Sunday, October 5, 2008

How Howard Hughes Avoided Taxes

As his empire grew, Hughes used every trick conceivable to avoid paying taxes to the government. In the early years of Hughes Aircraft, Hughes attempted to move his company from Southern California to Nevada in an effort to take advantage of Nevada's low tax rates. Ultimately, Hughes donated all his stock in Hughes Aircraft to the Howard Hughes Medical Institute, thereby turning the military contractor into a tax-exempt charity. In addition to avoiding income taxes, this had the effect of silencing the upper management in Hughes Aircraft, who for many years had clamored for stock in the company as part of their compensation.

Hughes was able to keep and maintain highly qualified managers in his companies by promising them large sums of money at the end of their careers. In order to be able to give them the most money without taxation, Hughes would make an arrangement whereby he would publicly criticize a certain manager that had recently left his company. Then, the manager would sue Hughes in court for public defamation. A settlement was given to this manager in court which was not subject to taxes. This happened with Noah Dietrich, Robert Maheu, and others. For example, Robert Maheu was awarded US$2.2 million in a defamation lawsuit shortly after leaving Hughes' employ.

Although Hughes lived in his own home in California for many years, he later came up with the idea of living in hotels as this enabled him not to have a legally declared residence in any state which would require him to pay personal income taxes. Shortly after Hughes began living in hotels with no state as his official residence, legislation was passed that any person living in a state 180 days or longer was subject to personal income tax during that time period in that state. Then, Hughes would live in a given hotel for just under 180 days, before moving to another hotel for just under 180 days, and so on. His extremely creative efforts to avoid taxes were successful; even after his death, the states of California and Texas were unable to collect inheritance taxes since it could not be proven that he was a legal resident of either state.

[Via Wikipedia]

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