Trial Lawyer Bailout: Yes, There Would Political Fallout

Daniel Fisher of reacts to today’s news that the litigation lobby could win a $1.6 billion tax favor from the U.S. Treasury. From the On the Docket column, “Treasury May Give Trial Lawyers a Sweet Tax Break“:

It would be a victory for trial lawyers who have complained they must eat the costs of prosecuting contingency-fee cases as incurred and only get to write them off against any fee they obtain at the end. Writing off the costs each year would substantially boost their after-tax income and increase the attractiveness of contingency-fee cases as an investment, much as tax writeoffs on drilling expenses dramatically increase the odds of financial success in the oil and gas business. The change would be poorly timed from a political standpoint, though: At the same time as legislators are trying to take away the lucrative carried-interest tax break from hedge-fund operators, Treasury would be giving it to another group of well-heeled and politically powerful professionals. posts today:

UPDATE (1:10 p.m.): Excellent statement from the American Tort Reform Association, “ATRA Condemns Reported Treasury Effort to Bail Out Litigation Industry,” with comments from ATRA President Sherman “Tiger” Joyce. Excerpt:

“It’s truly baffling,” said Joyce. “The Obama administration insists that it’s determined to create jobs and help the private sector economy expand. But by forcing taxpayers to subsidize still more litigation, it would do the just the opposite.

“Congress has thus far chosen not to advance this trial lawyer tax break with legislation. So, why would the administration even consider creating such a break by fiat?

“We can either create more jobs or more lawsuits,” Joyce continued. “We can’t realistically create both, and surely officials at Treasury and throughout the administration understand this basic reality.”

UPDATE (1:25 p.m.): Ted Frank at Point of Law analyzes the legal issues, including champerty:

The issue is the tax-deductability of loans trial lawyers give their clients when bringing litigation. Under current tax law, the loans are treated as loans, and cannot be deducted unless the client does not pay the loan back at the end of the litigation. The tax break would treat the loans as a cost of doing business, and permit deduction immediately—which is one would think would be problematic if state bar associations enforced their own ethical rules, which prohibit lawyers advancing money to clients as expenses except as a bona fide loan. But don’t count on any investigations by professional responsibility committees to see whether transactions classified as ethical loans are being called business expenses when reported to the IRS.

That said, if professional responsibility committees won’t act, defendants should. Defendants can conduct discovery into whether plaintiffs have received loans from their lawyers, and, if so, conduct reasonable investigations into whether the law firm deducted the “loan” on its taxes the next year. If so, there is a good-faith basis to bring a lawsuit for champerty in many states. (A simple inquiry letter asking the attorney to state under penalty of perjury that they did not deduct the loan on their taxes should be sufficient for Rule 11 purposes to create a reasonable inference to bring a complaint on grounds of information and belief.) Alas, the organized defense bar is probably too cowardly to take that step, and too many corporate general counsels do not insist upon muscular defense representation.

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