Learned Hand was perhaps one of the greatest legal minds in American History. Although not a Supreme Court judge, his analysis on and off the bench influenced a generation of legal scholarship. And what a fantastic name!!!!
In a famous ruling concerning the duty of the individual regarding the law, he clarified the traditional rule that people do not have a duty to go beyond the written meaning of the law. That is you should only have to guide your actions by the rules laid out by the law, and not by the unwritten intentions of the lawmaker or your own subjective intentions. In Helvering v. Gregory, 69 F. 2d 809, 810 (2nd Cir, 1934), aff’d 293 U.S. 465 (1935) he stated that:
“[A] transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. 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.
“Over and over again Courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
In this ruling Learned Hand made it clear that the government has no right to expect taxpayers and citizens go beyond the mandates of the law and do what is best for the state. It is enough if what they do is within the technical boundaries of the law. The individual need not guide every action by the consideration of what is best for the government.
This was the basic sentiment that drove the American Revolution and the Founders: The Government is the Servant of the Citizens, not the Master.
Sadly, our sentiments have changed. Contrast Learned Hand’s statement with the “sham transaction doctrine” as approved by the court in Jacobson v. CM, 915 F. 2d 832 (2nd Cir, 1990):
“Transactions that are entered into solely for the purpose of obtaining tax benefits and that are without economic substance are considered shams for Federal income tax purposes and purported indebtedness associated therewith will not be recognized…. [A] sham transaction [is] a transaction that is lacking in objective economic reality and that has no economic significance beyond expected tax benefits.”
No longer is working within the law enough. No longer is it enough to dot every ‘i’ and cross every ‘t’. Now the taxpayer/citizen must act with subjective intention of doing what is best for the government; paying taxes. Now the government has the right to not only examine WHAT you did, but they can now examine WHY you did it!
As World War II was drawing to an end, and Learned Hand looked back on his generation and the terrible destruction that had taken place, he wrote:
“What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws, and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it; no constitution, no law, no court can even do much to help it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.” Learned Hand, P. 190, The Spirit of Liberty (1944).