On the verge of collecting an outsized share of $2 billion in fees from the $26 billion opioid settlement, attorney Paul T. Farrell did what a growing number of fellow trial lawyers have done: He moved to Puerto Rico.
Why Puerto Rico? The U.S. territory offers sun, sand and pleasant temperatures year-round. But it has much, much more, including a tax regime that allows newcomers who live there at least 183 days a year to shelter nearly all their income from state and federal taxes, even if that income is generated by providing services in the U.S.
Farrell moved in January, opening a new practice with his longtime partner Michael J. Fuller in San Juan. When asked if he had permanently moved to Puerto Rico, and if taxes were a factor, Farrell answered “yes and yes.”
“We’ve kind of transitioned to this new world,” said Farrell, a self-described West Virginia hillbilly who serves as co-lead counsel in federal multidistrict litigation against the opioid industry, along with Joe Rice of Motley Rice and Jayne Conroy of Simmons Hanly Conroy.
“I can sit behind a computer screen in West Virginia and be subject to state and federal income taxes,” said Farrell. “If you’re a lawyer in San Juan sitting behind a computer screen, you pay zero state and federal income taxes.”
Farrell is only the latest trial lawyer expat to set up shop in San Juan. Paul Napoli, also a lead plaintiff attorney in opioid litigation, moved there in 2018, according to Puerto Rico tax records. (He didn’t respond to a request for comment.) Marc D. Grossman arrived even earlier, moving his practice to the island in 2014 after racking up hundreds of millions of dollars in tort settlements and playing a prominent role in Vioxx litigation that ended with a $4.85 billion settlement in 2016.
Grossman said he moved with his wife and four children mostly for the lifestyle and was “deeply involved” in bringing a professional basketball team, the Guaynabo Mets, to San Juan. He said his law firm has since “trained and employed over 1,000 attorneys, paralegals and law clerks” and denied the island’s tax laws allow him to shelter U.S. income.
That is not how Farrell sees it, or how tax experts including Peter Palsen describe Puerto Rico’s Act 60, a law that incorporated earlier tax incentives designed to encourage U.S. citizens to relocate to the island. Palsen, an accountant associated with Frost Law, advises professionals on how to shelter U.S.-sourced income under Act 60, including how to take advantage of the law’s provisions without running afoul of the Internal Revenue Service.
The IRS normally subjects U.S. citizens to taxation on all foreign income, regardless of where it is earned. But U.S. territories like Puerto Rico are exempt from that rule and can establish their own tax regime. Under Act 60, people who move to Puerto Rico and establish firms that provide U.S. service income are subject to a low 4% tax on firm earnings and pay no taxes on capital gains or dividends from assets they accumulate after they establish official residency there.
A lawyer who moves to Puerto Rico, for example, can establish a firm on the island that performs services for its U.S. operations. The firm’s income from stateside activities would be taxed at 4% and the lawyer would avoid state and federal income taxes on his income from providing services to its U.S. affiliates. The only thing the lawyer needs to avoid IRS penalties is a transfer-pricing analysis verifying he is billing out his services at the equivalent of an arms-length negotiated price, Palsen said.
“The IRS is on the prowl in Puerto Rico,” Palsen said. But “there’s no rule that says just because it’s you and you’re related to the company, you can’t do this."
Farrell agreed. While his winnings from the opioid case might be subject to U.S. taxes – appropriate, perhaps, since the money is being paid to him by government plaintiffs out of their settlement proceeds – future income might flow to him nearly tax-free.
Farrell is currently suing Google for antitrust on behalf of some 300 newspapers.
“If I perform 60% of the work on my next project while sitting in Puerto Rico with Puerto Rican staff, working out of a Puerto Rico office,” he said, it will likely benefit Act 60 treatment. As with any highly paid professional, whether a jet-setting chief executive or professional basketball player, Farrell said, he will probably have to pay U.S. taxes on income derived from activities in the U.S., such as attending hearings or conducting depositions.
Even though pre-move earnings are subject to U.S. taxes, lawyers who negotiate a big settlement might buy assets with their winnings that are sheltered from dividend and capital gains taxes if they appreciate after they establish residency. An attorney who expects a large payout several years from now might move in advance of the settlement to take advantage of Act 60 later.
The IRS and Congress are watching Act 60 expats closely. An IRS report to Congress in 2020 found that Puerto Rico had granted benefits to some 4,300 individuals and businesses between 2012 and 2019, including a record 583 entities in 2019. About 80% of the entities had no prior IRS filing history, indicating they were set up specifically to take advantage of the Puerto Rico tax scheme.
Puerto Rico shared data with the IRS on 647 individuals who had paid $558 million in federal income taxes in the five years before relocating to the island. The IRS told Congress it will work to expand a tax information-sharing program with Puerto Rico, including receiving regular updates of taxpayers who shift their residency to the island.
The scrutiny doesn’t seem to have slowed the exodus of trial lawyers to Puerto Rico. In a recent article, the San Antonio Express-News said two of the city’s richest plaintiff attorneys, Mikal Watts and Thomas J. Henry, have moved to the island. Watts Guerra is launching a mass-torts practice in Guaynabo, the Express-News reported, and lawyers there are already working on litigation against Zantac manufacturer Sanofi.
“Watts Guerra LLC is performing export services for clients based in the Continental United States only,” Watts told the paper. “So everything I do is United States-based mass tort litigation.”