Iowa senator to Treasury: Explain trial lawyer tax break

John O'Brien Jul. 23, 2010, 8:00am


WASHINGTON (Legal Newsline) - The ranking Republican on the U.S. Senate Committee on Finance wants the Treasury Department to explain any plans it has to give trial lawyers a tax break on contingency fee lawsuits.

Sen. Chuck Grassley, R-Iowa, was joined in a letter sent late Thursday to the Treasury by Rep. Dave Camp, R-Mich., the ranking member of the House Ways and Means Committee. They want to know what authority the Treasury has to order the tax break, which was shot down last year by Congress.

Sources at an American Association of Justice convention last week in Vancouver, Canada, told Legal Newsline that John Bowman, the Director of Federal Relations for the AAJ, said in response to a question from a state delegate regarding recruiting new members that an administrative order from the Treasury Department could come soon. The AAJ is the nation's trial lawyer group.

At issue is a 1995 decision by the U.S. Court of Appeals for the Ninth Circuit. Grassley and Camp wrote that any change in tax policy regarding contingency suits would be "unwarranted."

"We urge you not to make such changes in the government's enforcement of the tax laws absent a clear direction from Congress or to comply with court decisions," Grassley and Camp wrote.

"As those circumstances are not met with respect to the deductibility of litigation costs in contingency fee cases, we believe the appropriate way to clarify this issue is to affirm that the 1997 Field Service Advice remains valid."

That FSA came in response to a decision by the Ninth Circuit that held attorneys who represent clients in gross fee contingency cases are not extending loans to clients and therefore can treat litigation costs as deductible business expenses.

The FSA instructed Internal Revenue Service staff to continue to categorize contingency fee expenses as loans to clients, except in the Ninth Circuit.

"The position the IRS instructed its employees to take in the 1997 FSA has remained the service's position for over a decade," Grassley and Camp wrote. "To our knowledge, the IRS has not been reversed in any other circuit, suggesting that this long-held stance remains a valid view of the law outside the Ninth Circuit."

The highest ranking member of the Finance Committee, Sen. Max Baucus, D-Mont., was joined by Sen. Dick Durbin, D-Ill., in an April letter to the Treasury's assistant secretary for tax policy, reported.

They asked Michael Mundaca to "clarify the position of the Treasury Department and the Internal Revenue Service with regard to the (Ninth Circuit's) decision." Mundaca said his office "is considering issuing guidance to clarify this issue."

Grassley and Camp add that no other circuit or Congress has validated the decision.

"Apparently dissatisfied by the failure of other circuits to address this issue (and to side with the Ninth Circuit) and the failure of the Congress to legislatively reach that result, the senators have asked Mr. Mundaca to 'clarify' the government's position, though the text of their letter leaves no doubt that what they really want is for the IRS to issue new guidance instructing its staff to follow the (Ninth Circuit's) decision in all jurisdictions," Grassley and Camp wrote.

A message left with the AAJ was not returned. The Treasury Department refused to comment.

Sources also said Bowman cautioned AAJ members not to go public with the news the order would soon be issued, for fear of raising public ire to the proposal.

The tax break could be similar to proposed legislation that didn't make it through Congress last year. That proposal, sponsored by U.S. Sen. Arlen Specter, D-Pa., would have allowed attorneys to deduct fees and expenses up-front for filing contingency fee lawsuits.

Specter also did not return a message seeking comment.

"If so, it's outrageous, using the taxpayers to subsidize speculative lawsuits to the tune of (an estimated) $1.6 billion," Carter Wood wrote on the National Association of Manufacturing's blog,

Grassley and Camp requested that the following information be provided if new regulations are being drafted:

-Documentation of conversations regarding the Treasury's authority to issue such an order;

-Copies of all drafts of such regulations and "indicate when these are expected to be effective and whether these were expected to be released for public comment before becoming effective";

-An explanation of when and why the order was considered urgent since the issue is not in a March 16 Priority Guidance Plan released by the Treasury; and

-Copies of communications between the Treasury and outside parties regarding the issuance of such regulations.

Grassley urged fellow Republican senators to thwart a 2008 bill that contained the tax break. Similar legislation failed in 2009, too.

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