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Tax Avoidance

Tax AvoidanceTax Avoidance: Legal and Unfair

Tax avoidance is perfectly legal… and often perfectly unfair. Tax avoidance is the “legal right” to “decrease the amount of what would otherwise be his taxes or altogether avoid them…”(1)

In 2010, General Electric (GE) reported a pre-tax profit of $5.1 billion on its U.S. operations.(2) It did not pay any U.S. income taxes. Why? Tax avoidance. GE has a 975-person tax-department staff and files tax returns in 250 global jurisdictions. In other words, this was an extremely complicated tax avoidance plan and GE paid a lot of employees to put it together. It also used previous losses to offset any tax, including losses from its subsidiary GE Capital.

By contrast, the average middle-class taxpayer is unable to take advantage of such tax avoidance. This is primarily because the avoidance is often accomplished through complicated tax loopholes that are tailored for big business. Also, the average middle-class taxpayer cannot afford a team of tax experts to devise a tax avoidance plan. This is what we call some very bad law.

Tax Avoidance vs. Tax Crime

The problem that we often see arise is when the average citizen is told that there is a way to get the same level of tax avoidance as GE. The citizen doesn’t understand the tax code and relies upon their tax expert to file an accurate return. Sadly, experts are sometimes wrong and the result can be a citizen that gets charged with tax fraud or tax evasion–criminal charges. However, if the citizen did not “willfully” violate the tax law, then (s)he is not guilty of these criminal charges, though civil charges may still be pursued.

This problem becomes even worse when you consider that many “experts” have themselves faced criminal charges/convictions. The reason—they were committing tax crimes of evasion or fraud rather than practicing legal tax avoidance. For instance, in May of 2011, two former Jenkens & Gilchrist partners (Paul Daugerdas and Donna Guerin) were found guilty for conspiring to devise, market and sell a massive, illegal tax shelter scheme.(3) The scandal led to the end of this Texas-based law firm that, at one point, had more than 600 lawyers.

In short, many good citizens who believed that they were merely engaging in legal tax avoidance strategies find themselves accused and persecuted for allegedly committing tax crimes. This is wrong. Citizens deserve better, which is why a strong defense in these cases is so important.

(1) Gregory v. Helvering, 293 U.S. 465 (1935). This is a famous United States Supreme Court case that dealt with the distinction between tax avoidance and tax crimes.

(2) Robert J. Samuelson, The Real GE Scandal, Newsweek, April 11, 2011.

(3) Mark Hamblett, Attorneys, Others Found Guilty in Tax Shelter Case, New York Law Journal, May 25, 2011.

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