Too often in modern America, "professional ethics" is an oxymoron. Lawyers find "ethical" ways to condone lying by their clients; journalists find "ethical" ways to abuse their power and inflict their whims and tantrums on the public; accountants find "ethical" ways to overlook misrepresentations by the companies they audit.
Over the next few months, the Treasury Department will have a chance to test the ethics of tax professionals _ the lawyers, accountants and investment bankers _ who have created a billion-dollar industry in tax shelters for rich corporations. These shelters have gotten so complex it's almost impossible to write rules that will stop them. So Treasury is appealing to the pros who created the tax dodges to help clean them up.
Treasury Secretary Lawrence Summers took the first step in this effort Friday afternoon when he met with a dozen of the nation's top tax lawyers. He'll meet this week with a delegation of investment bankers and later with a group of accountants. The basic challenge for all of them is to write new rules that raise professional standards so that it's no longer "ethical" to help rich companies cheat on their taxes.
Honest lawyers are troubled by the perversion of their profession. The group that visited Summers Friday told him that corporate shelters are a growing problem _ and that lawyers are uncomfortable with the opinions they are writing to justify them. The group also noted the spread of "tax products," which use fancy computer models to create transactions whose only purpose is to lower tax liability.
Imagine the outcry if securities lawyers touted their skill at evading SEC regulations. But that's something tax-shelter advisers do every day. If you doubt it, consider this excerpt Forbes magazine cited two years ago from a letter sent by a Big 5 accounting firm: "As we discussed, set forth below are the details of our . . . tax strategy to eliminate the Federal and State income taxes associated with (company name deleted) income for up to five (5) years."
For all the fancy language, these sophisticated tax plans are simply rip-offs of the government. One example is a shelter scheme known as "Lease-In, Lease Out." A company would contract to lease a foreign property _ say, a town hall in Switzerland _ and then lease it back to the foreign owner the same day. The company could take a deduction on the rent it pays on the initial lease, but wouldn't have to recognize the income it receives from the lease-back for many years. Treasury estimates that this trick cost the government $10.2-billion in lost revenue until the loophole was closed last year.
The shelter industry exists because tax professionals have been willing to pretend that such transactions are legitimate. They write dubious opinions stating that a shelter scheme may pass muster, which shelter promoters then use as a get-out-of-jail-free card. That's because, under present rules, a company can escape IRS penalties if it can show it had "reasonable cause" to believe a shelter was legal.
This sort of corporate chicanery is very costly to the government, and it raises the tax burden for ordinary citizens. Treasury estimates that the gap between U.S. companies' book income and their taxable income is now more than $90-billion. Last year, when U.S. companies reported surging profits, corporate-tax receipts actually fell by 2 percent!
Fortunately, many of the tax lawyers who met with Summers want their profession to clean up its act. According to one person who attended the meeting, there was general agreement that companies should have to disclose shelter-type transactions and face strict penalties if they don't. Most also favored raising standards for written legal opinions and new sanctions for professionals who assist or promote improper shelters.
"Why should there be such a thing _ an organized, for-profit attack on the intent of the law?" asks Paul Sax, a San Francisco attorney who heads the tax section of the American Bar Association. He attended Friday's meeting at Treasury and supports efforts to raise standards. But he cautions that big law and accounting firms have thriving "tax product" groups that essentially exist to cheat Uncle Sam.
"This is a very lucrative form of practice," Sax warns. "Hundreds of millions if not billions of dollars are being made here, and I don't expect the folks doing it to readily give it up."
"Anything goes" shouldn't be the slogan of America's professionals. No wonder so many of them seem to hate their jobs: What's left to enjoy, after all, if you've sold your independence and integrity? Let's hope the investment bankers and the accountants join the tax lawyers in helping the Treasury Department put the squeeze on corporate tax cheats.
David Ignatius is an associate editor of the Washington Post.