US Tax Planning for High Net Worth Investors​

Helvering v. Gregory

In the landmark case, Helvering v. Gregory 69 F.2d 809, 810 (2d. Circuit Court of Appeals, 1934), reversed a decision of The Board Of Tax Appeals (precursor to US Tax Court) see: Gregory v. Commr. 27 B.T.A. 223 (1932), and found against the taxpayer (Mrs. Gregory); Hand’s decision was affirmed by the US Supreme Court in the case: Gregory v. Helvering 293 U.S. 465, 469 (1935).

In Helvering v. Gregory, Judge Hand stated two tax rules:

1) ”a transaction does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Anyone may so arrange (their) affairs that (their) 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.”

2) The purpose of a business transaction (in this case a business reorganization and a dividend distribution) was to “exempt transactions (from tax) undertaken for “reasons germane to the conduct of a business” not when the sole purpose of a transaction was tax avoidance”… (the purpose of the transaction should be) to “exempt (from tax) the gain from exchanges (i.e. in this case a “reorganization”) made in connection with a transaction (reorganization) in order that the “ordinary business transactions will not be prevented”.

At the time of the US Supreme Court decision in Helvering v. Gregory, the Internal Revenue Code (adopted in 1913) was barely 20 years old, so the case had far reaching implications on the rule of law and tax planning to minimize allowable taxes due to be paid.

Several major cases followed in which lower courts (Federal Courts of Appeal and the Tax Court) expounded:

1) Asiatic Petroleum Co. (Delaware) Limited v. Commr. 79 F.2d 234 (1935) (Swan J. citing Gregory in support of the proposition that taxpayers can legitimately decrease their taxes);

2) Commr. V. Eldridge 79 F.2d 629 (1935), citing Gregory in support of the proposition that a “taxpayer may resort to any legal method available to him to diminish the amount of his tax liability”);

3) Rands v. Commr 34 B.T.A. 1094 (1936) citing Gregory for the proposition that “the purpose to save income taxes is now legally above reproach”).

Regarding tax planning and the intricacies involved, it is left best to Judge Learned Hand who stated:

“The words of such an act as the Income Tax… merely dance before my eyes in an meaningless procession: cross-reference to cross-reference, exception upon exception- couched in abstract terms that offer no handle to seize hold of-leave in my mind only a confused state of some vitally important, but successfully concealed purport which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help a saying of William James about certain passages in Hegel: that they were no doubt written with a passion of rationality; but that one cannot held wondering whether to the reader they have any significance save the words are strung together with syntactical correctness.” (Learned Hand, Thomas Walter Swan, 57 YALE L.J. 167,169 (1947).

Or more clearly, as Hand stated in Helvering v. Gregory 69 F.2d 809, 810 (2d. Cir. 1934) “just as a melody is more than the notes (so the) meaning of a sentence may be more than the of the separate words”.

US v. Wigglesworth

The United States of America, founded in 1776, has a long history of interpreting tax rules so they favor the individual citizen and not the government. In the historic 1842 case US v Wigglesworth, 28 F.Cas. 595, 596-7 (D. Mass. 1842) the Court stated: “It is, as I conceive, a general rule in the interpretation of all statutes, levying taxes or duties upon subjects or citizens, not to intend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operation as to embrace matters, not specifically pointed out, although standing upon a close analogy. In every case, therefore, of doubt, such statutes are construed most strongly against the government, and in favor of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed, beyond what the statutes expressly and clearly import. Revenue statutes are in no just sense either remedial laws or laws founded upon any permanent public policy, and, therefore, are not to be liberally construed”.

Since this case was decided over 70 years before the adoption of the Internal Revenue Code (1913) it is a clear expression of American tax planning policy not to be found in IRS or Treasury Dept. code sections, regulations or other rulings. More to the point it is not the type of advice that the IRS or Treasury Dept. would voluntarily offer to US taxpayers. Yet, nearly 200 years later (in 2017) it is still the law of America.

The US Supreme Court echoed the decision in” Wigglesworth” in their 1917 case Gould v. Gould 245 U.S. 151,153 (1917) when they stated: “In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government and in favor of the citizen.”(Justice McReynolds).

Since Wigglesworth, many Federal and U.S. Supreme Court Cases have profoundly supported the US Taxpayers rights to have US law applied in favor of US citizens when there is any dispute as to the rule law cited. Among these cases include:

Powers V. Barney 19 F.Cas. 1234 (S.D.N.Y. 1863) “duties are never imposed on the citizen upon vague or doubtful interpretations”;

U.S. v. Isham 84 U.S. 496 (1864) “a tax cannot be imposed without clear and express words”;

Hartfanft v. Wiegmann 121 U.S. 609 (1887) “duties are never imposed on the citizen upon vague or doubtful interpretation”;

In the Matter of Hannah Enston, Deceased 113 N.Y. 174 (Ct. App. N.Y. 1889) “it is well established rule that a citizen cannot be subjected to special burdens without the clear warrant of the law”;

American Net and Twine Co. v. Washington 141 U.S. 468 (1891) “where Congress has designated an article by a specific name and imposed a duty upon it, general terms in the same act… are not applicable to it”);

Rice v. U.S. 53 F. 910 (1893) “in cases of doubtful construction the court should refrain from imposing a tax or charge upon the citizen”;

Eidman v. Martinez 184 U.S. 578 (1901) “laws should be liberally interpreted in favor of the taxpayer(importer) and the intent of Congress to impose or increase a tax (upon imports) should be expressed in clear and unambiguous language;

Benziger v. U.S. 192 U.S. 38 (1904) “tax statutes should be liberally construed in favor of the taxpayer (importer), and if there were any fair doubt as to the true construction of the provision is question the courts should resolve the doubt in taxpayer’s favor.

In summary, in case of any doubts as to tax law interpretations, any doubts should be resolved in taxpayer’s favor.

The Gould case, decided by the US Supreme Court in 1917 (4 years after the adoption of the 1913 Internal Revenue Code) enabled both other Supreme Court justices and lower federal and state courts to decide in favor of the taxpayer, which cases include:

U.S. v. Field 255 U.S. 257, 262 (1920)(citing Gould for the proposition that “tax acts should not be extended by implication”;

U.S. v. Merriam 263 U.S, 179, 188 (1923) using Gould as the basis for deciding that sums given to the executor of a will are not to be considered “income”;

Crooks v. Harrelson 282 U.S, 55,62 (1930) “in taxing acts, adherence to the letter of the law should be applied with peculiar strictness”;

Weeks v. Sibley 269 F. 155, 158 (1920) (D. N.D. Tex.) citing Gould to support the contention “that courts must uphold transactions even when they are motivated by the desire “reduce or avoid taxation”.

Studebaker Corporation v. Gilchrist 244 N.Y. 114, 126 (1926) (Ct. App. N.Y.; J. Cardozo) citing Gould for the proposition “that a statute levying a tax will not be extended by implication by the clear import of its terms”;

Irwin v. Gavit 268 U.S. 161, 168 (1926), rejecting technicalities, J. Holmes noted that “it is said that the tax laws should be construed favorably for the taxpayers”

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