More Details on the Tax Break for Trial Lawyers

Dianne Searcey of the Wall Street Journal’s Law Blog provides more detail on the possible $1.6 billion tax break for contingency fee litigation. Having failed to move legislation to accomplish this special-interest policy change in Congress, the American Association for Justice has been trying to gain the same benefit from Treasury.

Apparently at the heart of the matter is an April letter Sens. Max Baucus (D., Mont.) and Richard Durbin (D., Ill.) sent to Michael Mundaca, assistant secretary for tax policy seeking clarity on the 9th Circuit ruling in the 1995 case of Boccardo v. Commissioner.

In the Boccardo case, the IRS asserted that out-of-pocket expenses incurred by attorneys on behalf of clients while prosecuting contingency cases are not deductible because the law firm expects reimbursement upon getting a settlement or judgment. The Tax Court agreed.

The 9th Circuit took up the matter. The letter sums up the ruling like this:

The court “held that attorneys who represent clients in contingency fee cases may treat litigation costs that are paid by the attorneys, such as filing fees and witness expenses as deductible ordinary and necessary business expenses . . . when the attorney and client agree to a specific fee arrangement known as a gross fee contract.”

The IRS issued a memo saying that the ruling applied only to attorneys in the 9th Circuit. But the Tax Court has since recognized the validity of the decision in at least one other case, according to the letter.

Here’s an analysis dated June 14 of the underlying and complicated tax law issues from Robert W. Wood of the San Francisco law firm of Wood and Porter, “Lawyers Who Deduct Client Costs: Revisiting Boccardo“. Abstract:

In this article, Wood considers how contingent fee lawyers treat costs and when they can deduct them, explaining the relationship between this issue and the fee agreement. He notes that Sens. Baucus and Durbin have recently entered the fray, but that 15 years after the Ninth Circuit decided Boccardo, considerable confusion remains.

And again, Victor Schwartz and Chris Appel of Shook, Hardy & Bacon explained why such a deduction would amount to a taxpayer subsidy of speculative lawsuits in a paper last year for the Washington Legal Foundation, “Federal Government Bailout for Trial Lawyers.”

Earlier posts here.

UPDATE: Good, newsy report in National Law Journal, in which the American Association for Justice confirms its lobbying: “‘Obviously, we are exploring all avenues to clarify this confusing tax code,’ said Ray De Lorenzi, a spokesman for the American Association for Justice, which advocates for trial lawyers, in a statement. He declined to give details on any meetings or exchanges with Treasury Department officials.”

Join the discussion 3 Comments

Leave a Reply