Ways to Escape Taxes Entirely

HOW do some extremely rich Americans manage to pay little or no federal income taxes? Two actual cases from Treasury records:

Taxpayer A reported an income of $6,511,903. Of that amount, $4,387,834 qualified as capital gains; this cut his taxable income to $4,300,000. He deducted $465,396 for state and local taxes that he had paid and wrote off another $5,543 in medical expenses and $24,129 in miscellaneous expenses. He donated a staggering $4,080,614 to charity, mostly in property that had originally cost him far less. As a result, he owed the Government nothing.

Taxpayer B used the oil-and-gas depletion allowance to avoid taxes almost entirely on an income before special deductions of $1,110,190. First, he deducted $41,141 for contributions, local taxes and medical expenses. Then he took off $185,468 for the direct costs of his exploration and drilling. Along with other minor deductions, that left him with a taxable income of $866,022, all but $3,980 of which escaped tax liability because of his 271% oil-and-gas depletion allowance of $862,042. He paid the Government $397--as much as the bill for an unmarried person with an income of $3,400.

-The blame for such notorious tax avoidance properly rests on the law, not its lucky beneficiaries. For a generation the guiding philosophy of loophole users has been that of the late Justice Learned Hand: "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Nobody owes any public duty to pay more than the law demands." Financier J. P. Morgan put it more bluntly: "If Congress insists on making stupid mistakes and passing foolish tax laws, millionaires should not be condemned if they take advantage of them."

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