ethical dilemmas in the tax world

Ethical Dilemmas in the Tax World

Nicole Crighton, Principal, KPMG LLP

Glenn C. McCoy, Jr., Director, KPMG LLP

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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Ethical Dilemmas in the Tax World

2013  FTA Annual Meeting

Albuquerque, New Mexico

June 9-12, 2013


Overview

Agenda

•  Goals of this Session

•  Sources of Guidance

•  Proposed Analytical Framework

•  Real-Life Examples

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Introduction

•  Ethics is not definable, is not implementable, because it is not conscious; it involves not only our thinking, but also our feeling. Vlademar W. Setzer

•  Relativity applies to physics, not ethics. Albert Schweitzer

•  The time is always right to do what it right. Martin Luther King

•  Subtlety may deceive you; integrity never will. Oliver Goldsmith

•  There is no such thing as a minor lapse of integrity. Tom Peters

•  The internal revenue code has made more liars out of the American public than golf. Will Rogers

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Sources of Guidance

•  Professional Organizations

•  Government-Imposed Rules

•  Rules Imposed on Revenue Departments

•  Corporate Policies

•  Personal Convictions

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Rules of Professional Organizations

•  American Bar Association

–  http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional conduct_table_of_contents.html

•  American Institute of CPAs

–  http://www.aicpa.org/Research/Standards/Tax/Pages/default.aspx

•  Tax Administrator Associations

–  e.g., New Mexico Statutes Unannotated

–  Note that the term “public official” does not apply to legislators in New Mexico.

•  Governmental Conduct, Chapter 10; Article 16.

•  Governmental Ethic Oversight Committee, Chapter 2; Article 15.

•  Financial Disclosures, Chapter 10; Article 16A

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Rules of Professional Organizations (continued)

•  Tax Executives Institute

–  http://www.tei.org/membership/Pages/StandardsofConduct.aspx

•  Institute for Professionals in Taxation

–  http://www.ipt.org/learncenter.asp?id=178410&page=29

•  Professional Oaths

–  e.g., California Attorney’s Oath

–  (http://www.calbarxap.com/applications/CalBar/PDFs/code_section_6068.pdf)

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Government-Imposed Rules

•  Sarbanes-Oxley

–  http://www.sec.gov/about/laws.shtml#sox2002

•  Circular 230

–  http://www.irs.gov/pub/irs-utl/circular_230.pdf

•  State-specific rules of professional conduct

•  Rules within tax laws

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Rules Imposed on Revenue Departments

•  Taxpayer bills of rights

•  State Level Codes of conduct

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Corporate Policies

•  Company’s own ethics policies or codes

•  Association of Corporate Counsel

–  http://www.acc.com/advocacy/keyissues/legalethics.cfm

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Personal Convictions

•  Individual Moral Code

–  Often the first level of scrutiny of a potential action

•  Individual Character

–  Internal moral barometers

–  Only the starting point; must navigate the whole framework

•  Disincentive of Public Disclosure

–  “What-would-your-mother-say” test

“Wall Street Journal” Test

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Definitions of “Ethics”

•  A principle of right or good behavior or a system of moral principles or values; the rules or standards of conduct governing the members of a profession

–  Webster’s II New College Dictionary Definition

•  The principles of conduct governing an individual or a group <professional ethics>

–  Merriam-Webster Online

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Purpose and Function of Ethics Codes

•  Reflect organizational values

•  Articulate principles and standards

•  Advise members of accepted conduct—and conduct that is not acceptable (Behavior may be branded unethical even though it is not unlawful.)

•  Aspiration to members and, through enforcement measures, protects integrity of the organization

•  Assist members in identifying ethical issues and provide framework for resolution

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Ethical Issues for Practitioners


Issues for the Corporate Tax Professional

The handling of tax returns

Withholding information

Reporting false information

Qualifications

•  Do you have to be an appraiser to present valuation testimony?

Those “things of value”

•  Gifts

•  Lavish entertainment

Hiring practices

Unwarranted appeals

Honor thy contract

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Issues for Attorneys

False or misleading advertising

Fee issues:

•  Are there really more than 24 hours in a day for billing purposes?

•  Fee Splitting

•  Contingent Fees

•  Multiple Year Appeals

•  Fees Must Be Reasonable

Settlement offers must be reported

Unauthorized use of refunds

Unwarranted appeals

Revealing confidential information

Conflicts of interest

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Issues for State Tax Administrators

•  The handling of tax returns

•  Withholding information

•  Qualifications

•  Those “things of value”

•  Gifts

•  Lavish entertainment

•  Hiring practices

•  Unwarranted protests or appeals

•  Reporting false information

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Applying Ethics: Practical Scenarios


Applying Ethics: Practical Scenarios

•  Unless otherwise stated, the following scenarios will be analyzed under the AICPA Code of Ethics, the ABA Model Rules of Professional Conduct, the IPT Canons of Ethics, the State Codes of Ethics for New Mexico, Colorado, and New York State.

•  Any conclusions expressed by the presenter are theirs alone.

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Ethical Questions—Yes/No

1.  George, a New Mexico attorney, frequently blogs SALT issues in the Income Tax Café group at LinkedIn. May he answer a question posted by Company A asking for advice with respect to the handling of intercompany transactions for sales factor purposes under the New York Corporate Income Tax Code?

2.  Would you advise a client to sign a settlement agreement that contains a $50,000 computational error in the client's favor?

3.  Gary is a regular user of Face book. May he ask Allan, represented by counsel in litigation that Gary is handling against Allan, to friend him on Face book?

4.  You are representing a client which is contesting a Colorado use tax assessment against its fractional ownership interest in aircraft. Would you advise your client to accede to the department hearing officer's suggestion that he might better understand the issues if he were to accompany the taxpayer on a previously-scheduled weekend flight to Breckenridge?

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Ethical Questions—Yes/No

5.  You have discovered a substantial error on a tax return recently filed with the State of California. Would you advise the client to file an amended return?

6.  What if the client refuses to file an amended return? Are you obligated in any way?

7.  You represented the Governor in a personal matter before she took office. May you call her to ask that she instruct the head of the department of revenue, who serves at the Governor's pleasure, to withdraw an assessment you consider improper?

11. Would you advise your client to engage in transactions that have some nominal business purpose but the principal objective of which is to reduce New York taxes? Assume that the transactions are substantive in economic terms.

12. May you store and access client files remotely on a third party server?

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Scenario 1

•  Settlement Negotiations

The taxpayer’s representative has been negotiating a settlement with State A’s Department of Revenue over a sales tax assessment. The taxpayer has authorized his representative to settle the case for up to 50% of the proposed assessment in order to avoid litigation. However, in negotiations with the Department of Revenue, the taxpayer’s representative tells the Department of Revenue that that the taxpayer is willing to pay no more than 25% of the disputed assessment.

Is there any ethical violation by the taxpayer’s representative?

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Possible Responses

The statement is:

A.  Prohibited by the ABA, AICPA and IPT rules

B.  Prohibited unless the matter actually settles for 25%

C.  Permitted as part of negotiations

D.  Permitted by ABA and IPT rules (for lawyer members only), but prohibited by AICPA rules

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Applicable Ethics Rules

Comment on ABA Model Rule 4.1. This rule prohibits false statements of material fact. Whether a particular statement should be regarded as one of fact can depend on the circumstances. Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value place on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category. ABA Model Rule 4.1 “A lawyer is required to be truthful when dealing with other on a client’s behalf, but generally has no affirmative duty to inform an opposing party of relevant facts.” AICPA Rule 102 prohibits knowingly misrepresenting facts.

IPT/ Canon 12 makes it unethical to “knowingly furnish ... inaccurate, deceitful or misleading information or to knowingly withhold information which lawfully should be revealed.” There is no suggestion that any law requires the disclosure of the taxpayer’s bottom line. The statement is made as a part of negotiations and should be taken as a proposal for the settlement of the matter rather than as an informational statement of fact

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Scenario 2

•  You are the Tax Commissioner for the State of Shock. Your family owns an accounting firm where your Father and Son both work. During the course of your term as Tax Commissioner a client of your Son’s (and contributor to your last campaign) requests a special payout plan on an assessment that you affirmed. The client sends your Son season football tickets to the Colorado Buffalos. You grant the request. Does this violate any ethical codes?

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Possible Responses

A. No, because payment plans are authorized and routinely granted by the Department of Revenue and approved by the Tax Commissioner.

B. Yes, the AICPA Statement of Standards for Tax Services, the ABA Model Rules, the Colorado Independent Ethics Commission, and the New Mexico Statutes all prohibit such an action.

C. No, because the Colorado Buffalo football tickets were given to the Tax Commissioner’s Son, not the Commissioner.

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Colorado Code

Although Article XXIX does not use the phrase “conflict of interest“, the purposes and findings section, Section 1(1) states that the public should have respect for and confidence in public employees. To that end, public employees should: “…avoid conduct that is in violation of their public trust or that creates a justifiable impression among members of the public that such trust is being violated.” Article XXIX, section 1(1) (c).

The constitution also directs public employees at Article XXIX, Section 1(1) (d) that: “Any effort to realize personal financial gain through public office other than compensation provided by law is a violation of that trust…” In other words, public employees and officials should conduct themselves for the benefit of the state or local government in which they work, and should avoid making decisions which benefit themselves or members of their family either personally or financially.

Colorado Revised Statutes §24-18-101 et seq. provides public employees, officials and members of the General Assembly with some guidance regarding their conduct.

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The appearance of impropriety is sometimes referred to as “the smell test.” For example, if someone who is seeking employment with the state invites a prospective employer to a sporting event, and the ticket is less than $53, it would not violate the letter of Article XXIX for the covered individual to accept, but it would look like the ticket was a way to influence the state employee. That situation creates an “appearance of impropriety.”

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Scenario 3

You are the Director of the Department of Revenue for State of Distress. Your husband is the newly elected state president of the AFL-CIO. There was a bitter and fierce election.

As Director, you instruct auditors within the Department to conduct an audit of the business operations “all video and book stores” in the State—but only one taxpayer is audited (the business owed by the political rival of your husband.)

Realizing that you have not documented your instructions to the audit staff, you prepare a back dated memo to the file detailing your former verbal instructions.

Does this cause any ethical concerns or violations?

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Possible Responses

A. No, because selection of Taxpayer’s to audit is within the purview and authority of the Director of Revenue.

B. Yes, the AICPA Statement of Standards for Tax Services, and the Colorado Independent Ethics Commission rules all prohibit such an action.

C. No, because backdating a memo to confirm an earlier action does not violate any ethical codes.

D. Yes, but only the ABA Model Rules prohibit this action.

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Colorado Ethics Handbook, Issues of Concern, Section d. Appearance of Impropriety.

The appearance of impropriety is sometimes referred to as “the smell test.” For example, if someone who is seeking employment with the state invites a prospective employer to a sporting event, and the ticket is less than $53, it would not violate the letter of Article XXIX for the covered individual to accept, but it would look like the ticket was a way to influence the state employee. That situation creates an “appearance of impropriety.”

New York Code (NY) POL §74(3)(d) Misuse of Office. You may not use your official position to secure unwarranted privileges or exemptions for yourself or others.

(NY)POL §74(3)(f) Appearance of Impropriety. You may not do anything that would give the public a reasonable basis to think that anyone can improperly influence you in your official duties by reason of kinship, rank, position or influence.

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Scenario 4

 The Tax Director of Company A participates in a protest conference over a proposed Florida corporate income tax assessment. The issue is the treatment of gain from the sale of a subsidiary. The Tax Director took the position on its Florida return that the sale resulted in non-business income, and therefore, was allocable to New Mexico – Company A’s state of commercial domicile. On it’s New Mexico return, the Tax Director took the position that the gain was apportionable, attributing 7% of the gain to New Mexico. The Tax Director does not volunteer these non-Florida treatments during a protest conference.

 Is the Tax Director obligated to volunteer this information?

 Same facts, but conferee asks about treatment in other states. Does the law require it be revealed?

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Possible Responses

A. Tax Director has no ethical duty to present consistent tax treatment of a gain from state to state.

B. Tax Director violated ethical Canons by treating the gain from the subsidiary sale inconsistently between Florida and New Mexico.

C. Tax Director should not reveal information about tax treatment in New Mexico to the Florida conferee.

D. Tax Director must reveal information about treatment in New Mexico to the Florida conferee.

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ABA Rule 3.3 A lawyer should not knowingly: •  Make a false statement of fact or law to a tribunal or fail to correct a false statement

of material fact or law previously made to the tribunal by the lawyer;

•  Fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel

Comment to Model Rule 3.3

Legal argument based on a knowingly false representation of law constitutes dishonesty toward the tribunal. A lawyer is not required to make a disinterested exposition of the law, but must recognize the existence of pertinent legal authorities. Furthermore, as stated in paragraph (a)(2), an advocate has a duty to disclose directly adverse authority in the controlling jurisdiction that has not been disclosed by the opposing party

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Applicable Ethics Rules (continued)

IPT Canon 12. IT IS UNETHICAL in the performance of a tax assignment to knowingly furnish or knowingly rely upon inaccurate, deceitful or misleading information, or to knowingly withhold information which lawfully should be revealed.

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Applicable Ethics Rules (continued)

What is a “tribunal” for purposes of applying these rules?

ABA Rule 1.0(m) defines tribunal as “a court, an arbitrator in a binding arbitration proceeding or a legislative body, administrative agency or other body acting in an adjudicative capacity.”

Acting in an adjudicative capacity?

•  A legislative body, administrative agency or other body acts in an adjudicative capacity when a neutral official, after the presentation of evidence or legal argument by a party or parties, will render a binding legal judgment directly affecting a party’s interests in a particular matter.

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Scenario 5

You have been in-house tax counsel for X corporation for ten years, but then get an exciting offer to become a partner in a large law firm. The new firm wants to accept a case against your former employer, but you have no official knowledge about the particular matter other than gossip that was discussed at the company’s last Christmas party.

A.  Can your new firm accept this case against your former employer?

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Possible Responses

A. Yes. Your firm can accept the case so long as your former company gives informed consent to your adverse representation.

B. Yes. Your firm can accept the case, so long as the firm erects an ethical wall to prevent your involvement in that case.

C. No. Both you and your new firm are disqualified against accepting this case against your former employer.

D. No. You are forever precluded from ever taking a matter adverse to your former employer.

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FORMAL OPINION 99-415

Representation Adverse to Organizations

by Former In-House Lawyer

C…Rule 1.9(b) would prohibit both the former employee and his firm from accepting this adverse engagement, even though the former in-house lawyer was not officially

involved in the dispute, because the former in-house lawyer obtained protected information during his employment that was protected information.

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Presenters

Nicole Crighton KPMG LLP 212-954-8696 [email protected] Glenn C. McCoy, Jr. KPMG LLP 212-954-2668 [email protected]

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