Tax Evasion and Tax Avoidance

Author(s): Montgomery B. Angell

Source: Columbia Law Review , Jan., 1938, Vol. 38, No. 1 (Jan., 1938), pp. 80-97
Published by: Columbia Law Review Association, Inc.

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 TAX EVASION AND TAX AVOIDANCE

To the professional mind, the phrase "tax evasion and tax avoid-
ance" has been familiar for many years, for the legal problems which
are implied by the phrase arose with the passage of our first Income Tax
Act and have been with us since. But within the past few months,
through official use and wide appearance in the press, the phrase is now
brought home to the public generally, with, it is feared, rather bewilder-
ing consequences. Charges of "tax evasion and tax avoidance" have
been made broadcast; public outcry has been raised against "evaders
and avoiders"; care in language and precision of statement have often
been lost; and laymen, unversed in the fundamental canons of statutory
interpretation which have been applied for a century and a half of
judicial decision, have leapt to conclusions which, in many instances,
are unwarranted.
The matter first came to general public attention in the President's
address to Congress made last June. At the outset of the message, after
reference to a report of the Secretary of the Treasury, the President
said:

"This report reveals efforts at avoidance and evasion of tax liability, so wide-
spread and so amazing both in their boldness and their ingenuity that further
action without delay seems imperative."'

The Secretary of the Treasury in his report set forth certain spe-
cific instances. These, said the President, "are alike in that they are
definitely contrary to the spirit of the law" ;2 while the Secretary's re-
port characterized certain of the cases as falling "in the category of a
legal though highly immoral avoidance of the intent of the law".3 The
press of the country in most instances followed the language of the
President and coupled avoidance and evasion in one phrase and gave
to both words one implication.
The confusion, perhaps, is the result of the use of words, rather
than of any fundamental difficulty in thought, as so often occurs where
a word or a phrase is employed for the sake of brevity. "Avoidance"-
"evasion": In defined nmeaning, as appearing in the standard dictionaries,
there is perhaps only a slight difference in shade between the two. The
verb "avoid" in our current dictionaries is defined as "to keep away or

181 CONG. REC. 6704 (1937).

2 Ibid.
31 d. at 6705.

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 TAX EVASION AND TAX AVOIDANCE 81

a distance from; go or be wide of; hence, to keep clear of or out of

the way of; having nothing to do with".4 The verb "evade" is defined
as "to avoid by artifice; elude or keep away from by craft or force; save
oneself from, as an impending evil"; and, secondarily, "to use evasion,
practice artifice in order to elude and escape".5 Each is given as a pos-
sible synonym of the other.6 Thus in common use the two words have
only a shade of difference, though that shade indicates the fundamental
difference which the two words have come to have in the field of in-
come tax interpretation, or, in fact, in the application of any statute
which undertakes to draw within its field certain situations, while ex-
cluding others.
Whatever may be the similarity or difference in the two words as
commonly employed, to the professional and judicial mind, there is a
very sharp and fundamental distinction in the idea or conception behind
the words. Clear thinking and sound judgments demand that this fun-
damental distinction be emphasized clearly, in order that the difference
may be applied sanely and appropriately. This is particularly true where
there are charges of immoral conduct, and implications of immorality
are constantly raised. Surely it is shocking to the sense of the Ameri-
can public that a given course of action may be legal and yet call forth
a charge that it constitutes "a highly immoral avoidance of the intent
of the law",7 in the words of the Secretary of the Treasury quoted
above.
As a rule, legislation undertakes to affect the conduct of individuals
in the sense that it penalizes or prohibits a certain course of action
while leaving other actions wholly free and unfettered. The most ob-
vious field is that of criminal law, where murder, robbery, housebreak-
ing and other crimes and misdemeanors, as defined by the statute, are
made punishable. If the individual has acted within the prohibited
field, he is caught by the statute and punished accordingly; but if not
within the field, the statute does not reach him and no penalty attaches.
Again, in the case of the Sherman Anti-Trust Act, the statute prohibits
the restraint of trade. If the individual in his conduct falls within the
statute, his action is illegal and he must suffer the penalty; but if his ac-
tion lies outside of the field prohibited, the statute has no force to con-
strain or penalize him.
Legislation is not self-operative. While certain acts are clearly

'FUNK & WAGNALL'S STANDARD DICTIONARY OF THE ENGLISH LANGUAGE

(1921) 199.
61 Id. at 863.

' 81 CONG. REC. 6705 (1937).

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 82 COLUMBIA LAW REVIEW

within the field and certain other acts are clearly not, there is a middle
ground where on the perusal of the statute and a consideration of the
facts doubt arises as to which side of the line the action falls.8 It is the
function of the judicial branch of the Government to resolve the doubt,
and in performing their judicial function the courts are called upon to
determine whether in view of the facts proven and the language em-
ployed in the statute the individual is or is not subject to the prohibition
or burden of the statute. In determining the question, the courts are
called upon to and, of necessity, must "interpret the act", that is to say,
the courts must apply to the particular issue raised certain canons of
construction which have been built up by judicial decision over a long
period of years, canons which have their origin in the need of applying
a statute fairly and impartially as between individuals and at the same
time giving effect to the intention of the legislature as expressed in the
language used in drawing the statute.
Sometimes intent is a prerequisite to the imposition of the penalty,
as in the case of murder. Sometimes the penalty follows irrespective of
the existence or absence of any intent or purpose, but results solely
from the existence of objective action alone, as in the case of the bank-
ruptcy laws.
The Internal Revenue laws and their application are no exception to
the general rule. In applying them, in the first instance the Treasury,
and, secondarily, the courts are confronted with exactly the same prob-
lems as arise under any statute, namely, does a certain course of conduct
or the existence of a certain set of facts have as its consequence the
imposition of a tax, or do the conduct and facts fall outside of the
statute and thus relieve the individual of the burden of the statute?
With one or two exceptions, under our Internal Revenue Acts the res-

On the question of drawing the line see Horning v. District of Columbia,

254 U. S. 135, 137 (1920); Irwin v. Gavit, 268 U. S. 161, 168 (1925); Superior
Oil Co. v. Mississippi, 280 U. S. 390, 395-396 (1930); HOLMES, THE COMMON
LAW (1881) 127. In this treatise, Mr. Holmes writes:

"The growth of the law is very apt to take place in this way. Two widely
different cases suggest a general distinction, which is a clear one when
stated broadly. But as new cases cluster around the opposite poles, and begin
to approach each other, the distinction becomes more difficult to trace; the
determinations are made one way or the other on a very slight preponderance
of feeling, rather than of articulate reason; and at last a mathematical line
is arrived at by the contact of contrary decisions, which is so far arbitrary
that it might equally well have been drawn a little farther to the one side or
to the other, but which must have been drawn somewhere in the neighborhood
of where it falls."
Wherever the line may be drawn, the courts in effect are declaring what is
the law, a declaration which in a sense is retroactive, since when the act oc-
curred, the individual involved did not have the decision before him.

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 TAX EVASION AND TAX AVOIDANCE 83

olution of the question turns entirely upon objective facts, quite with-
out regard to the purpose or intent of the individual. In the more recent
Income Tax Acts, certain corporations are made subject to a heavy sur-
tax where "formed or availed of for the purpose of preventing the im-
position of a surtax on its shareholders" ;9 and in the Estate Tax Act,
property which is the subject of a gift made "in contemplation of
death"'0 must be included within the gross estate. But aside from these
and one or two other exceptions, the substantive provisions of our
revenue statutes are drawn so that a tax is imposed depending upon the
existence or non-existence of objective facts, and the existence or non-
existence of an intent to escape the tax plays no part in the determina-
tion of the tax liability.
This is the unquestionable rule under the authorities. As re-
cently as January 7, 1935, the Supreme Court of the United States said,
in an unanimous opinion:

"The legal right of a taxpayer to decrease the amount of what otherwise

would be the amount of his taxes, or altogether avoid them, by means which
the law permits, cannot be doubted.""

The late Justice Oliver Wendell Holmes, whose enlightment in

the field of judicial interpretation is a byword in the law, said in the
course of an opinion involving a state taxing statute:

"We do not speak of evasion, because, when the law draws a line, the case
is on one side of it or the other, and if on the safe side, it is none the worse
legally that a party has availed himself to the full of what the law permits.
When an act is condemned as an evasion, what is meant is that it is on the
wrong side of the line indicated by the policy if not by the mere letter of the
law.2

Another liberal, Judge Learned Hand of the Circuit Court of Ap-

peals for the Second Circuit, expressed the rule in equally clear fashion,
when he said in a recent decision:

"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."'3

9REVENUE: ACT of 1936, Section 102(a).

10 REVENUE ACT of 1926, Section 302 (d) (1), as amended by Joint Resolution
of Mar. 3, 1931, and Section 803 (a) of the REVENUE ACT Of 1932.
" Gregory v. Helvering, 293 U. S. 465, 469 (1935). What the law permits
is the question for the courts to decide, and it is not the function of the judiciary
in this field to determine the morals of the matter.
' Bullen v. Wisconsin, 240 U. S. 625, 630-631 (1916). In using the word
"policy," the learned Justice obviously had in mind the policy of the legislature as
expressed in the language employed in the statute under consideration.
13 Helvering v. Gregory, 69 F. (2d) 809, 810 (C. C. A. 2d, 1934); aff'd, 293
U.S. 465 (1935).

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 84 COLUMBIA LAW REVIEW

The Circuit Court of Appeals for the Sixth Circuit has expressed
the rule thus:

"There was nothing unlawful, or even mildly unethical, in the motive of

the petitioner, to avoid some portion of the burden of taxation.""

So far as research has disclosed, the rule set forth in these decisions
has never been questioned judicially.15 It stands today as the law of

14 Marshall v. Commissioner, 57 F. (2d) 633, 634 (C. C. A. 6th, 1932).

15The Circuit Courts of Appeal for the other Circuits have stated the rule
with equal clarity. In Sawtell v. Commissioner, 82 F. (2d) 221, 222 (1936), the
First Circuit said:
"Nothing is better settled than that persons are free to arrange their affairs
to the best advantage for themselves under the law as it stands. A purpose
to minimize or avoid taxation is not an illicit motive."

In Commissioner v. Eldridge, 79 F. (2d) 629, 631 (1935), the Ninth Circuit

said:
"It is argued by the Commissioner that the transfers by respondents to
the corporation were made for the purpose of establishing a deductible loss
for income tax purposes. This, if true, is unimportant. A taxpayer may resort
to any legal method available to him to diminish the amount of his tax
liability."

The Board of Tax Appeals has also adopted the rule. In Rands, Inc. v.
Commissioner, 34 B.T.A. 1094, 1106 (1936), the Board said:
"The purpose to save income taxes is now legally above reproach...

The rule in England is equally clear. In Commissioners v. Fisher's Executors

[1926] A. C. 395, 412, 10 Tax Cases 327, 340 (decided by House of Lords), Lord
Sumner in his opinion said:
"My Lords, the highest authorities have always recognized that the
subject is entitled so to arrange his affairs as not to attract taxes imposed by
the Crown, so far as he can do so within the law, and that he may legitimately
claim the advantage of any express terms or of any omissions that he can find
in his favour in taxing Acts. In so doing he neither comes under liability nor
incurs blame."

In Duke of Westminster v. Commissioners [1936] A. C. 1, 7-8 (decided by the

House of Lords), Lord Atkin said:
"It was not, I think, denied-at any rate it is incontrovertible-that the
deeds were brought into existence as a device by which the respondent might
avoid some of the burden of surtax. I do not use the word device in any sinis-
ter sense, for it has to be recognized that the subject, whether poor and
humble or wealthy and noble, has the legal right so to dispose of his capital
and income as to attract upon himself the least amount of tax."

In the course of the same case, Lord Tomlin said:

"Every man is entitled if he can to order his affairs so as that the tax at-
taching under the appropriate Acts is less than it otherwise would be. If he
succeeds in ordering them so as to secure this result, then, however unappre-
ciative the Commissioners of Inland Revenue or his fellow taxpayers may be
of his ingenuity, he cannot be compelled to pay an increased tax." Id. at 19-20.

The above comment of Lord Atkin in the Duke of Westminster case was
cited with approval by our First Circuit Court of Appeals in Sawtell v. Comr
missioner, quoted supra.

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 TAX EVASION AND TAX AVOIDANCE 85

the land, applicable as well in the administration of the Income Tax

Acts as in all our Federal and State statutes.
But equally well-established is a second rule of general application.
An individual engages in a certain transaction, which under the statute
is taxable. In carrying out the transaction, he may endeavor to cover
up its real purport by descriptive language in contemporaneous docu-
ments, or he so complicates his affairs by the use of corporations, trusts
and the like as to hide the real character of the transaction, or on in-
vestigation by the administrative authorities he withholds the material
facts and thus seeks to evade the payment of the tax. The transaction,
of course, is subject to the tax since the actual facts bring it within the
field of the statute and the actual facts inevitably control, quite regard-
less of any intent of the individual. But intent is here material, since,
depending upon its existence or absence, the additional burden of the
exaction of fraud penalties will depend. Such action constitutes fraud
in fact, since there exists an intention to mislead, and, accordingly, an in-
tention to escape a burden which in all candor the individual knows he
is under. Here we have moral turpitude, and the individual is justly
charged with a real wrongdoing. An extreme case is where an individ-
ual receives and cashes an interest coupon and then so arranges his
books of account that its receipt is concealed.
What word or phrase is employed to identify each of these two
rules is of no consequence; the rules as formulated are definite and
clear and a sharp line of demarcation exists between them. For
brevity, in the legal profession the word "avoidance" has become identi-
fied with the first rule, while the word "evasion" has become identified
with the second. Thus it was that Justice Holmes in the excerpt quoted
above was careful not to speak of "evasion", since in his mind the
word "evasion" was definitely identified with a transaction which "is on
the wrong side of the line".
What, then, are we led to believe the President and the Secretary
of the Treasury had in mind when they speak of "avoidance and eva-
sion of tax liability",16 the characterization of both tax avoidance and
Similarly, in Ayrshire Pullman Motor Services v. Commissioners, 14 Tax
Cases 754, 763 (1929), the Lord President of the Scottish Court of Sessions said:
". . . No man in this country is under the smallest obligation, moral or
other, so to arrange his legal relations to his business or to his property
as to enable the Inland Revenue to put the largest possible shovel into his
stores. The Inland Revenue is not slow-and quite rightly-to take every ad-
vantage which is open to it under the taxing statutes for the purpose of de-
pleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled
to be astute to prevent, so far as he honestly can, the depletion of his means
by the Revenue. ..."

1 Supra, note 1.

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86 COLUMBIA LAW REVIEW

tax evasion as contrary to the spirit of the law",17 and a case which
may be legal and yet "a highly immoral avoidance of the intent of the
law" ?18 It is evident that there is either confusion in the use of words
or a confusion of ideas, and any confusion of this character is bound to
bewilder the lay public.
Unquestionably the Administration has good ground for many of
the complaints made. But should the complaint be made against the in-
dividual on account of his course of conduct, or should the complaint
be made against the legislature, which is responsible for the drafting of
the statute? To confuse the two rules discussed above by coupling tax
evasion with tax avoidance beclouds the real solution, and has had the
unfortunate practical effect of tarring a great many individuals, whether
named or not named, with the charge of immoral conduct. "Evasion"
in the sense in which Justice Holmes uses the word, cannot be con-
demned too harshly. Any amendments to strengthen the hand of the
Treasury and the Courts in requiring an individual to comply with the
requirements of the statute in making return and paying taxes should,
of course, be made, and the legal arm of the Government should be
vigilant in publicly condemning and privately prosecuting individuals
who willfully defraud the Government of its revenue. Here the fault
definitely lies with the individual. But, even here, justice should be
tempered with fairness, for our revenue statutes have become exceed-
ingly intricate, many provisions are the outgrowth of amendment upon
amendment, and in detecting and punishing the fraudulent taxpayer we
must avoid the imposition of unjust charges upon those who have
erred innocently in making return, although the taxes due must be col-
lected in full.
But what of the other rule? Suppose the transaction is one which
is "on the safe side", when Mr. Justice Holmes characterizes it "as
none the worse legally that a party has availed himself to the full of
what the law permits".
To say that tax avoidance and tax evasion in the sense that it carries
a moral stigma exists where the taxpayer intentionally directs his af-
fairs so as to avoid incurring a tax which would otherwise attach is
wholly beyond the mark, and neither the President nor the Secretary of
the Treasury could have had in mind any such broad generalization. For
example, suppose an unmarried man or a single woman, having an in-
come of $5,000 and a credit of $1,000, intentionally and with the avowed
purpose of reducing his or her income taxes makes a gift of $500 to a

7 Sutpra, note 2.
1 Supra, note 3.

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 TAX EVASION AND TAX AVOIDANCE 87

charitable organization. Or let us suppose an individual in the high

surtax brackets, owning certain securities which show an appreciation
in value over costs and others which show a depreciation in value over
cost, sells on the public stock exchange the appreciated securities and
then later, within the same year, with the avowed purpose of reducing
his income taxes, sells the depreciated securities. No one could right-
fully charge such individuals with any improper "avoidance" or "eva-
sion" of the tax liability. The same is true in the very obvious case
of purchasing tax exempt securities in lieu of taxable income producing
securities. The language of the statute and the policy of the statute
both combine to permit just such courses of action.
But the shoe begins to pinch a bit harder when we reach those
cases where, in an effort to enforce the general pattern of the statute
in laying taxes fairly and in accordance with the relative ability to pay,
Congress by the use of definitive and explicit language has undertaken
to coerce the individual from making use of certain so-called devices
which would relieve him of what is considered his just burden of taxa-
tion, but where the language employed falls short of accomplishing the
desired objective on account of its very explicitness, so that it is impos-
sible to say the transaction falls within the four corners of the statute.
The President named a few such instances in his message of last June,
such as, for example, the creation of foreign personal holding com-
panies in neighboring nations, the use of domestic holding companies
where the stock is spread sufficiently to escape the statutory definition
embracing such companies, the incorporation of yachts and country es-
tates, and the creation of loans between a personal holding company
and the stockholders with a view to the benefit of the interest deduction
on the loans. It is impliedly if not directly charged that such activities
involve moral turpitude, even though the transaction admittedly is quite
legal in the sense that under the existing language of the statute the
transaction is not within the taxable field. In such cases as these, is the
complaint appropriately addressed to the individual, or does the fault
lie elsewhere ?
It is useless to talk about "the spirit of the law",19 for such language
only serves to confuse the problem. If by "the spirit of the law" is
meant a compliance with one of the fundamental principles of an In-
come Tax Act, namely, the imposition and payment of taxes in accord-
ance with the relative ability to pay, such a standard is altogether too
vague, for what may be "the spirit of the law" to one man may appear
quite a different thing to another. If it is meant that an individual must

19 Supra, note 2.

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 88 COLUMBIA LAW REVIEW

refrain from taking any action which will reduce his taxes, the phrase
is quite contrary to our scheme of government. Surely our Income Tax
Acts contain nothing justifying a contention that an individual must
contribute to the support of his government when the statute does not
require him to do so. As the courts have said, "There is not even a
patriotic duty to increase one's taxes."'?
To insist that the statute be applied in accordance with "the
policy" of Congress leaves us little better off. In applying the statute, it
is appropriate to take into consideration the intention of the legislature
in enacting the statute, but its intention cannot be determined in vacuo;
it must be drawn from the language appearing in the statute, the history
of the particular provision under consideration, and, in case of doubt,
the purpose which the legislation aims to accomplish as expressed in the
House and Senate Committee reports accompanying the bill. If we go
beyond these sources, it is wholly a matter of guesswork what the policy
is, and again we would get into the dangerous field of rank uncertainty,
so inimical to the rights of the individual under a democratic govern-
ment.
Let us take, for example, one of the cases which the President cites
as constituting an abuse, namely, the use of a personal holding company
to reduce the individual surtax burden. The section2' does not make
it illegal to organize such a corporation, so it is not punitive in that
sense. The section simply imposes heavy additional surtaxes upon cer-
tain corporations as carefully defined, with a view to deterring their use.
But if a corporation wishes to function within it and pay the additional
taxes imposed, no one can complain. Complaint is made against a cor-
poration which intentionally remains beyond the line drawn, for the use
of such a corporation permits the individual to split his income and so

2sSupra, note 13. The question obviously is not one of individual or collective
morals. When the individual approaches the problem of preparing an income-tax
return, he is dealing with his government as a collector of revenue for the pur-
pose of running the government. Congress calls upon each citizen to pay what it
conceives to be his share of such revenues, and no more. Congress is not soliciting
gifts, but exacting revenue within the limitation of the statute, and the in-
dividual citizen is under no obligation, legal or otherwise, to contribute more
than Congress exacts. The case is quite different from that where the law falls
short of enforcing a moral obligation, as for example, where an individual stands
by and allows an infant to walk over a precipice, or a drowning man to go down
for the third time. We are in the field, rather, of political economy and not of
abstract morals, for certainly the act of a citizen in refraining from making a
voluntary contribution to the support of the government has nothing to do with
morals. He has a moral as well as a legal right to preserve his earnings intact
from the Treasury, in order to prefer a private charity, or the welfare of his
children, or the development of his business.
2 REVENUE Acr of 1937, Section 1, amending Section 351 of the REvENUE
AcT of 1936.

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 TAX EVASION AND TAX AVOIDANCE 89

neutralize to a large extent the application of the graduated individual

surtax rate.
In the 1936 Act,22 the statute expressly restricted the corporate
liability to cases where more than 50%o of the outstanding stock was
owned by or for "not more than five individuals", with the requirement
that the stock owned by certain specified members of a family shall be
considered as the stock of one individual. In order to obtain the benefits
of incorporation and yet avoid the imposition of the heavy corporate
surtaxes, an individual causes sufficient stock to be owned by a business
partner or business associate, and thus places the stock ownership
squarely outside of the explicit requirements of the statute. If the
transaction is thus made on "the safe side of the line",23 it cannot fairly
be said that such action is immoral, or even that there has been any
wrongdoing. It serves no purpose to talk of "the spirit of the law", or
"the policy" of Congress. When the law says five, it cannot be "the
spirit of the law" to enforce it in the case of an ownership by six; nor
can the ownership of six be said to be contrary to "the policy" of Con-
gress when Congress itself prescribed a maximum of five. The in-
dividual taxpayers of the country did not draw the statute, and when the
statute is drawn thus and so, what moral stigma can attach to an in-
dividual who so arranges his affairs that he would be subject to tax only
if the statute had been drawn in different language?
Even in the somewhat irritating field illustrated by certain of the
cases to which the President referred, it does not seem appropriate to
condemn the individual for care in arranging his affairs in order to
bring himself, in the words of Mr. Justice Holmes, "on the safe side of
the line"24 which the statute draws. This is his right, and if he succeeds,
no more criticism should be directed at him than at the unmarried man
with a $5,000 income who intentionally reduces his taxes by giving away
$500 to charity. Such an individual, of course, must take the risk of be-
ing "on the safe side", and if he fails, he must pay, for as the learned
Justice said in another case, "Men must turn square corners when they
deal with the Government".25 If, however, the corner is squarely turned,
on what ground can the action be characterized as "highly immoral
avoidance"26 when the law falls short of reaching the transaction? The
individual should be held morally culpable only where the transaction

' Section 351 (b) (1) (B).

3 Supra, note 12.
2 Supra, note 12.
' Rock Island, Arkansas & Louisiana R. R. Co. v. United States, 254 U. S.
141, 143 (1920).
a Supra, note 3.

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 90 COLUMBIA LAW REVIEW

falls on "the wrong side of the line"-7 and there exists an intention to
evade an incurred liability. For here there is real moral turpitude.
But can complaint justly be made of the courts? I think not. The
courts do not draft the statutes; the courts must take the statutes as
they come from the hands of Congress. Charged as they are with
balancing on the one hand the rights of the individual and on the other
with giving due effect to the act of Congress, certain canons of interpre-
tation have grown up which have their roots in sound experience. These
canons are as much the law of the land as the statutes, to the interpre-
tation of which they are applied. Intention or purpose is material. But
it is the intention of Congress as expressed in the statute which controls,
and not the intention of the individual. The Congressional intent must
be gathered from the language used, when read in the light of the history
of the provision under consideration, and where doubt exists resort may
be had to statements made in the Senate and House Committee Reports
accompanying the bill. Primarily it is the language used which is im-
portant. The other tests are secondary, for unless the language used
is subject to interpretation, the language must control.28 But under our
decisions a word or a phrase is not necessarily confined to its literal
meaning; the context is important.29 As Justice Holmes cryptically ex-
pressed it: "A word is not a crystal, transparent and unchanged, it is
the skin of a living thought and may vary greatly in color and content

Supra, note 12.

2 Wisconsin R. R. Commissioner v. C. B. & Q. R. R. Co., 257 U. S. 563, 589
(1922) ; Edwards v. Douglas, 269 U. S. 204, 210 (1925) ; Hamilton v. Rathbone,
175 U. S. 414, 421 (1899) ; Riverdale Co-Operative Creamery Ass'n v. Com-
missioner, 48 F.(2d) 711, 713 (C. C. A. 9th, 1931) ; Lewellyn v. Harbison, 31
F. (2d) 740, 741 (C. C. A. 3d, 1929).
' Helvering v. New York Trust Co., 292 U. S. 455, 464 (1934) ; Helvering
v. Morgan's Inc., 293 U. S. 121 (1934). In the course of the latter decision, Justice
Holmes said, at p. 126:
"But the true meaning of a single section of a statute in a setting as
complex as that of the Revenue Acts, however precise its language, cannot
be ascertained if it be considered apart from related sections, or if the mind
be isolated from the history of the income tax legislation of which it is an
integral part."

In Crocker v. Lucas, 37 F. (2d) 275, 276 (1930), an income tax case, the Ninth
Circuit Court of Appeals said:
"But the same word does not always mean the same thing, in a statute or else-
where."
In Helvering v. Gregory, 69 F. (2d) 809, 810 (C. C. A. 2d, 1934), aff'd, 293 U. S.
465 (1935), Judge Learned Hand said:
". . . as the articulation of a statute increases, the room for interpretation
must contract; but the meaning of a sentence may be more than that of
the separate words, as a melody is more than the notes, and no degree of
particularity can ever obviate recourse to the setting in which all appear, and
which all collectively create."

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 TAX EVASION AND TAX AVOIDANCE 91

according to the circumstances in which it is used."30 But even with

this liberality of approach, a tax cannot be sustained when on account
of the exact and explicit language used in the statute the statute itself
definitely negatives any intention to lay a tax.31
Let me illustrate by a concrete example, and again take the per-
sonal holding company. The 1936 Act required ownership of more than
50% of the stock by five individuals as defined. The purpose in fixing
the number mathematically was no doubt exactness in the application
of the statute. But the "loophole" was perfectly obvious, and its use
quite foreseeable. If the group owned 48% of the stock and 2%7 was
owned by a business partner or associate of one of the group (which still
gave practical control), the corporation was not within the field and so
escaped the burden of the section. The language of the statute was
mathematically so exact that no room existed for interpretation, for, as
Judge Learned Hand of the Second Circuit Court of Appeals said,
"As the articulation of the statute increases, the room for interpreta-
tion must contract".32 The existence of this particularity of language
definitely negatives any intent on the part of Congress to go beyond the
drawn field. The courts cannot be charged with any failure to rectify
the abuses, so long as the language used in drawing the statute leaves
no latitude for interpretation.
Thus we are driven irresistibly, although perhaps with some reluc-
tance, to the conclusion that these complaints of "tax avoidance" and

3Towne v. Eisner, 245 U.S. 418, 425 (1918).

3 United States v. Merriam, 263 U. S. 179 (1923); Crooks v. Harrelson, 282
U. S. 55 (1930); Gould v. Gould, 245 U. S. 151, 155 (1917). In the Merriam
case, the Supreme Court said, at pp. 187, 188:
". . . in statutes levying taxes the literal meaning of the words employed is
most important, for such statutes are not to be extended by implication
beyond the clear import of the language used."

The Court also quoted with approval the words of Lord Cairns in Parting-
ton v. Attorney General, L. R. 4 H. L. 100, 122 (1869):

". . . if the Crown, seeking to recover the tax, cannot bring the subject within
the letter of the law, the subject is free, however apparently within the spirit
of the law the case might otherwise appear to be. In other words, if there
be admissible in any statute, what is called an equitable construction, certainly
such a construction is not admissible in a taxing statute, where you can
simply adhere to the words of the statute."

The language in both instances was quoted with approval in the later Harrel-
son case, supra.
The New York Court of Appeals in People ex rel. Studebaker Corporation
v. Gilchrist, 244 N.Y. 114, 126 (1926), citing the Gould case, has also said:
"A statute levying a tax will not be extended by implication beyond the clear
import of its terms. . ..

32 Supra, note 29.

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 92 COLUMBIA LAW REVIEW

"loopholes" and "abuses" arising from the use of so-called schemes and
devices should in all candor be addressed to Congress and its draftsmen,
for the problem is a problem of legislative draftsmanship, nothing more
and nothing less. The Treasury is not free from responsibility, for while
Congress enacts the statute, it is often the Treasury officials who formu-
late the bill.
Yet the unpleasant fact remains that in the field which we are con-
sidering one individual, through sound advice and careful action, may
escape what on broader grounds may be considered his fair share of
the tax burden, while another who does not resort to such careful plan-
ning may pay much more heavily.33 The problem is of interest to all
of us. For instance, Congress and the Treasury have been increasingly
aware of the fact that the imposition of the same surtax rates on an in-
dividual whose income consists of earned income, such as the salaried
and professional man, and upon an individual whose income flows from
investment securities, is unfair, for while the latter already possesses a
capital fund which will take care of his dependents, the former has no
such capital fund and thus is confronted with heavy additional expenses,
such as life insurance and the need for building up a capital fund out of
earnings on account of dependents; and the earner of income cannot re-
duce his taxes through the use of devices requiring capital, such as the
personal holding company. Yet with the need for revenue as it exists
today, it is impossible to grant the appropriate relief unless the individ-
ual whose income is from investment securities is required to pay his
full share of the graduated surtaxes on such income. Thus in the field
which the President and the Secretary of the Treasury had in mind,
some solution is imperative, if a solution there be.
Is the solution to be found in the retention of the use of exact lan-
guage, but with an ever broadening of the field in order to catch the so-
called "avoiders"? In the 1937 Revenue Act, Congress undertook to
follow this course. The result is as involved and complicated a piece of

'With all the talk of the individual avoiding his just share of the burden of
taxation, little attention is being paid to those instances where the existing pro-
visions of law impose a very unjust burden, wholly out of line with any principle
of equality or the relative ability to pay. For example, an individual purchases
stock of a corporation at a high price, reflecting the existence of a large earned
surplus. Later, the corporation makes an extraordinary distribution in the form
of a dividend, an act unanticipated when the individual purchased the stock. As a
result of this distribution, the price of this stock falls precipitately and the pur-
chaser may be compelled to sell at an enormous loss over his cost. Under the
statute as now drawn, he must take up as income the large dividend distribution
and cannot deduct the loss except to the extent of a meager $2,000. Here surely
is a real abuse in the sense of the imposition of a wholly unfair tax, and needs
correction as much as the "abuses" growing out of the so-called "loopholes" in
the statute.

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 TAX EVASION AND TAX AVOIDANCE 93

legislation as ever emerged from the hands of Congress. To the layman

it is wholly unintelligible, and even to those versed in tax matters it pre-
sents uncertainties and inequalities which will take months, if not years,
to resolve. In respect of the stock ownership requirement of personal
holding companies, the field was broadened so as to attribute stock
owned by a corporation, partnership, estate or trust to the shareholders,
partners or beneficiaries proportionately, and stock owned by a partner
was attributed to any member of the partnership, a cumbersome and
complicated rule at best. So far as they go, these amendments do elimi-
nate certain obvious loopholes. Yet the ink of the Revenue Act of 1937
was hardly dry before certain "technicians" were announcing publicly
ways and means of retaining the benefits of the personal holding com-
pany without having it subject to the punitive taxes.
But the main vice in this method of approach arises in another di-
rection. The draftsmen of the statute, in their eagerness to catch the
"avoiders", have drawn within the range of the statute, no doubt un-
wittingly, situations which, when they are brought to light, were never
intended to be included. Here perhaps is the worst feature of the pres-
ent tendency toward particularity. Under the 1937 Act, many corpora-
tions engaged in trade or business, both domestic and foreign, and wholly
legitimate in character, find themselves within the net of the personal
holding company, and so face ruinous taxes. The language employed
is so exact and specific that it is impossible to afford relief through in-
terpretation. Thus the ultimate effect is to create greater inequalities,
when the avowed purpose is to iron out inequalities. The solution at-
tempted by the 1937 Act, while perhaps correcting certain so-called
"abuses", certainly is not a satisfactory solution.
There are three fundamental requirements of the graduated income
tax. It must produce revenue; it must accomplish fairness and equality
by laying the burden in accordance with the relative ability of the vari-
ous classes of taxpayers to pay; and, finally, it must constitute a chart
by which it may be determined with as great a degree of accuracy as
possible whether the individual is liable to pay tax, and if so, how much,
or whether he is hot subject to tax,-a requirement which is of prime
if not of controlling importance. The entire accomplishment of all these
three major aims certainly is extremely difficult and probably impossible.
We cannot hope for a perfectly drawn statute. Perhaps the solution is
by weighing the relative importance of the three major aims in the vari-
ous and different fields of the statute, and so strike a reasonable balance
depending on the needs.
In the major portions of the Income Tax Acts which impose the

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94 COLUMBIA LAW REVIEW

taxes, such as the definition of gross income, the permitted deductions,

the differentiation between classes of taxpayers, the withholding require-
ments, and the like, the importance of explicit language is obvious and
undoubtedly should be retained, even at the sacrifice of some inequality.
Here certainly we must have a chart, and a chart which may be readily
understood and easily applied. In this field there is no room for lati-
tude or flexibility if human ingenuity can avoid it, and simplicity of
draftsmanship is imperative. As now drawn, our Revenue Acts are full
of cross-references from one section to another and on to a third, and
even sometimes back to the original sectj1on, which often defeats the
very aim of explicitness and simplicity. But in this field of our statute,
explicitness of language obviously outweighs other considerations.
But in the field of the so-called "abuses", the field which the Presi-
dent and the Secretary of the Treasury had under consideration, it is
suggested, although with some hesitation, that perhaps a sounder re-
sult may be obtained by the use of less particularity and more generality
in language, even at the sacrifice of exactitude in the chart. Here, per-
haps, the emphasis should be laid on an effort to achieve equality in
laying the tax burden even at the expense of the primary rule. In this
rather narrow field, might it not be advisable to give the Treasury and
the courts somewhat more elastic language, language which will be sus-
ceptible of rational application in situations which are not foreseeable
when the Act is drawn? On the one hand, this greater flexibility would
tend to correct the so-called "abuses" by deterring individuals from em-
barking on schemes which the very presence of such flexibility will
render highly doubtful of success, and so too dangerous to attempt;
and, on the other, would permit the exclusion from the punitive provi-
sions of transactions which are quite proper and legitimate.
To illustrate the use of more general language and again taking as
our example the case of the personal holding company: If it is felt that
the 50%o stock ownership requirement and the five individual group re-
quirement must be preserved due to the difficulty of formulating a more
satisfactory definition, it might be appropriate to reframe the language
so as to make the section apply where more than 50%o of the stock is
"owned or controlled, directly or indirectly", by not more than five in-
dividuals. This would do away with the need of bringing in the cum-
bersome particularity of family ownership, or ownership through cor-
porations, partnerships or estates, or ownership of partners, with the
ever present possibility of future loopholes. The word "control" is sus-
ceptible of considerable latitude and would be interpreted in accordance
with the obvious purposes of the provision in question. Depending upon

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 TAX EVASION AND TAX AVOIDANCE 95

the facts of each case, it would tend to broaden the applic

tion to include such instances as those where stock was lodged in the
hands of a business associate, friend, etc., when such stock in fact was
subject to the control of the group, and at the same time support a nar-
rower application where the proven facts negative any intention to bring
within the class, as where the corporation is performing a purely busi-
ness function wholly unrelated to matters of taxation.
Or, to take another illustration: The Treasury and the courts have
experienced considerable difficulty in losses on the sale of securities be-
tween a husband and wife, or between members of a family, or between
a corporation and its stockholders when the stock is closely held. There
is nothing illegal or even "mildly unethical"34 in a sale between a hus-
band and wife; and so long as losses on the sale of securities are avail-
able for income tax purposes, the deduction should be allowed in the
case of such sales just as in the case where the securities are sold on a
public exchange, provided the sale is a real sale in the sense that a sale
on the market is real, that is, where the owner definitely and irretriev-
ably puts the security beyond any future control or dominion. In meet-
ing this situation, again our Revenue Acts undertake to be specific and
use exact language, prohibiting any deduction in the case of sales be-
tween certain specified persons.35 This has all of the vices pointed out
above. Might it not be feasible to draw the statute so that the retention
of control, direct or indirect, over the property is made the test? The
statute might provide that the loss upon the sale or other disposition of
property shall not be recognized "where the seller retains control, direct
or indirect, over the property which is the subject matter of the sale."
Here again, the greater generality of language would give it a flexibility
which would permit the Treasury and the courts more latitude in apply-
ing the statute in accordance with the broad aims of Congress. Thus
suppose two brothers each own and operate an incorporated business,
such as a grocery store or meat market, and one, wishing to retire, sells
out to the other by selling all of his stock. Under the existing statute,
the loss on the sale (assuming a loss occurs) must be disallowed. Un-
der the language suggested above, the seller would be allowed the loss,
for quite obviously the transaction is a legitimate business transaction at
arm' s length. But a loss on a colorable sale of securities between two
brothers would be disallowed, as under the present statute.
It may be urged that any such change in the form of our Income
Tax Acts will leave some of the most troublesome provisions gravely
3 Supra, note 14.
3 REVENUE Acr of 1936, Section 24(a) (6), as amended by the REVENUE Acr
of 1937.

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 96 COLUMBIA LAW REVIEW

indefinite until a body of judicial decision m

which will require three, four, or even more years. This is true. But
under the present Acts as now drawn, judicial precedent is often very
short-lived on account of constant amendment and replacement, due
to the constantly recurring need of broadening certain fields. During
the last four years, we have had four new Internal Revenue Acts.36
Any such constant overhauling of the statute renders of little weight
existing judicial decisions. Sooner or later we must have stability in
the substantive law provisions, for only by achieving such stability can
we obtain the full benefit of adjudicated cases. If certain of the vexing
problems under our Income Tax Acts are met by intelligent revision in
the form of greater flexibility in language, we must await with patience
the inevitable judicial interpretation. But with the substantive pro-
visions in a more satisfactory form, such patience may well be rewarded
by the prospect of greater stability and less tinkering.37
The question of how general the language and how specific in the
various fields embraced by the statute ultimately must rest in sound
judgment, and preferably should be accompanied by a thorough revi-
sion and overhauling of our statute. Perhaps the only solution lies in
the creation by Congress of a commission with sufficient ability among
its personnel and with a sufficient appropriation to insure an earnest and
careful study of the problem over a period of years. This will require
time and patience. Yet in the end I am confident that some such thor-
ough overhauling by a capable commission is the only solution, and
ultimately may be expected to bear very real fruit.
In any event, whether or not there be a solution of this perplexing
problem, certainly the remedy is not in charging broadcast that individ-
uals are ignoring "the spirit of the law"38 or that they are engaged in "a
highly immoral avoidance of the intent of the law".39 The problem is a
problem of draftsmanship predicated upon a sound knowledge of the
established principles of statutory interpretation. The extent of success
depends upon the skill and intelligence exercised in the draftsmanship.
Poor draftsmanship lends itself to the creation of so-called schemes
or devices to avoid the imposition of the taxes. Under good drafts-

W The REVENUE ACTs of 1934, 1935, 1936, and 1937.

7 Or it might perhaps be feasible to combine both methods of approach, that is
to say, retain specific language covering the obvious classes of cases and follow it
by general language susceptible of some latitude of interpretation. The objection
to such a course, however, is that the use of explicit language, even though some-
what narrowly confined, may result in drawing within the statute certain normal
transactions which it is not the intention of Congress to include.
a Supra, note 2.
' Supra, note 3.

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 TAX EVASION AND TAX AVOIDANCE 97

manship these schemes will no doubt exist to some extent, but will be re-
duced proportionately to the care and intelligence of the draftsman.
Draftsmanship is not the duty of the individual; it is not the duty of the
courts; it is the duty of Congress and its advisors. So long as the use
of exact language persists, so long as we strait-jacket the courts, let us
at least refrain from making unjustified complaint of the individual and
of the courts. Let us lay the complaint at the doorstep of those who are
responsible. For it is both inept and unfair to charge the individual
citizen, who has met all the requirements of the statute, with any wrong-
doing, when the responsibility for the loss of revenue clearly rests with
those who drew the law.
MONTGOMERY B. ANGELL
NEW YORK CITY

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