trial lawyer tax break Archives - Shopfloor

Circumnetting Asbestos Fraud, Henry Waxman and Champerty

By | Briefly Legal, Taxation | One Comment

Good commentary recently in several legal areas of interest to manufacturers…

Writing at Forbes.com, Rich Samp of the Washington Legal Foundation covers the CSX Transportation Inc. suit against a Pittsburgh law firm. As we reported yesterday, the Fourth Circuit just revived the case, CSX v. Gilkison. From “Asbestos Lawsuits as Racketeering Scheme?

Some defendants have successfully targeted absestos trial lawyers for their shady behavior (a WLF Web Seminar last April highlighted one example), and victims of asbestos litigation abuse had great hopes for a federal racketeering suit railroad firm CSX filed in 2007.  Those hopes flagged, however, when in March 2008, a federal trial judge dismissed CSX’s Racketeer Influenced and Corrupt Organizations (RICO) Act and state fraud claims as barred by the limitations periods of those two laws.

This week, the U.S. Court of Appeals for the Fourth Circuit, at the urging of CSX and a score of amici, including WLF (our brief here), vacated the district court’s opinion on the limitations issue and remanded the claims for further proceedings.

Walter Olson writing at Cato@Liberty welcomes the change in the leadership of the House Energy and Commerce Committee, “The Fall of the House of Waxman“:

Some lawmakers can talk a decent game about lean ‘n’ smart regulation, but no one ever accused Waxman of having a light touch. (The 900-page Waxman-Markey environmental bill, mercifully killed by the Senate, included provisions letting Washington rewrite local building codes.) He’s known for aggressive micromanagement even of agencies run by putative allies: his staff has repeatedly twisted the ears of Obamanaut appointees to complain that their approach to regulation is too moderate and gradual. More than any other lawmaker on the Hill, he’s stood in the way of any meaningful reform of the 2008 CPSIA law, which piles impractical burdens on small makers of children’s products, thrift stores, bicycles and others.

Chicago Tribune editorial, Dec. 23, “Lawsuit Loan Sharks“:

The offense of “champerty” has a long history in the law, and don’t let the Medieval-sounding name fool you: It’s alive and well in 21st-century Illinois.

Champerty involves financing someone else’s lawsuit in exchange for a cut of the payoff. The practice has expanded for more than a decade, thanks to weak laws, aggressive lobbying and erosion in ethical standards. Nowadays, litigation money-lenders woo potential plaintiffs with TV ads inviting anyone who has been in a car accident to give a call. They make upfront loans at enormous interest rates, getting paid back only if the case succeeds.

To protect the public against predatory practices, those loans should be covered by the same laws that govern any other type of consumer lending. Instead, litigation lenders have been pushing a bill in Springfield that would give them carte blanche to pocket a huge share of judgments won by individual plaintiffs with only a pretense of regulation. The Illinois Senate has approved a version of it, and a House committee has reviewed it with an eye toward a vote in January.

The bill is SB3322, and it’s being heard today in the Senate House Judiciary Committee. Travis Akin, executive director of Illinois Lawsuit Abuse Watch, has more on the bill here. If it becomes law in Illinois, look for other state legislatures to consider similar bills.

Sounds like the “trial lawyer tax break,” doesn’t it?

Still Trying for the Trial Lawyer Tax Break

By | Briefly Legal, General, Taxation | 2 Comments

The American Association for Justice is trying to keep this story out of the news, but according to the latest disclosure reports the AAJ is still heavily lobbying Congress and the Obama Administration for a $1.6 billion trial lawyer tax break that would encourage even more litigation.

Third Quarter 2010 lobbying disclosure reports at the House Clerk’s Office reveal that the Washington Tax Group LLC spent $40,000 in the three-month period lobbying on behalf of the AAJ for the legislation to allow a tax deduction for litigation expenses advanced by the attorneys in contingency fee cases. Not only did the tax lobbyists appeal to the House and Senate, which have before it two bills (H.R. 2519 and S. 437, respectively), but they also contacted the U.S. Treasury.

The trial lawyers turned to Treasury after its congressional lobbying the special-interest tax break drew unflattering attention. A tax interpretation or some other administrative action by Treasury might achieve the same policy goal with via less public (i.e., democratic) means, they figured.

Thankfully, news of the more surreptitious strategy also got out, and there’s even more fierce opposition from business groups (NAM-signed letter) and medical associations, including the American Medical Association.

The ranking Republicans on the House Ways and Means Committee and Senate Finance Committee have written Treasury Secretary Geithner demanding more information and documentation. Tax policy is indeed a matter best left to the policymakers, that is, Congress.

According to the AAJ’s own 3rd Quarter lobbying form, the association lobbied the Senate and House on the legislation but did not approach Treasury. Well, that’s why you hire the experts.

P.S. Trial lawyers occasionally try to claim that the new tax treatment would be fair, just like the way other businesses are handled. See, for example, this recent National Law Journal op-ed by Brian Kabateck and Karen Liao, attorneys in Los Angeles. But as the AMA and other medical groups wrote Geithner in a Sept. 1 letter:

[A] change in tax policy by the Treasury Department would conflict with long-standing state ethics rules against trial attorneys providing financial assistance to clients without the expectation of being paid back upon the successful conclusion of the case. These rules are meant to prevent a conflict of interest whereby a trial attorney’s financial stake in a case is put ahead of the client’s desire for justice.

Letter to Treasury: Don’t Give Trial Lawyers More Incentives to Sue

By | Briefly Legal, Taxation | 4 Comments

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. Read More

Policy or Politics, Tax Break for Trial Lawyers a Loser

By | Briefly Legal, Taxation | One Comment

Here and there the American Association for Justice has tried to defend its claim for a $1.6 billion federal tax break by arguing that trial lawyers want to be treated just like any other business. One AAJ spokesperson made the claim in a recent interview with The Hill, but apparently refused to be identified. Talk about the courage of your convictions.

As issue is the attempt to deduct loans extended in support of contingency fee litigation as business expenses. Bills to accomplish that goal have died in Congress, so the trial lawyers quietly appealed to the U.S. Treasury for a special-interest tax intepretation.

But what about the point? Is it really just about fairness?

A Washington Times editorial this week refuted the claim. From “Pushback on trial-lawyer tax breaks“:

“The Treasury is looking to clarify a provision in the tax code that prohibits trial lawyers from deducting expenses for contingency cases in the year they are incurred,” according to The Hill. “Instead, these expenses can only be deducted after the case has concluded. The [lawyers] seek to make it so trial lawyers can deduct these expense in the year they are paid. … Currently, expenses incurred by trial lawyers for contingency cases are considered to be loans that the client will eventually repay.”

Victor Schwartz, author of a prominent textbook on tort law and a leading opponent of jackpot-justice lawsuits, has estimated for about 25 years without contradiction that plaintiffs’ lawyers win at least some money by judgment or settlement from some 95 percent of their cases. In other words, these are loans for which repayment is quite likely. As the Heritage Foundation’s Jack Park explains, “When a carmaker or dealer, [or] a furniture company … makes a loan to the buyer by selling over time, those loans are part of a related business, not a deductible business expense. In fact, those loans generally do not become deductible unless and until there is a default. Why shouldn’t the trial lawyers wait until there is a default to deduct their loans like everyone else?”

The difference is important because if the lawyers get the tax subsidy, the Treasury will be floating the lawyers’ interest costs.

The Times noted the July 22 letter to Treasury from the ranking Republicans on the tax-writing committees, Sen. Grassley of Senate Finance and Rep. Dave Camp of House Ways and Mean, that made a clear case that the tax break was not justified and would circumvent the policymaking branch of government, Congress.

Twenty-four Senate Republicans added their opposition in a letter Thursday to Treasury Secretary Geithner on Thursday, recognizing — we assume — how politically repellant this kind of lawsuit-subsidizing, special interest tax break would be to most Americans. From the letter organized by Sen. John Thune (R-SD): Read More

More Details on the Tax Break for Trial Lawyers

By | Briefly Legal, Taxation | 3 Comments

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.”