Tax Evasion and Tax Essay

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Tax Avoidance vs. Tax Evasion

The main objective of a tax advisor is to assist his/her clients avoid taxes as much as possible through within the confines of the law in order to avoid crossing the line into tax evasion. In this case, the tax advisor guides his/her clients based on the law regarding tax avoidance and tax evasion. This paper focuses on comparing the concepts of tax avoidance and tax evasion based on Gregory v. Helvering case as well as other cases that mention this case. In this case, the paper will include a discussion of tax avoidance and tax evasion based on cases citing Gregory v. Helvering case. The use of these cases in the discussion is for the purpose of enhancing understanding of tax avoidance and tax evasion and how an individual can avoid evading taxes. This paper will also discuss whether tax liability minimization falls under either tax avoidance or tax evasion.

Comparison of Tax Avoidance and Tax Evasion

The American income tax system is based on the notion of voluntary compliance through which the taxpayer has the responsibility of report all his/her income. However, taxation remains to be a highly controversial and divisive issue among many people. As a result, some people attempt to avoid or evade taxes including through failure to report some of their money-making activities, which is considered illegal and a violation of the law. The tendency by some individuals to evade taxes is also attributable to the principle of voluntary compliance, which is the basis of the income tax system. Through this principle, the government requires and expects all individual citizens to report their income voluntarily and freely. During the reporting, the individual citizen is expected to calculate his/her tax liability correctly and file his/her tax returns in a timely manner. However, this is not always the case given the increased adoption of tax avoidance and tax evasion strategies by taxpayers (Murray, 2017).

Throughout the years, tax avoidance and tax evasion are concepts that have constantly been used interchangeably though they are essentially different. The major difference between tax avoidance and tax evasion is that the former is legal while the latter is illegal (Murray, 2017). As a result, individuals or businesses get into trouble with the Internal Revenue Service (IRS) when they attempt to engage in deliberate tax evasion strategies or activities. However, individuals or businesses can engage in strategies to avoid paying taxes through the help of a tax advisor without getting into trouble with IRS.

Tax avoidance can be described as actions undertaken by a taxpayer (either an individual citizen or business) to reduce tax liability and maximize income after taxation. Based on regulations by the Internal Revenue Service, eligible taxpayers are permitted to claim income adjustments, credits, and deductions in order to lessen their total tax liability. For instance, businesses can avoid taxes through establishing employee retirement plans or using other legal mechanisms to reduce their taxes. An example of a case that cite Gregory v. Helvering and demonstrates the legality of tax avoidance is The Sherwin Williams Company v. Commissioner of Revenue. In this case, the plaintiff, Sherwin Williams challenged the 1991 tax assessment and the rejection of nearly $47 million that the taxpayer deducted from its taxable income for royalty payments that the company had made two investment firms (Leagle, 2002). The Supreme Court found that Sherwin-Williams was not motivated by tax avoidance when making payments to the two passive investment companies. Additionally, the transactions made by the plaintiff has practical economic impacts since they were not motivated by tax avoidance and tax benefit purposes/reasons.

On the contrary, tax evasion is an illegal activity that involves the use of various techniques or mechanisms for not paying taxes. Individual taxpayers or businesses engage in tax evasion through coming up with various ways not to pay their taxes.

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While these individuals or businesses may carry out legal activities, they are liable for tax evasion if their motivation behind the legal activities is to fail paying the taxes they owe. According to Murray (2017), the most commonly utilized techniques by individuals to evade paying taxes include failing to report income, failing to pay taxes owed, and reporting expenses that are not legally permitted. Individual taxpayers also engage in tax evasion through failing to report income from money-making practices in the underground economy. On the other hand, businesses participate in tax evasion through state sales taxes and employment taxes. Additionally, some businesses engage in illegal practices to evade payment of sales and excise taxes as well as other federal, state, and local taxes (Murray, 2017).

An example of a landmark tax evasion case is Gregory v. Helvering case, in which the plaintiff, Ms. Evelyn Gregory, engaged in tax avoidance through treating the transfer of Monitor Securities Corporation's stock by United Mortgage Corporation to her as capital gain on her federal tax return. Gregory achieved this through promoting the reorganization of United Mortgage Corporation, a company that she owned all its stock and was entitled to obtain dividends from. Gregory facilitated the restructuring of United Mortgage Corporation by complying with all the technical statutory regulations for corporate reorganization. Gregory was entitled to tax benefits through tax avoidance because the transfer of a corporation's stock to its shareholders during a corporate reorganization represents capital gain (Leagle, 1935). The Supreme Court found Gregory guilty of taxation and ruled in favor of the federal tax commissioner who determined a deficiency in her (Gregory) taxes. Even though Gregory engaged met all technical statutory requirements for corporate reorganization and correctly treated capital gains on her federal taxes, her actions were motivated by tax evasion rather than genuine corporate reorganization. As a result, she was found guilty of tax evasion largely because her actions were driven by illegal motives of failure to pay taxes.

Examples of Tax Avoidance

As previously mentioned, there are various techniques through which taxpayers can engage in tax avoidance given the provisions of IRS laws. Some of these techniques that can be utilized for tax avoidance include . . .

Forming a Limited Liability Company

One of the most commonly utilized examples of tax avoidance is forming a limited liability company (LLC) in order to limit or lessen personal tax liability. A limited liability company helps in limiting an individual's tax liability since it acts as a pass-through tax entity and in turn serves as a legal mechanism for tax avoidance. Unlike a corporation, a limited liability company provides an individual or business with significant tax savings. The major advantage of forming a limited liability company to limit personal tax liability is flexibility in taxation. In this case, an individual can choose whether to be treated as a disregarded entity or obtain corporate treatment during taxation depending on his/her desired personal income and amounts to be reinvested in the business. Both strategies enable the taxpayer to obtain huge tax savings and in turn avoid taxes.

The other way through which an LLC can be used to limit personal tax liability is through leasing assets to a corporation. Leasing personal assets to a corporation enables an individual to create a business expense that can be written off by the LLC and increase his/her income in the process. A suitable example of this is in Niuklee, LLC v. Commissioner (2015) in which Robert Klee, co-founder of Hometown Quotes, LLC, formed Niuklee LLC to buy and lease an aircraft (Leagle, 2015). Klee formed Niuklee to lessen his personal liability with regards to purchasing and leasing an aircraft after considering his own liability as well as the tax consequences of forming Niuklee to buy and lease the aircraft. Based on the evidence presented in the court,.....

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