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No tax break? AAJ's priorities with the waning Congress

The American Association for Justice, the trial lawyers' lobby, has posted its public priorities for Congress' short September session at his homepage, www.justice.org. (Pdf'ed for posterity here.)

Congress Is Back: We're Running Out of Time
With only four weeks to go until the end of the session there is a short window to promote issues that strengthen the civil justice and jury system. Get involved!

Help provide strong remedies to victims of the BP oil disaster under the Death on the High Seas Act.

Hold foreign manufacturers accountable for the safety of their products in the U.S. legal system.

The November election is close at hand and the forces of Tort Reform are gaining momentum. They are powerful and well funded. AAJ PAC supports candidates on both sides of the aisle and ranks as one of the top contributors to House and Senate candidates every election cycle.

We're puzzled by the capitalization of "Tort Reform," and it's crass to boast of your fundraising prowess on a non-PAC website, but so be it.

Missing from the public list of priorities is the $1.6 billion tax break for contingency fee litigation, legislation (S. 437 and H.R. 2519) that stalled in Congress.

If the current Congress is so tough, imagine trying to push this special-interest tax break through once the balance of political power shifts with the November elections. These political realities explain the AAJ's attempt to get a tax guidance or interpretation from the U.S. Treasury, a quiet appeal that fortunately made it into the public eye.

Today, 76 business trade associations, medical groups, legal reform groups and others sent a letter to Treasury Secretary Geithner explaining their opposition to the tax break. (My employers at the National Association of Manufacturers were among the signers.) The Chamber's Institute for Legal Reform has the news release and letter. This letter argues primarily on the basis of tax law and the economic impact of the requested treatment: "[Such] change in policy would damage the economic recovery, not just as a result of losing billions in tax dollars, but also by fostering more questionable litigation."

A widely reported letter from the American Medical Association and other medical groups addressed those issues and made an additional important argument based on legal ethics. Most media reports omitted those points, and really, who but a lawyer is equipped to write about champerty? (Not us!) Still, a lawyer friend drew our attention to the passages as an important rebuttal to the AAJ's arguments. Excerpt:

We are also concerned that a change in tax policy by the Treasury Department would conflict with long-standing state ethics rules against trial attorneys providing financial assistance to clients without the expectation of being paid back upon the successful conclusion of the case. These rules are meant to prevent a conflict of interest whereby a trial attorney's financial stake in a case is put ahead of the client's desire for justice. Rule 1.8(e) of the American Bar Association's Model Rules of Professional Conduct provides that "a lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that...a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter...." (emphasis added) In other words, the ABA Model Rules consider expenses advanced by trial attorneys to be loans, which the IRS does not consider a deductible expense unless the loan is not paid back. Given that most states have adopted the ABA Model Rules, including some states in the Ninth Circuit, we believe that the Treasury Department is obligated to, at a minimum, consult with the ABA and every state that has adopted the ABA Model Rules to determine whether a change in tax policy, effectively allowing the expensing of costs associated with a client's claim, would undermine the intent and spirit of the Model Rules or otherwise subvert States' efforts to protect citizens against unethical practices by trial attorneys.

Amednews.com has more on the AMA's arguments, "Organized medicine to Geithner: Don't give lawyers tax break for litigation expenses."

Earlier at Point of Law, "Tax Breaks for Trial Lawyers: Making the Government a Partner in Litigation," by Marc Williams of Nelson Mullins Riley & Scarborough, LLP, and the immediate past president of DRI.

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Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.