ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW MUCH TAXES DO YOU REALLY HAVE TO PAY?
By Robert S. Schriebman
It is tax time once again. For many it is the most stressful and distressing time of the year. What if there was a formula you could apply to pay the minimum tax possible? This formula would be applied to any type of tax you could imagine – IRS, FTB, EDD and CDTFA. I’m happy to tell you that there is such a formula and it has been around since 1934. It is not a specific number, but it is a workable guideline.
There are two leading tax cases that established a guideline and workable formulas. I will discuss both cases and set forth these formulas.
Gregory v. Helvering, 69 F.2d 809 (1934)
This case was decided by Judge Learned Hand, one of the most famous judges in all of American jurisprudence. In this case Ms. Gregory attempted to take shares of stock out of one of her corporations without having to pay income taxes. She created a dummy corporation, transferred the desired corporation’s stock into it and dissolved the dummy corporation three days later. She claimed that the transaction was a tax-free corporate reorganization, and therefore the stock received on the corporate dissolution should be tax free to her. Judge Hand saw through her charade and made her pay the income taxes she would have had to pay had the dummy corporation not been created. Judge Hand established the first formula for legal tax avoidance.
“We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one chose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
Commissioner v. Newman, 159 F.2d 848 (1947)
This case was also decided by Judge Hand. In this matter Newman sought to transfer future taxable income to his children through the creation of a series of trusts. Newman retained control over the trusts including the rights to alter, amend, revoke, or terminate them. Too much control over the trusts prevents income from being shifted from the trust creator or settler to the beneficiaries. In deciding the trusts were shames, Judge Hand established the second formula for tax planning.
“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more on the name of morals is mere cant.”
What Do These Formulas Tell Us?
Both of Judge Hand’s formulas tell us that we are not obligated to pay one dime more in taxes than we legally have to. That is the bottom line. By this statement, I want to distinguish between tax avoidance and tax evasion. Avoidance is legal; evasion is not.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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