Attorney: Tax break would create more litigation, partnership with feds

John O'Brien Aug. 24, 2010, 12:41pm


HUNTINGTON, W.Va. (Legal Newsline) - A West Virginia defense attorney says a possible trial lawyer tax break that has attracted the attention of 25 U.S. senators would make the federal government partners with plaintiffs attorneys.

Marc Williams, an attorney with Nelson Mullins Riley & Scarborough, was critical of the tax break in a post on the legal blog "Point of Law." He especially takes issue with a 2009 statement released by the American Association for Justice, the nation's trial lawyer group, that says the tax break on contingency fee lawsuits is similar to those that any other business already has.

"So getting back to the AAJ and their 'trial lawyers are just like the barber shop down the street' analogy - it should be obvious by now that unlike Floyd the Barber, the expenses that the trial lawyer seeks to deduct are usually reimbursed out of settlement proceeds at the end of the case," Williams wrote.

"When Floyd deducts expenses for scissors, razors and the like, he is not going to get reimbursed for them down the road. So it is a bit disingenuous to compare the local trial lawyer to a typical small businessman."

Williams says the only time a trial lawyer gets to deduct the expenses associated with litigation is if the case is not successful and there is no recovery. The loan the expenses are classified as are treated like bad debts and can be deducted.

Allowing contingency lawyers to deduct expenses incurred during litigation will likely lead to reduced risks in such cases and more risky litigation being financed, Williams said.

"Thus, the tax change would relieve the lawyer of some of the risk of commitment of that capital, freeing the lawyer to invest in more litigation, as part of the risk is now being borne by the government," he said.

"This makes the government a partner with the lawyer in the litigation, a prospect that most taxpayers are likely to oppose."

Sources at an American Association of Justice convention in July in Vancouver, Canada, told Legal Newsline that John Bowman, the Director of Federal Relations for the AAJ, said an order from the Treasury could come soon. He said this in response to a question from a state delegate regarding recruiting new members.

The AAJ did not return an earlier message.

Twenty-five senators have written the U.S. Department of the Treasury, seeking information on the possible order. Similar legislation failed last year in Congress.

The tax break has an estimated worth of $1.6 billion for trial lawyers.

"From health care legislation to the recently-passed financial regulatory reform, Americans have witnessed this Administration and Congressional Democrat leadership cut deals with special interest groups," Sen. John Thune, R-S.D., wrote.

"Instead of providing tax relief for political allies, we ought to be providing across the board tax relief for the average, hardworking taxpayer."

The Treasury Department has refused to comment on the possible tax break.

At issue is a 1997 Field Service Advice that followed a decision by the U.S. Court of Appeals for the Ninth Circuit.

That decision 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 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."

Williams is a former president of DRI, the defense bar's national organization.

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Organizations in this Story

American Association for Justice
777 6th Street Northwest
Washington, DC 20001

Nelson Mullins Riley & Scarborough
949 3rd Avenue
Huntington, WV 25701

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