The nation's trial lawyers are lobbying the U.S. Treasury Department to approve a potentially lucrative tax change, after they failed to move the proposal through Congress.
Trial lawyers are hoping for an administrative ruling by the Treasury Department that would give them at least a partial victory in their long quest for the tax change. And so far, a top Treasury Department official has said he's considering the proposal.
At issue are the up-front litigation expenses in contingency-fee cases. In most cases, federal tax law and regulations treat those costs as a loan to clients because lawyers expect to be repaid if and when a lawsuit succeeds. If a firm doesn't recoup expenses later, then it may deduct the costs, but plaintiffs' lawyers would prefer to take the deduction in the year they incur the costs.
U.S. Sen. Arlen Specter, D-Pa., and Rep. Artur Davis, D-Ala., filed legislation last year that would allow the tax deduction. A handful of Republicans also supported the legislation, but business lobbyists have been vehemently opposed. The legislation has never left committee.
Now, trial lawyers are turning to the Treasury Department. Their leverage is a 1995 ruling by the 9th U.S. Circuit Court of Appeals. The decision allows lawyers to deduct up-front costs -- but only in the San Francisco-based 9th Circuit and only in contingency-fee cases where there's a so-called "gross fee."
Under its authority to interpret tax laws, the Treasury Department could expand the 9th Circuit ruling to the rest of the country, advocates on both sides of the issue say.
"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.
The plaintiffs' bar has two Democratic senators on its side. In April, Sens. Max Baucus, D-Montana, and Dick Durbin, D-Ill., wrote to the Treasury Department asking officials there to revise current policy. Baucus is chairman of the tax-writing Senate Finance Committee, while Durbin, as majority whip, is the second-ranking Democrat in the Senate.
As the policy stands, the senators wrote, "similarly situated taxpayers are treated differently" based on where lawyers file their tax returns.
Michael Mundaca, assistant treasury secretary for tax policy, replied May 6 that the department is reviewing the matter. "The Office of Tax Policy is aware of the concerns raised in your letter and is considering issuing guidance to clarify this issue," Mundaca wrote. A decision could come at any time without public comment.
(In a column Wednesday, The American Lawyer's Susan Beck defended the proposed tax change.)
It's not clear how much lawyers would stand to gain if the Treasury Department expands the rule for "gross fees" to the rest of the nation. A congressional analysis in 2008 of allowing the tax deduction in all contingency-fee cases found that the change would be worth an average of $157 million a year over a decade. Trial lawyers call that estimate inflated.
In a case with a gross fee, the plaintiffs lawyer expects to collect a flat percentage of the eventual award, as opposed to a flat percentage plus expenses.
At the American Association for Justice annual convention this week in Vancouver, Canada, one of its representatives expressed optimism that a change was imminent, De Lorenzi said -- a comment that the U.S. Chamber of Commerce seized on.
"This amounts to a subsidy for more lawsuits at the expense of the American taxpayer. Now they're trying to circumvent Congress and go right to the Treasury Department to allow them to have this tax break," said Lisa Rickard, president of the Chamber's Institute for Legal Reform, in a statement.
De Lorenzi, the American Association for Justice's spokesman, said his group has been unapologetic in making its case. "It is no secret that we have advocated that our members receive the same, fair tax treatment that every other small business in the country currently enjoys," he said in a statement.
The association has hired two lobbying firms, the Palmetto Group and the Washington Tax Group, to work on the issue. Others registered to lobby on it include the Chamber, the American Insurance Association, and the American Institute of Certified Public Accountants.
Sandra Salstrom, a spokeswoman for the Treasury Department, declined to comment on the possibility of a tax change by administrative ruling. "There is no public process for administrative rulings and really nothing else to comment on," she wrote in an e-mail.
