Tax Lawyer’s Dilemma: Recent Developments Heighten Tax Lawyer Responsibilities and Liabilities

Sunday, January 15th, 2012 at 11:07 am by Charles A. Rose

Charles A. Rose, Tax Lawyer’s Dilemma: Recent Developments Heighten Tax Lawyer Responsibilities and Liabilities, 2011 Colum. Bus. L. Rev. 258.

The complexity and uncertainty of the tax laws in the United States ensure the need for individuals, corporations and other business entities to depend on tax lawyers for advice. The lack of clarity in our nation’s tax system requires the advice of tax lawyers for a variety of reasons and in a number of contexts. In private practice, tax lawyers spend a considerable amount of their time helping clients plan and structure transactions so as to minimize the impact of federal income taxes. While the need for tax advice is undeniable, opportunities for exploitation abound. As a result, tax practitioners, courts, and lawmakers have long struggled with the question of where to draw the line between legitimate and appropriate tax advice and illegal tax avoidance.

The financial prosperity of the 1990s fueled the emergence of a substantial market in abusive tax shelters. In a series of largely unsuccessful attempts to thwart these new structures, a string of legislative and judicial developments emerged, which have transformed the nature of tax practice in the United States. The most important of these developments for tax lawyers were the changes adopted by the Treasury in Treasury Department Circular No. 230. In conjunction with the changes instituted by the government, courts have seen an avalanche of litigation arising out of failed tax shelters in the form of malpractice suits brought by clients against opining lawyers and accountants. Furthermore, courts and prosecutors have displayed an increased willingness to use civil and criminal liability to deal with tax avoidance tactics. More recently, President Obama signed into law the Health Care and Education Reconciliation Act of 2010 (“Health Care Act”), which codified the common law “economic substance” doctrine to help pay for some of the anticipated costs of the healthcare reform measures. Although the codification of the economic substance doctrine is intended to clarify the doctrine and promote its uniform application, this legislation actually presents new problems and areas of uncertainty. Not surprisingly, these developments, acting in concert, have caused many of the nation’s preeminent tax lawyers to re-evaluate their attitudes toward tax planning practice. Unfortunately, however, these changes will not succeed in preventing tax shelter abuse, but instead will have an unwarranted adverse effect on tax lawyers attempting to provide legitimate tax advisory services.

The efforts to curb the use of tax shelters have had a significant detrimental impact on the vast majority of tax professionals who seek to provide legitimate tax advice. Recent legislative and administrative efforts, based largely on heightened disclosure requirements and increased penalties, are not effective solutions for the tax shelter problem, largely because they are only prospective in nature and taxpayers often move on to new types of shelters. Furthermore, the recent court decisions are unlikely to provide sufficient guidance to tax professionals for them to determine what the proper standards should be. Although tax shelter litigation has been ongoing for nearly two decades, the recent wave of cases stands out due to both the astonishing financial recoveries and the prominent institutions targeted. For example, in United States v. Stein, dubbed the largest tax fraud case in history, the government filed a forty count indictment against seventeen former KPMG accountants, a former partner at Sidley Austin Brown & Wood LLP, and a former financial executive. These cases have contributed to a seismic shift in the nature of tax practice by deterring lawyers and law firms from providing opinions for legitimate tax planning purposes. The codification of the economic substance doctrine as part of President Obama’s Health Care Act inflicts further harm on the nation’s tax system by increasing uncertainty because it is overly broad and fails to specify when the doctrine applies. Furthermore, the Act threatens legitimate business transactions, which if tested for economic substance under the unreasonably broad provision, could fail the statutory test.

This Note argues that the burdens of heightened liability and increasing uncertainty undermine the ability of tax lawyers to add value through viable tax advisory services, and that the rules and standards governing tax opinions should be revised to encourage lawyers to give legitimate tax advice, rather than driving lawyers away from the practice altogether.

Author Information

J.D., Columbia University School of Law; B.S., University of Kansas.