Corporate Governance and Professional Responsibility in Tax Law

Abstract

In recent years, Congress, Treasury and the IRS began recognizing the important role of applicable corporate governance as well as the duties and responsibilities to which corporate organs are subject in monitoring the corporation's tax strategy. This article focuses on three aspects: (i) shareholders' liability; (ii) officers' duty of care; and (iii) advisers' rules of conduct.

The author concludes that except for limited circumstances, the corporate veil should be kept for tax purposes, unless a court would find that piercing the veil is necessary to prevent fraud.

With respect to officers' duty of care, decisions regarding tax strategy typically occur at the level of the corporate executive, although they can reasonably claim to have little or no tax expertise and are therefore not aware of the consequences of their corporation's tax strategy. Providing executives with adequate information about the consequences of their corporation's tax strategy would not only immune them from breaching their duty of care but also result in improved checks and balances with respect to the corporation's tax strategy. Thus, such executives should be provided with, and would benefit greatly from, information regarding the penalties, disclosure rules, and the other legislative provisions involved.

Finally, with respect to rules of conduct, the author believes that the vast majority of tax practitioners would satisfy high standards regardless of the proposed revision of Circular 230 due to the increasing tendency of clients to sue their advisers for failure to follow adequate standards in drafting tax opinions.

To conclude, the better approach would be to allow shareholders, officers and advisers to solve their conflicts with respect to the corporation's tax strategy in accordance with traditional corporate governance principles under civil law rather than imposing criminal or regulatory liability on these organs.

Keywords: Rules of conduct, circular 230, Duty of Care, piercing the corprate veil