Devious Tax Avoidance

I’ve told you all time and time again how much I recommend using the day’s news to market your business, to join the conversation your prospects are already having, rather than starting your own conversation (which probably won’t interest them very much anyway). So it probably won’t surprise you to learn I spend a fair amount of time, both online and off, combing the news for the information I need to keep TaxCoach up to date, as well as “infotainment” I can use to grab readers’ attention. 

As a history-major-turned-attorney, I’m especially fond of original sources I can cite to substantiate my claims. I’ve found some surprisingly intriguing and entertaining documents to incorporate into my discussions with both you and, for those of you in the Networker program, your clients. I’ve dissected the very first Form 1040 for a Networker email. And I’ve used information from a summary report prepared by Special Agent Frank Wilson used to help prosecute bootlegger Al Capone for another Wire Service email.

Imagine my delight, then, when I came across an 11-page memo that Treasury Secretary Henry Morgenthau wrote for President Franklin Roosevelt back in 1937, as FDR was preparing to campaign against tax loopholes for the rich. (You didn’t think Warren Buffett was the first guy to complain about paying more tax than his secretary, did you?)

Morgenthau’s memo is a classic example of populist indignation, with sentiment that could come straight out of the mouths of today’s Occupy Wall Street protestors, tinged with just a touch of starched-collar righteousness. But more important, his report reveals that legal tax avoidance is nothing new, and sophisticated planners have always worked to use the Tax Code to their clients’ best advantage:

“The investigation of the income tax returns for each successive year reveals the increasingly stubborn fight of wealthy individuals and corporations against the payment of their fair share of the expenses of their Government . . . . But we still have too many cases of what I may call moral fraud — that is, the defeat of taxes through doubtful legal devices which have no real business purpose nor utility, and to which a downright honest man would not resort to reduce his taxes.”

Reading the memo, you can see Morgenthau working himself into a real lather. He attacked percentage depletion as “perhaps the best example of legalized theft from the United States Treasury which the revenue laws still permit.” (Washington still hasn’t seen fit to eliminate it.) He blasted income splitting between spouses as “another legalized fraud on the revenues at the expense of taxpayers in the 40 states which do not have community property laws.” (If you’re thinking to yourself, “wait a minute, there are only eight community property states — what happened to the other two,” remember, this was written in 1937, before the Dakota Territories joined the Union.) And he bemoaned that “one of the most disheartening facts disclosed by our investigation is that lawyers of high standing at the bar are advising their clients to utilize devious tax avoidance devices, and they are actually using them themselves.” (Does he not realize that the attorneys he speaks of would never have used these strategies themselves if they weren’t wholly convinced of their legitimacy?)

Morgenthau didn’t just reveal how his era’s bold-face names avoided taxes. He revealed who, naming names in a way that would land today’s Wiki-leakers in jail:

  • Creation of multiple trusts. Mr. Louis Blaustein of Baltimore established 64 different trusts in favor of his wife and three children, saving his beneficiaries $485,257. Mr. Charles Merrill and Mr. Edwin Lynch had 40 trust funds and 23 personal holding companies. “They operate a great many numbered brokerage accounts and only at the end of the year identify for whose benefit the account has been operated. In this way innumerable transactions are carried on between the different corporations and trusts which have no effect upon the beneficial interests of Merrill and Lynch, but which are designed to reduce their tax liability very greatly.”

 

  • Foreign personal holding corporations. George Westinghouse, Jr. “has a $3 million Bahamas corporation and in an attempt to prevent the Bureau of Internal Revenue from catching up with him, moves his home address from one small hamlet to another each year.” Razor king Jacob Schick renounced his citizenship (renouncing his U.S. Army pension in the process), formed Schick Industries in the Bahamas, and transferred to it his stock in his Connecticut company, thereby evading U.S. law imposing a 25% tax on transfers of securities to foreign corporations.

 

  • Incorporated yachts and country places. “Mr. Alfred P. Sloan’s yacht is owned by Rene Corporation, one of his personal holding companies, along with $3 million in securities. He rents the yacht from his company and the company uses its income from securities to pay depreciation on the yacht, the wages of the captain and crew, and the expenses of operating the yacht.” Wilhelmina Du Pont Ross used a corporation to own her $421,000 country place, saving $20,000 in tax, and even caused the corporation to pay her husband a salary for managing it — “she thereby supplies him with pocket money, and in effect secures a deduction for the expense of maintaining him.”

There aren’t many folks that would find Morgenthau’s memo as fun as I do — but if there are, they’re probably reading these BriefsCheck it out for yourself and see how many of the names you recognize. You’ll be amazed at just how easy it was to avoid taxes in that “innocent” age.

You’ll also get a little historical context and perspective that we rarely get to enjoy in the midst of our day-to-day work. Here at TaxCoach, Keith and I tout proactive tax planning as the best way to build your business. But proactive tax planning isn’t anything new. It’s been going on, legally, morally, and ethically, since before any of us were born. And clients will still love it when our grandchildren are commuting to their offices in flying cars and personal jet-packs.