The Business, Entrepreneurship & Tax Law Review

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Tax Ethics and Legal Indeterminacy


The modern framework of professional tax ethics is often given in reference to famous quotations of Justice Oliver Wendell Holmes or Judge Learned Hand. The common quote from Holmes is that “the very meaning of a line in the law is that you may intentionally go as close to it as you can if you do not pass it”; Hand’s quote is that “there is nothing sinister in so arranging affairs as to keep taxes as low as possible . . . [a taxpayer] is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” However, there are two significant problems when these are applied to form the basis of tax ethics. First, Holmes’ idea of “crossing the line” is taken as a presumption that tax laws are legally determinate. They are not. Every tax practitioner ought to be aware that tax laws are not legally determinate. Accordingly, the limits of tax planning should not be expected to be clearly marked. Second, Hand’s premise of the legitimacy of “arranging affairs” raises the problem of structuring. By structuring, the tax practitioner creates a convoluted and indeterminate transaction out of a previously known set of facts. The respective “facts” then become slippery, just as Karl Llewellyn said, so the dream of tax law as a complete and fully valid set of intersecting code provisions dramatically falls apart. The Internal Revenue Service has struggled to respond to this challenge with new penalties and ever-changing tests. However, tax structuring represents a new animal in terms of legal philosophy comprising Factual Indeterminacy, where the underlying “facts” become indeterminate in various ways. This changes things for tax ethics because the standard line—”the lawyer applies the law to the facts”—is not an exclusive description of tax lawyering. By structuring, the tax lawyer is sometimes pushing toward indeterminacy. In nearly all other legal contexts lawyers push in the opposite direction, away from indeterminacy. Various ethics scholars have proposed that the tax lawyer merely acts in different roles in different contexts, and that personal standards of ethics (or, morals) could serve as a guide to ethical lawyering. An alternative framework of professional tax ethics based on the direction of tax planning toward or away from indeterminacy is proposed here.