Tax Planning for the Investment Portfolio of a Commercial Bank
by Louis A. MACKENZIE Partner, New York Office
Presented before The First Annual Bank Tax Institute, New York—September 1965
MANY OF YOU no doubt have heard that "nothing is certain in life except death and taxes." And so if taxes are as certain as death itself, then why tax planning?
This question can be answered, I think, in two parts. First, inevitable
as taxes clearly are, they are not certain. Widely different and, therefore, uncertain tax consequences can result from business transactions
simply by the fact of form and arrangement. Secondly, and again notwithstanding the inevitability of taxes, it is still possible, as with death, to defer or delay the day of reckoning.
These then might really provide one form of a definition of tax planning, which we might say is the careful arrangement of business transactions in a manner that will produce the most favorable tax result both from an absolute tax dollar standpoint and from the standpoint of when such taxes must be paid.
Let me raise this question. Does this mean that taxes should be the pivotal point in the arrangement of a business transaction? Definitely
not! Tax objectives should be designed to harmonize with normal business operations and objectives rather than to control them. A sound and learned approach to tax planning will be a balanced one— one that will permit taxes to take their rightful place as a major consideration
but not the major one in any affected business decision. In attempting to place the proper emphasis on the role of taxes in business planning let us not, however, minimize their importance. The fact cannot
be overlooked that in the final analysis the ultimate stockholders' test of successful business management is the amount of net profits available for re-investment or for distribution as a dividend. In this, the era of the forty-eight per cent corporate tax rate, taxes, by and large, will match these available profits dollar for dollar.
To the success of the commercial bank and particularly to the success
of its investment portfolio operation, tax planning is no less important
than it is to business as a whole.
OBJECTIVES AND LIMITATIONS
In any discussion of tax planning such as this, at least two basic approaches are possible. The discussion could take the form of a pre-