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Tuesday, October 22, 2019

Trial lawyer tax break attracts attention of two dozen senators

By John O'Brien | Aug 3, 2010


WASHINGTON (Legal Newsline) - One-quarter of the U.S. Senate has expressed concern that the U.S. Department of the Treasury may be planning to issue an order giving trial lawyers tax breaks on contingency fee lawsuits.

Following a letter from Sen. Chuck Grassley, R-Iowa, 24 more senators wrote the Treasury department Thursday to express similar worries about a tax break that failed the past two years in Congress. John Thune, R-S.D., authored the letter, sent to Treasury Secretary Timothy Geithner.

Thune is the chairman of the Republican Policy Committee.

"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," Thune said.

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

Sources at an American Association of Justice convention last month 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 is the nation's trial lawyer group and did not return an earlier message.

"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 U.S. Rep. Dave Camp, R-Mich., wrote to Geithner July 23.

The Manhattan Institute last year estimated the tax break to be worth $1.6 billion.

"We believe that this targeted tax break will do nothing to spur economic growth or job creation. Instead, it would only further provide incentives for contingency fee lawsuits which raise prices for consumers and decrease employment," Thune's letter says.

"We are also very concerned that this proposal may be moving through without any scrutiny. Bills which would have a similar effect have been introduced in both the U.S. House of Representatives and the U.S. Senate.

"However, neither the Ways and Means Committee nor the Finance Committee has held a hearing on these bills due to the significant opposition that they face. Additionally, this proposal was not mentioned in the Treasury's Department's annual 'Green Book.'"

The Treasury Department has refused to comment on the possible tax break. 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 has not returned a message seeking comment.

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 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 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.

From Legal Newsline: Reach John O'Brien by e-mail at

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