Patriot or Criminal: The Important Distinction Between Tax Avoidance and Tax Evasion
On June 16, 1931 Al Capone—the notorious gangster at the top of the F.B.I’s ‘Most Wanted’ list—was sentenced to 11 years behind bars for tax evasion. Tax evasion is an ugly phrase that runs hand-in-hand with words such as slimy, crooked, shady, corrupt. Those who purposefully and criminally evade paying their due in taxes are justifiably scorned as unscrupulous cheaters.
Unfortunately, there is a common, but mistaken, belief that tax avoidance is the same as tax evasion; that it is in some way shady and just a lesser evil than tax evasion.
This is not true. Tax evasion is the unlawful nonpayment or underpayment of taxes. Tax avoidance is entirely different: it is a perfectly legal and scrupulous practice employed by honest and upstanding citizens. Tax avoidance is simply arranging one’s financial affairs in such a way as to minimize tax liability within the law.
If not illegal, isn’t tax avoidance at the very least unpatriotic?
Not at all! In the words of Federal Appellate Judge Learned Hand:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v Helvering 1934
“Over and over again courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands.” Commissioner v Newman 1947
Isn’t that just one man’s opinion?
It is true that in this world opinions are plentiful, and finding a quote to support your position on any given subject is not hard to do. Goodreads and BrainyQuote will pull up hundreds of eloquent phrases to uphold your cause in just a few seconds. However, taking the time to check the validity of the quote, the context of the quote, or the credentials of the person being quoted takes a bit more time. (An important practice rarely employed.)
Who is Judge Learned Hand, and why should his opinion hold weight?
A graduate of Harvard Law School, Billings Learned Hand served as a federal judge from 1909-1951. He is a renowned judicial philosopher and defender of free speech whose judgments continue to stand as guidelines for interpreting law into the current century.
According to his profile in John R. Vile’s, Great American Judges: an Encyclopedia, Learned Hand is the most frequently quoted lower-court judge by legal scholars, as well as United States Supreme Court justices.
A January 27, 1947 article in the Washington Post said of him:
"He has won recognition as a judges' judge. His opinions command respect wherever our law extends, not because of his standing in the judicial hierarchy, but because of the clarity of thought and the cogency of reasoning that shape them."
All this leads to a simple conclusion: Judge Learned Hand’s statements regarding tax avoidance are far more than simple opinion; they are well-thought out, law-based, clarifying, and solid words which one can safely base action upon.
Great! Now, how do I make sure I’m avoiding and not evading taxes?
As with most things, at some point it’s time to call on the experts. Title 26 of the U.S. Code (aka ‘tax code’) is 3.4 million words on 7,500 full-sized pages. Once, when asked for his reaction on the income tax code, Albert Einstein replied, “This is a question too difficult for a mathematician. It should be asked of a philosopher.” He then did the smart thing and hired tax accountant Leo Mattersdorf to file his taxes.
The State Board of Equalization employs an entire staff of experts whose sole purpose is administrating the tax code regarding the transactions of aircraft, vessels, and vehicles.
Fortunately, the taxpayers of California have access to their own team of experts to help them avoid paying more in taxes than is required. Aero & Marine Tax Professionals are experts in the highly specialized area of California sales tax law, and who are committed to assist and defend the taxpayers right to pay no more than is legally due.
Smart isn’t a matter of knowing the intricacies of the tax code, it’s a matter of knowing when, and from whom, to get help.