Raising the Ethical Bar for Tax Lawyers: Why We Need Circular 230

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a visiting scholar in taxation at UCLA School of Law and an assistant professor of law at American University Washington College of Law (beginning fall 2006). He would like to thank Vic Fleischer, Kirk Stark, Joe Thorndike, and Eric Zolt for their helpful comments. All errors are the author’s. This is the first installment of a new column in which Ventry will examine the intersection of tax policy and tax practice, with particular emphasis on the relationship between tax officials, tax policymak- ers, and tax practitioners. Copyright 2006 Dennis J. Ventry Jr. All rights reserved. I. Introduction This is the first in a series of nine columns arguing that the failure of the organized bar to promulgate ethical guidelines reflecting the true nature of tax practice has facilitated the market for tax shelters. The reluctance and inability of the organized bar to rein in members partici- pating in aggressive shelter work indicates that self- regulation doesn’t work. Time and again the organized bar, when faced with the prospect of Treasury regulating tax practice through Circular 230, has said, ‘‘Don’t worry, we’ll be fine if left to our own devices.’’ Time and again, however, the tax shelter lawyers, the ‘‘young’’ lawyers, and the controversy lawyers get more aggressive. While the tax bar appears more committed than the organized bar or the tax shelter bar in preventing overaggressive shelter work, the ‘‘tax planning’’ norms at the heart of the tax bar have historically been overwhelmed by the ‘‘tax controversy’’ norms of the organized bar and the tax shelter bar. Controversy norms have prevented planning norms from informing the organized bar’s ethical stan- dards governing tax practice, even though tax lawyers serve predominately as planners and advisers rather than as litigators and advocates. In the end, a revised Treasury Circular 230 can act as a useful and necessary counter- vailing force to dominant controversy norms, giving voice to tax planning norms that better reflect the kind of work in which tax lawyers actually engage. In 1980 the Treasury Department issued proposed amendments to Circular 230, promulgating for the first TAX NOTES, May 15, 2006 time standards for legal opinions used in the promotion of tax shelters. 1 The proposed amendments required opinion writers to conform to standards of practice that exceeded existing ethical standards of the organized bar. 2 In particular, they elevated due diligence requirements to ensure that opinions ‘‘fully and fairly disclose’’ facts affecting each important federal tax issue; that opinions ‘‘fully and fairly describe’’ and state a conclusion as to the likely outcome of each important federal tax issue; and that opinions are ‘‘accurately and clearly’’ described in any discussion of tax considerations in the offering materials. 3 Also, the proposed amendments prohibited opinions that failed to reach a more likely than not conclusion that the bulk of the tax benefits flowing from the shelter were allowable under current law. 4 Thus, practitioners were prevented from issuing negative opin- ions as well as the industry standard, reasonable basis opinions. Limited scope opinions were restricted, too. Further, tax shelter and tax shelter opinion were defined broadly and required opinion writers to ascertain an investor’s principal reason for participating in the tax shelter offering. That last requirement was particularly onerous given that the new rules applied to nonclient investors, while exempting written advice provided to one’s own client. The 1980 proposed amendments also lowered the mens rea required for prosecuting violations of the new rules, dispensing with the willfulness require- ment, and allowing mere negligence or incompetence to be grounds for suspension or disbarment from practice before the IRS. 5 Practitioners, in a word (or two), freaked out. It is ‘‘inherently dangerous’’ for Treasury to regulate opinion practice on tax matters, the New York State Bar Associa- tion cautioned. 6 Conferring on Treasury the power to exercise ‘‘draconian regulation of tax lawyers’’ threat- ened ‘‘our heritage of freedom.’’ 7 The ‘‘rampage’’ against Proposed Amendments, Tax Shelters; Practice Before the Internal Revenue Service, 45 Fed. Reg. 58,594 (Sept. 4, 1980). I use ‘‘organized bar’’ to refer to the American Bar Associa- tion and state bar associations, and ‘‘tax bar’’ to refer to the ABA Section of Taxation and the New York State Bar Association Tax Section. Section 10.33(a)(1). Section 10.33 (a)(2). Sections 10.51(j) and 10.52. NYSBA Tax Section, ‘‘Circular 230 and the Standards Appli- cable to Tax Shelter Opinions,’’ Tax Notes, Feb. 9, 1981, p. 251 at For ‘‘draconian regulation of tax lawyers,’’ see John Andre LeDuc, ‘‘The Legislative Response of the 97th Congress to Tax Shelters, the Audit Lottery, and Other Forms of Intentional or Reckless Noncompliance,’’ Tax Notes, Jan. 31, 1983, p. 363 at 382. For ‘‘our heritage and freedom,’’ see NYSBA Tax Section, supra note 6 at 259. (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. Raising the Ethical Bar for Tax Lawyers: Why We Need Circular 230