According to Federal Appealate Judge, Learned Hand, the answer is a resounding - No. Here's what he said back in 1934 in the Helvering v. Gregory case*.
"A transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. Therefore, if what was done here, was what was intended by the statute, it is of no consequence that it was all an elaborate scheme to get rid of taxes, as it certainly was."
When it comes to tax reduction strategies, at a high level there are only four things you can do.
Within each of these four strategies there are many different tax reduction strategies that are available to all of us. Some years you're advisory team will come up with a homerun idea that will save you and your family a ton in taxes. Other years, the ideas will be a bit boring or mundane and won't seem to make an impact, but over time...they'll make a huge difference.
The most important take away is to make certain that tax reduction strategies are being talked about and discussed by your advisory team before the end of each year. If that's not happening for you, it may be time to get a second opinion.
We call this one turning lemons into lemonade.
Sometimes a business owner may have a bad year - even if only a paper loss. When that happens, it's the advisory teams job to look for other assets that can be converted to income in the same tax year in order to utilize the loss.
Often times, the business owner may have a traditional IRA that can be converted to a Roth IRA. The conversion would create income for the year and the business loss would offset the income. Once converted to a Roth IRA the asset will grow tax deferred and when distributions are taken, they are tax free under current tax law.
We call this one a bigger slice of the pie.
Sometimes an already successful business owner may see a hole in the market they serve and it provides an opportunity to start another business.
The problem is if they are successful again, the value of the new business will be added to their taxable estate. There are ways the business owner could structure the new business ownership so that it would not be included in their taxable estate. Is it more complicated than owning the business outright? Yes. Is it worth it? Probably.
For example, let's assume the business owner was very successful and already had a taxable estate. The new business, on day one, is worth nothing. If the value of the new business grows to $10M and it's 100% owned by the business owner, at a 40% tax rate their family would owe $4M of estate taxes, and the family would net $6M at the time of their death.
On the other hand, if the business was structured such that it was owned outside of the business owners taxable estate, the entire $10M could pass estate tax free.
Isn't that a bigger slice of the pie?
None of the mentioned tax reduction strategies can be utilized as personal tax advice. In fact, our firm does not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
Our point is simply that these conversations between your professional advisors should be happenening each and every year to ensure you are taking advantage of every tax reduction strategy available.
We act as the catalyst to help our client's professional advisors collaborate on a regular basis.