IRS Market Segment Specialization Program: Abusive Tax Shelters

District of Columbia v. Neyman, 417 F.2d 1140, 1143 (D.C. Cir. 1969)

"A taxpayer is at complete liberty to decrease his taxes or avoid them altogether by means which the law tolerates.”

[District of Columbia v. Neyman, 417 F.2d 1140, 1143 (D.C. Cir. 1969)]

United States v. Schmidt, NO: 2:14-CV-0237-TOR, 21 (E.D. Wash. Dec. 14, 2016)

Finally, the Government asserts that the Schmidts have refused to pay their tax obligation, knowing that it is due. The Schmidts testified that they retired, are living on a fixed income and that they no longer have the ability to pay the tax. The bankruptcy filing seems to confirm that the Schmidts are cash poor. However, even the willful failure to pay taxes, by itself, is not evasion. Hawkins, 769 F.3d at 669 ("no Circuit has held that living beyond one's means alone constitutes willful tax evasion, and no circuit has held that failure to pay taxes, by itself, constitutes willful tax evasion within the meaning of that clause in § 523(a)(1)(C).").

At bottom, this case is similar to Hawkins and Spies where the Ninth Circuit and the Supreme Court considered the difference between the misdemeanor of willfully failing to pay a tax or file a timely return with the felony of willfully attempting to evade or defeat a tax or its payment. In those cases, both Courts rejected the Government's contention that a willful failure to file a return, coupled with a willful failure to pay the tax, constituted a willful attempt to evade or defeat a tax. Rather, both Courts interpreted the statutes as requiring some "willful commission in addition to willful omissions." Hawkins, 769 F.3d at 668 (applying the logic of Spies to § 523(a)(1)(C)).

As such, the Government has failed to establish any badges of fraud, but more importantly, has failed to show by a preponderance of the evidence that the Schmidts willfully attempted to evade or defeat their 1998 taxes.

[United States v. Schmidt, NO: 2:14-CV-0237-TOR, 21 (E.D. Wash. Dec. 14, 2016)]

Waterman Steamship Corporation v. C.I.R, 430 F.2d 1185, 1193 (5th Cir. 1970)

“Gregory does not per se preclude a taxpayer from decreasing his taxes or avoiding them by methods permitted by law. The application of that principle does not mean, however, that a person may reduce his tax liability by transferring his money from one pocket to another even though he uses different pairs of trousers.”

[Waterman Steamship Corporation v. C.I.R, 430 F.2d 1185, 1193 (5th Cir. 1970)]

Wight v. Davidson, 181 U.S. 371 (1901)

" A constitutional right against unjust taxation is given for the protection of private property, but it may be waived by those affected who consent to such action to their property as would otherwise be invalid."

[Wight v. Davidson, 181 U.S. 371 (1901)]

[EDITORIAL: In this case, concerning a property owner in D.C. SCOTUS acknowledged that even in D.C. there is a 5th Amendment protection for all persons against property being taken without due process of law.

This is a good point to make for those who believe that living in D.C. somehow prevents one from claiming nonresident alien status. Not if you are an American national!! An American national is present ANYWHERE in the USA or the federal United States by RIGHT and does not require a green card or any permission from anyone to be present on that land.

It is not mere presence on LAND that gives federal government right to tax income, but PRIVILEGE. That is the only thing that makes it NOT a violation of 13th Amendment or 9th Amendment reserved rights.]

Gregory v. Helvering, 293 U.S. 465 (1936)

"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, 84 U. S. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; 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."

[Gregory v. Helvering, 293 U.S. 465 (1936)]

[EDITORIAL: The principle established by SCOTUS in Helvering v Gregory was that a business arrangement with no business purpose other than to avoid tax was unlawful. This principle applies to U.S. persons that are taxable on all income, but would not necessarily apply to foreign persons, where there is jurisdiction to tax only federally sourced income. In other words, the IRS and courts cannot treat a foreign person's foreign status itself as an "arrangement" to avoid tax in the same way the "double irish" tax scheme is an arrangement to avoid tax. I suppose even a foreign person who arranged for federally sourced income to be reduced with such schemes would also face a disallowance of such tactics. It is all about whether U.S. has jurisdiction to begin with--whether over the person or over particular items of income.

In Gregory, a corporation was formed solely to reduce the taxable income of a sister corporation controlled by the same taxpayer. That case resolved around whether the taxpayer had effected a "reorganization" as defined in the statute. SCOTUS determined NO, because of the clear lack of any business purpose for the reorganization, and this went against how "reorganization" was defined in the statute. Note the two other SCOTUS cases in support of the principle that the taxpayer has a legal right to "altogether avoid" what would otherwise be his taxes, using means the law permits. In Gregory, the law did NOT permit what the taxpayer had done. Had the same taxpayer realized her corporation was foreign to begin with, and the income not federally-connected, there would have been no need in the first place to resort to this "reorganization" tactic to try to reduce the taxable income.]

26 U.S.C. §461:  General Rule for Taxable Year of Deduction

26 U.S.C. §461:  General Rule for Taxable Year of Deduction

(i) Special rules for tax shelters

(3) Tax shelter defined

For purposes of this subsection, the term ''tax shelter'' means -

(A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale,

(B) any syndicate (within the meaning of section 1256(e)(3)(B)), and

(C) any tax shelter (as defined in section 6662(d)(2)(C)(iii)).

26 U.S.C. §6111:  Registration of tax shelters