The Legal Art of Tax Avoidance

Once upon a time, making money was looked upon as the supreme challenge of American manhood. Leisure, luxury, power and prestige--all these hinged on how much money a man could make. The result was materialism: a lamentably lopsided accent on acquisition. Today American manhood faces a much deeper and more spiritual challenge. As every alert, red-blooded young American knows, true achievement is no longer measured by how much money a man can make. What counts is how much he keeps.

For this is the Age of the Income Tax, that triumph of technology, a machine for the manufacture of instant poverty. Today man maketh and--unless he is, like Sherlock Holmes, a master of deduction--Internal Revenue taketh away.

The adroit American male, therefore, must master the legal art of tax avoidance. Avoidance, it should be emphasized, is different from evasion. The penalty for evasion is prison or worse. Evasion is ill-advised as well as illegal. The tax evader breaks the rules of the game. He is downright unsportsmanlike, especially since those who abide by the rules wind up shouldering his burden for him. Avoidance, by contrast, is not only universally regarded as good, clean, exhilarating fun, but has the added virtue of being licit.

Like any art, the practice of avoidance has its own special rules. But its object is simple. The artful avoider attempts, by threading his way through a maze of records and regulations, to achieve that stunning aesthetic satisfaction: payment of the Absolute Legal Minimum.

The true avoider pursues the A.L.M. with passionate dedication. He is willing to bear his share of the cost of government, but he is in no mood to make a charitable contribution to the Internal Revenue Service. He thus appreciates the distinction between A.L.M.s and alms. For this reason tax minimization may properly be called ALMsmanship.

Many potentially competent avoiders give up the game before they begin, intimidated by what they call "all those fine points." The resourceful ALMsman knows that the essence of legal avoidance is not to ignore the "fine points," or to fear them, but to use them. That is what they are there for.

Of course, not everyone can make equal use of them. "Our taxes," one expert has declared, "reflect a continuing struggle among contending interests for the privilege of paying the least." The result is that, even in our own fair republic, where all men are equal, some men are more equal than others. Married men, for instance.

While a married engineer who earned $10,000 in salary in 1964 might, after performing a paper ploy known as "income splitting." reduce his Absolute Legal Minimum to $1440, his bachelor colleague, equal in earning, in learning, and the ardor to avoid, must part with $1872. This places a premium on marriage that the originators of wedlock failed to foresee.

Similarly, just as not all men are equal, not all types of income are equal. Observe the curious fact that the exact amount of one's Absolute Legal Minimum is affected not merely by how much income the taxpayer has earned, but by how that income is derived. Thus, the married young man who has no children, and who earned $12,000 in 1964 as a salaried executive, might find that his A.L.M. is $1900. His friend, in equal circumstances, was lucky enough to make his $12,000 by selling stock at a profit after holding it for more than six months while he watched its value rise. His A.L.M. is a mere $72O.

Moreover, the possibilities for legal avoidance multiply as the taxpayer grows richer and his affairs more tangled. For the owner of oil wells, the $100,000-a-year executive who receives a stock option to activate his incentive glands, the businessman who creates a tax-exempt foundation, the entrepreneur who finds a pecuniary haven in Liechtenstein or Switzerland, the canny collector who contributes a Modigliani to his favorite museum--for men in this rarefied financial atmosphere, the art of avoidance may yield truly magnificent returns.

Most beginning avoiders, of course, cannot take advantage of the lush potential that the law permits this favored few. Even intermediate avoiders are somewhat limited by the rules of the art; and the tax burden, therefore, falls with particular weight on the shoulders of young men who earn $10.000 to $25,000 in salary form. Yet, unless they have something desperate to conceal, even such unfortunates should reject immediately the counsel of gangster Frank Costello, who, in a moment of avuncular charm, advised his cohorts: "Pay your taxes, boys ... Pay more than you owe. It looks good to get a refund." The true avoider will know that such advice merely encourages waste. He will phrase his own basic principle differently. "Pay your taxes," he will agree, "but pay the Absolute Legal Minimum." It is to help you define that elusive but artistic quality, the A.L.M., that the following guide is offered.

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Let us begin with that evanescent commodity known as income. The first step in artful avoidance is to find out what your income, from all sources, totaled for the year. "From all sources" means from all sources. The Internal Revenue Service ominously notes that "Some taxpayers, while reporting income from wages and other principal sources, tend to forget to report lesser amounts from sources such as interest on savings accounts and other interest, dividends and rents ... " "Forgetting" to report income is not the way of the artful avoider. It is not only illegal, it is foolish.

Once the total income is determined, the artful avoider sets about systematically to subtract items from it--eventually, in this way, arriving at a lower and more important figure known as the "taxable income." The lower this figure turns out to be, the lower your tax bracket, and your Absolute Legal Minimum, will be. It is immediately evident, therefore, that the most important mathematical process for the artful avoider is subtraction.

Subtraction, however, begins with addition. Thus the more deductions and exemptions you can add, the more you can ultimately subtract. The astute ALMsman begins by adding up the number of his dependents. Even a novice knows that the tax man permits you to exempt $600 from taxable income for yourself and for each dependent. What the novice doesn't know is that this is a trape placed there for the unwary and unethical--for the midget-mind who thinks that by simply adding imaginary children to his family he can outwit the tax man and reduce his A.L.M. He is thus tempted to cross from avoidance to evasion, with ignominious results. The record is replete with cases in which evaders added cats, canaries and canines to their list of "dependents" in the vain hope that their pets would be taken for children. Then there was the truck driver who claimed his truck as an exemption. These are not examples of willful guilt; they are examples of shining innocence--the innocence of the imbecile. All such gambits are doomed to failure.

Having counted up his dependents, the avoider is now ready for the serious business of subtracting deductions. First of these is the so-called standard deduction, which comes in two tempting sizes--the 10-percent standard and the so-called minimum standard. The avoider must determine which is better for him. The 10-percent standard is roughly equal to 10 percent of the taxpayer's income or $1000, whichever is less. The minimum standard, an innovation of the new tax law, is $200, plus an additional $100 for each exemption claimed on the return. For a single man who has only himself as an exemption, the minimum standard would be $300. Like the 10-percent standard, the minimum standard is limited to $1000 in total deductions. This tempting offer of a "standard deduction," since it simplifies the taxpayer's paper work, is eagerly accepted by the slothful, the wasteful and the unwary. The enlightened ALMsman, however, takes the longer route, plucking a deduction here and a deduction there, and adding them up. Often his arithmetical effort is rewarded by the discovery that the individual deductions available to him total up to considerably more than the standard deduction. Let us examine several of the oft-neglected opportunities of which he can take advantage.

Taxes. Nothing would irritate the true avoider more than having to pay taxes on taxes. Fortunately, even Internal Revenue people do not always demand this. Hence, in calculating his A.L.M., the expert avoider carefully deducts, whenever he can, the amounts he has spent on state or local sales taxes. These include such subterranean sales surcharges as those on gasoline or food and drinks in restaurants and bars. As a consumer, he is also permitted to deduct taxes passed along to him by retailers. Naturally, he has no exact record of the actual total of these taxes. He has to--and is permitted to--make a reasonable estimate.

The big bite, and hence the big deduction, in this category is state income tax. If state income tax is withheld from your salary, you will have a simple record of it. But do not forget to add the amount you paid last April if your with-holdings did not fully cover the state tax. If you make estimated payments to the state, be sure to deduct all the estimated payments made during the year.

Medical Expenses. Imaginative avoiders have taken advantage of modern medicine in novel ways. One ALMsman deducted the cost of clarinet lessons for his child on the grounds that they had been prescribed by an orthodontist. His child has been tootling tax-free ever since.

Not all ALMsmen are quite so lucky. The history of taxation includes the allegedly authentic case of the man suffering from severe depression who was advised by his doctor that sexual intercourse might work wonders. This inventive fellow tried to deduct from his tax the cost of callgirls, and even presented their receipted bills to the tax people, who, however, took a dim view of this type of therapy.

(continued on page 159) Tax Avoidance (continued from page 106)

In the category of personal deductions, everything is turned to advantage. Even illness has its saving grace. Like certain head-cold remedies, sickness works two ways for you. First, the tax collector allows you to deduct from your total income up to $75 a week of the amount paid to you by your employer while you were out ill, if the sum paid you was 25 percent less than your normal paycheck. But your pay is not considered tax-free until you have been home for seven days, unless you have spent at least one day in the hospital.

If you were sick longer than 30 days, you may deduct up to $100 a week after the 30th day, whether your boss reduced your pay scale or not. Thus, if you have received your normal salary of, say, $250 per week for a period of time during which you were lolling in bed with an ice pack on your head or ogling the nurses from a hospital pallet, you may claim up to $100 a week as tax-free for every week after the first 30 days. This rule, however, has a proviso: Your company must have a regular sick-pay plan in effect--which, chances are, it has, if you have been paid at all while ill.

The second advantage of illness is the medical bills. Receipts from doctors, dentists and druggists and all hospital charges are deductible. The ALMsman, however, doesn't stop there. He also remembers to deduct all bills for such items as eyeglasses, hospitalization insurance, health and accident policies, and even that portion of his auto liability insurance that goes for medical payments. He also deducts the cost of transportation to and from the hospital, the doctor or the dentist. If he drives, the rate allowed is five cents a mile. One alert taxpayer won a ruling from Internal Revenue permitting him to deduct the cost of transportation to and from meetings of Alcoholics Anonymous, since he had joined on doctor's orders.

In calculating all these items, it is important to remember that medical expenses are deductible only if they exceed three percent of your income--after business expenses, if any, have been deducted. Thus, the lucky ALMsman is he who is slightly, but expensively, ill in the course of the year.

Theft (and other lucky mishaps). The ordinary driver who suffers a smashed fender curses his luck. The ALMsman, on the other hand, takes a cheerier view of such adversity. If the damage was covered by insurance, he will be reimbursed. If it wasn't, he may claim what is called a "casualty" loss for damage over and above $100. He will also deduct the fee paid the appraiser who assessed the damage. Uninsured theft losses are deductible, too. But the experienced avoider knows that there is a distinction between something stolen and something lost. He must be prepared to offer proof that his watch was heisted, not merely left behind in the men's washroom of a Midwestern airport. In the case of either theft or casualty loss, a police report made at the time, repair bills and appraisals will help support the claim.

Charity. Although averse to making any unnecessary contribution to the Internal Revenue Service, the ALMsman makes contributions to charity drives, to churches or to cultural organizations. He knows that charity begins and ends at home. All such donations are deductible. If you have made a contribution to the alumni fund, the sum is deductible. Have you purchased benefit tickets to a Broadway play, a movie or sports event? If so, remember to deduct the excess over the regular admission price. Even if you haven't given a Goya to a public gallery, you may have donated a dresser to the Salvation Army. You are allowed to deduct the fair market value of such gifts. You may also deduct any extra costs incurred by you while working as a volunteer for such organizations as the United Fund or the Civic Orchestra: carfare, out-of-pocket auto expenses (at the five-cents-a-mile rate), etc. But don't try to deduct the value of your services.

Even experienced avoiders overlook many small items in this category. Add up your receipts. You will be surprised to learn how generous you are.

Interest. Whether the ALMsman sports an Alfa Romeo or drives a secondhand Dodge, he remembers to deduct the interest paid on the auto loan, or on any other personal loans. Installment purchases ordinarily entail payment of interest charges, whether they are specified or not. The canny ALMsman takes the trouble to determine the amount of such charges, then takes the trouble to deduct them.

Education. Schooling, like sickness, has virtues that are not immediately apparent. First, scholarships and many fellowships represent forms of income that are exempt from the tax man. If you are studying for a degree, you should know that a scholarship is tax-free, except for payments received as compensation for teaching or research. This exemption covers the value of grants for tuition and matriculation fees as well as for room, board, laundry and similar expenses. Grants earmarked for the payment of travel expenses, research costs or clerical help are also tax-free. If you are not studying for a degree, your grant may still be tax-free up to $300 per month for up to 36 months.

The benefits of education, taxwise as well as otherwise, continue even after one is no longer a full-time student. Thus, if you are working while taking courses on the side, you may be able to deduct their cost. Remember here that what is important is not what you learn, but why. Among the more Byzantine paradoxes of the tax code there is one that provides that you may deduct the costs of continuing education only if you are taking the courses at the behest of your boss, or--and read these words closely--if the courses are to maintain and improve your business or professional skills in your present occupation. What this odd phraseology means is that you may not claim a deduction for education expenses incurred in an attempt to qualify yourself for a different or better job.

Horatio Alger would shudder at the implications of such an ambition-deadening rule, but the fact remains that you must be able to persuade the tax collector that any better job you got as a consequence of off-the-job educational activity was incidental, not central, to your purpose. If you happen to earn a degree this way, it also must be a by-product rather than the purpose. Once you have satisfied these eccentric essentials, you may deduct the full cost of tuition, fees, books, equipment and the like.

Careful ALMsmen may also be able to deduct the cost of foreign travel as educational expense. The Treasury remains unimpressed by the argument that travel broadens. Yet a pair of peripatetic taxpayers who fought it out in court succeeded in establishing their right to claim at least part of their expenses for trips abroad. Thus, a schoolteacher was permitted to deduct half the cost of a tour sponsored by Temple University. He attended lectures at various European universities and received academic credit for his trip. The court found that the tour had helped him to maintain and improve his teaching skills.

There are many other intriguing items that fall under the heading of personal deductions. Indeed, the array of allowable items that greets the eye of the avoider is so great that no capsule guide such as this one can describe them all. But those noted above are the major ones.

In the meantime, the category of business deductions is no less fruitful a field for investigation by the eager ALMsman.

Professional Expenses. The ALMsman is often a joiner. He remembers to deduct all membership fees or dues in professional associations for which he himself has had to foot the bill. He also keeps tabs on how much he spends for books, trade journals and other items essential to his professional activity. Other expenses incurred as part of making your living also may be deducted, such as the rental of a safe-deposit box in which you keep bankbooks, stock certificates, Government bonds, etc. Remember, too, that fees paid to an employment agency (say for a successful job placement) or to an investment counselor are deductible. Even special clothing may be deductible, if it is required by your work. But caution must prevail. Don't try to deduct ordinary business clothes. You will have a hard time proving that your monogrammed boxer trunks are indispensable to your office uniform.

Wining and Dining. The rules of ALMsmanship are not puritan. Even the Treasury's hardest-nosed collectors recognize that it is possible to transact business over a dinner table. Fear not, therefore, to lift the cup, or to share a Chateaubriand, with a blue-chip client. But when the time comes, as it may, when you must convince the collector that you are an avoider and not an evader, be prepared to demonstrate that you were not merely living it up or repaying a friend for past favors. It helps if you can prove that you were trying to line up new business.

The tax man will not require detailed documentation of business purpose in order to support a deduction claimed for wining and dining in a restaurant or bar whose setting is conducive to the talking of turkey. You don't even have to prove that turkey was talked--merely that it might have been. But you will need records to establish: (a) the cost of the meal or drinks, (b) the name of the customer or prospect and (c) the general business purpose. If the tab totals more than $25, you will also need a receipt.

It's hardly necessary to mention that the ALMsman does not forget that his own food is a legitimate part of the cost. If there's one thing a tax man hates to see, it is a malnourished taxpayer. Thus, do not hesitate to deduct the cost of your own meal or drinks as well as that of your guest. Argue later, if necessary. The able avoider bears in mind, however, the maxim that--as physicians, philosophers and tax agents all agree--excess is evil.

Deductions for the cost of dining out in restaurants stand a better chance of being allowed than the cost of night-clubbing, theater or concert attending, and other such entertainments in which distractions may take the mind off of the dollars-and-cents justification for the occasion. This is not to say, however, that more elaborate business entertainment is ruled out. Indeed, tax history is full of examples of artful avoiders--usually businesses rather than individuals--who claimed, and were allowed, deductions for such items as a $5000 golf party, a $23,758 Christmas whiz-bang and $10,903 worth of Kentucky Derby festivities. Then there was the disquieting case of a mortician who claimed "entertainment expenses" of $77,470 over a three-year period. This sum was challenged by the tax men, but a court finally allowed $52,000 of it. A horse handicapper successfully claimed the expense of keeping a yacht on which to socialize with track officials, turf writers and thoroughbred fanciers. And one imaginative businessman jubilantly justified $16,943 worth of yacht expenses on the slippery ground that he used the vessel's deck to demonstrate the quality of nonskid sneakers; a court upheld his claim.

Internal Revenue has tightened its rules since those halcyon days, but it is still possible to deduct expenses for taking a client or a potential customer to a night club, theater party, World Series game or on a sailboat cruise, among other diversions. What matters is that business be discussed. The law determines how and when.

Thus, such expense may be deductible if the entertainment occurs immediately before or after (i.e., on the same day as) a bona fide business discussion. There is, however, a humane exception for the out-of-town customer who may come to your office for a business discussion and then allow himself to be entertained the following day, or vice versa.

As for yachts, Internal Revenue makes it difficult, if not impossible, to deduct the cost of operating your craft. To take the deduction, you must be able to prove that the boat is used more than 50 percent of the time for business. You may then deduct only that part of the cost of operating the vessel that is "directly related" to business. Therein, however, lies a small but effective tax-code torpedo. For the Treasury contends that there is little or no possibility of engaging in "directly related" entertainment on a boat--because of distracting influences.

Paradoxically, while the Government will not permit you to deduct the cost of operating the boat, it will allow a deduction for the actual cost of entertainment occurring on a boat, if it immediately precedes or follows that bona fide business discussion. ALMsmen who are helmsmen will remember, in such cases, to write off not only the cost of food and drink, but the cost of the boat fuel during the cruise.

Gift-giving. "The manner of giving is worth more than the gift," according to Pierre Corneille, the 17th Century French playwright. According to Sheldon Cohen, Commissioner of Internal Revenue, however, the manner of giving had better be circumspect. A business gift may be a legitimate business expense, and hence deductible as part of the cost of earning your living. But, says Cohen, "Taxpayers frequently cannot prove that they made the expenditure at all....Many taxpayers who can prove that they purchased gift items cannot or refuse to give examining officers the names of the donees....Gifts to friends and relatives are often claimed as business deductions ..."

A word to the wise avoider: Keep a record of each gift, spelling out clearly its business purpose. But remember that no business associate is worth more than a $25 gift as far as the tax man is concerned. "Just friends" are worth nothing on Form 1040.

Office at Home. The artful avoider loves his hearth. If you conduct business at home, don't forget to deduct a percentage of the cost of maintaining your in-the-home office. You don't need to have your main office at home, but you must transact business there regularly, either during the evening or at some other specified time. In short, you've got to do your homework.

To claim this deduction, set aside a specific room for business. Provide a desk, chair, file cabinet and phone with a business listing. Have business mail addressed to your home, and keep records of phone calls, local and long distance, plus a diary of your business appointments on the premises.

The skilled ALMsman tallies up the cost of his housing--including rent, utilities, insurance, domestic help, tips to doormen, et cetera--then deducts a percentage in proportion to the space allotted for business (say, one room out of five). If the room, however, has uses outside of business, he must reduce the percentage accordingly.

The deduction for a home office is available not only to self-employed taxpayers, but also to employees--but proof requirements are stiffer. It is necessary for the employee to show that his firm requires him to have such an office; or that his job requires him to do certain work regularly outside of office hours.

Travel. Speaking of home, the rules of ALMsmanship--and of the Internal Revenue Service--permit you to deduct the high cost of business trips away from home. But the IRS has its own ideas of the meaning of "home." Your home for tax purposes is considered to be the general geographical area of your business or office, and to deduct the cost of business travel you must be away from this area longer than a working day.

To claim meals on a trip lasting less than a day, you must take time out for sleeping, although no one as yet insists, especially if you happen to be an insomniac, that you actually sleep. Dozing will do.

Then there is the long trip, lasting several months or more. In order to claim a deduction here--a sizable one--you must show that your assignment was temporary and that during your absence you maintained a "home" to return to. This may prove frustrating for bachelors, inasmuch as tax men contend that a bachelor's home is wherever he hangs his hat.

Once it has been established that you do, in fact, possess a stationary base called a home, and that you've been away from it on a business trip, you may deduct business-connected transportation charges. If you use your own car for business, you may deduct ten cents a mile for the first 15,000 miles of business travel and seven cents a mile thereafter. Whether you drive your own car or not, you may deduct cab fares, phone calls, the cost of lodging, baggage charges, laundry expenses and tips. Internal Revenue, it should be noted, will disallow expenses deemed to be "lavish or extravagant." But avoidance being an art, not a science, words like "lavish or extravagant" are not defined--which often leads to semantic haggling. But one minor certainty exists: The cost of first-class travel and hotel accommodations is not considered extravagant per se. Hence, the expert ALMsman travels, and travels well. He goes first-class by plane, train or ship--but he doesn't go overboard.

The wise ALMsman also knows that if he has actually moved his home from one city to another to take a full-time job in a new location, he can--if the move was 20 miles or more from his old job location and his former home, and if he continues to be employed in the new location 39 weeks or more--deduct the expense of moving for himself, his family and his personal goods. He remembers to include in this sum any amounts spent for storage in transit, and for meals and lodging en route.

Vacations. The ALMsman also learns quickly that there is a fine, if sometimes fuzzy, line between business and pleasure. Thus, he knows that work and vacation travel can sometimes be profitably combined. If he is selling sewing machines in Salzburg, there's nothing to stop him from taking advantage of the skiing while he's there. Financial negotiations in Florida may facilitate fishing. But the experienced ALMsman exercises caution.

When the prime purpose of a trip is business, and you arrange to take some vacation time in the same area, you can deduct your transportation costs to and from the point at which the business is conducted. The important thing is to be able to show that the main motive for the trip was business. But don't try to deduct your extracurricular vacation costs, too.

If you are on a reimbursement arrangement, and your company sends you on a business trip, the tax collector graciously assumes that there was a business necessity for the trip. But he is less easily convinced if you are self-employed, or if you are a managing executive of your company. In these cases, reimbursement is not enough. You must be able to prove that the trip was planned primarily for business and not merely to provide a fig leaf of excuse for some faraway fun.

The experienced ALMsman recognizes that the above listing of business loopholes and indulgences is, of necessity, only partial. The legal art of tax avoidance permits of infinite variety. It is time, however, to move on to that fascinating final category of supplementary deductions listed on the tax form under the heading "Other"--which afford the ALMsman a vast variety of new possibilities for paring down his Absolute Legal Minimum to even trimmer proportions.

In this category of deductions, the chief savings offered have to do with non-salary income. Of all the principles of ALMsmanship, none is more important than the one expressed in the following syllogism: Not all forms of income are equally taxed; salaries and wages are more heavily taxed than other forms of income; ergo, the advanced avoider attempts to shift as much of his income as possible into nonsalary forms. This means that the avoider must begin plying the path of the ALMsman long before April 15--all year round, in fact, seeking ways to earn as much as possible in those forms of income that are taxed the least.

Dividends. Not everyone, unfortunately, receives dividend income. ALMsmen who do, however, have a special advantage. The first $100 of dividend income is tax-free. More important, dividends reduce your final A.L.M. by two percent against all remaining dividend income. For example, the man who receives $500 in dividends in the course of the year subtracts $100 as tax-free. The remaining $400 gives him a two-percent credit (eight dollars) to be deducted from his final 1964 tax bill. Since this is neatly sliced from the final tax figure rather than from total income or adjusted taxable income, it is the equivalent of a deduction several times its size. Do not despise such small favors. They can add up to a tidy savings.

Gifts, Personal Damages and Inheritance. The rule here is short. None of these forms of income is subject to income tax. Consequently, receive as many gifts as you can. If you have been hit by an onrushing locomotive, collect as much as possible in personal damages. Even more important, inherit as much as you can.

Capital Gains. The novice has, perhaps, heard of capital gains and not understood the term. The true avoider has fully penetrated its mysteries. A capital gain is what you get when you sell your shares of A. T. & T. for more than you paid, or when you own a parcel of real estate and sell it for more than its purchase price to you. It has nothing to do with dividends or other income you may have received from ownership of the asset. It is merely the quintessence of buy-low-sell-high.

The expert ALMsman knows that capital gains come in two types--long term and short term. He knows also that a short-term capital gain occurs when the individual sells a capital asset that has belonged to him for six months or less. If he has held it for more than six months before selling, it becomes a long-term capital gain. The significance of this distinction is more than academic. It is the cornerstone of considerable wealth. For if you have made any money from short-term capital gains, this money is taxed at your regular tax rate, as determined by your taxable income figure. (The minimum is 16 percent, the maximum 77 percent.) But if your money has come from a long-term capital gain, it is taxed at no more than 25 percent, even if you are otherwise in, say, the 77-percent bracket.

Moreover, should you happen to lose money in a stock transaction or in real estate, you are permitted to deduct up to $1000 from taxable income this year. This is known as a capital loss. And if, by any grim accident, your loss should exceed $1000, you may deduct up to $1000 each year until the loss is eliminated. The amount of capital loss that may be deducted is reduced by the amount of capital gain, if any.

The advanced avoider concludes the obvious. Of all die common forms of income, income from capital gains is the most sheltered. He therefore strives to bring in as much as he can in the form of long-term capital gains--buying low and selling high in the fine old Yankee tradition of the merchants and traders who founded the nation.

Records. In ages past, men kept diaries to record their more memorable moments for posterity, or to permit them to savor, in old age, the memories of their youth. Men keep diaries today, too. Especially ALMsmen. The artful avoider who wants to avoid prolonged disputation with a T-man will get into the habit of carrying a "daybook" in which he enters all expenditures that are business-related. He will also stuff into a folder all receipted bills for business-expense items: travel tabs, hotel and motel bills, and the like.

If you have a reimbursement arrangement with your employer, you must keep these records principally for his edification. The company has the responsibility for seeing to it that the records are adequate and for repaying only your bona fide business expenses. If this is done, you probably will not have to produce your own records for the tax man. But if you are self-employed, or if you are a managing executive in your company, you may expect that prying eyes will want to review your private journal. The more detailed it is, the better your claim is likely to be.

The ALMsman's Advisor. The ambitious ALMsman seldom works alone. He asks an accountant or attorney to help him prepare his tax form, secure in die knowledge that the fee paid for this service is itself deductible. He is aware, however, that anyone who can letter TAX HELP on a shingle has the right to set up in business and charge for advice. Tax experts now number in the tens of thousands. Like lilies in the spring, many of these flower in March and fade away in April, sometimes with appalling results.

The careful avoider chooses his advisor with deliberation. He guards against the expert who glibly guarantees a tax refund. He is even cagier about the expert who hands him a blank, tax form to sign and suggests that the details be left to him. Some so-called tax advisors have taken signed forms, claimed illegal deductions and exemptions, won fraudulent refunds for their clients on die strength of them, and then disappeared, leaving the client to confront the collector later on. In effect, the "advisor" turned the client into a tax evader. The fact that the client may have been ignorant of what was being done is not considered a justifiable excuse. He has, in fact, put his signature under a false statement. The penalty for such falsification may be stiff indeed, and the taxpayer himself is held responsible.

It goes without saying, finally, that with or without an advisor, the ALMsman always files a form. Even if he concludes that he owes nothing to Internal Revenue, he goes through the motion of filing. Failure to file may, in itself, turn an avoider into an evader. The temptation to forget to file is sometimes overpowering. Resist it.

The aspiring avoider who has read this far may already begin to feel a bit taxed; but the rewards of his perseverant attention will be manifold--and die climax of his effort is near. For he will be prepared, after making the suggested subtractions, to arrive at his taxable income, that stark statistic which will determine, once and for all, his Absolute Legal Minimum. No matter what his A.L.M. turns out to be, of course, the true avoider will passionately believe that it is too high. He will comb back over the figures seeking the tiniest stray error which, if corrected, might force his A.L.M. down still further.

At that moment he will, no doubt, think of all the things he might have done, or that his employer might have done, to reduce his A.L.M. to the vanishing point. He will think of perquisites, for example. He will know that if his company had only provided him with an automobile as an emblem of his executive importance--or with country-club membership, or with free medical checkups, dining-room privileges, courtesy discounts on company products or no-interest loans--he might have enjoyed the fruits of a pay raise without suffering an increase in his taxes. Such perquisites in lieu of cash are often die employer's way of sheltering his executives from the cold touch of the tax collector.

The avoider may think, too, about stock options, those incentive-energizing devices under which a company offers its employees the right to purchase its stock at a stipulated price at a date in the future when the market price is expected to be higher. Such options have provided windfalls for their lucky recipients--income that normally falls in the capital gains category.

The farsighted ALMsman thinks also about profit sharing. Under such an arrangement a company salts away a sum each year--often up to 15 percent or more of one's annual salary--for its employees. It invests these funds for them. Not only is die return on investment tax-free to the fund, but when the employee leaves or retires, and receives his share of die fund, he pays only the capital gains rate on it.

Then there is the lucky avoider who knows in advance that he is likely to have a very large income in a single year. He may be helped by deferring part of that income to future years when his take-home, and hence his tax bracket, may be smaller. Writers, actors and other professionals whose income fluctuates widely from year to year often defer part of their earnings in a good year. Not all such deferred payment plans are wise, however. The ALMsman may surprise himself and earn an even higher income in a year when a deferred payment falls due, thus winding up in a higher bracket than before. Moreover, a deferred payment plan is only as safe as the solvency of the company that agrees to die plan. In short, deferment should be considered, but one bird in die ALMsman's palm may be worth two in the collector's coffer.

Even if deferring income is not advantageous, however, averaging it may be. Averaging is a ploy invented for die man on the rise. It is a dismal theorem of economics that the higher your income, the higher your tax bracket. The man who sees his paycheck increase sharply in one year may see almost all his increase eaten away when he is bounced into a higher bracket. The averaging gambit helps buffer him against this unwanted effect. If his 1964 income exceeded the average of the four previous years by one diird plus $3000, he qualifies for averaging. This permits him to count part of his income as if it had been earned over a five-year period, and therefore permits him, in effect, to freeze his tax bracket at a lower level than if it were counted as a single year's income.

Consider the case of the ambitious young lawyer who won a big case last year. For the previous four years his income averaged only $12,000. Last year, however, it spurted to $20,000--more than one third plus $3000 over the four-year average. Thus qualified, he then can calculate his average, add one third to it, and come up with a figure of $16,000. Up to that figure, he pays tax at die normal rates. But the $4000 beyond that is taxed, more or less, at the same rate as if his total income were only $16,000. The result: a lower-than-ordinary bracket and a slenderized bill. The rules on averaging are hellishly complex, but the ascendant avoider does not let this hinder his search for die A.L.M. Having considered their use, he is now ready to conclude his efforts.

As the artful avoider gives his tax return a last look before affixing his signature, he inevitably stops to consider again the critical difference between avoidance and evasion. He realizes how important it is not to be lured across the line that separates the two, and he recalls, perhaps, the sorry fate of the man who was seduced by a rhinoceros. For many years the tax returns of a major U. S. circus and its owners were prepared by a gentleman whose three-ring imagination was evidently as colorful and comic as the circus itself. He once discovered, in a flash of insight, a hidden relationship between revenue and rhinoceroses. This revelation spelled his downfall. It made of him an evader instead of an avoider. In filling out his client's tax return one year, he claimed a sizable deduction for depreciation on one rhinoceros. He claimed the animal had cost die circus a purchase price of $35,000, whereas the going rate for rhinoceroses was a mere $3500. This particular rhinoceros, moreover, was nonexistent.

In the years that followed, he managed to make a circus out of the tax returns by deducting depreciation on a vast menagerie of such imaginary animals. Five giraffes, eight tigers, nine zebras, 23 camels, 23 lions, 665 horses, not to speak of assorted elephants--all creatures of his fecund imagination--thundered and trampled across the tax forms. As time rolled by and the maximum permissible depreciation was reached on each of his rapidly aging phantom herd, he would drop them from the form, claiming that the circus had disposed of them. In this and other ways, he managed to conceal something like $6,000,000 in earnings of the circus owners, for whom he also prepared individual income tax returns. His animal husbandry might have continued indefinitely had not some sharp-eyed big-game hunters in the Internal Revenue Service been intrigued by the mystery of what happened to 48 pachyderms he claimed the circus had abandoned one year. Their hunt for the vanished elephants proved futile, and the evader made a safari to jail. The elephant joke was on him.

The artful avoider will grasp die moral of this beastly tale. You can make a jungle of your fiscal affairs, but you can't make a monkey of the IRS.