, “Speech Before Oil Producers,” 9 May 1919, Box 34, RAC-HL.

53. Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918.”

54. The theoretical principles behind this shift were based on an appreciation of land itself, as valuing oil property from a theoretical perspective required an immersion in the geology of individual tracts and wells as well as an understanding of the broader economic context. Simply measuring the quantity of oil underground was insufficient in determining value because so many other factors weighed heavily. Geologists calculating theoretical values thus relied upon a spectrum of geological, chemical, technological, and economic considerations. The character of the oil mattered, since “light” oil contained more valuable fractions like naphtha and gasoline than the fuel-oil-rich “heavy” oils. “Light” and “heavy” describe oil’s specific gravity, or the relative weight of the oil as compared with an equal volume of water. Since the components of crude oil varied from region to region and field to field, determining specific gravity indicated the kinds of refined products (and their values) a particular well would yield. Structural geology indicated the quantity of oil underground and whether the broad dome of an anticline or a massive chunk of salt trapped substantial oil deposits. Locating underground fault zones also provided clues for oil traps. Natural gas pressure, the extractive technologies used, the anticipated costs of production, and the degree of certainty of these estimates itself—all contributed to geologists estimates of value. Arnold, “Oil Geology in Relation to Valuation,” 434–39.

55. Keller, Morton, Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933 (Cambridge, 1990), 4950.Google Scholar

56. Valuation was used to set rates, restrict railroad consolidation, constrain what Dixon called “the financial juggler,” and serve as a basis for investments. Valuation also shaped accounting. “In the accounting problems of the present,” Dixon observed, “such for example as depreciation, an accurate valuation of property with all the historical confusion of accounts eliminated, and a systematic method of keeping this valuation abreast of the times should be of enormous utility. Anything that contributes to the soundness and scientific exactitude of accounting increases the efficiency of public regulation.”Haigh Dixon, Frank, Railroads and Government: Their Relations in the United States, 1910–1921 (New York, 1922), 76.Google Scholar

57. Moorhead, William S., “What Is the Matter with the Income Tax Unit,” The National Income Tax Magazine 1, no. 9 (October 1923): 7.Google Scholar

58. Bureau of Internal Revenue, Manual for the Oil and Gas Industry Under the Revenue Act of 1918 (Washington, D.C., 1919), 27Google Scholar, italics in the original; Ralph Arnold to J. H. G. Wolf, 4 November 1918, Box 49, RAC-HL; Ralph Arnold to J. C. Donnell, 19 October 1918, Box 49, RAC-HL.

59. T. E. Savage to Ralph Arnold, 26 October 1918, Box 49, RAC-HL.

60. Thomas A. O’Donnell to Arnold, 29 January 1919, Box 53, RAC-HL.

61. Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918.”

62. “Proposed Method of Figuring Depreciation of Oil Lands,” ca. 1919, Box 132, RAC-HL.

63. Beal, Carl, The Decline and Ultimate Production of Oil Wells, with Notes on the Valuation of Oil Properties (Washington, D.C., 1919), 67, 14.Google Scholar

64. Beal, The Decline and Ultimate Production, 7, 9; Bureau of Internal Revenue, Manual for the Oil and Gas Industry Under the Revenue Act of 1918.

65. On the development of geophysical prospecting methods, see Bowker, Geoffrey C., Science on the Run: Information Management and Industrial Geophysics at Schlumberger, 1920–1940 (Cambridge, 1994)Google Scholar; and Wesley Owen, Edgar, Trek of the Oil Finders: A History of Exploration for Petroleum (Tulsa, 1975), 489534.Google Scholar

66. Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918”; Arnold, “Speech Before Oil Producers.”

67. Savage to Arnold, 1 November 1918, Box 49, RAC-HL. For a time, the definition of proven acreage was decided on a case-by-case basis, largely relying on the experience of oil producers. Early in 1919 and to the dismay of Arnold and his colleagues, an arbitrary forty acres was substituted; see note 90.

68. Caudill, Samuel J., “The Application of Depletion Allowances to Oil Property Taxation,” AAPG Bulletin 5 (1921): 485–86.Google Scholar Even geologists involved in this work could concede that “geology is not an exact science and geological data in connection with oil production cannot always be mathematically evaluated.” Carl Beal, “Essential Factors in the Valuation of Oil Properties,” AAPG Bulletin 3 (1919): 367–68.

69. Bureau of Internal Revenue, Regulations 45: Relating to the Income Tax and War Profits and Excess Profits Tax Under the Revenue Act of 1918, with Addenda, Containing all Treasury Decisions to December 2, 1919 (Washington, D.C., 1920), 7375, 7778Google Scholar; Bureau of Internal Revenue, Regulations 62 (1922 Edition): Relating to the Income Tax and War Profits and Excess Profits Tax Under the Revenue Act of 1921 (Washington, D.C., 1922), 9294, 9697.Google Scholar

70. Regulations 45, 75, 78–80; Regulations 62, 93–94, 97–101.

71. McGrath, T. O., “Mine Accounting Methods in Relation to Federal Taxes,” in Report of the Proceedings of the American Mining Congress, Twenty-Fifth Annual Convention, Cleveland, Ohio, October 9 to 14, 1922 (Washington, D.C., 1922), 587–88.Google Scholar See also McGrath, T. O., Mine Accounting and Cost Principles (New York, 1921).Google Scholar71 At around the same time, oil-producing states also began to introduce record-keeping requirements for regulatory purposes. Obviously, a common impulse toward efficient production and technical expertise underlay both federal and state regulations, though for slightly oblique purposes; also, the kinds of data the BIR required—most importantly geologically-based estimates of the sizes of proven reserves and projections of their value—are not found in any state regulation at least as late as 1920.

Texas developed the most elaborate oil-regulatory regime through its Railroad Commission (which was empowered to require any necessary record keeping to effect conservation), but it did not promulgate its first set of regulations until July 1919, after Ralph Arnold and the BIR’s Natural Resources Section had developed and disseminated their interpretation of the 1918 Revenue Act. Texas’s regulations required producers to account for the quantity of oil and gas produced and the prices at which they were sold, along with records from lease transactions. In terms of technical data, Texas drillers had to record and submit the locations of all wells drilled or plugged, the geology of the strata they drilled through, the materials they used, records of well production logs, and natural gas well pressures. Outside Texas, several other states required certain record keeping in the oil and gas industry: California required notification of the location, depth of deposit, and depth and manner of water shutoff for all wells, along with drilling logs recording the geology and character of each well and monthly production reports; Colorado required drilling logs; Indiana required a State Natural Gas Supervisor to tabulate basic statistics for gas drilling without specifying how he was to obtain that information; Kansas required the number and location of gas wells and drilling logs, and charged a state inspector to measure technical details like gas pressure and the quantity of gas produced; Louisiana charged a state official to report on quantity of oil and gas produced, in what geological strata, with what underground pressures, and with what capital investment in the industry; later, in 1916, producers were required to make quarterly reports of the quantity of oil and gas produced and where; Ohio required field maps; Oklahoma, through its Corporation Commission, required meters, drilling logs, and production records; and Wyoming required reports on the total gross mine product in previous years. Morrison, R. S. and De Soto, Emilio D., Oil and Gas Rights (San Francisco, 1920), 528–52Google Scholar, 570–71, 592, 601, 627, 650–51, 659, 686, 716, 732, 793.

72. A. C. Bedford to Arnold, 4 December 1918, Box 49, RAC-HL. In marked contrast, the committee simultaneously condemned a similar investigation by the Federal Trade Commission; according to Arnold, “not because our questions are less burdensome but because we have made the operators a part of our conferences and have thus made them feel that they were responsible for the questions rather than being quizzed by some outside agency.” Ralph Arnold to Daniel Roper, 6 December 1918, Box 49, RAC-HL.

73. Ralph Arnold Memorandum to Daniel C. Roper, 27 March 1919, Box 47, RAC-HL.

74. Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918.”

75. Claude Parker to Ralph Arnold, 7 December 1918, Box 48, RAC-HL.

76. Henry McGraw to Ralph Arnold, 26 February 1919, Box 51, RAC-HL.

77. Ralph Arnold Speech Transcript, 9 May 1919, Box 134, RAC-HL.

78. Arnold, “Valuation of Oil Properties Under the Revenue Act of 1918.”

79. “Memorandum Regarding the Work of the Oil and Gas Section of the Internal Revenue Bureau to June 30, 1919,” Box 53, RAC-HL; Ralph Arnold to Daniel Roper, 6 December 1918.

80. Arnold, “Speech Before Oil Producers.”

81. “Gypsy Geologist Resigns,” Oil and Gas Journal, 4 July 1919. Arnold believed that the bureau’s efforts in valuation would be a great boon to the geological profession. Writing to a colleague in the U.S.G.S. who specialized in metals and was considering venturing into private consulting, Arnold observed that the Treasury work in “valuing mining, oil and similar properties should furnish a lot of work for competent mining geologists and engineers, particularly mining geologists, as the problem of valuation hinges largely on the quantity of ore reserves and probable profits that will accrue from their exploitation.” Ralph Arnold to F. L. Ransome, 23 July 1919, Box 53, RAC-HL.

82. J. O. Lewis to Daniel C. Roper, 24 January 1919, Box 132, RAC-HL.

83. Arnold, “Speech Before Oil Producers.”

84. Gilbert, American Financing of World War I, 222; Brownlee, “Social Investigation and Political Learning in the Financing of World War I,” 337–43.

85. Allen, “Mine Taxation.”

86. R. C. Allen to Bradley Stoughton, 8 September 1919, Box 50, RAC-HL; comments of Fay, Mr. Albert H. in the “Wednesday Afternoon Session,” Report of the Proceedings of the American Mining Congress, Twenty-Fifth Annual Convention, Cleveland, Ohio, October 9 to 14, 1922 (Washington, D.C., 1922), 547–53.Google Scholar

87. Immediately after the war, the branch’s mines section suffered the most, as inadequate funding kept it to a mere three engineers and a handful of assistants. Supporters of the bureau’s work claimed that the number should have been closer to thirty or forty; actual staff numbers grew somewhat by 1922. The Oil and Gas Section fared somewhat better, on account of the publicity and educational efforts of Arnold and his team, especially in assembling the Manual for the Oil and Gas Industry, which systematically explained the rules for and importance of oil taxation. Allen, “Mine Taxation”; Ralph Arnold to Bradley Stoughton, 4 December 1919, Box 50, RAC-HL.

88. Quote from “Comments of Batson, Mr. E. H. in the “Wednesday Afternoon Session,” Report of the Proceedings of the American Mining Congress, Twenty-Fifth Annual Convention, Cleveland, Ohio, October 9 to 14, 1922 (Washington, D.C., 1922), 555Google Scholar; Moorhead, William S., “What Is the Matter with the Income Tax Unit,” The National Income Tax Magazine 1, no. 9 (October 1923): 7Google Scholar; “The Causes of the Large Increase in Tax Refunds,” The National Income Tax Magazine2, no. 5 (May 1924): 142–43.

89. Congressional Record 61 (1921): 5815–16, 6111; Revenue Act of 1921, U.S. Public Law 67–98 (23 November 1921), chap. 136 § 214(a)(10); Revenue Act of 1924, U.S. Public Law 68–176 (2 June 1924), chap. 234 § 214(a)(9).

90. Carl H. Beal to Ralph Arnold, 27 October 1919, Box 50, RAC-HL; Ralph Arnold to M. L. Requa, 22 April 1919, Box 132, RAC-HL; “Deductions Allowed—Depletion after Discovery of Oil and Gas Wells—Proven Tract or Lease—Disproportionate Value, Articles 220 and 221 of Regulations 45 Amended,” 1919, Box 132, RAC-HL. T. S. Adams confirmed to Arnold that Congress intended only to support the wildcatter, though he had argued at the time for even more generous tax incentives to stimulate oil production for the war. See T. S. Adams to Ralph Arnold, 24 April 1919, Box 132, RAC-HL. Later Adams concluded that depletion provisions offered the taxpayer “his greatest extra statutory advantages,” as Congress’s intention to reward exploration and genuine discovery had been twisted by oil producers and permitted by the Treasury to grant the privileges of discovery depletion to tracts that in no conventional sense of the word could be considered newly discovered. Noting that property holders adjoining land with new oil discoveries typically drilled offsetting wells, Adams charged that “discovery depletion is granted to three offsetting wells or perhaps ten where it is granted to one true discovery well. But the doctor who discovered a cure for sleeping sickness or arteriosclerosis could take no deduction for the cost of his laboratory materials used in making the discovery.” Adams, T. S., “Proposals for Administrative Tax Changes Made by Dr. Adams,” The National Income Tax Magazine 3, no. 12 (December 1925): 433.Google Scholar

91. For a fascinating exploration of the development of Mellon’s plan, see Mary Susan Murnane, “The Mellon Plan: The Income Tax and the Penetration of Marginalist Economic Thought into American Life and Law in the 1920s” (Ph.D. diss., Case Western Reserve University, 2006).

92. For his part, Mellon responded by directing the Bureau of Internal Revenue to investigate Couzens’s sale of Ford stock in 1919, claiming he had underpaid the government some $10,000,000. The action was an ill-conceived blunder on Mellon’s part; the Board of Tax Appeals that settled the case concluded that while Couzens’s payments were indeed incorrect, he had in fact overpaid the government and warranted a refund of $900,000. Barnard, Harry, Independent Man: The Life of Senator James Couzens (New York, 1958), 8394Google Scholar, 158–67; Cannadine, David, Mellon: An American Life (New York, 2006), 315–17, 43–48.Google Scholar

93. Senate Select Committee on Investigation of the Bureau of Internal Revenue, Investigation of the Bureau of Internal Revenue: Partial Report, 69th Cong., 1st sess., 1926, S. Rep. 27, 1–2, 8.

94. Ibid., 95, Senate Committee on Finance, Revenue Act of 1926 [Hearing], 69th Cong., 1st sess., 1925–26, 159–60.

95. Select Committee, Partial Report, 3–4, 17, 88, and for the entire range of cases, 1–129 more generally.

96. Ibid., 4.

97. Howard, The Hidden Welfare State, 3–16.

98. Select Committee, Partial Report, 20.

99. Manson noted that of 13,671 claims for discovery depletion examined by the Couzens Committee, only thirty-five represented real discoveries of new oil deposits. See Senate Committee on Finance, Revenue Act of 1926: Hearings Before the Committee on Finance, U.S. Senate, 69th Cong., 1st sess., 4, 5, 9, and 12–14 January 1926, 151, 154, 163.

100. House Committee on Ways and Means, Revenue Revision, 1925 [Hearings], 68th Cong., 2nd sess., 19 October to 3 November 1925, 1006.

101. Ibid., 162.

102. “Depletion Deduction to Determine Net Taxable Income of Oil and Gas Wells,” Mid–Continent Annual Report 9 (1926). The initial Finance Committee proposal was for a 25 percent deduction; it was increased to 30 percent during Senate debate. The House-Senate Conference Committee compromised with 27½ percent. Congressional Record 67 (11 February 1926): 3761–78.

103. Ibid., 3767.

104. Ibid., 3761–63.

105. Texas senator Tom Connolly recalled that the 27½ percent compromise was reached “because it became obvious that if we asked for more, a majority of Congress might have cut it off entirely.” See Connolly, Tom, My Name Is Tom Connolly (New York, 1954), 158–59.Google Scholar

106. Paul Y. Anderson, “The Sacred Ointment,” Nation, 24 March 1926, 311.

107. House Committee on Ways and Means, General Revenue Revision, 85th Cong., 1st sess., 27 January 1958, 1,982, 1,991. Hollywood lawyer Roger Marchetti made a similar argument before the Bureau of Internal Revenue in 1938. According to Marchetti, a typical movie star had five to seven years of success before returning to relative obscurity, yet much of his or her income—upward of 70 percent in those years for actors earning $400,000—was taxed by the federal government and the State of California. “Popularity is the source of their income,” he explained, “and that runs dry as quickly as an oil well does.” Marchetti sought a depletion allowance, or something like it, for those in Hollywood, just as Reagan would twenty years later. “Tax Relief Plea to Liken Film Stars to Oil Wells,” Los Angeles Times, 3 January 1938.

108. Cannon, Lou, Reagan (New York, 1982), 9091Google Scholar; Reagan, Ronald, An American Life (New York, 1990), 117.Google Scholar

109. Joint Committee on Internal Revenue Taxation, Reports of the Joint Committee on Internal Revenue Taxation, Sixty-Ninth Congress, Pursuant to Section 1203 (b) (6), Revenue Act of 1926. Division of Investigation, Vol. 1–Part 2: Preliminary Report—Depletion—Oil and Gas Revenue Act of 1926 (Washington, D.C., 1927), 1011Google Scholar, 13–14, 30–31.

110. Ibid., 14, 30. On justifications of depletion, see Lichtblau and Spriggs, The Oil Depletion Issue, 26–32.

111. Zelizer, Taxing America, 300–304.

112. Rex G. Baker in Baker and Griswold, “Percentage Depletion—A Correspondence,” 366.

113. The leading executive and central architect of Amerada was Everette Lee DeGolyer, one of the most influential figures in the twentieth-century oil business, and at an early stage of his career, one of Ralph Arnold’s regional lieutenants conducting geological research for the BIR during World War I. See “Manual for the Oil and Gas Industry,” Box 57, RAC-HL; Tinkle, Lon, Mr. De: A Biography of Everette Lee DeGolyer (Boston, 1970), 216.Google Scholar In 1944, Amerada returned a mere $200,000 to the Treasury, an effective tax rate of 4 percent, lower than the year before, lower than the oil industry average of almost 39 percent, and lower still than the overall industry average of nearly 55 percent. Amerada’s taxes were low because of the company’s deft use of the depletion allowance. According to Fortune, with depletion provisions, Amerada “quite literally, does not have to pay any federal income tax if it does not want to.”“Amerada Plays Them Close to the Chest,”Fortune, January 1946, 128–30, 158; Freeman, “Percentage Depletion for Oil: A Policy Issue,”402.

114. Melosi, Coping with Abundance, 266.

115. Blakey and Blakey, The Federal Income Tax, 187.