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tax notes
The Tax Section’s Ethics Debate —
Historical Reflections
By Michael Hatfield
Michael Hatfield is a professor of law at Texas Tech
University School of Law
and of counsel at Schoenbaum, Curphy & Scanlan PC
in San Antonio.
The recent American Bar
Association Section of Taxation debate on standards of
advice and disclosure is not
Michael Hatfield
new among tax lawyers. The
legal ethics literature reports tax lawyers discussing
these issues in the 1950s and 1960s. Having neither
the burden nor the benefit of formal ethics opinions
or committee work, for good or not, the debate was
more open-ended, oriented more around the ethics
of lawyering than the law of lawyering.
On May 31 the IRS finalized section 10.34(a) of
Circular 230, providing the standard for practitioners preparing tax returns and advising on tax
return positions.1 The section 10.34 standard now
more closely reflects the preparer penalty standards
of section 6694. Given the different purposes and
structures of section 10.34 and section 6694, there
remain important differences between the two. And
given some clumsy drafting choices in the section
10.34 revisions, getting a handle on those differences is not as easy as it might have been. But
putting some complexities aside, ‘‘reasonable basis’’
is now the section 10.34 standard for positions
disclosed on returns, and ‘‘substantial authority’’ is
the standard for undisclosed positions.2
The American Bar Association Section of Taxation recommended against linking the section 10.34
and section 6694 standards.3 Instead, the 6694 tax
section recommended linking section 10.34 to the
standards in ABA Formal Opinion 85-352,4 which
include the reasonable basis standard for disclosed
return positions and the ‘‘realistic possibility of
success on the merits’’ standard for undisclosed
return positions.5 The 6694 tax section commented
that ‘‘the incorporation of the ‘substantial authority’
standard for undisclosed positions conflicts with
the long-standing position of the ABA’’ and urged
‘‘that the disciplinary provisions of Circular 230’’ be
made consistent with the ABA position.6 The ABA
described its position as settled ethics, having been
‘‘the professional standard for asserting positions in
a tax return for twenty-five years.’’7 The 6694 tax
section cautioned against the unsettling of ethical
standards that would follow from directly linking
section 10.34 to section 6694 — and thus turning the
legislative whims of Congress into the source of
professional ethical standards.8 Congress having
amended section 6694 twice in recent years was
cited as evidence of how quickly unsettled the
ethical standards could become.9 The 6694 tax section argued that ethical principles should be more
durable than statutory language and that directly
linking an ethical standard to a statute was simply
wrong.
Although the comments represent the views of
the tax section,10 there were dissenters who favored
linking the standards. The liveliness of the topic
was clear when a debate to be moderated by the
committee chair was scheduled for the section’s
May meeting. All interested parties, ‘‘especially
former debaters,’’ were invited to the debate, titled
‘‘Resolved: That the Standards for Tax Return Positions of Circular 230 Section 10.34 Should Conform
in All Respects to the Standards Prescribed by IRC
Section 6694.’’11 The panelists for the affirmative
3
1
Jeremiah Coder, ‘‘Final Circular 230 Rules Adopt Reasonable Basis Standard,’’ Tax Notes, June 6, 2011, p. 1022, Doc
2011-11713, 2011 TNT 105-1.
2
Circular 230 section 10.34(a)(1)(i)(A) and (ii)(A) explicitly
applies the reasonable basis standard. However, Circular 230
section 10.34(a)(1)(i)(B) and (ii)(B) references unreasonable positions described in section 6694(a)(2), which incorporates into
section 10.34 the substantial authority standard for undisclosed
positions.
TAX NOTES, September 5, 2011
See ‘‘ABA Members Comment on Proposed Amendments to
Circular 230 Rules,’’ Doc 2010-26014, 2010 TNT 235-22 (tax
section comments).
4
Id. at 3.
5
Id.
6
Id.
7
Tax section comments, supra note 3, at 14.
8
Id.
9
Id.
10
Id., cover letter to IRS Commissioner Douglas Shulman
from Charles H. Egerton, section chair.
11
ABA Tax Section May 2011 Meeting Final Program, at 40.
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VIEWPOINTS
COMMENTARY / VIEWPOINTS
The substance of the issue aside, this process for
settling an ethics standard is itself debatable. It
involved a federal agency issuing proposed regulations on the standards for disciplining professionals
under its authority followed by a voluntary professional association issuing detailed comments on the
proposed regulations and arguing that its standards
were the ones that should be adopted instead. For
good measure, the professional association then
allowed dissenting professionals who favored the
federal agency’s standard the opportunity for a
public debate at the annual meeting. That we use
the word ‘‘ethics’’ to describe the results of an
inter-institutional process settling standards backed
by the institutional threat of discipline should strike
us as an odd, if not incorrect, word choice. This is
the ‘‘law of lawyering’’ rather than the ethics of
lawyering, and the process is that of 21st century
American bureaucracy, not ethical reasoning. Or at
least not ethical reasoning Socrates would recognize, although there is no reason to believe he knew
more than anyone else about the appropriate standards for giving 21st century American tax advice.
The transformation of the ethics of lawyering
into the law of lawyering became clear in the 1970s.
By then, as one legal historian has put it, ‘‘The
moral tradition of lawyering was dead,’’ replaced
by ethics law intended to constrain Oliver Wendell
Holmes’s ‘‘bad man’’ (or, more specifically, bad
lawyer) with fear of consequences rather than the
counsel of conscience.13 Today, legal ethics questions are answered the same way others are: Rules
are researched and then applied in light of potential
consequences. Contracts and pollution are regulated that way, and so are lawyers. But when the
object being regulated is the bar, we call it ‘‘ethics.’’
12
Id.
See Michael Ariens’s historical account of the transformation of legal ethics into the law of lawyering in ‘‘American Legal
Ethics in an Age of Anxiety,’’ 40 St. Mary’s Law J. 343, 448-452
(2008). See also Oliver Wendell Holmes, ‘‘The Path of the Law,’’
10 Harv. L. Rev. 457, 459 (1897) (‘‘If you want to know the law
and nothing else, you must look at it as a bad man, who cares
only for the material consequences which such knowledge
enables him to predict, not as a good one, who finds his reasons
for conduct, whether inside the law or outside it, in the vaguer
sanctions of conscience.’’).
13
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To say that using the word ‘‘ethics’’ in that way is
odd is not to say that it is bad. Sustained corporate
reflection on complex issues may be the most
practical option for finding the way forward. Indeed, in the late 1950s and early 1960s, members of
the tax bar longed for the sort of ethics guidance we
now consider the norm. Prof. John Maguire of
Harvard Law School hoped ‘‘marching orders’’ for
tax lawyers would be given by a duly informed bar
committee.14 Former IRS Commissioner Mortimer
Caplin urged the ABA to provide professional ethics guidance.15 Norris Darrell of Sullivan & Cromwell encouraged the tax bar to increase its
involvement in work on professional ethics issues.16
Before the law of lawyering became the paradigm for legal ethics, the writings on ethical issues
for tax lawyers rarely, if ever, deduced guidance
from Circular 230 or the ABA Canons of Ethics.17
Today, it would be unthinkable for anyone to debate
the ethical issues for tax lawyers without beginning
or ending with the ABA Model Rules and Circular
230. Yet, the specific issues considered by the tax bar
in the 1950s and 1960s are often the ones still
debated today — but they were debated then
outside the light of any committee or agency pronouncements. That arguably hindered, rather than
furthered, analysis. During the May debate, one
side argued for a substantial authority standard for
those positions (that is, section 6694) while the other
side argued for a realistic possibility of success on
the merits standard (that is, ABA Formal Opinion
85-352). While those terms of art are subject to
ongoing dispute, we generally know what they
mean or know enough about them to dispute what
they should mean.
Before ABA Formal Opinion 314 was issued in
1965 establishing the reasonable basis standard for
undisclosed positions, there were no settled terms
with which to stake out positions or guide discussions, and individual writers on tax ethics struggled
to articulate their own standards for disclosing
arguable positions.
14
John Maguire, ‘‘Conscience and Propriety in Lawyer’s Tax
Practice,’’ 13 Tax. L. Rev. 27, 45, 48 (1957).
15
Mortimer M. Caplin, ‘‘What Is Good Tax Practice: A
Statement of the Problem & the Issues Involved,’’ 21 N.Y.U. Inst.
on Fed. Tax’n 9, 17 (1963); Caplin, ‘‘Responsibilities of the Tax
Adviser — A Perspective,’’ 40 Taxes 1030, 1033 (Dec. 1962).
16
Norris Darrell, ‘‘The Tax Practitioner’s Duty to His Client
and His Government,’’ 7 Prac. Law. 39, 39-40 (Mar. 1961).
17
When Maguire suggested that a bar committee specifically
consider the ethical issues of tax practice, he did mention the
canons and Circular 230. He thought that the implications of tax
lawyers being subjected to both needed to be investigated, but
he did not attempt it — suggesting it should be the work of a
committee. See supra note 14, at 48.
TAX NOTES, September 5, 2011
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were Prof. Linda M. Beale of Wayne State University Law School and Diana L. Wollman of Sullivan
& Cromwell LLP; for the negative were Christopher
S. Rizek of Caplin & Drysdale and Michael J.
Desmond of Bingham McCutchen LLP.12 The debate itself left the room closely divided but with the
negative panelists winning a slight edge in the
informal audience poll.
COMMENTARY / VIEWPOINTS
18
Edmund Cahn et al., ‘‘Ethical Problems of Tax Practitioners: Transcript of the Tax Law Review’s 1952 Banquet,’’ 8 Tax
L. Rev. 1, 31 (1952).
19
Id.
20
Boris I. Bittker, Professional Responsibility in Federal Tax
Practice 253 (1965).
21
Id.
22
Id. at 254-255.
23
Randolph Paul, ‘‘The Lawyer as Tax Adviser,’’ 25 Rocky
Mtn. L. Rev. 412, 427 (1952).
24
Id.
25
Id. at 428.
26
Id. at 427-428.
that ‘‘unless you conclude that the chances of
winning are ‘fifty-fifty,’’’ you should advise the
client to disclose the position on the return.27 Although a degree short of the more likely than not
standard some suggest should be the norm for tax
advice,28 Bickford’s professional standard for undisclosed positions was higher than both the realistic
possibility of success standard recently recommended by the ABA and the substantial authority
standard adopted by the IRS. Imagine what the
May debate would have been if the IRS had suggested an ‘‘at least fifty-fifty chance’’ undisclosed
position standard for section 10.34. I imagine the
opposition would have won far more than a slight
edge of support in the audience poll.
Also writing before the 1965 opinion was issued,
Norris Darrell did not focus on chances of success,
as Sullivan & Cromwell’s Bickford did, nor the
degree of legal clarity, as Paul did. He argued more
bluntly that a tax lawyer should disclose any
‘‘doubtful but arguable’’ position that the lawyer
thought ‘‘the government would probably seek to
tax.’’29 But Paul and Darrell agreed that the mere
fact that the government continues to argue a
position does not mean it is doubtful. Darrell did
not believe disclosure should be required in situations in which ‘‘there are many court decisions
uniformly in [the] client’s favor but as to which the
government bullheadedly hadn’t yet given up.’’30
Unfortunately, he offered no guidance on distinguishing due principledness from undue bullheadedness, but his point is fairly clear. And his
suggested standard is very high. Imagine how the
May debate would have gone if the IRS had suggested the disclosure standard be as high as Darrell
had suggested.31 I can envision appeals to the
Constitution — and perhaps the Magna Carta.
27
Hugh C. Bickford, Successful Tax Practice 139 (1952).
See, e.g., Linda M. Beale, ‘‘Tax Advice Before the Return:
The Case for Raising Standards and Denying Evidentiary Privileges,’’ 25 Va. Tax Rev. 583 (2006) (‘‘The statutory and ethical
standards for positions taken or advised on returns should be
raised. A taxpayer should not be able to take a position on a tax
return, nor an advisor advise a position, unless it is considered
to have a greater than fifty percent likelihood of success on the
merits if litigated. To make returns fully transparent and facilitate enforcement, Congress should amend the law to eliminate
the applicability to pre-return tax planning advice of the common law attorney-client privilege and work product protection.’’).
29
Darrell, ‘‘Responsibilities of the Lawyer in Tax Practice,’’ in
Bittker, Professional Responsibility in Federal Tax Practice 87, 92
(1965).
30
Id.
31
Diana Wollman, one of the panelists in favor of the higher
standard, is a tax partner at Sullivan & Cromwell, where Darrell
was a partner for 42 years. Darrell’s obituary is available at
28
(Footnote continued on next page.)
TAX NOTES, September 5, 2011
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Before ABA Formal Opinion 65-315 was issued,
Prof. Gerald Wallace of New York University School
of Law focused his disclosure analysis on situations
in which there was a ‘‘bona fide and reasonable
doubt as to’’ the law.18 In situations of reasonable
doubt, Wallace argued that no disclosure should be
required as long as the ‘‘attorney is of the position
that the Bureau’s position is wrong.’’19
Also before the 1965 opinion was issued, Prof.
Boris Bittker of Yale Law School considered the
disclosure issue in depth and from various angles.
He looked at the administrative burden on the IRS
when it had to process the disclosure of complicated facts and debatable questions of law20 and
thought the agency should specifically require disclosure of ‘‘those items which in its experience are
frequently debatable, or difficult to detect without
assistance from the taxpayer.’’21 But other than
positions for which the IRS specifically requires
disclosure, Bittker argued that as long as the practitioner honestly believes the positions on the return
are proper, there should be no duty of disclosure.22
In 1952 Randolph Paul of Paul, Weiss, Rifkind,
Wharton & Garrison LLP argued that there was no
duty of disclosure in situations in which there was
a great deal of legal uncertainty or, as he described
it, situations in which there is ‘‘a thicket of obscurity’’ or ‘‘no yardstick for the measurement.’’23 He
had in mind situations in which the ‘‘Bureau would
decide the issue adversely to the client’’ but for
which the result was unclear if the question were
litigated.24 He also argued that there was no duty of
disclosure in situations in which the bureau would
decide against a client whose ‘‘position was supported by a number of authoritative and carefully
reasoned court opinions.’’25 That standard sounds
similar to today’s substantial authority standard,
although Paul described it as arising only when the
government persisted in litigating a losing position.26
While Paul may have anticipated a substantial
authority-type of disclosure rule, Hugh C. Bickford
anticipated a more likely than not standard. In his
1952 treatise, Successful Tax Practice, Bickford argued
COMMENTARY / VIEWPOINTS
http://www.nytimes.com/1989/08/15/obituaries/norrisdarrell-lawyer-and-tax-expert-90.html.
1046
The Pursuit of an Effective
Balanced Budget Amendment
By Richard J. Cebula
Richard J. Cebula is the
Walker/Wells Fargo Endowed Professor of Finance
at Jacksonville University in
Jacksonville, Fla.
This article provides an
alternative to the standard
simplistic form of a balanced budget amendment to
the U.S. Constitution. InRichard J. Cebula
stead of simply prohibiting
government outlays from exceeding government
revenues, which could lead to higher government
spending and to higher taxation levels, this proposal provides potential flexibility in the federal
budget and deficit conditions (when necessary)
while protecting against tax increases and excessive
growth in government outlays. The proposal prohibits government spending from exceeding revenues; however, under some conditions, with the
approval of a two-thirds majority of both the House
and Senate along with approval of the president, a
temporary budget deficit of up to 2.5 percent of
GDP could be authorized. The requirements that
must be met for such a limited budget deficit
include the following: the ratio of government
spending to GDP may not exceed 20 percent (its
approximate average historical level), and the unemployment rate must exceed 8 percent (to reflect
genuine recessionary conditions). Those conditions
could be modified; for example, a 7.5 percent
unemployment rate could be adopted.
Introduction
During the latter years of the Clinton administration and through the early years of the George W.
Bush administration — that is, fiscal years 1998 to
2001 — the federal government had four consecutive years of budget surpluses. However, beginning
with fiscal 2002, the federal budget has been in a
deficit. As shown in the table, during the Bush years
after fiscal 2001, the federal budget deficit ranged
from a low of $158 billion to a high of $459 billion.
Expressed as a percent of GDP, the federal budget
deficit ranged from a low of 1.2 percent (fiscal 2007)
to a high of 3.5 percent (fiscal 2004). Beginning with
fiscal 2009, the federal budget deficit surged to $1.41
trillion (10 percent of GDP), followed by a deficit of
$1.65 trillion (10.9 percent of GDP) for fiscal 2010.
The projected federal budget deficit for fiscal 2011 is
slightly in excess of $1.1 trillion (7 percent of GDP),
although with increased unemployment rates it is
likely to be higher.
TAX NOTES, September 5, 2011
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In 1965 the terms of the ethics debate over the
appropriate standard were reined in when the bar
issued its formal opinion on the reasonable basis
standard for undisclosed positions. From that point,
the ethics discussion became centered on and
guided by the ABA ethics standards and Circular
230. The transformation of tax lawyering ethics into
tax lawyering law had begun. A more practical,
objective, and legalistic approach prevailed, and the
tax bar ethics discussions started becoming more
standardized, domesticated, and useful. Considering the issue within the framework of the 1965 ABA
opinion and Circular 230, the discussion developed
to the point of a higher standard being articulated
in the 1985 ABA opinion, and then to the point of a
higher standard in the 2011 revision to Circular 230.
Tax lawyer ethics became tax lawyering law several
decades ago, and at a practical level, we have
accepted that — for good reason. Even if Paul and
Darrell would have stood apart from the tax section
by arguing for an even higher standard than the IRS
had recommended, no doubt they would have
appreciated the value of an institutional process.
Despite the advantages of an institutional process, there continues to be ambivalence in the tax bar
about the transformation of professional ethics into
professional regulation. That ambivalence was evident in the May meeting debate over the Circular
230 revisions. The panel against tying the professional standard to the penalty standard was arguing
that ethics is something different from law, something professionals should articulate for themselves
in light of their own professional values and not
something to be legislated by Congress. The panel
in favor of more closely connecting the professional
standard and the penalty standard was not denying
that ethics is something different from law but
rather that ethics always must be something more
demanding than the law. That is, if legislation
requires a standard for tax return advice, the professional ethical standard simply cannot require
less. On the one hand was resistance to the idea that
ethics is determined by law, and on the other, the
argument that submitting to the law is a minimum
demand of ethics. While he may not have recognized the bureaucratic processes, Socrates certainly
would have recognized the issues.