Message to Treasury: Don’t Give Trial Lawyers that Tax Break

The ranking Republicans on the Senate and House’s tax-writing committees have written U.S. Treasury Secretary Geithner, urging him not to allow Treasury to circumvent Congress by letting trial lawyers deduct loans to clients in contingency litigation as business expenses.

Sen. Charles Grassley (R-IA) of the Senate Finance Committee and Rep. Dave Camp of the House Ways & Means Committee sent Geithner the letter late Thursday, the Chamber-backed Legal Newsline reported. The letter is available online here.

According to their joint news release, “Camp, Grassley Question Whether Executive Branch is Again Bypassing Congress to Impose Tax Policy“:

Grassley and Camp said they are concerned that Treasury might be establishing a pattern of unilaterally making tax changes in contravention of congressional intent. In November 2008, Treasury and the IRS came under fire from Grassley and others for giving a tax break that allowed banks to acquire one another. The Treasury ruling helped to accommodate the sale of the Wachovia Corporation to Wells Fargo. Grassley questioned whether Treasury had the authority to bestow such a tax break independently of congressional action.

Regarding the legal expenses issue, Camp and Grassley noted:

  • No other Circuit Court has affirmed the Ninth Circuit decision;
  • On other matters, the IRS has maintained its policies despite unfavorable decisions from multiple Circuit Courts; and
  • Despite the introduction of provisions in both the House and Senate to affirm the Ninth Circuit Court decision, Congress has failed to enact such a law.

The two also demanded relevant documents from Treasury, including any that would explain why action was so urgent considering the issue wasn’t mentioned in the latest update of Treasury’s 2009-2010 Priority Guidance Plan.

The American Association for Justice, the trial lawyer lobby, has lobbied two successive Congresses for legislation to make the expenses deductible. Making the expenses deductible would be worth $1.57 billion over 10 years, the Joint Committee on Taxation estimated in May 2008. (Page 6, “Uniform treatment of attorney-advanced expenses and court costs in contingency fee cases.”)

It’s tough to sell a trial lawyer bailout in a time of soaring federal debt, and the sponsors of this year’s bills, Rep. Artur Davis of Alabama and Sen. Arlen Specter of Pennsylvania, lost clout after they were defeated in Democratic primaries. So the trial lawyers’ lobbying strategy became more recondite. The AAJ had been lobbying Treasury and the IRS along with Congress, according to page 12 of its first quarter 2010 lobbying disclosure form, but the association dropped its executive branch contacts in the second quarter. (Page 15 of the latest disclosure form.)

Instead, the AAJ hired the specialists at the Washington Tax Group to lobby the issue to the tune of $60,000 so far in 2010. (Lobbying disclosure forms show $20,000 in the first quarter and $40,000 in the second quarter report.) Patton Boggs also started lobbying Treasury for the AAJ in the second quarter for the deduction (but not in the first quarter). Well, there’s nothing wrong with turning to the experts.

What’s wrong is the policy itself that the AAJ is trying to achieve via Treasury. As Victor Schwartz and Chris Appell of Shook, Hardy & Bacon wrote for the Washington Legal Foundation in May 2009:

Today the costs of litigation act as a curb against marginal and frivolous litigation. This is what makes the plaintiffs’ lawyers’ tax proposal of such great practical importance. While one cannot calculate it mathematically, having the federal government bear 40% of the initial costs allows plaintiff’s attorneys to take more cases with higher risks. The result to industries targeted by plaintiffs’ lawyers will be staggering.

The bright light of publicity killed the tax break when the AAJ pushed it in 2008, so they first planned to “attach it” to something to sneak it through Congress, and when that appeared to fail, quietly approached Treasury.

Thankfully, the word got out. It’s the Republicans Grassley and Camp who objected, but members of Congress of both parties carefully guard their tax-writing authority from encroachment by the Executive Branch. Congress, after all, is the policymaking branch of government.

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