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Note: The following is an excerpt from the introduction to the
article as published in The State and Local Tax Lawyer, 2006 Symposium Edition. Author citations have been
omitted for brevity.
Tax Planning and Tax “Sheltering”: Is It More than a Word Game?
Peter L. Faber*
I. INTRODUCTION
The tax laws have been unduly complicated for longer than living people can remember and, despite occasional protestations to the contrary, are likely to remain so and, indeed, to get worse. This complexity, aside from enabling the writer and the readers of this article to make a living, has had many consequences. One of them is that it has created opportunities for taxpayers to exploit ambiguities in the law to their advantage, sometimes in what many feel is an inappropriate manner.
It is clear that taxpayers have a right to interpret an ambiguous law in a way that reduces their tax liability. Moreover, taxpayers have a right to structure their affairs so as to minimize their tax liability, regardless of whether they exploit ambiguities in the law in doing so.1 It is absolutely clear, for example, that a company starting out in business can decide to locate a factory in Nevada rather than in Massachusetts even though the sole reason for doing so is to save taxes. Similarly, shareholders capitalizing a corporation may decide to use a liberal portion of debt rather than equity so that the corporation will be able to deduct the current return that it pays to the investors. Investors starting a new business may use a pass-through entity such as a limited liability company, a partnership, or an S corporation rather than a C corporation so as to avoid the double tax on earnings to which C corporations are subject. How does one draw the line between legitimate and appropriate tax planning, which the techniques just described clearly are, and inappropriate “tax sheltering?” In fact, is any tax planning inappropriate?
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*Partner with McDermott, Will & Emery, New York. Faber has served as chair of the American Bar Association Section of Taxation and the New York State Bar Association Tax Section. He is a member of the advisory committees of the New York State and New York City Tax Appeals Tribunals and has represented many major corporations in state and local tax controversies and litigation.
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