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Using tax policy to encourage class-action lawsuits



Sen. Arlen Specter (R-PA) has introduced S. 437, amending the Internal Revenue Code to allow attorneys a tax deduction in the current taxable year for reimbursable expenses and court costs which they pay or incur in connection with contingency fee cases.

This another run at legislation that Ways& Means Chairman Charlie Rangel tried to include in the energy and tax extenders bill last year (Section 311 in H.R. 6049), and it's a straight-forward giveaway to trial lawyers. In an editorial last May, The Wall Street Journal called the provision, "The Bill Lerach Tax Cut." Excerpt:

The provision would allow plaintiffs lawyers to deduct the up-front expenses of pursuing contingency-fee lawsuits, even in cases where the lawyer is expecting to be reimbursed for these expenses. The IRS currently considers these costs a loan from the lawyer to his client, and like other taxpayers, the lawyer can only deduct the loan if it isn't paid back.

Mr. Rangel's spokesman says, "This is purely a matter of fairness and tax equity. The individuals who would benefit from this provision are already eligible to deduct expenses related to contingency-fee lawsuits, the only question is when." Not exactly. Attorneys who snare a percentage of the recovery plus expenses today receive no deduction. Allowing these big deductions now would mean that future reimbursements are taxed, but with some monster class-actions, the lawyers could avoid the tax bill for a decade or more.

Naturally, this would be an incentive to file more class-action suits, because the lawyers could write off their up-front expenditures to pursue them.

Kathleen Flynn Peterson of the American Association for Justice wrote a letter in response and Sherman "Tiger" Joyce of the American Tort Reform Association also commented.

Specter's introductory statement and the bill text are on page S2325 of the Congressional Record. His cosponsors are: Mike Crapo (R-ID), Lindsey Graham (R-SC), Mary Landrieu (D-LA), Patrick Leahy (D-VT) and Mel Martinez (R-FL).

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.