NYT Article on "Navigating Between Tax Avoidance and Evasion" (2/13/13)

The NYT recently published an article discussing tax avoidance and tax evasion.  Paul Sullivan, Navigating Between Tax Avoidance and Evasion (NYT 2/11/13), here.

In order to discern the dividing line between tax avoidance and tax evasion, we need first to define the two.  The key difference, in the popular legal imagination, is that avoidance is not a criminal act, whereas tax evasion is a criminal act.  This handy distinction, often used, does not really tell where the dividing line is or describe what the two concepts are.  I offer some snippets from various sources below on the subject, but moving to the article which addresses, inter alia, the offshore bank account issue, here are some snippets from the article:

“We all tailor our notion of fairness to our self-interest,” said Meir Statman, a professor of finance at Santa Clara University in California and the author of “What Investors Really Want,” which has a chapter on great tax cheats. “People will tell themselves that I evade taxes because the government wastes it or there are people who evade even more taxes than me. People get themselves into tricky tax situations because of their anger at what they perceive as unfairness.”\ 

Today’s highly politicized tax atmosphere ensures that Mr. Mickelson [the Golfer] and Mrs. Curran [the offshore account defendant] come off badly in the public eye and suggests that legal tax avoidance and illegal tax evasion have a future. As far as evasion goes, where is the most peril?

So, I refer readers to the NYT article for more.

Hear are some snippets from various Law Review articles that deal with the subject of tax evasion and tax avoidance:

Assaf Likhovski, The Duke and the Lady: Helvering v. Gregory and the History of Tax Avoidance Adjudication, 25 Cardozo L. Rev. 953 (2004):

   n1. Tax law makes a distinction between "tax evasion," "tax avoidance" and "tax minimization." Evasion is defined as a "clear violation of the tax laws such as fabricating false accounts." Tax Law Design and Drafting 44 (Victor Thuronyi ed., 1996). It is a criminal offense. Avoidance is defined as a "behavior by the taxpayer that is aimed at reducing tax liability, but that does not constitute a criminal offense." Id. The term is usually applied to a reduction or elimination of taxes which is done in contravention of the intention of the legislator by abusing gaps or loopholes in the law without breaching specific statutory duties. Avoidance is not criminal but it often leads to recharacterization of the transaction by the courts. Minimization is defined as a "behavior that is legally effective in reducing tax liability," but which is neither criminal nor leads to recharacterization. Id. at 45. For example, not consuming certain products such as alcohol, which are subject to taxation. See id. The actual boundaries between these three categories are fuzzy. One indication of this is that different people will use different terms to describe tax avoidance (for example what the taxpayer will see as legitimate "tax planning," "tax savings," "tax minimization," "tax reduction" or "sheltering" may be viewed as "tax evasion," "tax abuse" or "tax dodging" by the government). Ultimately, it seems that the boundaries of the categories are not natural but vary over time and are determined by political, economic and moral considerations. An early legal-realist discussion of these categories can be found in Randolph Paul, Restatement of the Law of Tax Avoidance, in Studies in Federal Taxation: Taxation without Misrepresentation 9 (1937). Another attempt to distinguish between avoidance and evasion was suggested by Franklin D. Roosevelt who said that "tax avoidance means that you hire a $250,000-fee lawyer, and he changes the word "evasion' into the word "avoidance.'" The Two Hundred and Twenty Fifth Press Conference July 31, 1935, in The Public Papers and Addresses of Franklin D. Roosevelt 313 (1935); see also Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts P 4.3.2 (3d ed. 1999); Marvin A. Chirelstein, Federal Income Taxation 13.02 (9th ed. 2002); Leo Katz, Ill Gotten Gains 1-132 (1996); George Cooper, The Taming of the Shrewd: Identifying and Controlling Income Tax Avoidance, 85 Colum. L. Rev. 657 (1985); James E. Eustice, Abusive Corporate Tax Shelters: Old "Brine' in New Bottles, 55 Tax L. Rev. 135, 153-60 (2002); Alan Gunn, Tax Avoidance, 76 Mich. L. Rev. 733 (1978); Deborah H. Schenk, Symposium on Corporate Tax Shelters, Part I: Foreword, 55 Tax L. Rev. 125, 127-28 (2002); Michael L. Schler, Ten More Truths about Tax Shelters: The Problem, Possible Solutions and a Reply to Professor Weisbach, 55 Tax L. Rev. 325, 328-32 (2002); Theodore S. Sims, Debt, Accelerated Depreciation and the Tale of A Teakettle, 42 UCLA L. Rev. 261 (1994) (examples of the many attempts to define tax avoidance). 

Barker, The Ideology of Tax Avoidance, 40 Loy. U. Chi. L.J. 229, 240 (2009)):

Tax avoidance can be approached by determining what it is not - that is, criminal tax fraud or evasion. In examining the approach different nations take to distinguish between tax avoidance and evasion, care must be taken with vocabulary because certain terms are used differently. It is safe to say that there are three different categories of conduct involved. The first is tax evasion, fraud fiscal in France and Steuerhinterziehung in Germany, which describes criminal behavior. The second is tax avoidance, called simply tax avoidance in the U.K. and called illegitimate, impermissible tax avoidance in the U.S., evasion fiscale in France and Stearumaehung in Germany. 70 Tax avoidance describes "legal" but unsuccessful tax planning. 71 Last, there is permissible or legitimate tax avoidance, tax planning, or tax minimization, which denotes fully appropriate, successful tax planning. In order to keep the discussion intelligible, I shall refer to criminal conduct as evasion, to unsuccessful tax planning as avoidance, and to successful tax planning as minimization.

Zoe Prebble and John Prebble, The Morality of Tax Avoidance, 43 Creighton L. Rev. 693 (2010)

The question of the morality of tax avoidance is best illuminated by comparing tax evasion and tax avoidance. Both tax evasion and tax avoidance aim to reduce or to minimize tax liability, but avoidance is legal whereas evasion is illegal. 13 This article responds to a line of judicial authority that stands for the general proposition that there is a moral entitlement to avoid taxes. The proposition has some intuitive and popular appeal but the authors argue that (a) it is not supported by sound reasoning and (b) it is predicated on flawed assumptions. 

The assertion that tax avoidance is moral appears to rest on four main assumptions that this article will set out and evaluate. Section III addresses the first assumption: that taxpayers have a moral entitlement  [*701]  to their pre-tax incomes. Section IV discusses a second assumption: that tax avoidance and evasion are not seriously harmful and therefore are not immoral. It will clarify the harms that both types of conduct cause. Section V will address a third key assumption: that tax evasion is malum prohibitum rather than malum in se. That is, the sole moral content of tax evasion is derived from its legal status. According to this assumption, since avoidance lacks illegality, the one quality that differentiates it from evasion and the one source of evasion's immorality, then avoidance must be moral. Section V will demonstrate that despite the traditional conception of mala prohibita and mala in se as mutually exclusive and exhaustive categories, there is logical space for other hybrid types of legal wrongs to exist between the two extremes. Section VI will address the assumption that morality exists wholly independently of the law with particular reference to the writing of Professor Tony Honore. 

This article demonstrates that not only do all four assumptions fail to justify the view that tax avoidance is moral, but that the evidence and the logic of the argument support the opposite view. To test this conclusion, Section VII considers public opinion as to the morality of tax avoidance.