Reasonable Basis and Ethical Standards Before 1980

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a visiting scholar in taxation at the UCLA School of Law and an assistant professor of law at the American University Washington College of Law (beginning fall 2006). Copyright 2006 Dennis J. Ventry Jr. All rights reserved. I. Introduction The Treasury Department dropped a bombshell on the tax practitioner world in September 1980. Only eight months after indicating that it was willing to wait a reasonable period for the organized bar to offer guidance regulating the issuance of tax shelter opinions and the participation of tax lawyers in the thriving tax shelter market, 1 Treasury released its own guidelines. Proposed amendments to Circular 230 set new standards for legal opinions used in the promotion of tax shelters and outlined punitive disciplinary criteria for practitioners failing to meet the new rules. 2 Treasury’s actions incensed the tax bar, which had responded to Treasury’s solicita- tion by beginning to formulate new ethical guidelines for tax lawyers. The American Bar Association Section of Taxation had set about drafting a suggested ethics opin- ion for the ABA’s Standing Committee on Ethics and Professional Responsibility, 3 while the New York State Bar Association Tax Section established a committee to recommend standards for the issuance of tax shelter opinions. 4 However, the organized bar’s longstanding reluctance to regulate — and punish— the misconduct of members providing legal opinions enabling and fueling the tax shelter industry suggested that Treasury’s pre- emptive move was more than justified. Fully appreciat- ing the magnitude of Treasury’s 1980 proposed amend- ments to Circular 230 requires us to understand the universe of ethical standards that predated the new rules. II. Opinion 314: ‘Noncompliance With Scienter’ 5 The organized bar facilitated the professional miscon- duct of tax lawyers by setting low ethical standards for tax practice. ABA Formal Opinion 314, issued in 1965, promulgated guidelines governing advice to clients in the preparation of tax returns. 6 The ambit of Opinion 314 quickly widened to represent the prevailing ethical stan- dards ‘‘not only for advice to clients in return prepara- tion, but generally for lawyers in their relationship with the Internal Revenue Service.’’ 7 In advising a return position, the lawyer could ‘‘freely urge the statement of positions most favorable to the client just as long as there is reasonable basis for those positions.’’ 8 When the lawyer formulated a basis that a particular transaction did not generate taxable income, ‘‘or that certain expenditures are properly deductible as expenses,’’ he had ‘‘no duty to advise that riders be attached to the client’s tax return explaining the circumstances surrounding the transaction or the expenditures.’’ The lawyer owed an affirmative duty ‘‘not to mislead the Service,’’ but he was under ‘‘no duty to disclose the weaknesses’’ of his client’s case. Moreover, he was obligated to be ‘‘candid and fair’’ with the IRS and to represent his client ‘‘within the bounds of the law and without resort to any manner of fraud or chicane.’’ Less honorable was the characterization of the IRS as an ‘‘adversary party rather than a judicial tribu- nal’’ or even a ‘‘quasi-judicial institution.’’ In highly populist fashion, Opinion 314 stated perfunctorily that ‘‘few will contend’’ the IRS ‘‘provides any truly dispas- sionate and unbiased consideration to the taxpayer. Al- though willing to listen to taxpayers and their represen- tatives and obviously intending to be fair, the service [denied the courtesy of capitalization] is not designed and does not purport to be unprejudiced and unbiased in See Jerome Kurtz, ‘‘Kurtz on ‘Abusive Tax Shelters,’’’ Tax Notes, Feb. 18, 1980, p. 213; Robert H. Mundheim, ‘‘Mundheim on ‘Abusive Tax Shelters,’’’ Tax Notes, Feb. 18, 1980, p. 213 at 214. Proposed Amendments, Tax Shelters; Practice Before the Internal Revenue Service, 45 Fed. Reg. 58594 (Sept. 4, 1980). ABA Section of Taxation, ‘‘Statement on Proposed Rule Amendment Circular 230 With Respect to Tax Shelter Opin- ions,’’ 34 Tax Law. 745, 748 (Spring 1981). New York State Bar Association Tax Section, ‘‘Circular 230 and the Standards Applicable to Tax Shelter Opinions,’’ Tax Notes, Feb. 9, 1981, p. 251. TAX NOTES, May 29, 2006 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 365. ABA Committee on Professional Ethics, Formal Opinion 314 (Apr. 27, 1965). Citations in this paragraph, unless otherwise indicated, are from Opinion 314. The Association of the Bar of the City of New York, Special Committee on the Lawyer’s Role in Tax Practice, ‘‘The Lawyer’s Role in Tax Practice,’’ 36 Tax Law. 865 (Summer 1983). ABA Committee on Professional Ethics, supra note 6. Em- phasis added. (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. Reasonable Basis and Ethical Standards Before 1980