tax avoidance assignment

Battling Uphill Against the Assignment of Income Doctrine: Ryder

Benjamin Alarie

Kathrin Gardhouse

Benjamin Alarie is the Osler Chair in Business Law at the University of Toronto and the CEO of Blue J Legal Inc. Kathrin Gardhouse is a legal research associate at Blue J Legal .

In this article, Alarie and Gardhouse examine the Tax Court ’s recent decision in Ryder and use machine-learning models to evaluate the strength of the legal factors that determine the outcome of assignment of income cases.

Copyright 2021 Benjamin Alarie and Kathrin Gardhouse . All rights reserved.

I. Introduction

Researching federal income tax issues demands distilling the law from the code, regulations, revenue rulings, administrative guidance, and sometimes hundreds of tax cases that may all be relevant to a particular situation. When a judicial doctrine has been developed over many decades and applied in many different types of cases, the case-based part of this research can be particularly time consuming. Despite an attorney’s best efforts, uncertainty often remains regarding how courts will decide a new set of facts, as previously decided cases are often distinguished and the exercise of judicial discretion can at times lead to surprises. To minimize surprises as well as the time and effort involved in generating tax advice, Blue J ’s machine-learning modules allow tax practitioners to assess the likely outcome of a case if it were to go to court based on the analysis of data from previous decisions using machine learning. Blue J also identifies cases with similar facts, permitting more efficient research.

In previous installments of Blue J Predicts, we examined the strengths and weaknesses of ongoing or recently decided appellate cases, yielding machine-learning-generated insights about the law and predicting the outcomes of cases. In this month’s column, we look at a Tax Court case that our predictor suggests was correctly decided (with more than 95 percent confidence). The Ryder case 1 has received significant attention from the tax community. It involved tax avoidance schemes marketed by the law firm Ernest S. Ryder & Associates Inc. (R&A) that produced more than $31 million in revenue between 2003 and 2011 and for which the firm reported zero taxable income. The IRS unmasked more than 1,000 corporate entities that R&A’s owner, Ernest S. Ryder , had created and into which he funneled the money. By exposing the functions that these entities performed, the IRS played the most difficult role in the case. Yet, there are deeper lessons that can be drawn from the litigation by subjecting it to analysis using machine learning.

In this installment of Blue J Predicts, we shine an algorithmic spotlight on the legal factors that determine the outcomes of assignment of income cases such as Ryder . For Ryder , the time for filing an appeal has elapsed and the matter is settled. Thus, we use it to examine the various factors that courts look to in this area and to show the effect those factors have in assignment of income cases. Equipped with our machine-learning module, we are able to highlight the fine line between legitimate tax planning and illegitimate tax avoidance in the context of the assignment of income doctrine.

II. Background

In its most basic iteration, the assignment of income doctrine stands for the proposition that income is taxed to the individual who earns it, even if the right to that income is assigned to someone else. 2 Courts have held that the income earner is responsible for the income tax in the overwhelming majority of cases, including Ryder . It is only in a small number of cases that courts have been willing to accept the legitimacy of an assignment and have held that the assignee is liable for the earned income. Indeed, Blue J ’s “Assigned Income From Services” predictor, which draws on a total of 242 cases and IRS rulings, includes only 10 decisions in which the assignee has been found to be liable to pay tax on the income at issue.

The wide applicability of the assignment of income doctrine was demonstrated in Ryder , in which the court applied the doctrine to several different transactions that occurred between 1996 and 2011. Ryder founded his professional law corporation R&A in 1996 and used his accounting background, law degree, and graduate degree in taxation for the benefit of his clients. R&A designed, marketed, sold, and administered six aggressive tax-saving products that promised clients the ability to “defer a much greater portion of their income than they ever dreamed possible, and, as a result, substantially reduce their tax liability.” 3 In 2003 the IRS caught on to Ryder ’s activities when his application to have 800 employee stock option plans qualified at the same time was flagged for review. A decade of investigations and audits of Ryder and his law firm spanning from 2002 to 2011 followed.

What is interesting in this case is that Ryder , through his law firm R&A, directly contracted with his clients for only three of the six tax-saving products that his firm designed, marketed, and sold (the stand-alone products). The fees collected by R&A from two of the stand-alone products were then assigned to two other entities through two quite distinct mechanisms. For the other three tax-saving products, the clients contracted — at least on paper — with other entities that Ryder created (the group-tax products). Yet, the court treated the income from all six tax-saving products identically. The differences between the six types of transactions did not affect the outcome of the case — namely, that it is R&A’s income in all six instances. Blue J ’s predictor can explain why: The factors that our predictor highlights as relevant for answering the question whether the assignment of income doctrine applies have less to do with the particular strategy that the income earner conjures up for making it look like the income belongs to someone else, and more to do with different ways of pinpointing who actually controls the products, services, and funds. In Ryder , the choices ultimately come down to whether that is R&A or the other entity.

We will begin the analysis of the case by taking a closer look at two of the six tax-saving products, paying particular attention to the flow of income from R&A’s clients to R&A and Ryder ’s assignment of income to the other entities. We have selected one of the tax-saving products in which Ryder drew up an explicit assignment agreement, and another one in which he tried to make it look like the income was directly earned by another entity he had set up. Regardless of the structures and means employed, the court, based on the IRS ’s evidence, traced this income to R&A and applied the assignment of income doctrine to treat it as R&A’s income.

This article will not cover in detail the parts of the decision in which the court reconstructs the many transactions Ryder and his wife engaged in to purchase various ranches using the income that had found its way to R& A. As the court puts it, the complexity of the revenues and flow of funds is “baroque” when R&A is concerned, and when it comes to the ranches, it becomes “ rococo .” 4 We will also not cover the fraud and penalty determinations that the court made in this case.

III. The Tax Avoidance Schemes

We will analyze two of the six schemes discussed in the case. The first is the staffing product, and the second is the American Specialty Insurance Group Ltd. (ASIG) product. Each serves as an example of different mechanisms Ryder employed to divert income tax liability away from R&A. In the case of the staffing product, Ryder assigned income explicitly to another entity. The ASIG product involved setting up another entity that Ryder argued earned the income directly itself.

A. The Staffing Product

R&A offered a product to its clients in the course of which the client could lease its services to a staffing corporation, which would in turn lease the client’s services back to the client’s operating business. The intended tax benefit lay “with the difference between the lease payment and the wages received becoming a form of compensation that was supposedly immune from current taxation.” 5 At first, the fees from the staffing product were invoiced by and paid to R&A. When the IRS started its investigation, Ryder drew up an “Agreement of Assignment and Assumption” with the intent to assign all the clients and the income from the staffing product to ESOP Legal Consultants Inc. ( ELC ). Despite the contractual terms limiting the agreement to the 2004-2006 tax years, Ryder used ELC ’s bank account until 2011 to receive fees paid by the various S corporations he had set up for his clients to make the staffing product work. R&A would then move the money from this bank account into Ryder ’s pocket in one way or another. ELC had no office space, and the only evidence of employees was six names on the letterhead of ELC indicating their positions. When testifying in front of the court, two of these employees failed to mention that they were employed by ELC , and one of them was unable to describe the work ELC was allegedly performing. Hence, the court concluded that ELC did not have any true employees of its own and did not conduct any business. Instead, it was R&A’s employees that provided any required services to the clients. 6

B. The ASIG Product

R&A sold “disability and professional liability income insurance” policies to its clients using ASIG, a Turks and Caicos corporation that was a captive insurer owned by Capital Mexicana . Ryder had created these two companies during his previous job with the help of the Turks and Caicos accounting firm Morris Cottingham Ltd. The policies Ryder sold to his clients required them to pay premiums to ASIG as consideration for the insurance. The premiums were physically mailed to R& A. Also , the clients were required to pay a 2 percent annual fee, which was deposited into ASIG’s bank account. In return, the clients received 98 percent of the policy’s cash value in the event that they became disabled, separated from employment, turned 60, or terminated the policy. 7

R&A’s involvement in these deals, aside from setting up ASIG, was to find the clients who bought the policies, assign them a policy number, draft a policy, and open a bank account for the client, as well as provide legal services for the deal as needed. It was R&A that billed the client and that ensured, with Morris Cottingham ’s help, that the fees were paid. R&A employees would record the ASIG policy fee paid by the clients, noting at times that “pymt bypassed [R&A’s] books.” 8 Quite an effort went into disguising R&A’s involvement.

First, there was no mention of R&A on the policy itself. Second, ASIG’s office was located at Morris Cottingham’s Turks and Caicos corporate services. Ryder also set up a post office box for ASIG in Las Vegas. Any mail sent to it was forwarded to Ryder . Third, to collect the fees, R&A would send a letter to Morris Cottingham for signature, receive the signed letter back, and then fax it to the financial institution where ASIG had two accounts. One of these was nominally in ASIG’s name but really for the client’s benefit, and the other account was in Ryder ’s name. The financial institution would then move the amount owed in fees from the former to the latter account. Whenever a client filed for a benefit under the policy, the client would prepare a claim package and pay a termination fee that also went into the ASIG account held in Ryder ’s name. The exchanges between the clients and ASIG indicate that these fees were to reimburse ASIG for its costs and services, as well as to allow it to derive a profit therefrom. But the court found that ASIG itself did nothing. Even the invoices sent to clients detailing these fee payments that were on ASIG letterhead were in fact prepared by R&A. In addition to the annual fees and the termination fee, clients paid legal fees on a biannual basis for services Ryder provided. These legal fees, too, were paid into the ASIG account in Ryder ’s name. 9

IV. Assignment of Income Doctrine

The assignment of income doctrine attributes income tax to the individual who earns the income, even if the right to that income is assigned to another entity. The policy rationale underlying the doctrine is to prevent high-income taxpayers from shifting their taxable income to others. 10 The doctrine is judicial and was first developed in 1930 by the Supreme Court in Lucas , a decision that involved contractual assignment of personal services income between a husband and wife. 11 The doctrine expanded significantly over the next 20 years and beyond, and it has been applied in many different types of cases involving gratuitous transfers of income or property. 12 The staffing product, as of January 2004, involved an anticipatory assignment of income to which the assignment of services income doctrine had been held to apply in Banks . 13 The doctrine is not limited to situations in which the income earner explicitly assigns the income to another entity; it also captures situations in which the actual income earner sets up another entity and makes it seem as if that entity had earned the income itself, as was the case with the ASIG product. 14

In cases in which the true income earner is in question, the courts have held that “the taxable party is the person or entity who directed and controlled the earning of the income, rather than the person or entity who received the income.” 15 Factors that the courts consider to determine who is in control of the income depend on the particular situation at issue in the case. For example, when a personal services business is involved, the court looks at the relationship between the hirer and the worker and who has the right to direct the worker’s activities. In partnership cases, the courts apply the similarity test, asking whether the services the partnership provided are similar to those the partner provided. In other cases, the courts have inquired whether an agency relationship can be established. In yet other cases the courts have taken a broad and flexible approach and consulted all the available evidence to determine who has the ultimate direction and control over the earnings. 16

V. Factors Considered in Ryder

Judge Mark V. Holmes took a flexible approach in Ryder . He found that none of the entities that Ryder papered into existence had their own office or their own employees. They were thus unable to provide the services Ryder claims they were paid for. In fact, the entities did not provide any services at all — the services were R&A’s doing. To top it off, R&A did nothing but set up the entities, market their tax benefits, and move money around once the clients signed up for the products. There was no actual business activity conducted. The court further found that the written agreements the clients entered into with the entities that purported to provide services to them were a sham and that oral contracts with R&A were in fact what established the relevant relationship, so that R&A must be considered the contracting party. In the case of the ASIG product, for example, a client testified that the fees he paid to Ryder were part of his retirement plan. Ryder had represented to him that the ASIG product was established to create an alternative way to accumulate retirement savings. 17

Regarding the staffing product in which there existed an explicit assignment of income agreement between R&A and ELC , the court found that ELC only existed on paper and in the form of bank accounts, with the effect that R&A was ultimately controlling the income even after the assignment. A further factor that the court emphasized repeatedly was that R&A, and Ryder personally as R&A’s owner, kept benefitting from the income after the assignment (for example, in the staffing product case) or, as in the case of the ASIG product, despite the income allegedly having been earned by a third party (that is, ASIG). 18

VI. Analysis

The aforementioned factors are reflected in Blue J ’s Assigned Income From Services predictor. 19 We performed predictions for the following scenarios:

the staffing product and R&A’s assignment of the income it generated to ELC with the facts as found by the court;

the staffing product and R&A’s assignment of the income it generated to ELC if Ryder ’s version of the facts were accepted;

the ASIG product and service as the court interpreted and characterized the facts; and

the ASIG product and service according to Ryder ’s narrative.

What is interesting and indicative of the benefits that machine-learning tools such as Blue J ’s predictor can provide to tax practitioners is that even if the court had found in Ryder ’s favor on all the factual issues reasonably in dispute, Ryder would still not have been able to shift the tax liability to ELC or ASIG respectively, according to our model and analysis.

The court found that R&A contracted directly with, invoiced, and received payments from its clients regarding the staffing product up until 2004, when Ryder assigned the income generated from this product explicitly to ELC . From then onward, ELC received the payments from the clients instead of R&A. Further, the court found that ELC did not have its own employees or office space and did not conduct any business activity. Our data show that the change in the recipient of the money would have made no difference regarding the likelihood of R&A’s liability for the income tax in this scenario.

According to Ryder ’s version of the facts, ELC did have its own employees, 20 even though there is no mention of a separate office space from which ELC allegedly operated. Yet, Ryder maintains that ELC was the one providing the staffing services to its clients after the assignment of the clients to the company in January 2004. Even if Ryder had been able to convince the court of his version of the facts, it would hardly have made a dent in the likelihood of the outcome that R&A would be held liable for the tax payable on the income from the staffing product.

With Ryder ’s narrative as the underlying facts, our predictor is still 94 percent confident that R&A would have been held liable for the tax. The taxation of the income in the hands of the one who earned it is not easily avoided with a simple assignment agreement, particularly if the income earner keeps benefiting from the income after the assignment and continues to provide services himself without giving up control over the services for the benefit of the assignee. The insight gained from the decision regarding the staffing product is that the court will take a careful look behind the assignment agreement and, if it is not able to spot a legitimate assignee, the assignment agreement will be disregarded.

The court made the same factual findings regarding the ASIG product as it did for the staffing product post-assignment. Ryder , however, had more to say here in support of his case. For one, he pointed to ASIG’s main office that was located at the Morris Cottingham offices. Morris Cottingham was also the one that, on paper, contracted with clients for the insurance services and the collection of fees was conducted, again on paper, in the name of Morris Cottingham . The court also refers to actual claims that the clients made under their policies. There is also a paper trail that indicates that the clients were explicitly acknowledging and in fact paying ASIG for its costs and services. From all this we can conclude that Ryder was able to argue that ASIG had its own independent office, had one or more employees providing services, and that ASIG engaged in actual business activity. However, even if these facts had been admitted as accurately reflecting the ASIG product, our data show that with a 92 percent certainty R&A would still be liable for the income tax payable on the income the ASIG product generated. It is clear that winning a case involving the assignment of income doctrine on facts such as the ones in Ryder is an uphill battle. If the person behind the scenes remains involved with the services provided without giving up control over them, and benefits from the income generated, it is a lost cause to argue that the assignment of income doctrine should be applied with the effect that the entity that provides the services on paper is liable for the income tax.

C. Ryder as ASIG’s Agent

Our data reveal that to have a more substantial shot at succeeding with his case under the assignment of income doctrine, Ryder would have had to pursue a different line of argument altogether. Had he set R&A up as ASIG’s agent rather than tried to disguise its involvement with the purported insurance business, Ryder would have been more likely to succeed in shifting the income tax liability to ASIG. For our analysis of the effect of the different factors discussed by the court in Ryder , we assume at the outset that Ryder would do everything right — that is, ASIG would have its own workers and office, and it would do something other than just moving money around (best-case scenario). We then modify each factor one by one to reveal their respective effect.

From this scenario testing, we can conclude that if R&A had had an agency agreement with ASIG, received some form of compensation for its services from ASIG, held itself out to act on ASIG’s behalf, and the client was interested in R&A’s service because of its affiliation with ASIG, Ryder would have reduced the likelihood to 73 percent of R&A being liable for the income tax. Add to these agency factors an element of monitoring by ASIG and the most likely result flips — there would be a 64 percent likelihood that ASIG would be liable for the income tax. If ASIG were to go beyond monitoring R&A’s services by controlling them too, the likelihood that ASIG would be liable for the income tax would increase to 82 percent. Let’s say Ryder had given Morris Cottingham oversight and control over R&A’s services for ASIG, then the question whether ASIG employs any workers other than R&A arguably becomes moot because there would necessarily be an ASIG employee who oversees R&A. Accordingly, there is hardly any change in the confidence level of the prediction that ASIG is liable for the income tax when the worker factor is absent.

Interestingly, this is quite different from the effect of the office factor. Keeping everything else as-is, the absence of having its own ASIG-controlled office decreases the likelihood of ASIG being liable to pay the income tax from 82 to 54 percent. Note here that our Assigned Income From Services predictor is trained on data from relatively old cases; only 14 are from the last decade. This may explain why the existence of a physical office space is predicted to play such an important role when the courts determine whether the entity that allegedly earns the income is a legitimate business. In a post-pandemic world, it may be possible that a trend will emerge that puts less emphasis on the physical office space when determining the legitimacy of a business.

The factor that stands out as the most important one in our hypothetical scenario in which R&A is the agent of ASIG is the characterization of ASIG’s own business activity. In the absence of ASIG conducting its own business, nothing can save Ryder ’s case. This makes intuitive sense because if ASIG conducts no business, it must be R&A’s services alone that generate the income; hence R&A is liable for the tax on the income. Also very important is the contracting party factor: If the client were to contract with R&A rather than ASIG in our hypothetical scenario, the likelihood that R&A would be held liable for the income tax is back up to 72 percent, all else being equal. If the client were to contract with both R&A and ASIG, it is a close case, leaning towards ASIG’s liability with 58 percent confidence. Much less significant is who receives the payment between the two. If it is R&A, ASIG remains liable for the income tax with a likelihood of 71 percent, indicating a drop in confidence by 11 percent compared with a scenario in which ASIG received the payment.

To summarize, if Ryder had pursued a line of argument in which he set up R&A as ASIG’s agent, giving ASIG’s employee(s) monitoring power and ideally control over R&A’s services for ASIG, he would have had a better chance of succeeding under the assignment of income doctrine. As we have seen, the main prerequisite for his success would have been to convince the court that it would be appropriate to characterize ASIG as conducting business. Ideally, Ryder also would have made sure that the client contracted for the services with ASIG and not with R&A. However, it is significantly less important that ASIG receives the money from the client. The historical case law also suggests that Ryder would have been well advised to set up a physical office for ASIG; however, given the new reality of working from home, this factor may no longer be as relevant as these older previously decided cases indicate.

VII. Conclusion

We have seen that R&A’s chances to shift the liability for the tax payable on the staffing and the ASIG product income was virtually nonexistent. The difficulty of this case from the perspective of the IRS certainly lay in gathering the evidence, tracing the money through the winding paths of Ryder ’s paper labyrinth, and making it comprehensible for the court. Once this had been accomplished, the IRS had a more-or-less slam-dunk case regarding the applicability of the assignment of income doctrine. As mentioned at the outset, an assignment of income case will always be an uphill battle for the taxpayer because income is generally taxable to whoever earns it.

Yet, in cases in which the disputed question is who earned the income and not whether the assignment agreement has shifted the income tax liability, the parties must lean into the factors discussed here to convince the court of the legitimacy (or the illegitimacy, in the case of the government) of the ostensibly income-earning entity and its business. Our analysis can help decide which of the factors must be present to have a plausible argument, which ones are nice to have, and which should be given little attention in determining an efficient litigation strategy.

1   Ernest S. Ryder & Associates Inc. v. Commissioner , T.C. Memo. 2021-88 .

2   Lucas v. Earl , 281 U.S. 111, 114-115 (1930).

3   Ryder , T.C. Memo. 2021-88, at 7.

4   Id. at 32.

5   Id. at 17, 19, and 111-112.

6   Id. at 51-52, 111-112, and 123-126.

7   Id. at 9-12.

8   Id. at 96.

10  CCH, Federal Taxation Comprehensive Topics, at 4201.

11   Lucas , 281 U.S. at 115.

12   See , e.g. , “familial partnership” cases — Burnet v. Leininger , 285 U.S. 136 (1932); Commissioner v. Tower , 327 U.S. 280 (1946); and Commissioner v. Culbertson , 337 U.S. 733 (1949). For an application in the commercial context, see Commissioner v. Banks , 543 U.S. 426 (2005).

13   Banks , 543 U.S. at 426.

14   See , e.g. , Johnston v. Commissioner , T.C. Memo. 2000-315 , at 487.

16   Ray v. Commissioner , T.C. Memo. 2018-160 .

17   Ryder , T.C. Memo. 2021-88, at 90-91.

18   Id. at 48, 51, and 52.

19  The predictor considered several further factors that play a greater role in other fact patterns.

20  The court mentions that ELC’s letterhead set out six employees and their respective positions with the company.

END FOOTNOTES

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Recognizing when the IRS can reallocate income

• C Corporation Income Taxation
• IRS Practice & Procedure

Transactions between related parties come under close scrutiny by the IRS because they are not always conducted at arm's length. If the amounts involved in the transaction do not represent fair market values, the IRS can change the characteristics of the transaction to reflect its actual nature.

The IRS may attempt to reallocate income between a closely held corporation and its shareholders based on several sets of rules, including the following:

• Assignment-of-income rules that have been developed through the courts;
• The allocation-of-income theory of Sec. 482; and
• The rules for allocation of income between a personal service corporation and its employee-owners of Sec. 269A.

Income reallocation under the assignment - of - income doctrine is dependent on determining who earns or controls the income. Justice Oliver Wendell Holmes made the classic statement of the assignment - of - income doctrine when he stated that the Supreme Court would not recognize for income tax purposes an "arrangement by which the fruits are attributed to a different tree from that on which they grew" ( Lucas v. Earl , 281 U.S. 111, 115 (1930)).

Reallocation under Sec. 482 is used to prevent tax evasion or to more clearly reflect income when two or more entities are controlled by the same interests. Note the use of the word "or" in the preceding sentence. The Code empowers the IRS to allocate income even if tax evasion is not present if the allocation will more clearly reflect the income of the controlled interests. The intent of these provisions is to place the controlled entity in the same position as if it were not controlled so that the income of the controlled entity is clearly reflected (Regs. Sec. 1. 482 - 1 (a)) .

Example 1. Performing services for another group member:   Corporations P and S are members of the same controlled group. S asks P to have its financial staff perform an analysis to determine S' s borrowing needs. P does not charge S for this service. Under Sec. 482, the IRS could adjust each corporation's taxable income to reflect an arm's - length charge by P for the services it provided to S .

Under Sec. 269A(a), the IRS has the authority to allocate income, deductions, credits, exclusions, and other items between a personal service corporation (PSC) and its employee - owners if:

• The PSC performs substantially all of its services for or on behalf of another corporation, partnership, or other entity; and
• The PSC was formed or used for the principal purpose of avoiding or evading federal income tax by reducing the income or securing the benefit of any expense, deduction, credit, exclusion, or other item for any employee-owner that would not otherwise be available.

A PSC will not be considered to have been formed or availed of for the principal purpose of avoiding or evading federal income taxes if a safe harbor is met. The safe harbor applies if the employee - owner's federal income tax liability is not reduced by more than the lesser of (1) $2,500 or (2) 10% of the federal income tax liability of the employee - owner that would have resulted if the employee - owner personally performed the services (Prop. Regs. Sec. 1. 269A - 1 (c)).

For purposes of this rule, a PSC is a corporation, the principal activity of which is the performance of personal services when those services are substantially performed by employee - owners (Sec. 269A(b)(1)). An employee - owner is any employee who owns on any day during the tax year more than 10% of the PSC's outstanding stock. As with many related - party provisions, the Sec. 318 stock attribution rules (with modifications) apply in determining stock ownership (Sec. 269A(b)(2)).

Example 2. Reallocation of income: H forms M Corp., which is a PSC. A few months later, he transfers shares of stock of an unrelated corporation to M . The following year, M receives dividends from the unrelated corporation and claims the Sec. 243(a) 50% dividend exclusion. The IRS may reallocate the dividend income from M to H if the principal purpose of the transfer of the unrelated stock to M was to use the 50% dividend exclusion under Sec. 243. However, the amounts to reallocate to H must exceed the safe - harbor amounts.

These rules usually apply when an individual performs personal services for an employer that does not offer tax - advantaged employee benefits (such as a qualified retirement plan and other employee fringe benefits). In those situations, the individual may set up a 100%- owned C corporation that contracts with the employer. The employer then pays the corporation. The individual functions as the employee of the corporation, and the corporation sets up tax - advantaged fringe benefit programs. The individual generally is able to "zero out" the income of the corporation with payments for salary and fringe benefits.

Despite the significant authority that Sec. 269A grants to the IRS, there is little evidence of the IRS or the courts using this statute. In a 1987 private letter ruling, the IRS held that a one - owner , one - employee medical corporation did not violate the statute, even though it retained only nominal amounts of taxable income, and the corporate structure allowed the individual to achieve a significant pension plan deduction. These facts were not sufficient to establish a principal purpose of tax avoidance (IRS Letter Ruling 8737001). In Sargent , 929 F.2d 1252 (8th Cir. 1991), the Eighth Circuit indicated a lack of interest in applying Sec. 269A because, in that case, the court felt the PSC had been set up for other legitimate reasons.    

This case study has been adapted from PPC's Tax Planning Guide — Closely Held Corporations , 31st Edition (March 2018), by Albert L. Grasso, R. Barry Johnson, and Lewis A. Siegel. Published by Thomson Reuters/Tax & Accounting, Carrollton, Texas, 2018 (800-431-9025; tax.thomsonreuters.com ).

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The research credit: documenting qualified services, income tax treatment of loyalty point programs, tax court rules cancellation of debt is part of gain realization, listing of reportable transactions under the apa.

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What Is Tax Avoidance?

Understanding tax avoidance, special considerations.

• Avoidance vs. Evasion

The Bottom Line

• Deductions & Credits

What Is Tax Avoidance and How Is It Different From Tax Evasion?

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Investopedia / Dennis Madamba

The term tax avoidance refers to the use of legal methods to minimize the amount of income tax owed by an individual or a business. This is generally accomplished by claiming as many deductions and credits as are allowable. It may also be achieved by prioritizing investments that have tax advantages, such as buying tax-free municipal bonds. Tax avoidance is not the same as tax evasion , which relies on illegal methods such as underreporting income and falsifying deductions.

Key Takeaways

• Tax avoidance is any legal method used by a taxpayer to minimize the amount of income tax owed.
• Individual taxpayers and corporations can use forms of tax avoidance to lower their tax bills.
• Tax credits, deductions, income exclusion, and loopholes are forms of tax avoidance.
• These are legal tax breaks offered to encourage certain behaviors, such as saving for retirement or buying a home.
• Tax avoidance is unlike tax evasion, which relies on illegal methods such as underreporting income.

Tax avoidance is a legal strategy that many taxpayers can use to avoid paying taxes or at least lower their tax bills. In fact, millions of individuals and businesses use some form of tax avoidance to cut down how much they owe to the Internal Revenue Service (IRS) legally and legitimately. When used in this context, tax avoidance is also referred to as a tax shelter .

Taxpayers can take advantage of tax avoidance through various credits, deductions, exclusions, and loopholes, such as:

• Claiming the child tax credit
• Investing in a retirement account and maxing out your annual contributions
• Taking the mortgage tax deduction
• Putting money into a health savings account (HSA)

Credits and deductions (and, therefore, tax avoidance) must first be approved by U.S. Congress and signed into law by the president before they become part of the U.S. Tax Code. Once done, these provisions can be used for the benefit or relief of some or all taxpayers.

Tax avoidance is built into the Internal Revenue Code (IRC) . Lawmakers use the Tax Code to manipulate citizen behavior by offering tax credits, deductions, or exemptions. By doing so, they indirectly subsidize certain essential services such as health insurance, retirement saving, and higher education. Or, they may use the Tax Code to advance national goals, such as greater energy efficiency.

The expanding use of tax avoidance in the U.S. Tax Code has made it one of the most complex tax codes in the world. In fact, its sheer complexity causes many taxpayers to miss out on certain tax breaks. Taxpayers end up spending billions of hours each year filing tax returns, with much of that time used looking for ways to avoid paying higher taxes.

Families often have a difficult time making decisions about retirement, savings, and education because the tax code changes every year. Businesses especially suffer the consequences of a tax code that constantly evolves, which can affect hiring decisions and growth strategies.

Eliminating or reducing tax avoidance is at the core of most proposals seeking to change the Tax Code. Newer proposals often seek to simplify the process by flattening tax rates and removing most tax avoidance provisions. Proponents of establishing a flat tax rate argue that it would eliminate the need to pursue tax avoidance strategies. Opponents, however, call the flat tax concept regressive .

There are some tax policies, though, that disproportionately advantage citizens with higher incomes. For instance:

• Federal estate taxes are not levied on estates valued at less than $12.92 million in 2023, increasing to $13.61 million in 2024
• Long-term capital gains are taxed at a lower rate than most earned income
• Mortgage interest is deductible on both a first home and a second (but not a third) home

Make sure you save every receipt that may be useful for legal tax avoidance if you're a business owner, freelancer, or investor.

Types of Tax Avoidance

As noted above, there are several ways that taxpaying entities can avoid paying taxes. This includes certain credits and deductions, exclusions, and loopholes that make up the U.S. Tax Code. The following are just a few of the tools taxpayers have at their disposal to take advantage of tax avoidance.

The Standard Deduction

The IRS reported that 87.3% of taxpayers used the standard deduction rather than itemizing their deductions in 2020. The standard deduction is $13,850 for single filers in 2023, increasing to $14,600 in 2024, and $27,700 for married couples filing jointly in 2023, increasing to $29,200 in 2024.

For most Americans, that negates the usefulness even of the mortgage interest deduction —especially now that the Tax Cuts and Jobs Act (TCJA) , which was signed in 2017, increased the standard deduction and capped deductions for state and local taxes at $10,000.

But there are plenty of small business owners, freelancers , investors, and others who save every business expense receipt that may be eligible for a deduction. Others leap to the IRS challenge and angle for every tax deduction and credit they can get.

Retirement Savings

Saving money for your retirement means you're probably engaging in tax avoidance. And that's a good thing. Every individual who contributes to an employer-sponsored retirement plan or invests in an individual retirement account (IRA) is engaging in tax avoidance.

If the account is a so-called traditional plan, the investor gets an immediate tax break equalling the amount they contribute each year, up to a limit that is revised annually. Income taxes on the money is owed when it is withdrawn after the saver retires. The retiree's taxable income will probably be lower as well as the taxes owed. That's tax avoidance.

Roth plans allow investors to save after-tax money and the tax break will come after retirement, in the form of tax-free savings. In this case, the entire balance of the account is tax-free . Roths allow the saver to permanently avoid income taxes on the money their contributions earn over the year.

Workplace Expenses

Before 2018, you could use deductions through your workplace to avoid federal taxes. In some states, you still may be able to claim certain expenses that are not reimbursed through your employer on your annual tax return. These workplace expenses should be considered necessary to do your job. Some examples include mileage on a personal vehicle, union dues, or tools you may need.

There are loopholes in the U.S. Tax Code that allow corporations and high-net-worth individuals (HNWIs) to move their money to offshore tax havens. These are locations that have looser regulations, more favorable tax laws, lower financial risks, and confidentiality. Going offshore by setting up subsidiaries or bank accounts allows these taxpaying entities to avoid paying (higher) taxes in their home countries.

Tax Avoidance vs. Tax Evasion

People often confuse tax avoidance with tax evasion. While both are ways to avoid having to pay taxes, they are very different. Tax avoidance is very legal while tax evasion is completely illegal.

Tax evasion happens when people underreport or fail to report income or revenue earned to a taxing authority like the IRS. You are guilty of tax evasion if you don't report all of your income, such as tips or bonuses paid by your employer. Claiming credits to which you aren't entitled is also considered tax evasion. Some taxpayers are guilty of tax evasion by not filing their taxes or not paying their taxes even if they've filed returns.

Tax evasion is a serious offense. Entities that are found liable can be fined, jailed, or both.

Is Tax Avoidance Legal?

The simple answer to this question is yes. Tax avoidance can be a legal way to avoid paying taxes. For instance, you can avoid paying taxes by using tax credits, deductions, exclusions, and loopholes to your advantage. For instance, corporations often use different legal strategies to avoid paying taxes. These include offshoring their profits, using accelerated depreciation, and taking deductions for employee stock options.

Tax avoidance can be illegal, though, when taxpayers make it a point to ignore tax laws as they apply to them deliberately. Doing so can result in fines, penalties, levies, and even legal action.

What's the Difference Between Tax Avoidance and Tax Evasion?

Tax avoidance is generally a legal way that taxpayers can avoid paying taxes. They can do so by using tax credits, deductions, exclusions, and loopholes that are part of the tax code to their advantage. Using these strategies can help them either avoid paying taxes altogether or lower their tax liability. Tax avoidance can be illegal if a taxpayer abuses these strategies and doesn't follow tax laws.

Tax evasion, on the other hand, is the deliberate failure to comply with tax laws. By doing this, taxpayers evade tax assessment and payment of their taxes. Tax evasion can entail hiding income, offshoring income in areas that don't comply with a taxpayer's home country, falsifying tax records, and inflating expenses. Tax evasion can result in fines, penalties, levies, and even prosecution.

What Are the Types of Tax Avoidance?

There are many strategies that taxpayers can use to avoid paying taxes. These are very legal and legitimate options. They include taking the standard deduction, contributing to a qualified retirement account, claiming work-related expenses, and offshoring profits.

Contrary to what most people think, tax avoidance is a very legal way to avoid paying too much in taxes. There are different strategies in place that you can use to completely avoid paying or lower your tax liability. For instance, you can use the standard deduction to avoid paying excess taxes on your annual income. And if you save for retirement in an IRA, the amount is also considered a tax avoidance strategy. But don't confuse it with tax evasion. which is illegal. When in doubt, consult a tax or financial professional about how to ensure that you're following the law.

Intuit Turbo Tax. " Tax Avoidance, Tax Evasion and Tax Sheltering: How They Differ ."

U.S Department of the Treasury. " Writing and Enacting Tax Legislation ."

Internal Revenue Service. “ Credits and Deductions for Individuals .”

Internal Revenue Service. “ 2022 Annual Report to Congress (ARC) - Publication 2104 .” Page 31.

Internal Revenue Service. " Estate Tax ."

Internal Revenue Service. “ Topic No. 409, Capital Gains and Losses .”

Internal Revenue Service. “ Publication 936, Home Mortgage Interest Deduction .” Page 2.

Internal Revenue Service. “ Publication 1304, Statistics of Income: Individual Income Tax Returns Complete Report 2020 .” Page 21.

Internal Revenue Service. “ IRS Provides Tax Inflation Adjustments for Tax Year 2024 .”

Internal Revenue Service. " IRS Provides Tax Inflation Adjustments for Tax Year 2023 ."

Internal Revenue Service. " Topic No. 503 Deductible Taxes ."

Congressional Research Service. “ Reference Table: Expiring Provisions in the ‘Tax Cuts and Jobs Act’ (TCJA, P.L. 115-97) .” Pages 1-2, and 5.

Internal Revenue Service. " Traditional and Roth IRAs ."

Internal Revenue Service. “ Publication 5307, Tax Reform Basics for Individuals and Families .” Page 7.

Congressional Research Service. “ Tax Havens: International Tax Avoidance and Evasion .” Pages 1 and 12. 

Internal Revenue Service. " The Difference Between Tax Avoidance and Tax Evasion ." Page 1.

United States Code. “ 26 USC 7201: Attempt To Evade or Defeat Tax .”

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What Is the Difference Between Tax Avoidance and Tax Evasion?

Tax avoidance.

• Examples of Tax Avoidance

Tax Loopholes and Tax Shields

Tax evasion, tax evasion and trust fund taxes.

• Tax Evasion/Tax Fraud Practices

Employment Tax Fraud Examples

Intentional tax evasion vs. mistakes, how to avoid tax evasion charges.

The Balance

No one likes to pay taxes. But taxes are the law. The terms "tax avoidance" and "tax evasion" are often used interchangeably, but they are very different concepts. Basically, tax avoidance is legal, while tax evasion is not. 

Businesses get into trouble with the IRS when they intentionally evade taxes. But your business can avoid paying taxes, and your tax preparer can help you do that. 

Tax avoidance is the legitimate minimizing of taxes and maximize after-tax income, using methods included in the tax code . Businesses avoid taxes by taking all legitimate deductions and tax credits and by sheltering income from taxes by setting up employee retirement plans and other means, all legal and under the Internal Revenue Code or state tax codes.  

Some Examples of Tax Avoidance Strategies 

• Taking legitimate tax deductions to minimize business expenses and lower your business tax bill. 
• Setting up a tax deferral plan such as an IRA, SEP-IRA, or 401(k) plan to delay taxes until a later date. 
• Taking tax credits for spending money for legitimate purposes, like taking a tax credit for giving your employees paid family leaves. 

A tax loophole is tax avoidance. it's a clause in the tax laws that people creates a hole people can go through to reduce their taxes. It's a way to avoid paying taxes, but since it's in the tax code it's not evasion.

Since the tax code is so complex, savvy tax experts have found ways to lower taxes for their clients without breaking the law, taking advantage of parts of the law. If you are tempted to use a tax loophole, be aware that the tax laws are complex and difficult to interpret. Getting a competent, honest tax expert can save you from going over the line to tax evasion. 

Tax shields are another strategy for avoiding taxes. A tax shield is a deliberate use of tax expenses to offset taxable income. The number of tax shields has been reduced since 2018, with the Tax Cuts and Jobs Act removing or limiting many Schedule A deductions.

Some tax loopholes are deliberate on the part of lawmakers; accelerated depreciation is one example.

Tax evasion , on the other hand, is using illegal means to avoid paying taxes. Usually, tax evasion involves hiding or misrepresenting income. This might be underreporting income, inflating deductions without proof, hiding or not reporting cash transactions, or hiding money in offshore accounts.  

The Internal Revenue Code says that the willful attempt to "evade or defeat any tax" law is guilty of a felony. If convicted, tax evasion can result in fines of up to $250,000 for individuals ($500,000 for corporations) or imprisonment of up to five years, or both, plus court the cost of prosecution.  

Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non-payment of taxes. Fraud can be defined as "an act of deceiving or misrepresenting," and that's what someone evading taxes does — deceiving the IRS about income or expenses. The IRS Criminal Investigation unit prosecutes cases under the broad designation of "tax fraud."  

In this situation, the phrase "ignorance of the law is no excuse" comes to mind. 

Tax evasion is most commonly thought of in relation to income taxes, but tax evasion can be practiced by businesses on state sales taxes and on employment taxes . One common tax evasion strategy is failing to pay turn over taxes you have collected from others to the proper federal or state agency.

These taxes are called trust fund taxes, because they are given in trust to a business, with the expectation that they will be turned over to the appropriate state or federal agency. Failing to pay  employment taxes to the IRS and sales taxes to a state taxing authority and other federal, state, and local taxes can mean high fines and penalties.  

Examples of Tax Evasion/Tax Fraud Practices

In general, it's considered tax evasion if you knowingly fail to report income or you don't file an income tax return. Some practices considered tax evasion/tax fraud:

• Under-reporting income (claiming less income than you actually received from a specific source, particularly cash income .
• Not reporting an income source.
• Providing false information to the IRS about  business income  or expenses
• Deliberately underpaying taxes owed.
• Substantially understating your taxes (by stating a tax amount on your return which is less than the amount owed on the income you reported).
• Overstating the amount of deductions.
• Keeping two sets of books.
• Making false entries in books and records.
• Claiming personal expenses as business expenses .
• Claiming false deductions without having documents to support them
• Hiding or transferring assets or income.    

Tax evasion isn't limited to income tax returns. Businesses that have employees may be committing tax evasion in several ways: 

• Failure to withhold/pyramiding: An employer fails to withhold federal income tax or FICA taxes from employee paychecks, or withholds but fails to report and pay these  payroll taxes . 
• Employment leasing, which the IRS explains is hiring an outside payroll service that doesn't turn over funds to the IRS.
• Paying employees in cash and failing to report some or all of these cash payments.
• Filing false payroll tax returns or failing to file these returns.  

Sometimes taxpayers make mistakes; this is considered negligence, not intentional tax fraud. But the IRS will probably send you a notice of penalties and interest due. In the case of a mistake that results in an underpayment of taxes, for example, the IRS can still impose a penalty of 20% of the amount of underpayment, in addition to requiring repayment.  

While tax evasion might seem willful, you may be subject to fines and penalties from the IRS for tax strategies they consider to be illegal and which you were unaware you were practicing.

To avoid being charged with tax evasion:

• Know the tax laws for income taxes and employment taxes. For example, knowing what deductions are legal and the recordkeeping requirements for deductions is a big factor in avoiding an audit. For employers, knowing the payroll tax reporting and payment requirements will help keep you out of trouble. 
• Get an honest, careful tax professional to help you with your taxes. Listen to your tax preparer and keep excellent records of all income and expenses, especially if you have a cash-based business . And keep reading articles from this site and others, to learn more about what constitutes tax evasion. 

Internal Revenue Service. " Worksheet Solutions. The Difference Between Tax Avoidance and Tax Evasion ." Accessed Apr. 27, 2020.

Cornell Legal Information Institute. " Tax Evasion ." Accessed April 27, 2020.

Internal Revenue Service. " Tax Crimes Handbook ," Page 2. Accessed April 27, 2020.

Internal Revenue Service. " Employment Tax Evasion – Criminal Investigation (CI) ." Accessed April 27, 2020.

Internal Revenue Service. " Trust Fund Taxes ." Accessed April 27, 2020.

IRS. " How Do You Report Suspected Tax Fraud Activity ?" Accessed April 27, 2020.

Internal Revenue Service. " Tax Crimes Handbook ," Pages 4-6. Accessed April 27, 2020.

Internal Revenue Service. "Information About Your Notice, Penalty, and Interest ," Page 3. Accessed April 27, 2020.

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Assignment of Income Lawyers

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  What Happens if you Assign your Income?

There are some instances when a person may choose to assign a portion of their income to another individual. You may be able to do this by asking your employer to send your paycheck directly to a third party.

It should be noted, however, that if you choose to assign your income to a third party, then this does not mean that you will be able to avoid paying taxes on that income. In other words, you will still be responsible for paying taxes on that income regardless of whether you decide to assign your income to a third party or not. This guideline is known as the “assignment of income doctrine.”

The primary purpose of the “assignment of income doctrine” is to ensure that a person does not simply assign their income to a third party to avoid having to pay taxes. If they do, then they can be charged and convicted of committing tax evasion .

One other important thing to bear in mind about income assignments is that they are often confused with the concept of wage garnishments. However, income or wage assignments are different from wage garnishments. In a situation that involves wage garnishment, a person’s paycheck is involuntarily withheld from them to pay off a debt like outstanding child support payments and is typically ordered by a court.

In contrast, an income or wage assignment is when a person voluntarily agrees to assign their income to someone else through a contract or a similar type of agreement.

How is Assigned Income Taxed?

Are there any exceptions, should i consult with an attorney.

As previously discussed, a taxpayer will still be required to pay taxes on any income that is assigned to a third party. The person who earns the income is the one who will be responsible for paying taxes on the income, not the person to whom it is assigned. The same rule applies to income that a person receives from property or assets.

For example, if a person earns money through a source of what is considered to be a passive stream of income, such as from stock dividends, the person who owns these assets will be the one responsible for paying taxes on the income they receive from it. The reason for this is because income is generally taxed to the person who owns any income-generating property under the law.

If a person chooses to give away their income-generating property and/or assets as a gift to a family member, then they will no longer be taxed on any income that is earned from those property or assets. This rule will be triggered the moment that the owner has given up their complete control and rights over the property in question.

In order to demonstrate how this might work, consider the following example:

• Instead, the person to whom the apartment building was transferred will now be liable for paying taxes on any income they receive from tenants paying rent to live in the building since they are the new owner.

There is one exception to the rule provided by the assignment of income doctrine and that is when income is assigned in a scenario that involves a principal-agent relationship . For example, if an agent receives income from a third-party that is intended to be paid to the principal, then this income is usually not taxable to the agent. Instead, it will be taxable to the principal in this relationship.

Briefly, an agent is a person who acts on behalf of another (i.e., the principal) in certain situations or in regard to specific transactions. On the other hand, a principal is someone who authorizes another person (i.e., the agent) to act on their behalf and represent their interests under particular circumstances.

For example, imagine a sales representative that is employed by a large corporation. When the sales representative sells the corporation’s product or service to a customer, they will receive money from the customer in exchange for that service or product. Although the sales representative is the one being paid in the transaction, the money actually belongs to the corporation. Thus, it is the corporation who would be liable for paying taxes on the income.

In other words, despite the fact that this income may appear to have been earned by the corporation’s agent (i.e., the sales representation in this scenario), the corporation (i.e., the principal) will still be taxed on the income since the sales representative is acting on behalf of the corporation to generate income for them.

One other exception that may apply here is known as a “kiddie tax.” A kiddie tax is unearned or investment-related income that belongs to a child, but must be paid by the earning child’s parent and at the tax rate assigned to adults (as opposed to children). This is also to help prevent parents from abusing the tax system by using their child’s lower tax rate to shift over assets or earned income and take advantage of their child’s lower tax bracket rate.

So, even though a parent has assigned money or assets to a child that could be considered their earned income, the money will still have to be paid by the parent and taxed at a rate that is reserved for adults. The child will not need to pay any taxes on this earned income until it reaches a certain amount.

In general, the tax rules that exist under the assignment of income doctrine can be confusing. There are several exceptions to these rules and many of them require knowing how to properly apply them to the specific facts of each individual case.

Therefore, if you have any questions about taxable income streams or are involved in a dispute over taxable income with the IRS, then it may be in your best interest to contact an accountant or a local tax attorney to provide further guidance on the matter. An experienced tax attorney can help you to avoid incurring extra tax penalties and can assist you in resolving your income tax issue in an efficient manner.

Your attorney will also be able to explain the situation and can recommend various options to settle the assignment of income issue or any related concerns. In addition, your attorney will be able to communicate with the IRS on your behalf and can provide legal representation if you need to appear in court.

Lastly, if you think you are not liable for paying taxes on income that has been assigned to you by someone else, then your lawyer can review the facts of your claim and can find out whether you may be able to avoid having to pay taxes on that income.

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Major companies haven't paid federal income tax in 5 years. How could that be?

Dozens of large corporations paid more money to their top executives than they shelled out in federal taxes between 2018 and 2022, according to a new watchdog report.

The analysis names 35 corporations, including Tesla, Netflix and Ford, that each reportedly spent more on compensation to their five highest-paid executives than they paid in federal income taxes over five years.

Collectively, the 35 corporations spent $9.5 billion on their top executives over that span, the report said, while their combined federal tax bill came to – $1.8 billion: a collective refund.

The report, released Wednesday, is titled “More for Them, Less for US: Corporations That Pay Their Executives More Than Uncle Sam.” It comes from the Institute for Policy Studies, a nonprofit, left-leaning think tank, and Americans for Tax Fairness, a nonprofit advocating for progressive tax reform.

“Lavish corporate compensation packages and inadequate corporate tax payments are not unrelated phenomena,” the report states.

Corporate boards “have more money to spend on their highest-paid employees when they don’t have much or anything to pay in taxes. Until this self-reinforcing cycle is broken, we’ll have a corporate tax and governance system that works for top executives – and no one else.”

Netflix, for example, paid its five top executives $652 million between 2018 and 2022, the report says, while paying only $236 million in cumulative federal income tax in the same years.

In response, the streaming company said, “Netflix complies with tax laws and regulations in the US and around the world. From 2018-2022 we paid global income taxes in excess of $2B and in 2023 we paid nearly $1.2B in global income taxes, the majority of which was US federal income tax.”

Another firm targeted in the report is FirstEnergy, the electric utility. According to the watchdog groups, FirstEnergy paid $121 million in executive compensation over five years, compared with $44 million in federal income tax, a net refund.

FirstEnergy responded with a prepared statement.

"FirstEnergy pays taxes in compliance with federal, state and local tax laws. In addition to federal taxes, the company pays hundreds of millions in state, local and payroll taxes every year," it said.

The company said its executive pay programs are "carefully designed to attract, retain, focus and reward our talented and diverse executive team," and that shareholders overwhelmingly support the firm's compensation structure.

The report also names Duke Energy, saying the firm paid $181 million to top executives over five years, compared with $1.2 billion in federal income taxes, a net refund.

In response, the company said, "Duke Energy fully complies with federal and state tax laws as part of our efforts to make investments that will benefit our customers and communities. Duke Energy has a deferred tax balance – this does not mean Duke Energy is not paying these taxes, it means that our taxes are due in future years, and we will pay them. We have approximately $10.6 billion in deferred tax liabilities related to investments in the energy system on behalf of our customers."

The utility said it is investing private capital in "our nation’s critical energy infrastructure," a corporate practice incentivized by the current federal tax code.

"It’s also important to note that at the state and local levels, we are often the largest taxpayer in many of those communities and much of the taxes paid are directed toward local services," the company said.

Several other firms did not comment on the report.

The watchdog report draws on recent research by the Institute on Taxation and Economic Policy, another nonprofit, left-leaning think tank. That group found 342 large corporations that paid a cumulative effective tax rate of 14.1% over five years, well short of the statutory corporate tax rate of 21%.

The data in the report come from financial documents filed with the Securities and Exchange Commission . Compensation figures include base salary, cash bonuses, perks, stock options, stock awards and changes in the value of retirement benefits.

Report: 18 corporations paid no federal income tax in 5-year stretch

The new report cites 18 profitable corporations that paid no federal income tax in the five-year period. Instead, all but one received refunds. The same corporations paid their top executives a cumulative $5.3 billion in those years.

The watchdog report comes as the Internal Revenue Service is ramping up audits of large businesses and high-income Americans, leveraging billions in new funding from Congress.

President Joe Biden added nearly $80 billion in IRS funding to the Inflation Reduction Act of 2022 with the hope that the investment would recoup as much as $400 billion over the next decade in unpaid taxes from wealthy people and companies.

The watchdog report charts a decadeslong decline in the tax rates paid by corporations. The top statutory tax rate has declined from 51% in 1986 to 21% today, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

Corporations also avoid taxes by shifting profits offshore, among other loopholes, the report says.

While corporate tax revenue has stagnated, the report says, executive pay has skyrocketed. The typical CEO compensation package reached $14.8 million in 2022, according to The Associated Press, compared with $77,178 for the average worker in those companies.

Not all economists agree with the report's conclusions.

Kyle Pomerleau , senior fellow at the nonpartisan American Enterprise Institute, said low corporate tax rates reflect big corporations doing what they can to reduce their tax burden, just like ordinary taxpayers.

"These low effective tax rates are not reflective of tax evasion," he said. "It's tax avoidance. Tax evasion is illegal. Tax avoidance is legal." Whether you're a business or a private citizen, he said, "if there's a tax credit or deduction you're entitled to, you're going to take it."

Pomerleau said many corporate tax breaks, such as tax credits for research and development, are tailored to encourage "activities that have a broad positive effect on the economy."

Which firms spend more on executive pay than income tax?

Here are snapshots of 10 large corporations, spotlighted in the watchdog report, whose executive pay reportedly exceeds their federal income tax payments.

5-year executive pay: $2.5 billion

5-year federal income tax (and tax rate): -$1 million (0%)

5-year executive pay: $675 million

5-year federal income tax (and tax rate): -$80 million (-0.4%)

5-year executive pay: $652 million

5-year federal income tax (and tax rate): $236 million (1.6%)

American International Group

5-year executive pay: $406 million

5-year federal income tax (and tax rate): $385 million (2.2%)

5-year executive pay: $355 million

5-year federal income tax (and tax rate): $121 million (1.5%)

NextEra Energy

5-year executive pay: $325 million

5-year federal income tax (and tax rate): $287 million (1.2%)

Darden Restaurants

5-year executive pay: $120 million

5-year federal income tax (and tax rate): $28 million (0.8%)

5-year executive pay: $240 million

5-year federal income tax (and tax rate): $96 million (0.8%)

Duke Energy

5-year executive pay: $181 million

5-year federal income tax (and tax rate): -$1.2 billion (-7.9%)

FirstEnergy

5-year executive pay: $121 million

5-year federal income tax (and tax rate): -$44 million (-0.7%)

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Tax avoidance

What is tax avoidance.

• What to do if you think you are engaged in tax avoidance
• Legislative tools to challenge tax avoidance
• The consequences of engaging in tax avoidance
• Mandatory Disclosure Regime
• Informing Revenue of tax avoidance
• Transactions at risk of Revenue review

Tax avoidance is applying tax legislation in a way that inappropriately obtains a tax advantage. Tax avoidance can involve the misuse of tax reliefs and allowances or the re-characterisation of a transaction. Tax avoidance involves transactions which are undertaken primarily to claim a tax advantage and not for genuine business reasons. Tax avoidance often involves contrived, artificial transactions that serve little or no purpose other than to gain a tax advantage.

Advisors and promoters may tell you ways to reduce your tax bill. You must consider whether you are being given efficient tax advice, or if you are being sold a tax avoidance scheme.

If you are unsure if what you are doing is tax avoidance, you should ask yourself the following questions:

• Is the end benefit too high in comparison to the real economic risk you are taking?
• Does the proposal seem complex, given the business aims you have?
• Do you have difficulty understanding the proposed structure or transaction?
• Do you have difficulty identifying the commercial reasons behind the structure or transaction?
• circular flows of funds
• offshore companies.
• Does the fee being charged appear high for what you thought was a simple transaction?
• Is the manner in which the fee is being charged unusual? 
• Is the promoter trying to impose unusual confidentiality conditions and not providing copies of written advice?
• Is the promoter unwilling to discuss the transaction with your accountant or business advisor?
• Do you think Revenue would challenge the scheme if they became aware of it?
• Has the promoter offered you insurance against the structure being challenged by Revenue?

This list of questions above is not exhaustive. If you have answered yes to any of the questions, then you may be involved in tax avoidance.

The promoter may provide you with a transaction number from Revenue. This number will have been provided to the promoter after they made a Mandatory Disclosure. This does not mean that Revenue approves of the scheme, or that it is not a tax avoidance scheme. For further details about Mandatory Disclosure, please see the page entitled 'Mandatory Disclosure Regime' in this section.

If you are tempted to use a tax avoidance transaction, you should think carefully about the costs involved such as:

• the possible disruption caused by having to deal with Revenue enquiries
• potentially lengthy litigation
• the prolonged uncertainty over the outcome you may face as a result.

Next: What to do if you think you are engaged in tax avoidance

Published: 02 October 2023 Please rate how useful this page was to you Print this page

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IRS Overstates Abuse in Charity-Geared Trusts, Tax Advisers Say

By Erin Schilling

Tax avoidance schemes are uncommon in most charitable remainder annuity trust transactions, tax practitioners said, despite the addition of certain uses of these trusts to the IRS’s list of suspect transactions.

Charitable remainder annuity trusts, or CRATs, allow individuals to donate to charities and receive income payments in return. But the IRS March 22 released proposed regulations outlining which uses of CRATs it considers abusive. The regulations are the latest in a series from the IRS to formalize its listed transactions , or deals that require additional disclosures because of tax avoidance concerns.

“This kind of abuse is not that ...

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Tax Avoidance

Tax avoidance is the legal usage with the tax regime in a single territory to one’s own advantage to reduce the quantity of tax that is usually payable by ensures that are within what the law states. Tax sheltering is quite similar, although unlike tax avoidance tax sheltering isn’t necessarily legal. Levy havens are jurisdictions which usually facilitate reduced taxes.

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Tax Avoidance

• Introduction

Tax is a source of revenue for a government of a country through which it endeavours to provide better infrastructure, the standard of living, and security to its residents. The taxpayers approach various ways to reduce tax liability. Usually, there are three ways to reduce taxes:

1. Tax planning: Tax planning means analyzing one's financial position and legally planning one's income to avail various exemptions and deductions.

2. Tax avoidance: Tax avoidance is an activity of taking unfair advantage of the shortcomings/loopholes in the tax rules to avoid the tax payments.

3. Tax evasion: Tax evasion is an illegal way to reduce one's tax burden through fraudulent techniques, such as the deliberate understatement of taxable income or inflating expenses.

• What is Tax Avoidance?

Tax avoidance is an act to minimize tax liability through legal methods. In other words, it is the legal usage of the tax law to reduce the tax amount by means that are within the law. Tax avoidance is not advisable as it could be used for one's advantage to reduce the amount of tax payable.

Tax avoidance is considered immoral because it involves dodging of tax, and it leads to the deferment of tax liability. One of the ways to do tax avoidance is to adjust the accounts in such a manner where there will be no violation of tax rules. Tax avoidance is lawful, but, in some cases, it could be considered as a fraud.

• How to Control Tax Avoidance?

Tax avoidance can be controlled through the implementation of stringent laws and regulations. The Government of India is trying to remove shortcomings/loopholes in existing laws by bringing amendments to ensure that people don't avoid tax payment by manipulating law. With the regular amendments implemented by the government through the tax budget, it is becoming difficult for the taxpayer to do tax avoidance.

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Decoding tax rules for nris working remotely from india for foreign employers.

The pandemic led to work flexibility, impacting NRIs with significant tax implications. The article discusses tax laws, DTAA, Act exemptions, TRC requirements, foreign assets reporting, and employer tax implications for NRIs opting for remote work.

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• The salary received is not deductible from the employer's Indian taxable income.
• Specific exemptions may apply to NRIs employed by foreign ships or governments.

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