Taxes - The difference between paying, avoiding and evading.
a/k/a "Tax Avoidance, Tax Mitigation and Tax Evasion"
The San Francisco Bay Bridge - a common site to those of us who live and work in northern California. This majestic setting is the perfect place to illustrate our tax pay, avoid or evade scenario. On the San Francisco (West) side of the bridge is US 101 while on the Oakland (East) side is Interstate 80. A few hundred yards from the foot of the bridge on the Oakland side is a "toll plaza" with dozens of toll booths. Ironically, the San Francisco side of the bridge doesn't have any toll booths at all.
As one approaches the bridge from the East; Interstate 80 West traffic jockeys into either those wanting to go through the toll plaza and those that desire to turn South down Interstate 580 to San Jose and all parts in between. Now the decisions begin. Do I go on and pay the $2.00 toll, head South to San Jose and take US 101 North up to San Francisco or run the toll booth?
There's nothing illegal about turning South and driving an extra 80 miles to avoid the $2.00 toll (tax) or simply paying the toll (tax) and leisurely drive across the 6 mile bridge BUT the State of California definitely frowns upon those who evade the toll (tax) by running the booths without paying. This is exactly what Judge Learned Hand said in his landmark decision in GREGORY v. HELVERING, Commissioner of Internal Revenue.
In fact, to paraphrase Judge Hand; a motorists driving west on Interstate 80 could even arrange his affairs in such a manner that he would totally avoid the Interstate 80/580 interchange by getting off at Valejo and taking California Highway 37 to Navato connecting with US 101 north toward Oregon or south to San Francisco (but then there is a $3.00 toll at the Golden Gate Bridge). Many Californian believe that if San Francisco could figure a way to erect toll (tax) booths all around the city they would do it.
"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. Over and over again the 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 alike and all do right, for nobody owes any public duty to pay more than the law demands." Judge Learned Hand
293 U.S. 465
HELVERING, Commissioner of Internal Revenue.
Argued Dec. 4, 5, 1934.
Decided Jan. 7, 1935.
[293 U.S. 465, 466] Mr. Hugh Satterlee, of Washington, D.C., for petitioner.
The Attorney General and Mr. J. Crawford Biggs, Sol. Gen., of Washington, D.C., for respondent. [293 U.S. 465, 467]
Mr. Justice SUTHERLAND delivered the opinion of the Court.
Petitioner in 1928 was the owner of all the stock of United Mortgage Corporation. That corporation held among its assets 1,000 shares of the Monitor Securities Corporation. For the sole purpose of procuring a transfer of these shares to herself in order to sell them for her individual profit, and, at the same time, diminish the amount of income tax which would result from a direct transfer by way of dividend, she sought to bring about a 'reorganization' under section 112(g) of the Revenue Act of 1928, c. 852, 45 Stat. 791, 816, 818, 26 USCA 2112(g), set forth later in this opinion. To that end, she caused the Averill Corporation to be organized under the laws of Delaware on September 18, 1928. Three days later, the United Mortgage Corporation transferred to the Averill Corporation the 1,000 shares of Monitor stock, for which all the shares of the Averill Corporation were issued to the petitioner. On September 24, the Averill Corporation was dissolved, and liquidated by distributing all its assets, namely, the Monitor shares, to the petitioner. No other business was ever transacted, or intended to be transacted, by that company. Petitioner immediately sold the Monitor shares for $133,333. 33. She returned for taxation, as capital net gain, the sum of $76,007.88, based upon an apportioned cost of $57,325.45. Further details are unnecessary. It is not disputed that if the interposition of the so-called reorganization was ineffective, petitioner became liable for a much larger tax as a result of the transaction.
The Commissioner of Internal Revenue, being of opinion that the reorganization attempted was without substance and must be disregarded, held that petitioner was liable for a tax as though the United corporation had paid her a dividend consisting of the amount realized from the sale of the Monitor shares. In a proceeding before the [293 U.S. 465, 468] Board of Tax Appeals, that body rejected the commissioner's view and upheld that of petitioner. 27 B.T.A. 223. Upon a review of the latter decision, the Circuit Court of Appeals sustained the commissioner and reversed the board, holding that there had been no 'reorganization' within the meaning of the statute. 69 F.(2d) 809. Petitioner applied to this court for a writ of certiorari, which the government, considering the question one of importance, did not oppose. We granted the writ. 293 U.S. 538 , 55 S.Ct. 82, 79 L.Ed. --.
Section 112 of the Revenue Act of 1928 (26 USCA 2112) deals with the subject of gain or loss resulting from the sale or exchange of property. Such gain or loss is to be recognized in computing the tax, except as provided in that section. The provisions of the section, so far as they are pertinent to the question here presented, follow:
'Sec. 112. ... (g) Distribution of Stock on Reorganization. If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock of securities shall be recognized. ...
'(i) Definition of Reorganization. As used in this section ...
'(1) The term 'reorganization' means ... (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. ... ' 26 USCA 2112(g), (i) (1).
It is earnestly contended on behalf of the taxpayer that since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected; and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result [293 U.S. 465, 469] or make unlawful what the statute allows. It is quite true that if a reorganization in reality was effected within the meaning of subdivision ( B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 506; Superior Oil Co. v. Mississippi, 280 U.S. 390, 395 , 396 S., 50 S.Ct. 169; Jones v. Helvering, 63 App.D.C. 204, 71 F.(2d) 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said.
When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' (section 112(g) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose-a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. [293 U.S. 465, 470] When that limited function had been exercised, it immediately was put to death.
In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.
Billings Learned Hand
Gerald Gunther's biography of Learned Hand paints a portrait of a brilliant, anguished man
Learned Hand: The Man and the Judge, by Gerald Gunther, Alfred A. Knopf, $35 hardback, 818 pages.by Diane Sussman
In legal circles, there is a cherished joke about judge Learned Hand. The setting of the joke is a banquet in heaven, where Voltaire, Socrates, Descartes and Benjamin Franklin are toasting past lives and parsing ennui. As Voltaire rises to speak, the assembled guests shush him and tell him to sit down. "Quiet," they say, "Learned Hand is about to speak."
The anecdote, albeit in slightly different form, concludes Stanford University law professor's Gerald Gunther's new book, "Learned Hand: The Man and the Judge." Gunther also wrote the widely used textbook, "Constitutional Law."
Anyone who has heard the joke will be surprised to learn that it originated with Hand, not with his admirers. Hand used to describe the banquet as the perfect ending to his first day in heaven. Of course, there were other events that preceded the banquet. Earlier on this heavenly day, Hand hit a home run, in the bottom of the ninth with the bases loaded, to bring his underdog team to victory. And that was after Hand caught a punt and scored the winning touchdown, with a minute left to play, in a scoreless game of perfectly matched teams.
Among people outside legal circles, however, the joke may elicit more questions than chuckles.
And the biggest question of all is, who is Hand?
Ranked with Oliver Wendell Holmes, Louis Brandeis and Benjamin Cardozo, Hand has been called "the greatest American judge never to sit on the Supreme Court."
With his electric, bushy eyebrows, cavernous eyes and craggy face, Hand also may be the most photogenic judge in American history. Alfred Eisenstaedt photographed him repeatedly, as did Dan Weiner, whose celebrated 1957 portrait of Hand is contained in the book "The Family of Man."
He certainly was the most enduring justice, serving 52 years, longer than any federal judge in U.S. history. He died in 1961, at the age of 89.
Politically, he was hard to pigeonhole. He waved flags for no party and championed no isms. He valued independence of thought, feared legions of like-minded Babbits. "Our dangers are not from the outrageous but from the conforming," he wrote, "from those, the mass of us, who take their virtues and their tastes, like their shirts and their furniture, from the limited patterns which the markets offer."
Gunther, who says he has spent his life "criticizing judges," considers Hand "the model judge."
"You could not predict how he would rule on a particular case because he did not let ideology or the interests represented in a case dictate his decisions," said Gunther. "He came as close to open-minded, neutral judging as any judge we've ever had."
Gunther's association with Hand goes back 40 years, when Gunther, a refugee from Nazi Germany, served Hand as a clerk on the United States Court of Appeals. As Gunther recalls in the book, Hand was an exacting taskmaster, at one point throwing a paperweight at the young clerk in frustration.
Gunther ducked and never let the experience tarnish his idol.
Indeed, idolatry was what Gunther feared most in writing the biography. "I began despite the fear that my admiration might preclude an absolutely unprejudiced portrayal," he writes in the preface. "I end hoping I have pictured him fully, warts and all. He remains my idol still."
Certainly, if doubt and feelings of isolation are considered "warts," then "Learned Hand" fulfills Gunther's intention.
Hand was born in Albany, N.Y., in 1872, the only son of an intellectually rigorous lawyer and an over-protective, Calvinist mother. Hand was 14 when his father died, and for the rest of his life he felt inadequate beside his own idealized image of his father.
Hand was a driven child, sober and dutiful. Instances of innocent childhood pleasure are striking only for their rarity. "I remember the enchantment of seeing rabbit tracks in the snow," Hand recalled while in his 80s. "A rabbit has four legs but he only makes three tracks."
Hand attended Harvard University, where he studied philosophy with George Santayana and William James. He nearly continued in philosophy, but family loyalty and tradition caused him to choose law.
Hand didn't marry until age 30. Until he met Bryn Mawr graduate Francis Finke, he had never met a woman with the right mix of pluck and intellect. "Most of the women I meet are better fitted for matrimony than anything else," he wrote his cousin, Gus. "But there are some that God made with matrimony so much in mind that that they are married in soul as soon as they have any characters at all, and long before they know one man better than Tom, Dick or Harry."
Because his work kept him in New York, Hand and his wife often were separated for long stretches of time. There are hints of adultery and lesbianism on Francis' part, first with college roommate Mildred Minturn and later with family friend Louis Dow. Neither is substantiated.
Despite all this, the Hands remained married for 59 years and had three children. Toward their end of their lives, they seemed to have found love for each other once again. "I love you and hate to be separated from you," Hand wrote at 78. "It must not go on; we must manage to be together until one of us leaves for all."
Although written to appeal to a wider audience than those in the legal profession, "Learned Hand" does offer some problems for the lay reader, or at least for this lay reader.
First, it is overly long. Twenty years of sifting through Hand's notes, correspondence and opinions seems to have caused Gunther to value everything equally. Would the portrait of Hand really suffer if we never learned that Hand once danced in a dress at Hasty Pudding? Or that he wrote baby talk to his wife and drew pictures of hearts and cats? I doubt it.
Likewise, there are times when the narrative gets bogged down by academic convention. In too many instances, Gunther uses quotes when paraphrasing would do. The style seems altogether too cautious, more concerned with demonstrating thorough research than establishing a story-teller's tone.
There were many instances when I simply wanted more Hand and less narrative. If Hand's words truly had the power to inspire Americans, and not just jurists, then I wanted to hear them, to judge for myself. More than a tell-all biography, I wanted an intellectual biography.
And finally, it wasn't until the end of the book that Gunther addressed my two most pressing questions: What makes a good judge? and, what made this judge great?
For Hand, "complete personal detachment" defined judicial greatness. "As far as possible you must keep your personal choice out of the frame you select. And you must have as much imagination as possible."
Overall, however, "Learned Hand" is a portrait of American greatness. And despite the doubts Hand may have had about himself, there is no doubt whatsoever about the scope of his contribution to American freedom and thought. Sir Thomas Noon Tailfourd could easily have been describing Hand when he said, "Fill the seats of justice with good men, but not so absolute in goodness as to forget what human frailty is."
Or, he might have added, to recognize it in himself.