The National Association of Manufacturers has joined 75 business associations, legal reform groups and others in a letter to Treasury Secretary Timothy Geithner expressing strong opposition to any administrative move that would unilaterally grant a tax deduction for lawyers’ loans to the plaintiffs they’re representing in civil lawsuits.

This is the $1.6 billion tax break for trial lawyers that the American Association of Justice has failed to push through Congress. It almost fails the laugh test, and it certainly fails the political primary test. Chief sponsors of the legislation — Sen. Arlen Specter (D-PA) for S. 437 and Rep Artur Davis (D-AL) for H.R. 2519 — both lost their primaries, and no one has stepped forward to pick up the flag.

So AAJ went to its fall-back position, asking Treasury for a guidance or tax interpretation that would grant what Congress refuses to grant. Leading members of Congress have objected, saying that the Executive Branch should not supplant Congress is policymaking. Professional groups like the American Medical Association are alarmed (AMA letter), and business groups like the NAM protest the possibility of a huge tax break that would create an incentive for more litigation.

From the joint letter:

A change in IRS policy to permit the deduction envisioned by the trial bar is totally unwarranted. According to the Congressional Joint Committee on Taxation, permitting this deduction would result in a $1.572 billion loss of revenue for the federal government over a ten-year period.

Moreover, such change in policy would damage the economic recovery, not just as a result of losing billions in tax dollars, but also by fostering more questionable litigation. Contingency fee lawyers, enticed by the ability to immediately deduct their reimbursable expenses, would be more willing to take on new, spurious and highly speculative cases. Such a change in policy would further shift the litigation cost-benefit calculus to encourage pursuit of even more litigation. Ultimately, American taxpayers would bear the costs of this subsidized form of litigation.

It is inappropriate to change tax law and circumvent Congress as suggested by the plaintiffs’ trial bar in order to provide them with such an unprecedented tax break. Such action is particularly unsound public policy given our Nation’s current fiscal situation and economic challenges. Accordingly, we urge the Treasury Department to maintain its long-held position that litigation costs advanced by lawyers on behalf of their clients based on contingency fee agreements are treated in the year paid as loans to their client, not as ordinary and necessary business expenses.

One concern is that Treasury will wait until after Congress adjourns, perhaps even after a lame-duck session, and quietly grants the trial lawyers their big break in the quiet days of December. Such a move would still be a political and policy mistake and harm the economy, and December wouldn’t stay quiet for long.

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