Attorney General William French Smith yesterday said he is returning the $50,000 severance fee he accepted just before taking office and that he will limit his federal income tax deductions on two oil and gas drilling projects to his actual cash investment.
Smith said he believed that all three transactions, which were listed on his annual financial disclosure statement, were "proper," but he said, "The fullest public confidence in the nation's chief law enforcement officer requires an attorney general to do whatever is necessary to avoid even an inaccurate appearance of impropriety.
"Although I earnestly believe that none of these actions are required by propriety or law, public service often invites the use of an even stricter standard. I intend to apply the strictest of standards," he said.
The Office of Government Ethics raised questions about the $50,000 severance payment he received Jan. 12, 1981, when he resigned from the board of directors of the Earle M. Jorgensen Co., a California steel firm, to avoid possible conflict of interest as attorney general. Earle M. Jorgensen, its founder, served with Smith in President Reagan's "kitchen cabinet" of informal advisers.
A company spokesman said other departing directors had received gold watches or continuation of annual directors' fees, but that no other outside director had been given a monetary severance payment.
Smith said he was called late Thursday by the ethics office and asked "whether I was considering any action concerning the severance payment."
J. Jackson Walter, director of the Office of Government Ethics, would not discuss his conversation with Smith, but he approved Smith's financial disclosure statement yesterday, after Smith had amended the disclosure to indicate that he had returned the $50,000 severance fee. Jackson is required to pass final judgment over the disclosures of all top presidential appointees.
Tom DeCair, a department spokesman, said there had been no ruling, either in the Justice Department or in the ethics office, on whether the payment was proper. Several other administration officials also have received severance pay, at least one of which, that of Interior Secretary James G. Watt, has been approved by the ethics office.
DeCair said Smith "has been considering for two weeks the appropriate thing to do. As part of the consideration, you have to decide whether you want to be the first attorney general in 30 years to serve for four years or whether you want to go back to California after the election." Smith apparently has decided that he needed to remove any appearance of a conflict so that he can serve out the full four-year term.
Smith said that the Los Angeles law firm of O'Melveny and Myers had reviewed the transaction for any possible conflict of interest problem before the payment was made.
"Federal law prohibits outside compensation for government services, but the severance payment was made to me prior to my confirmation hearing for past, not future, services," he said, adding that the payment was in appreciation for services he had provided to the company since 1975.
However, Justice Department legal opinions since 1976 have disallowed several severance fees similar to Smith's.
"While receipt of the payment was therefore proper and legal," Smith said, "I have decided to return the payment to dispel unfounded concerns that might create even a possible appearance of impropriety."
Smith said he made his investments in two gas and oil drilling ventures in Oklahoma on the advice of his tax counsel.
The tax shelters were expected to run into problems with the Internal Revenue Service because in the first year, Smith and the other investors were deducting $4 for every $1 invested--twice the amount permitted by a current IRS ruling. Smith and his partners relied on an opinion from a Los Angeles law firm saying they hoped to beat an IRS challenge in court.
Smith would have taken a total of at least $175,000 in tax deductions over three years for an investment of approximately $66,000.
Smith's decision means that he plans to give up anticipated tax deductions of $117,600 on his investments.
Smith personally made the investment in Yale-Quay Energy Partners in December, 1981, almost a year after he took office. He first invested in the gas shelter, called Blackhawk Energy Partners, Ltd., on Dec. 17, 1980, six days after he was nominated to be attorney general.
Smith said he will no longer take deductions beyond his actual investment in transactions entered into after he was selected as attorney general. He also said, "I have advised the deputy attorney general that I will recuse myself from any decisions involving the tax treatment of investments in energy drilling programs."
He added that he would disqualify himself on any other issues that might present the appearance of a conflict. Smith has assets of several million dollars with extensive investments, most of them in a blind trust. The energy investments were made outside the blind trust by Smith.
"The actions I am announcing today will therefore dispel all of the concerns raised in the press about the investments as well as the one transaction about which the Office of Government Ethics inquired," he said.
In Santa Barbara, Calif., where Reagan is vacationing, spokesman Larry Speakes said Smith acted "on his own volition" in giving back the money, adding that there was "no active contact between the White House and Smith on this matter."