Tax practice is an inside game, at least when it comes to letter rulings. As Tax Analysts' Amy S. Elliott explained in her recent article, smart practitioners know how to target their ruling requests at preferred attorneys within chief counsel. That kind of forum shopping isn't necessarily nefarious. But it isn't new, either.
Both officials and practitioners are quick to insist on the innocence of most pre-ruling contacts. "It's not that you're trying to get special treatment when you make a phone call over there; you just want to get fair treatment," one practitioner told Elliott. (For prior coverage, see Doc 2012-1753 or 2012 TNT 20-1 .)
No doubt that's true, at least most of the time. But it's also true that such contacts -- especially when pursued with a specific goal in mind, like trying to target a ruling request -- can look bad. In particular, they raise the dreaded specter of the revolving door.
Some large percentage of the people reading this story have passed through that revolving door. And why not? Government service is a fine way to get professional experience (for the attorney) and cheap labor (for the agency). But it sets up some unavoidable ethical pitfalls. And while those dangers can be successfully avoided, both by the practitioner and the agency, they don't go away. And they don't look good.
This is not a new problem. In 1988 The Washington Post created a minor stir when it reported on a letter from Cadwalader, Wickersham & Taft LLP to potential clients. "We have direct access to members of congressional tax writing committees and members of their staffs, as well as direct access to senior officials in the Treasury and at the Internal Revenue service," the firm wrote.
Access wasn't the only service Cadwalader was peddling: "Rather, our principal value is that whether we are dealing with members of Congress, key staff personnel or officials at the Treasury Department or the IRS, we are working with individuals who know us from prior experience (often when we were with the government), and with whom we share a bond of trust."1
Cadwalader lawyers insisted that there was nothing wrong with the letter. "I don't think it's unprofessional," said partner J. Roger Mentz, a former Treasury assistant secretary for tax policy. "I think it's appropriate."
In an editorial, The Washington Post acknowledged as much. Cadwalader's only real mistake was its "imprudent enthusiasm," the paper said. Still, such "high-powered merchandising" came at a cost. "It deepens the public cynicism toward taxation and strengthens the common impression that the income tax code is the product of continuous manipulation to the advantage of the kind of taxpayer who can pay Cadwalader's fees and to the disadvantage of everyone else," the editorial concluded.2
That common impression has a long pedigree, dating back at least to the early decades of the 20th century. The introduction of the income tax seems to have been a catalyst: By making the tax laws vastly more complex, the levy put a premium on officially gathered expertise.
Secrecy and Expertise
For a long time, the revolving door of tax expertise was driven by official secrecy. In 1926 a Senate investigating committee pointed out that the Bureau of Internal Revenue (BIR) as the IRS was then called, didn't publish most of its rulings. "Many of the principles, practices, methods, and formulas applied in the determination of tax have never been reduced to writing," the panel complained. "And only 15 1/2 percent of the formal written rulings applicable to income taxes have been published."3
In the absence of published rulings, tax law was reduced to a sort of oral tradition, developed and passed along by BIR attorneys. And when these lawyers left the agency, they took their specialized knowledge into private practice.
And what a practice it was! Then, as now, tax lawyers made a lot of money, and their salaries were inflated, according to outraged senators, by their store of secret knowledge. "To secure the benefit of unpublished precedents, taxpayers are forced to employ former employees of the income tax unit to advise and represent them in tax cases," the committee wrote. "Their exclusive possession of information as to the unpublished precedents and practices of the income tax unit has placed an artificial premium upon the value of the services of ex-employees which enables them to demand and receive immense fees for information which should be freely available to everybody."
The obvious injustice of the situation was bad enough, but it was compounded by the personnel difficulties it created within the BIR. "This artificial premium is the cause of the extraordinary turnover among the employees of the unit and of the difficulty experienced by the unit in retaining the services of competent employees at salaries within the range of the salaries paid by the Government for comparable service," the committee wrote.
The Senate complaints changed exactly nothing. The BIR continued to keep its rulings secret, and departing BIR employees continued to hawk their expertise to the highest bidder. A half-century later, the agency did begin to release some of its rulings (after Tax Analysts forced the issue with its landmark lawsuit over letter rulings). But even that big step into the sunshine didn't stop the spinning of the revolving door.
If disclosure isn't the answer, what is? Maybe higher pay would help. A recent report by the Congressional Budget Office concluded that federal service pays better than the private sector -- except for people with advanced degrees, like the lawyers working at the IRS.4
Predictably, most observers found it hard to work up much sympathy for the underpaid and overeducated among our public servants. As Tim Carney wrote for The Washington Examiner:
How many PhDs cash out to those they were supposed to be regulating? Do the added long-term earnings from a stint in government service make up for the short-term sacrifice? The CBO study doesn't address that, but the broad picture is this: Government is nice work if you can get it.5
No doubt true, at least for many federal employees. But is that really a good argument for continuing to underpay them? Doesn't low pay make "cashing out" more appealing and more likely? Presumably we should pay these folks more so they'll stick around a little longer and stop focusing on post-official employment (assuming, in ungenerous and probably unjustified fashion, that they aren't doing their level best while still on the federal payroll).
Of course we should. But that being said, I don't think higher pay is going to slow the revolving door very much. We should pay federally employed professionals a reasonable salary because that's the right thing to do. But many of them will still jump ship.
The gap between private and public salaries is simply too great to overcome with any sort of pay raise, even if a big one were politically feasible (which it is not). The IRS will never compete successfully with white-shoe law and accounting firms, at least not when cash is the only currency in question.
Ultimately, the revolving door is one of those unsavory elements of American government that we all need to get used to. And it shouldn't be too hard. After all, we manage to overlook the cash contributions that constituent-supplicants routinely make to lawmakers on Capitol Hill, including the folks who write our tax laws. If you need a windmill to satisfy your penchant for tilting, I'd go after that one first.
1 Anne Swardson, "Lawyers' Unsubtle Solicitation: Firm's Letter Boasts of Capitol Hill Tax Ties," The Washington Post, May 27, 1988, at A1.
2 "D.C. Law," The Washington Post, May 29, 1988, at 54.
3 Senate Select Committee on Investigation of the Bureau of Internal Revenue, 69th Congress, 1st Session, Report No. 27, "Investigation of the Bureau of Internal Revenue: Partial Report," at 7-8. All subsequent quotations are from this report.
4 CBO, "Comparing the Compensation of Federal and Private-Sector Employees" (Jan. 2012), available at http://1.usa.gov/wR80HU.
5 Timothy P. Carney, "One Way or Another, Federal Employment Pays Off," The Washington Examiner, Jan. 30, 2012, available at http://bit.ly/A7aOaQ.
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