William Hubbard.
William Hubbard. (Photo: John Disney/Daily Report)

The American Bar Association warned Congress that law firms and lawyers would face substantial hardship under the leading tax reform proposals on Capitol Hill—and could be forced to reduce their number of contingency and pro bono cases.

In a statement for a key House subcommittee Thursday, ABA President-Elect William Hubbard wrote that provisions in the tax reform proposals would fundamentally change the way law firms and partners pay taxes.

The provisions would add complexity to the tax bills of law firms, and lawyers would be forced to pay taxes on “phantom income they have not yet received and might never receive,” Hubbard wrote to the House Committee on Small Business’ economic growth, tax and capital access subcommittee.

Hubbard said those provisions would cause financial pressure at law firms in particular. Many firms that charge on an hourly basis would be forced to collect their legal fees immediately after attorney services are provided, lawyers would have to represent fewer clients on a contingency-fee basis and reduce the amount of pro bono legal services.

“This particular issue has become one of the most important issues to our members—and many state and local bars throughout the country—because of the serious negative effects that the proposed legislation would have on practicing lawyers, their law firms and their clients,” Hubbard wrote.

The subcommittee held a hearing Thursday on Capitol Hill entitled, “Cash Accounting: A Simpler Method for Small Firms?” Hubbard did not testify at the hearing, which focused on the tax burdens of farmers and other smaller businesses.

Under the tax proposals, firms with gross receipts of greater than $10 million could no longer use the cash method of determining taxable income. Instead, those firms would use the more complex accrual method. The change would increase government revenues by $23.6 billion during the next 10 years, according to an analysis by the Joint Committee on Taxation.

Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, included the provision in February in his latest draft of The Tax Reform Act of 2014. A similar provision is also a part of the Senate draft legislation. Law firms’ earnings represent a big target for the revenue needed to help make an overall tax reform bill possible.

Hubbard told the subcommittee that the proposal “would cause the legal profession to suffer even greater financial hardships than other professions because many lawyers and law firms are not paid by their clients until long after the work is performed.

“Many types of lawyers—such as business lawyers working on complex transactions and litigators involved in lengthy trials or appeals—often are not paid until the end of the case or project, which can be years after the work is performed,” Hubbard said.

“This sets lawyers and law firms apart from many other types of professionals—such as doctors, dentists and accountants—who typically work on a pay-as-you-go basis,” Hubbard wrote.

Contact Todd Ruger at truger@alm.com. On Twitter: @ToddRuger.