"Sovereign Society's Offshore A-Letter" <info@sovereignsociety.com>

Tax Martyrs and Tax Masters;

Which One Are You?

Dear A-Letter Reader,

May we as Americans never forget the story of Joe Louis.

He was without a doubt one of the greatest boxers in history, and he personally smashed the sport's color barrier. With his lethal jab and civil demeanor, Louis shattered the world's preconceptions about black athletes and proved that anyone could excel, regardless of skin color.

Moreover, he did so on a world scale.

In the most anticipated boxing match of 1938, Louis laid out Hitler crony Max Schmeling in mere seconds. When Schmeling fell to the mat that fateful June evening, so did Hitler's myth of Aryan superiority. Only to be further done in by Jesse Owens' epic performance in the Olympics later that year.

Nicknamed ‘The Brown Bomber' Joe accepted and endured America's racial stereotypes with dignity and class. But there's another thing that Joe accepted without question...that he took for granted. And that's what we're going to talk about today...

Taxes.

You see, Louis' legendary match in 1938 wasn't the end of his personal war against fascism and Hitler.

To the contrary, Louis joined the Allies' effort and traveled all across Europe during World War II. And instead of keeping the profits from these matches overseas, Louis personally donated over US$100,000 to the war effort.

But when he returned home at the end of the war, someone was waiting for him. You guessed it; the IRS. You see, they fully taxed his wartime income despite the fact that he gave most of it away. And so began the fight that Joe would never win, the one that he would have to fight through his dying day.

Instead of retiring comfortably, Joe was stuck with an insurmountable tax burden that only grew as time went by. The IRS took everything, down to the US$600 dollars given to Joe by his dying mother.

But Joe continued with his quiet demeanor, never complaining. He continued to fight long after his prime, even taking a few professional wrestling matches to try and cover the difference. But there was simply no way.

His second marriage to a tax lawyer provided some relief, slowing the IRS's seizures and aggressive pursuit in Joe's waning years. But the IRS' ruthless pursuit of Joe Louis had forever marked the man.

And Joe Louis the American Hero was forced to become Joe Louis the Tax Martyr.

But - Like old Howard - You Don't Have to Take it Lying Down

But let's transition to a happier tale, one of Howard Hughes and how he dealt with taxes.

If you saw the film ‘The Aviator' or if you know anything about Howard Hughes, chances are that you're familiar with the man's disdain for his home government. And Hughes' means for dealing with the government were unique and effective.

It started with Hughes Aircraft, his massive company that served primarily as a military contractor. After fretting over different tax situations in different states, Hughes simply donated the entire company to the Howard Hughes Medical Institute; a tax-exempt charity. In doing so, he not only avoided income taxes but quieted the cries of upper management eager for ownership stake in the company.

Later in his life, when Hughes became a Las Vegas real-estate tycoon, he would move from one hotel to another at regular intervals. These intervals were always just days - or even hours - short of being enough time to declare him a resident in the city/state he was currently occupying.

As a result of his mastery of the tax code, Hughes' estate remained in dispute until just a few years ago. Since he technically didn't hold residence anywhere, it was entirely unclear which tax laws should apply to his estate.

But Hughes' masterstroke could be seen in how he dealt with his executives...his right-hand men. Noah Dietrich is the classic example.

You see, Howard Hughes didn't like to pay his executives. It wasn't because he was greedy or felt they were undeserving. Quite the opposite; he felt that the traditional means of paying executives were too highly taxed by the government. Simply put; Howard thought the government always took more than they were entitled to.

How did Howard get around this? Well it's simple really. Noah Dietrich quit his job and made the usual public statement thanking Hughes for the opportunity. Hughes would then publicly rebut and slander his previous employee.

In response, Noah filed a suit for defamation of character. Hughes then settled out of court to the tune of US$2.2 Million...and - since it was a court settlement - every penny of it was tax-exempt.

Hughes did the same with several of his top executives, and despite the bizarre nature of this payment arrangement, it worked like a charm.

Ladies and Gentlemen, I give you Howard Hughes. The Tax Master.

The Decision Is Yours

Joe Louis' tragic flaw was assuming that everyone - or at least the government that owed him a tremendous debt of gratitude - would treat him with the same dignity and respect with which he treated the world around him.

Regardless, Louis' tacit assumption cost him the comfortable retirement he had so rightly earned.

But Howard didn't seem to trust the government for a second. He was always thinking a step ahead, anticipating their guile and their hunger for more tax revenue than they were due. And in making these assumptions, Howard took the first step on a path where he would be immensely successful.

Now I'm NOT (repeat NOT!) saying you should simply stop paying your taxes - far from it.

But before we even start talking about our own very personal situations, before we start calculating how much we have to pay and how much we can legally avoid - we should ask ourselves, which assumptions are we making? And do these assumptions make me a tax martyr or a tax master?

Decide not to be a victim, and you won't be one.