[Congressional Record Volume 151, Number 74 (Tuesday, June 7, 2005)]
[Senate]
[Pages S6149-S6152]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
MORT CAPLIN ON THE NATION'S TAX SYSTEM
Mr. KENNEDY. Mr. President, earlier this year, Mort Caplin, a
founding partner of the law firm Caplin & Drysdale in Washington, DC,
and the outstanding IRS Commissioner under President Kennedy, delivered
the Erwin Griswold Lecture at the annual meeting of the American
College of Tax Counsel, which was held in San Diego.
In his eloquent and very readable address, Mr. Caplin summarizes the
evolution of our modern tax system, the current challenges it faces,
the recent efforts by Congress to achieve reform, the alarming drop in
compliance and revenue collection, and the ethical responsibilities of
the tax bar.
Mr. Caplin's remarks are especially timely today as Congress
struggles to deal with its own responsibility for the effectiveness,
integrity and fairness of our tax laws. All of us in the Senate and
House can benefit from his wise words, and I ask unanimous consent that
his lecture be printed at this point in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Virginia Tax Review, Spring 2005]
The Tax Lawyer's Role in the Way the American Tax System Works
(By Mortimer M. Caplin)
It is a high privilege to be asked to deliver this Erwin N.
Griswold Lecture and a treat too to see so many old friends
and meet so many new ones. In honor of our namesake, I would
like to touch on four matters of relevance: (1) Dean
Griswold's impact on the tax law, (2) the role of the U.S.
Tax Court, (3) the role of the IRS, and (4) the tax lawyer's
role in the way the American tax system works.
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My first contact with the Dean was in my early days as a
young law professor at the University of Virginia School of
Law--struggling in the classroom using Griswold, Cases and
Materials on Federal Taxation. Not that the casebook was
entirely new to me; for, with the good help of the G.I. bill,
I'd become well-acquainted with it at N.Y.U. in my post-World
War II doctoral efforts. It's hard to believe, but the
Griswold casebook was the first ever devoted entirely to
federal income taxation; and it proved a godsend to me as I
segued from New York law practice to teaching at UVA in the
fall of 1950.
Erwin Griswold and I met at law professor gatherings and
bar meetings, especially in the early 1950's at American Law
Institute sessions in Washington as members of ALI's Tax
Advisory Group. We both were hard at work on its
comprehensive tax report, which later became part of the 1954
Code. Never did I tell him though that, in using his
casebook, my custom was to try a personal touch by
distributing mimeograph materials that totally rearranged the
order of presentation and reading assignments. Nor did I ever
hint that, after a year or two, I switched entirely to his
major competitor, the more comprehensive Surrey and Warren.
He probably learned about it faster than I thought skimming
through his royalty reports--reports which he undoubtedly
scrutinized with great care.
He had graduated from Harvard Law School in 1929, and his
first real contact with the tax law was during his five-year
stint as a fledgling attorney in the Office of the Solicitor
General of the United States. Federal tax rates and tax
receipts were at a low point then and handling tax cases was
not the most sought after assignment. By default, he soon
became the office's tax expert, arguing the bulk of its tax
cases both in the U.S. Supreme Court and the U.S. Courts of
Appeals. I should mention that, just before leaving the
S.G.'s office, he was instrumental in the rule change that
allowed appeals in tax cases to be made under the general
title ``Commissioner of Internal Revenue,'' without the need
to specify the name of the incumbent. That's why you see
older tax cases bearing the names of particular
Commissioners--David Burnet or Guy T. Helvering, for
example--and, later, hardly any with names like Latham,
Caplin, Cohen, Thrower and the like. Let me mournfully add:
``Sic transit gloria mundi''--so passes away the glory of
this world!
Erwin Griswold left the S.G.'s office in 1934 to become a
Harvard Law School professor for 12 years, and then dean for
the next 21. He had a major influence on tens of thousands of
law students as well as lawyers throughout the world. As
years went by, he reminisced that he found ``less
exhilaration'' in teaching the federal tax course as ``the
tax law had become far more technical and complicated . . .
In the early days, the statute was less than one hundred
pages long and the income tax regulations . . . were in a
single, rather slight, volume.'' Oh, for the good old days!
In the fall of 1967, he returned to the S.G.'s office, but
this time as the Solicitor General of the United States--a
position he held for six years. He'd been appointed by
President Lyndon B. Johnson during the last years of his
administration, and in 1969 was reappointed by President
Richard M. Nixon. President Nixon for his second term,
however, preferred as his S.G. a Yale law professor, Robert
H. Bork, someone more closely in tune with his philosophy.
Erwin Griswold's duties ended in June 1973, at the close of
the Supreme Court's term, well in time to avoid the heavy
lifting of Watergate and the ``Saturday Night Massacre.''
Although, he later said that he would not have followed
Solicitor General Bork in carrying out the President's order
to fire Special Watergate Prosecutor Archibald Cox.
Shortly after leaving office, he joined Jones, Day, Reavis
& Pogue as a partner and engaged in law practice and bar
activities for some 20 years, until his death in 1994 at the
age of 90. Erwin Griswold was honored many times over, not
only for his innumerable contributions to the law, but for
``his moral courage and intellectual energy . . . meeting the
social responsibilities of the profession.''
I always suspected that any special feeling the Dean may
have had for me had roots in my strong backing of his plea
for a single federal court of tax appeals--to resolve
conflicts and provide ``speedier final resolution of tax
issues.'' He observed, ``The Supreme Court hates tax cases,
and there is often no practical way to resolve such
conflicts''; and he anguished over the practicing bar's
opposition to his proposal, convinced that ``the real reason
is that tax lawyers find it advantageous to have uncertainty
and delay''--a preference for forum-shopping, if you will.
But in the end, in his 1992 biography, Ould Fields, New
Corne, he sounded a bit more hopeful: ``Eventually, something
along the lines proposed will have to come as it makes no
sense to have tax cases decided by thirteen different courts
of appeals, with no effective guidance on most questions from
the Supreme Court.''
One Supreme Court Justice, who'd had hands-on experience in
tax administration, and well understood weaknesses in our
appellate review system, was former Justice Robert H.
Jackson. The Court's most informed member on taxation, he had
previously served successively as ``General Counsel'' of the
Bureau of Internal Revenue (succeeding E. Barrett Prettyman),
Assistant Attorney General in charge of the Tax Division,
Solicitor General, and then Attorney General of the United
States. In 1943, in his famous Dobson opinion, Justice
Jackson made a determined effort to strengthen the Tax
Court's status in the decision-making process so as to
minimize conflicts and attain a greater degree of uniformity.
To these ends, he laid down a stringent standard in appellate
review of Tax Court decisions:''
[W]hen the [appellate] court cannot separate the elements
of a decision so as to identify a clear-cut mistake of law,
the decision of the Tax Court must stand . . . While its
decisions may not be binding precedents for courts dealing
with similar problems, uniform administration would be
promoted by conforming to them where possible.''
The message was straightforward and seemingly clear; but it
didn't cover District Court decisions or those of the Court
of Federal Claims. Also, other problems were encountered by
judges and members of the bar, and dissatisfaction was high.
Ultimately this led to the 1948 statutory reversal of
Dobson by enactment of the review standard now in the
Internal Revenue Code, which requires U.S. Courts of
Appeals to review Tax Court decisions ``in the same manner
and to the same extent as decisions of the district courts
in civil actions tried without a jury.'' And that's where
the situation lies today--save for those still aspiring,
as Erwin Griswold did for the rest of his life, for
greater uniformity and earlier resolution of conflicts.
Justice Jackson never did change his view about the
critical importance of the Tax Court. In his 1952 dissent in
Arrowsmith v. Commissioner, he underscored this in strikingly
poignant fashion, saying: ``In spite of the gelding of Dobson
v. Commissioner . . . by the recent revision of the Judicial
Code . . . I still think the Tax Court is a more competent
and steady influence toward a systematic body of tax law than
our sporadic omnipotence in a field beset with invisible
boomerangs.''
Members of the tax bar readily endorse this strong vote of
confidence in the role of the Tax Court. As our nationwide
tax tribunal for over 80 years, it has served effectively and
with distinction as our most important court of original
jurisdiction in tax cases.
Today's tax system has its genesis in World War II when
income taxes rapidly expanded from a tax touching the better
off only, to a mass tax reaching out to the workers of
America. Revenue collection was turned upside down with
Beardsley Ruml's ``pay-as-you-go,'' collection-at-the-source,
withholding and estimated quarterly payments, and floods of
paper filings. Commissioner Guy Helvering said it couldn't be
done. And, in fact, the old Bureau of Internal Revenue, with
its politically-appointed Collectors of Internal Revenue, was
not fully up to the task. Subcommittee hearings chaired by
Congressman Cecil R. King, D-California, revealed
incompetence, political influence and corruption; and
directly led to a total overhaul under President Harry
Truman's 1952 Presidential Reorganization Plan. New district
offices and intermediate regional offices, replaced the old
Collectors' offices; and, except for the Commissioner and
Chief Counsel, who still require presidential nomination and
Senate confirmation, the entire staff was put under civil
service. The last step a year later was the official name
change to ``Internal Revenue Service.''
The new IRS made remarkable headway turning itself
completely around by the end of the 1950's; and it was not
long before it was recognized as one of government's leading
agencies. In the early 1960's, new heights were reached
through a fortunate confluence of events, strong White House
endorsement and unflagging budgetary support. President John
F. Kennedy had a special interest in tax law and tax
administration and almost immediately called on Congress for
anti-abuse tax legislation and strengthening of tax law
enforcement, including Attorney General Robert F. Kennedy's
drive against organized crime. Of key importance was the
final congressional go-ahead for installing a nationwide
automatic data processing system (ADP), backed by approval of
individual account numbers and a master file of taxpayers
housed in a central national computer center. IRS had entered
the modern age. But it is this same ADP design, now badly
out-of-date, which is still in use, albeit patched with
additions and alterations. And it is the dire need to
modernize this 44-year old system which is IRS' chief
challenge today.
Starting in the 1970's, IRS began to encounter its present
serious difficulties. A series of complex legislative
changes, tightened budgets, an exploding workload, and
expensive failures to complete its ``tax systems
modernization'' (TSM) project-- all contributed to weakened
performance and heightened congressional oversight. In 1995
and 1996, Congress created the National Commission
on Restructuring the Internal Revenue Service ``to review
the present practices of the IRS, and recommend how to
modernize and improve the efficiency and productivity of
the IRS while improving taxpayer services.'' A year later,
the Commission issued its report, ``A Vision for a New
IRS,'' which led to the enactment of the Internal Revenue
Service Restructuring and Reform Act of 1998 (RRA 98).
The report centered chiefly on governance and managerial
type changes, including IRS modernization, a publicly-
controlled Oversight Board, a business-type Commissioner of
Internal Revenue, electronic filing and a paperless tax
system, taxpayer rights, and finally--and of primary
importance--changing
[[Page S6151]]
IRS' culture and mission so as to place emphasis on enhanced
``customer service'' and functioning like ``a first rate
financial institution.'' Congress was asked to do its part
too: simplified tax legislation; complexity analyses reports;
multiyear budgeting; joint hearings and coordinated reports
of the different oversight committees. To the more
sophisticated, the suggestions to Congress appeared more
aspirational than realistic.
The House largely followed the Commission's recommendations
(H.R. 2676). But the legislation found itself pending at a
tumultuous time, when the air was filled with words of U.S.
Senators--if you can believe it--like: ``end the IRS as we
know it,'' ``tear the IRS out by the roots,'' ``drive a stake
in the heart of the corrupt culture at the IRS,'' and ``stop
a war on taxpayers.'' At this point, Senator William V. Roth,
Jr., R-Delaware, Senate Finance Committee Chairman, took over
and ran a series of dramatic, highly televised hearings,
carefully prepared by his staff, and featuring a handful of
allegedly abused taxpayers and IRS employees who gave
testimony that shocked the nation. Never at the time did the
IRS have the opportunity to tell its side of the story; nor
was the testimony tested for accuracy or placed in proper
context. Later, however, after enactment of RRA 98, court
proceedings and various government reports by the GAO and
Treasury Inspector General for Tax Administration (TIGTA)
clearly established that much of the testimony was not only
misleading but false; IRS may have made mistakes, but they
were not malicious or systemic. Numerous corrective news
stories began to appear with sharp headlines like the
following: ``IRS Abuse Charges Discredited''; ``Highly
Publicized Horror Story That Led to Curbs on IRS Quietly
Unravels''; ``IRS Watchdog Finds Complaints Unfounded'';
``Court is Asked to Block False Complaints against IRS'';
``Secret GAO Report is Latest to Discredit Roth's IRS
Hearings.'' But publication came too late; the damage was
already done.
Congress, the public and ultimately the Clinton
administration had all been outraged by the Senate testimony
and, almost overnight, sweeping support was given to Senator
Roth's proposed highly stringent treatment of the IRS. His
Senate version added some 100 new provisions to the House
bill. Some are praiseworthy and reasonably protective of
taxpayer rights, but others step over the line, unduly
micromanaging IRS daily operations and laying the groundwork
for serious delaying tactics by taxpayers and damage to the
administrative process. In the end, the legislation was
adopted by an overwhelming vote. One of the most criticized
provisions is the ``10 Deadly Sins'' sanction in section 1203
of RRA 98. This peremptory discharge procedure, which directs
the Commissioner to terminate an employee for any one of
certain specified violations, is deeply disturbing to IRS
personnel. Some hesitate to enforce the tax law because of
possible unfair exposure to complaints by disgruntled
taxpayers. Both Commissioner Mark W. Everson and former
Commissioner Charles O. Rossotti have noted this erratic
impact and have requested modification. In my mind, there is
little doubt that section 1203 should be totally repealed.
Commissioner Rossotti very ably captained the transition to
the new culture. But with Congress' continuing emphasis on
the ``customer service'' aspect of tax administration, it was
not until his last years that the word ``enforcement'' began
to trickle out, along with warnings of the ``continuing
deterioration'' and ``dangerous downtrend in the tax
system.'' This shift in emphasis was quickly hastened by new
Commissioner Mark Everson, who early announced: ``At the
IRS our working equation is service plus enforcement
equals compliance.'' (This to me is the basic ``S-E-C of
taxation.'') He underscores repeatedly the significant
``diminution of resources''; the continuing fall in
audits, collection, notices to non-filers; the 36 percent
drop in enforcement personnel since 1996; and, since 1998,
the audit rate drop of 57 percent!
Perhaps of even greater importance is the negative impact
this weakened enforcement has had on compliance and self-
assessment. Commissioner Everson often quotes President
Kennedy's admonition: ``Large continued avoidance of tax on
the part of some has a steadily demoralizing effect on the
compliance of others.'' Indeed, the annual tax gap continues
to grow: Last reported as a $311 billion tax loss each year--
from underreporting, nonpayment and non-filing--new findings
of a major increase are anticipated in the IRS study now
underway
With repeated annual deficits and a burgeoning national
debt, the Commissioner recently confessed: ``The IRS, frankly
speaking, needs to bring in more money to the Treasury.'' The
White House had confirmed this by supporting a 2005 budget
increase and allocating to enforcement alone an increase of
11 percent. But this was not to be. For in the cut-back in
the increase, House majority leader Tom DeLay, R-Texas,
commented rather imprudently: ``I don't shed any tears for
the IRS. Our priority as far as the IRS is concerned is to
put them out of business.'' So much for the looming crisis in
meeting the revenue needs of our democracy!
IRS' final 2005 appropriation reflected hardly a one
percent increase--an overall grant of $10.3 billion, almost
$400 million below the President's request. This tight
squeeze tells clearly why IRS went along with outsourcing to
private debt-collection agencies the collection of certain
delinquent tax accounts. The statutory authorization to pay
outsiders up to 25 percent of tax debts collected is
technically ``off-book''; and through this backdoor
financing, IRS' appropriations takes no direct hit.
This then is the very serious state of affairs confronting
those directly concerned with the fair and balanced
administration of our tax law.
The proper functioning of our tax system is largely
dependent upon the quality and responsible involvement of
well-trained tax practitioners, primarily tax lawyers and tax
accountants. Well over half the public seeks their help for
tax advice and return preparation--inquiring, time and again,
about the ``rules of the road,'' what's right and what's
wrong, what's lawful and what's not. The integrity and
standards of these tax professionals serve as the nation's
guideposts, with direct impact on taxpayer compliance and the
self-assessment concept itself. The significance of their
good faith practices cannot be overstated.
Recent congressional and IRS investigations, however, have
identified an alarming spread of extremely questionable
practices, some approaching outright fraud, by a number of
previously well-regarded tax practitioners. The Senate
Finance Committee has zeroed in directly on practitioners as
a whole, emphasizing the ``important role tax advisors play
in our tax system.'' Chairman Charles Grassley, R-Iowa,
caustically observed: ``At the heart of every abusive tax
shelter is a tax lawyer or accountant.'' In full agreement,
Senator Max Baucus, D-Montana, the committee's ranking
minority member, added: ``Let's stop these unsavory practices
in their tracks by restoring integrity and professionalism in
the practitioner community.'' In their follow-up letter to
the Treasury Secretary John N. Snow, they called for
reinvigoration of IRS' Office of Professional Responsibility
(OPR), for its proper funding, and for extension of the
authority of its new head, Cono Namorato. Much has
happened since, legislatively and administratively.
Taking the lead, the American Jobs Creation Act of 2004
greatly enhances OPR's effectiveness through a series of new
provisions that expand Circular 230's reach: (1) confirming
authority to impose standards on tax-shelter opinion writers,
(2) clarifying authority to ``censure'' practitioners, as
well as to suspend or disbar them, (3) granting authority,
for the first time, to impose monetary penalties on
individual practitioners, as well as on employers or entities
for which they act, and (4) granting injunction authority,
for the first time, to prevent recurrence of Circular 230
violations.
In turn, publication of Treasury's long-awaited Circular
230 amendments on tax-shelter opinion writing puts OPR's
momentum in high gear. The official release advises that
these ``final regulations provide best practices for all tax
advisors, mandatory requirements for written advice that
presents a greater potential for concern, and minimum
standards for other advice.'' No doubt is left, however, that
the amendments' underlying intent is to ``Promote Ethical
Practice,'' ``improve ethical standards,'' and ``restore and
maintain public confidence in tax professionals.''
Highlighted too is the caution that ``one of the IRS' top
four enforcement goals'' is ``[e]nsuring that attorneys,
accountants and other tax practitioners adhere to
professional standards and follow the law.''
This is a harsh estimate of tax practitioners in general.
As members of the profession of tax lawyers, it is difficult
to ignore our collective responsibility to respond. What do
we do about it? Certainly the tax bar has not been asleep.
Both the ABA Tax Section and the AICPA separately have been
working on standards of practice for over 40 years; and each
has published a series of guiding principles which continue
as works in progress. The issue remains, however, whether the
tax bar has probed deeply enough.
Have we been willing to grapple with more subtle, more
difficult issues? Have we articulated what we regard as
``best practices'' for tax lawyers, keeping in mind that
Circular 230 applies to a broad range of ``practitioners''?
Tax lawyers are clearly quite distinguishable from other
``practitioners'' and, indeed, from lawyers in general. And
it seems fair to ask: Which practices are acceptable to the
tax bar, and which are not? At what point does the tax bar
regard tax advice or tax practice as crossing the line? As
``too aggressive''? As ``things that are not done''?
These questions, of course, transcend the current concern
with tax shelters only. It may not be long, in my view,
before we will be asked to revisit a broader question:
``Whether, in a system that requires each taxpayer to self-
assess the taxes that are legally due, a tax lawyer can
properly advise a client that he or she may take an
undisclosed tax return position absent the lawyer's good
faith belief that the position is `more likely than not'
correct?'' In considering the issue some 20 years ago, ABA
Formal Opinion 85-352 crafted as a more flexible answer the
``realistic possibility of success'' test, which later became
a touchstone used by Congress and the Treasury in assessing
certain penalties. In light of unacceptable developments
since then, it would seem timely for the entire subject
matter to undergo a thorough review.
In his speech on The Public Influence of the Bar, Supreme
Court Chief Justice Harlan F. Stone addressed the same theme
of lawyers' ethics in relation to the great Wall
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Street stock market crash. Critical of ``clever legal
devices,'' and critical of lawyers having done ``relatively
so little to remedy the evils of the investment market,'' he
observed that ``whatever standards of conduct in the
performance of its function the Bar consciously adopts must
at once be reflected in the character of the world of
business and finance.'' In his view, ``the possibilities of
its influence are almost beyond calculation''; and he went on
to advise, ``It is needful that we look beyond the club of
the policeman as a civilizing agency to the sanctions of
professional standards which condemn the doing of what the
law has not yet forbidden.''
The point is: Though we are a long-recognized profession,
allowed the privilege of autonomy and essentially self-
regulation, no insurmountable barriers exist to prevent
encroachment on this privilege, or even its end, if our
practices or standards are regarded as inadequate or
unrealistic. Today, we already see a gradual erosion flowing
from a series of new governmental rules--by Congress, for
example through the Internal Revenue Code or legislation like
Sarbanes-Oxley, or by the SEC or Public Company Accounting
Oversight Board (``Peekaboo''), or by Treasury through
Circular 230 or other regulations.
Our profession of tax lawyers must take the initiative and
become more intently involved--more proactive and not simply
defensive. Problems need be identified and solutions
developed by ourselves, and where necessary recommended for
implementation by the bar in general or by appropriate
governmental bodies. We cannot wait for others to compel
answers. Nor can we move at the pace of the ALI project that
required 13 years to complete a two-volume Restatement of the
Law Governing Lawyers. Ours would naturally be more immediate
in time and focus, and might well look to the leadership of
the ABA Section on Taxation, this organization, the American
College of Tax Counsel, or some other concerned and qualified
group.
As tax lawyers, we face many different responsibilities
daily--to our clients, to the profession, to the public, to
ourselves. How we maintain our own self-respect as lawyers;
how we desire to be viewed by others; and how we use our
special skills to improve the nation's revenue raising
system--are all questions crossing our minds every day, some
at times in conflict and in need of balancing as we confront
different tasks. In this regard, Dean Griswold counseled us
to preserve our ``independence of view''--separating our
representation of clients from our role as public citizens
seeking to improve the functioning of government.
The one exemplar he acclaimed is Randolph E. Paul,
Treasury's General Counsel and tax policy leader during World
War II, whom the Dean refers to as ``one of the early giants
in the tax field.'' Randolph, with whom I practiced during my
beginning days as a lawyer, asserted this individual
independence throughout his entire career, while he developed
a remarkable tax practice. In the closing lines of his
classic Taxation in the United States, he makes these seminal
observations on ``the responsibilities of tax experts'':
``The most I can say is that I do not think surrender needs
to be unconditional . . . I know tax advisers who accomplish
the double job of ably representing their clients and
faithfully working for the tax system taxpayers deserve . . .
At another level I venture the opinion that they lead a more
comfortable life than do many of their colleagues. Of one
thing I am very sure--that both taxpayers and the government
need many more of these independent advisers.''
Tonight this room is filled with many of these independent,
responsible advisers--some surely to become the giants we
will salute in the future. I am certain that together we will
overcome our present challenge ``to restore and maintain
public confidence in tax professionals.'' At the same time, I
have no doubt too that we will not fail in our ongoing
commitment to better the way in which our nation's needs for
revenue are fulfilled, fairly and honorably.
____________________