The case of Helvering v Gregory made popular one of the most famous tax quotes, which may also be one of the most misunderstood quotes. In his opinion, Learned Hand commented that “[a]ny 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.” There has already been much written about this quote and is often used by taxpayers to justify not paying taxes. However, as with most things, the quote must be understood in context, not only L. Hand’s opinion but also the current law.


To understand the quote, one has to understand the context in which it was made. The case of Helvering v Gregory involved a tax transaction that all parties conceded was only done to avoid taxation. The taxpayer was in the process of selling her business to another company. The underlying deal was an asset sale; the company sold all of its assets to another company and received cash that was stuck in the entity. If that had been the end of the story, the sizeable profit would have first been taxed at the entity level and then again when the entity distributed the cash to the owner. To reduce the amount of tax paid, a new entity was formed that acquired the original company’s shares in a tax-free reorganization and then close the new company and distribute the property (cash) to the taxpayer. That distribution, also part of the reorganization, would also be tax-free. The new corporation was in existence for only four days in total.

The IRS rejected this transaction because it was obviously done as a tax-avoidance scheme and had no legitimate business purpose. On appeal, the government’s determination was overturned because the Board noted that the transaction’s intent was irrelevant. The government appealed this, which brought it to Judge Learned Hand.


Judge Hand made his infamous quote in the opinion and did agree with the lower ruling that the transaction’s intent was irrelevant if the transaction met the intent of the law. If you provide two different transactions that achieve the same business result, one is under no obligation to pick the one that results in a higher tax liability. However, it is important to note that despite this viewpoint, the taxpayer lost the case. That’s right, despite the language supporting the taxpayer, and the agreement with the lower ruling, once Judge Hand reviewed the entire transaction, he disagreed that the transaction met the intent of the law and could not be upheld.

Current Law

Judge Hand’s quote was made in 1934. Since that time, we have seen two major tax reforms and numerous smaller reforms. While Judge Hand may have made a similar quote today, it would likely not have the same effect. Under today’s law, the transaction’s intent can be relevant to whether or not it should be observed. One reason for this is that the economic substance doctrine has been developed over the years as a common law doctrine, and more recently, codified by Congress. This doctrine requires that a transaction has to have a valid purpose apart from reducing tax liability. Under the doctrine, the transaction in the Gregory case would likely not have been found valid.

What’s it all mean?

At the end of it all, Judge Hand’s quote is still memorable and represents an important consideration for taxpayers and tax preparers. However, it does not mean that taxpayers have the ability to construct elaborate transactions for the mere purpose of avoiding tax, or even worse, evade tax through less legal means. It is important to keep in mind more recent developments that require transactions to have more than just a tax substance.

If you are under audit, and the IRS is talking about intent, make sure that you are ready to show what the business substance of the transaction is. If you have questions about how show this, or document it, or need help defending it, contact us today.