It was Plato, writing in the fourth century BC, who advanced the concept of the ‘noble lie’. It was part of a proposition that lying is not merely forgivable but actually admirable as long as it is carried out for moral ends. It goes without saying that this is not a proposition that would be approved of or welcomed by the South African Revenue Services (SARS). Plato, a member of the Athenian governing class, was making a profound argument for rule by an elite, a wise and disinterested class of philosophers, who alone are capable of insight into the truth and what is best for the country.
Plato made it clear that only members of the ruling class were allowed to lie. It would be for the rulers of the city to use falsehood in dealing with citizens or enemies for the good of the state. If any citizen should lie to the rulers, however, it would be a graver offence than a patient lying to his doctor; or an athlete lying to his trainer about his physical condition; or for a sailor to misrepresent to his captain any matter concerning the ship or its crew.
Plato’s ‘noble lie’ was a kind of parable. It was false and indeed wholly deceitful but it was nonetheless benign in its consequences, because it assured social harmony and made the population more inclined to care for the state and for one another. This is, of course, nonsense although the philosophy has been embraced by a number of politicians over the years.
Fortunately the noble lie has no place in tax planning although a number of taxpayers have attempted, wholly unsuccessfully, to justify their tax evasion on these grounds.
A successful businessman in Johannesburg put an enormous sum of money, none of which had attracted tax, in a bank account in the name of his only daughter to hide it from his bitter and estranged wife. He justified this by claiming that it was in the best interests of the family that their daughter should have the money. Unfortunately for him, his daughter met, and was seduced by, a smooth talking Romeo who got his hands on her and the money and promptly disappeared. SARS found out about the bank account and in spite of his noble lie he was unable to explain why he had evaded tax on the money. He was charged with fraud and sentenced to imprisonment.
The estranged wife, who was a teacher of English at the local High School, could have been forgiven for enjoying what the Germans call schadenfreude – the malicious enjoyment of another person’s misfortune. Instead she merely suggested to her husband that during his time in prison he might wish to study Shakespeare, and Hamlet in particular. Therein you will find, she said, that “… when sorrows come, they come not as single spies but in battalions!…”
She was more fortunate than a woman in Los Angeles County on whose life a man procured an insurance policy in his favour, married her, bought some rattlesnakes, made them bite her foot, and then, when this failed to kill her, joined with another man and drowned her. At the trial, the rattlesnakes were identified and introduced as evidence; evidence was also given that the accused had previously insured, married and drowned a woman. In court he claimed, outrageously, that both women had been common prostitutes and that he was assisting the State by removing them from society.
He was convicted and sentenced to death. Appeals to the Supreme Court of California and to the Supreme Court of Appeal of the United States failed and the man was executed at San Quentin, the last man to be hanged there. Waiting in the wings throughout the trial were observers from the Internal Revenue Service, who were determined to exact income tax from the man, or his estate, on his ill-gotten gains. The man was Major Raymond Lisemba, alias “Robert S. James,” popularly known as “Rattlesnake James”. Needless to say, the IRS succeeded.
Sam Cohen was one of the founders of the OK Bazaars in the 1920s. It had been his custom to travel to the United States every year to order goods for his stores. He and his wife were in the United States when the Second World War broke out in 1939. He returned to South Africa towards the end of the War claiming that, while it had always been their intention to return earlier, it was unsafe to travel by sea because of the threat of attack by German submarines. It was true that in 1940 two passenger liners carrying hundreds of children being evacuated from Britain to Canada were sunk in the Atlantic with the loss of hundreds of lives. However, the threat of submarine attack receded as the War progressed.
The Appellate Division was called upon to decide what was Mr Cohen’s residential status for income tax purposes. An enormous amount of tax depended on that decision. The court recognised his intentions but decided that while he was resident in the United States for the duration of the War, he was ordinarily resident in South Africa where his real home was.
Chartered Accountants seldom seem to appear in exotic tax cases, except as witnesses, but a Chartered Accountant in the Transvaal did appear as the appellant in the Special Court for Hearing Income Tax Appeals. His evidence, which was the complete antithesis of a noble lie, was that he disliked the drudgery and dullness of his profession and that he craved something more exciting and stimulating. He started betting on horses. He went to the races twice a week and bet on several races at each meeting. He was so successful that after a few years his income from gambling was five times that of his practice income. He devoted his time less and less to the drudgery of his practice and more to the excitement of the turf. But what was the secret of his success?
He told the court that in seven races out of eight his method was to lay a single bet on the horse he thought most likely to win. He then observed the representatives of the main racing stables as they placed bets and if the odds on their horses shortened, he would lay off three or four bets on those horses in case his own lost. Although his method was not as effective as a bookmaker’s, the principle was similar and he was infinitely more successful as a turf accountant than a chartered accountant.
In court, his counsel argued that he was not liable to pay income tax because his gambling did not constitute a business and the wins were purely fortuitous. Quoting the celebrated English case of Graham v Green (1925) 2 KB 37, in which the distinguished judge Rowlatt J held that gambling transactions are purely irrational agreements, he argued that all that could be said about a person who gambled habitually was that he was addicted to betting; that it was a habit and no more; and that in consequence the winnings could not be subject to income tax.
The Special Court was impressed with the taxpayer’s honesty and integrity but held that his intention was manifest by his conduct. His careful procedure on the racecourse and the intentional decline of his accountancy practice clearly indicated that he made his living from gambling. He lost his appeal.
Penelope Webb, who for some years has worked in industry, is a former tax partner of a large international accounting firm.