[Pursuant to that portion of the executive order of June 10, 1933, which transferred to the Department of Justice such functions of conducting litigation as were not then performed by it, a Tax Division was set up in the Department to prosecute or defend all income tax cases in the courts. Such proceedings, except for criminal cases, theretofore had been handled largely by Treasury Department attorneys.
Illustrative of these duties were cases against former Secretary of the Treasury Andrew W. Mellon. Shortly after taking office, Attorney General Cummings determined to use the full powers of his office to bring to an end the practice of claiming losses from fictitious or "wash" sales, which had been freely indulged in by taxpayers to escape their full share of the tax burden. Pursuant to this policy, a substantial number of cases were submitted to grand juries for determination by them as to whether or not criminal prosecution should be had--among them that of Mr. Mellon, which led to criticism and claims of political persecution although similar cases submitted involved both Democrats and Republicans. The grand jury did not return an indictment against Mr. Mellon. However, in civil proceedings before the Board of Tax Appeals the government, represented by General Counsel of the Bureau of Internal Revenue Robert H. Jackson, was successful as to part of its claims (see Mellon v. Commissioner of Internal Revenue, 36 B.T.A. 977), and, before the case was carried further, the Treasury Department accepted a substantial settlement. Frank J. Hogan, who later became President of the American Bar Association, was chief counsel for Mr. Mellon.
Another development of major significance in the tax field was the decision in James v. Dravo Contracting Co., 302 U. S.134, December 6, 1937, in which the Supreme Court permitted state taxation to reach the gross income of government contractors who had previously been exempt upon the theory that they were "federal instrumentalities." This conclusion had been urged by the Department of Justice in a brief filed by the Attorney General as amicus curiae at the invitation of the Court. Following up the movement thus given impetus, on April 25, 1938, the President transmitted to the Congress a message recommending the enactment of legislation which (1) would subject to the federal income tax the interest paid on future issues of federal, state, and municipal bonds and the salaries of state and municipal employees, and (2) would permit state taxation of holders of future issues of federal bonds and of federal officers and employees within the taxing jurisdiction. An intensive study