Tax Analysts Blog

When All Else Fails, Blame a Tax Pro

Posted on Mar 20, 2015

Earlier this month the Democratic staff of the Senate Finance Committee released a report that caught my eye. It’s entitled “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions.” The committee’s ranking minority member, Oregon Sen. Ron Wyden, timed the report’s release to coincide with recent Senate hearings on tax reform. You can read Wyden’s introductory statement from those hearings here.

OK, the tax code is a disgrace. I get it. But a member of Congress is blaming tax professionals? Really?

The substance of the report is useful. It decries the fact that some taxpayers can deploy sophisticated tax planning strategies to trim their tax bills, often by millions of dollars each year. Wyden is specifically referring to exotic financial products that, by their nature, are of no practical use to ordinary citizens. The report identifies six techniques that are judged to be particularly inappropriate:

• Hedge collars (to avoid paying capital gains);

• Wash sales (to defer the recognition of capital income)

• Derivative manipulation (to conceal partnership interests);

• Derivative manipulation (to convert ordinary income into capital gains);

• Basket options (to convert short-term gains into long-term gains); and

• Nonqualified deferred compensation abuse (to avoid recognition of employment income).

I appreciate Wyden’s frustration. It’s galling that taxpayers serviced by $700-an-hour advisers routinely benefit from schemes unavailable to the rest of us. Personally, I wouldn’t shed a tear if each of the identified practices were permanently shut down tomorrow.

I disagree, however, with making tax attorneys and accountants the culprits. Let’s be clear on one thing: Each of the featured techniques is “perfectly legal.” That little detail is straight out of the report’s introduction. And whose fault is that?

It’s every lawyer’s duty to zealously represent his clients’ interests. It’s misguided to expect counsel to violate that obligation because the tax rules that govern private economic behavior are poorly written or otherwise ill-suited to their task. Moreover, it’s not a tax professional’s job to rewrite the tax code.

Frankly, the tax bar is unusually forthcoming and generous with its time in making recommendations on how our tax laws should be improved. Professional groups like the American Bar Association Section of Taxation, the New York State Bar Association Tax Section, the American Institute of Certified Public Accountants, and many others have an impressive history of offering practical reforms to legislative bodies. I wish I had a dollar for every time their sound advice is summarily dismissed by lawmakers on the grounds that “lobbyists won’t like it” or “it might affect my fundraising.”

I often agree with what Wyden has to say about tax policy, but with this blame game he has shifted responsibility from where it properly belongs.

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