Filling the Ethical Void: Treasury's 1986 Circular 230 Proposal

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is an assistant professor of law at American University Washington College of Law. Comments are welcome at dventry@wcl.american.edu. Copyright 2006 Dennis J. Ventry Jr. All rights reserved. I. Introduction The period between 1980 and 1985 produced tremen- dous activity over the perceived influence of tax ethics on noncompliance. In 1980 Treasury proposed amendments to Circular 230, attempting to regulate for the first time practice standards for legal opinions used in the promo- tion of tax shelters. 1 In 1982 the American Bar Association (ABA) promulgated Formal Opinion 346, covering ethi- cal and disciplinary standards for lawyers rendering opinions on tax shelter investments offered to noncli- ents; 2 in the same year, Treasury issued modified pro- posed amendments to Circular 230. 3 In 1984 the ABA Section of Taxation concluded a multiyear study of the debased ‘‘reasonable basis’’ standard, 4 which prompted the ABA Committee on Ethics and Professional Respon- sibility to promulgate Formal Opinion 85-352 replacing the reasonable basis standard with the realistic possibility Proposed Amendments, Tax Shelters; Practice Before the Internal Revenue Service, 45 Fed. Reg. 58594 (Sept. 4, 1980). For a recent discussion, see Ventry, ‘‘The Reaction to the 1980 Proposed Amendments to Circular 230,’’ Tax Notes, June 5, 2006, p. 1141. ABA Committee on Ethics and Professional Responsibility, Formal Opinion 346 (Rev.) (Jan. 29, 1982). For a recent discus- sion, see Ventry, ‘‘ABA Formal Opinion 346 and a New Statutory Penalty Regime,’’ Tax Notes, June 12, 2006, p. 1269. Modified Proposed Regulations, Tax Shelters; Practice Be- fore the Internal Revenue Service, 47 Fed. Reg. 56144 (Dec. 15, 1982). For a recent discussion, see Ventry, ‘‘No Joke: Circular 230 Is Here to Stay,’’ Tax Notes, June 19, 2006, p. 1409. ABA Tax Section, ‘‘Proposed Revision to Formal Opinion 314,’’ May 21, 1984, reprinted in Bernard Wolfman and James P. Holden, Ethical Problems in Federal Tax Practice, 2d edition (Charlottesville, Va.: The Michie Company, 1985), at 71-74. For a recent discussion, see Ventry, ‘‘Lowering the Bar: ABA Formal Opinion 85-352,’’ Tax Notes, July 3, 2006, p. 69. TAX NOTES, August 21, 2006 of success standard; 5 and also in 1984 Treasury issued final Circular 230 regulations. 6 While Treasury and the ABA attacked noncompliance by addressing practice standards and ethical guidelines, Congress supplied a strengthened penalty regime aimed at both tax practitio- ners and taxpayers. The Economic Recovery Tax Act of 1981 (ERTA), 7 the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 8 and the Deficit Reduction Act of 1984 (DEFRA) 9 all added new penalty provisions while fortifying others. But Treasury wanted more. Responding in large part to the ABA’s failure to elevate appreciably ethical stan- dards in Opinion 85-352, Treasury sought to raise practice standards through the Circular 230 regulations and to demonstrate to tax practitioners that they had obligations both to clients and to the government. In 1986, only two years after finalizing amendments to Circular 230, Treasury issued another round of proposed amendments. 10 While the earlier episode incurred criti- cism from tax practitioners jealous of their right to self-regulation, 11 Treasury’s 1986 proposal caused even more commotion among practitioners who thought they were being unfairly targeted by new rules that threatened their livelihood. The Treasury proposal added two notable elements to the regulations. First, it raised due diligence standards by requiring practitioners to assure themselves that all re- porting positions on a tax return comply with the tax law and that the positions were reasonable, meritorious, and made in good faith. 12 Second, the proposed amendments added a new section to Circular 230 that addressed a ABA Committee on Ethics and Professional Responsibility, Formal Opinion 85-352 (July 7, 1985). See Ventry, supra note 4, at Final Rule, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries Before the Internal Revenue Service, 49 Fed. Reg. 6719 (Feb. 23, 1984). See Ventry, supra note 3, at 1413-1414. P.L. 97-34 (Aug. 13, 1981). See Ventry, supra note 2, at 1273. P.L. 97-248 (Sept. 3, 1982). See Ventry, supra note 2, at P.L. 98-369 (July 18, 1984). See Ventry, supra note 3, at Notice of Proposed Rulemaking, Tax Practitioners, 51 Fed. Reg. 29113 (Aug. 14, 1986). See Ventry, supra note 1, at 1142-1149. Supra note 10, at section 10.22(a). (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. Filling the Ethical Void: Treasury’s 1986 Circular 230 Proposal