In this blog, I usually discuss tax crimes and matters related to tax crimes. At least for tax professionals, there are parallel ethical issues. The ethical issues certainly are recognized or should be recognized by tax professionals whose conduct approaches the criminal tax line -- that line where they cross over into intentionally violating a known legal duty, the mens rea standard for tax crimes.
The Ethicist, a column in the New York Times, addressed a facet of the ethical issue, in a context that does not necessarily implicate a tax crime. Chuck Klosterman, A Tax Lawyer's Quandary (NYT Ethicists 3/22/13), here. The question the anonymous tax lawyer asks is:
I am a tax lawyer. Is advising wealthy companies of ways to reduce their tax bills through sophisticated legal structures ethically permissible? The structures take advantage of legal loopholes in the tax legislation.The Ethicist answer, very short, is:
The ethics of specific professions create unique realms of responsibility. In the same way that a defense attorney is ethically obligated to give his client the best possible defense — even if he’s convinced of the individual’s guilt — your principal responsibilities lie with the company hiring you. You need to do your job to the best of your abilities, within the existing rules. You should, however, voice your moral apprehension about the use of such loopholes to the company you represent.For a good, short general discussion, I suppose this works.
The question as it implicates tax crimes is whether the perceived or claimed loophole is really a loophole. I am not aware of a universal definition of loophole. The one from Wikipedia, here. is as good as any.
A loophole is an ambiguity in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied or explicitly stated, of the system. Loopholes are searched for and used strategically in a variety of circumstances, including taxes, elections, politics, the criminal justice system, or in breaches of security.The Wikipedia entry has a good discussion of the broader context for this meaning of loophole, so I recommend it for readers.
The bullshit tax shelters offer a good tax context for consideration. Bullshit tax shelters fall into two categories -- those that have been criminally prosecuted and those that have not. Neither category is legal in the sense that, ultimately, they work when a court reviews them. In that sense, they are not loopholes. But, for criminal purposes, I suppose, not all are criminal even though they are cobbled together by sophisticated and well-paid tax professionals. I think it appropriate now to cut and paste the characteristics of a tax shelter -- focused on the bullshit variety -- from my Federal Tax Procedure Book:
Tax shelters are many and varied. Some are outright fraudulent wrapped in what is disguised as a real deal. The more sophisticated, however, are often without substance but do have some at least tenuous claim to legality. Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional); and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive. More succinctly, a Yale Law Professor has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.” Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”So, for those tax professionals engaging in such transactions that they know violated a known legal duty, their conduct is illegal and unethical. For those transactions engaging in such transactions where they don't know (perhaps are willfully ignorant) that the conduct is illegal (ultimately most of the bullshit tax shelters are found to be illegal), then at least the ethical issues arise. These are smart professionals, paid (supposedly) to predict what a court will do with the bullshit tax shelter. Yet, in the prominent civil cases that swat down bullshit tax shelters, they fail miserably in their predictions. (Which may suggest that their more-likely-than-not opinions were motivated in significant part by some form of willful ignorance seasoned with greed seasoned further with selling insurance for the taxpayer's risk of civil and criminal penalties.)
These are questions. I have no answers. I do have questions.
I invite comments from readers. Any reader with expansive thoughts might consider writing a guest blog.