For those of a certain age, undoubtedly the first time we saw the word "transparency" was on a sign attached to an overhead projector that said, "Do not use Magic Marker on the transparency." In preparing my remarks, I undertook to identify the first time the word was used in relation to tax. So I turned to the Internet's fount of all knowledge, Wikipedia. It reminded me that initially "transparency" related to the government, as in open government or government in the sunshine.
Consider what the world was like in 1980, when I started practicing tax law with the Tax Division's Appellate Section in the Department of Justice. My tenure began right after Tax Analysts brought a series of Freedom of Information Act suits attacking the IRS's "secret law." FOIA wasn't that old at the time; it was enacted in 1966. That was pretty late in the game when you consider that Sweden's version of FOIA became law 200 years earlier.
The 1970s saw many court decisions relating to the publication of private letter rulings, technical advice memoranda, and determination letters. In 1976, Congress responded by enacting section 6110 of the Internal Revenue Code, which created an affirmative obligation for the IRS to publish its written determinations. But that didn't stop the suits. In the early 1980s, General Counsel Memoranda, Technical Memoranda, and Actions on Decisions were the subjects of disclosure suits, and soon the Justice Department was required to provide copies of court opinions and their briefs--even though these were public documents, the courts were sympathetic to the argument that it would be easier for the public to get them from the Department rather than the courts.
In the 1990s, there were "secret law" attacks on Chief Counsel Advice, Field Service Advice, and Advance Pricing Agreements. More recently, Tax Analysts prevailed in a case seeking disclosure of advice under the Chief Counsel's "two-hour" rule, which resulted in the publication of advice contained in emails.
Well, litigators hate to lose cases, and during my 5 years at Justice some of my colleagues suggested that the IRS should just stop issuing private rulings. You could understand the "that will show them" attitude, perhaps, but it would certainly not be an example of good tax administration. Part of that bitterness no doubt stemmed from the rule that Department attorneys were not permitted to cite any of these private rulings because of the express statutory prohibition against using them as precedent. Even today the Internal Revenue Manual--another target of a FOIA action--cautions against reliance on private rulings as precedent.
But rely we do; even the Supreme Court cites to private rulings and has for some time. Just check out the 1981 case of Rowan Cos., when the Supreme Court for the first time cited a private letter ruling.
Now, my purpose today is not to discuss FOIA in any detail, but rather to put the issue of taxpayer disclosure in perspective. Transparency, if you think about it, has probably caused as much or more angst for the government as it has for taxpayers. (And lest you think otherwise, I am not referring to Wikileaks.)
At the same time Congress opened up numerous government records for disclosure under FOIA, it was shutting down access to taxpayers' tax returns. Before 1977, tax returns were "public records," but they were only open to inspection under Treasury regulations approved by the President or under presidential order. Again, if you're of a certain age, you know how well that went. In 1976, as part of its post-Watergate reforms, Congress strengthened section 6103 to provide that tax returns and tax return information are confidential and are not subject to disclosure, except in limited situations.
The 1970s were also the heyday when tax shelters went middle class, leading to the enactment of prophylactic measures in 1976. But as IRS Commissioner Jerome Kurtz observed in late 1977, "No sooner were the apparent leaks in the dike plugged than new ones appeared." At the time, there was no penalty for failure to disclose that a taxpayer had taken a position on its return contrary to IRS guidance. Commissioner Kurtz proposed raising disclosure standards for tax practitioners to, say, those required of lawyers in SEC offerings, which he thought would alert Treasury to aggressive reporting positions, encourage the use of competent counsel, and facilitate a non-adversarial relationship between the IRS and tax lawyers. He also proposed requiring taxpayers to report "questionable positions" on their returns--a suggestion he explained by stating it was inappropriate for taxpayers to "take positions gambling on the fact that their number won't be drawn in the audit" lottery.
Given the current disclosure landscape, it's a bit surprising that the first taxpayer disclosure statute was not enacted until 1982; before that, there were only negligence and fraud penalties. But in the Tax Equity and Fiscal Responsibility Act of 1982, Congress enacted a substantial understatement penalty. Now codified as section 6662, this penalty had an out for taxpayers: It would not be imposed to the extent the understatement was attributable to items for which the relevant facts were disclosed on...