Tax Ethics: Advice from the Past

Michael Hatfield, Legal Ethics and Federal Taxes, 1945-1965: Patriotism, Duties, and Advice, 12 Fl. Tax Rev. 1 (2012), available at SSRN.

Major cases in the news from tax shelter promotions to corporate accounting abuses have once again put the ethical obligations of  lawyers, and specifically tax lawyers, onto center stage (or at least in the wings).  Congress passed increased standards for return preparers and the Treasury has followed with increased preparer standards in Circular 230.

It is within this framework that I read Professor Michael Hatfield’s article, which examines the ethical debate and discussions by some of the leading scholars and practitioners during the 40s, 50s, and 60s.  These tax lawyers were at the forefront of discussions regarding the modern income tax.  Professor Hatfield’s historical examination provides us with insight into what they were thinking, and provides us with food for thought as we examine modern ethical problems. Professor Hatfield’s point is just that, to provide us with food for thought.  He does not attempt to draw conclusions from this debate regarding what we should do now.  Instead, he carefully and thoroughly outlines the debate at the time and leaves us with opportunity to draw our own lessons from the analysis.  What is clear from the article is that the leading tax lawyers of the time were as conflicted as we are today on many issues, especially the question whether tax lawyers had a special “duty to the system.”  Interestingly, however, they were almost universal in their agreement on two major points: (1) that the payment of taxes was a civic duty, one which had a strong patriotic element, and (2) tax lawyers had a duty to be proponents, reformers, and educators about the tax system.

Professor Hatfield starts his analysis by reminding us that these commentators were thinking about tax issues in the context of victory in World War II and the rise of communism.  Communism was thought of as the next great evil, and commentators believed that a just and fair tax system was essential to a strong capitalistic economy – the strength of which was necessary to defeat communism.

The historical analysis with regard to a tax lawyer’s duty to the system versus the duty to a client is very similar to the debate the tax bar has had since 1965.  With regard to the duty of tax lawyers almost all commentators concluded that once a taxpayer was involved in a tax controversy, a tax lawyer had no special duty to the system.  A lawyer in a tax controversy owed the client the same duty as other lawyers engaged in litigation.  A tax lawyer’s duty in the prelitigation stage, however, was more divisive. Several commentators including Mortimer Caplin (Caplin & Drysdale) argued for a need for “authoritative guidance in the prelitigation of tax practice.”  Professor John Maguire (Harvard) called for a full examination of “the tax lawyer’s special obligations.” He analyzed the issue based on the tax controversy/planning distinction often used today.  He argued that when the tax lawyer was acting as an advisor, he had a higher duty to the public interest.  Maguire felt such a duty was essential in light of the system of voluntary compliance. Professor Edmond Cahn (NYU) expressed concern that “lawyers were becoming the ‘jackals of the bourgeoisie,’” and Professor Jerome Hellerstein (NYU) argued that tax lawyers have a special duty to both the system and to the client, and pushed for increased disclosure as a means of preventing fraud and abuse.

Others, including Professor Boris Bittker (Yale), Mark J. Johnson (New York practitioner), and Professor John Potts Barnes (Virginia) found no special duty of tax lawyers in any situations.  Hatfield explains that these commentators staked their analysis on the high degree of ethical responsibility that all lawyers faced.  It was not that they were against a high standard for tax lawyers, but that they believed there was a high standard for all lawyers.

Professor Hatfield next examines the historical literature in light of world conflicts.  International conflicts and the threat to capitalism and democratic institutions influenced commentators to view the payment of tax as a means of upholding our democratic values and our democratic system.  As America confronted wars in Iraq and Afghanistan, the President and Congress seemed more afraid that the increased collection of revenue would decrease the support of these conflicts.  Paying taxes did not garner the same type of patriotic fervor it did Post-World War II.  Not only was there not a patriotic push for taxes, but there was a significant push for lower taxes during this period.

Finally, Professor Hatfield’s historical analysis also sheds light on a view, almost universally shared by commentators, that tax lawyers have a duty to engage in public activity to improve the tax system.  This view of “duty” has been shared by leaders in the tax bar since the 1940s (this may be why they are leaders.)  Interestingly, just this week, at the ABA Tax Section Mid-Year Meeting, Professor Kleinbard from the University of Southern California joined with others to present a challenge to the academic community attending the Teaching Tax program to help educate voters about tax policy and budget choices, as Congress and President deal with significant budget challenges.  Professor Hatfield’s historical reminder coupled with Professors Kleinbard’s immediate challenge, is a nice reminder to us all about the tax community’s professional duty to engage in public activity to improve the system.

Professor Hatfield’s historical analysis is a fun-filled stroll through yesteryear.  It provides us a brief glimpse as to “what they were thinking” as the foundation for the duties facing tax lawyers was developed, and reminds us of our public obligations to both support the success of the system of voluntary compliance and to use our expertise to work for a better system.