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Tax break for trial lawyers: AAJ fesses up, sort of

The American Association for Justice seems to have abandoned its approach of trying to sneak through a $1.6 billion tax break for litigation that lawyers finance by upfront loans to their clients. The sub rosa strategy was no longer tenable after LegalNewsLine, a U.S. Chamber-affiliated publication, reported comments from AAJ's lobbyist, Linda Lipsen, at the national convention in San Francisco: "You cannot have a stand alone bill to help lawyers ... so we have to tuck it into something."

Lipsen has now released a statement: "AAJ: Treat Trial Attorneys Like Other Small Businesses; Bipartisan Legislation Will Clarify IRS Tax Code." She attacks the messenger as advocacy journalism and then attacks the Chamber's Institute for Legal Reform "as a corporate front group dedicated to undermining the civil justice system." She also claims to have been taken out of context, but doesn't say how. It's the usual deflection, but then she makes an actual argument: The tax break is about "fairness."

The gist of AAJ's argument is the legislation -- introduced separately in S. 437 and H.R. 2519 -- is as stated in the headline: The tax break is no different than the tax treatment other businesses enjoy. Lipsen:

The tax legislation will treat the trial attorney profession like every other small business in this country, allowing them to deduct their expenses in the year incurred. Currently, trial attorneys pay all case costs from their own pocket when representing Americans that cannot afford exorbitant hourly fees. These attorneys must wait to deduct their expenses until the case concludes. This legislation will allow the IRS to treat this profession as every other small business.

The bill merely changes the timing of the deduction to when the expenses are paid - it would not in any way increase the amount of the deduction.

So that's now the public line, but it has been rebutted by Victor Schwartz and Chris Appel in a paper by the Washington Legal Foundation, "Federal Government Bailout for Trial Lawyers."

A principal difference between a plaintiffs' lawyers' fronting of costs and a business' deductible expenditures is that the former carries a formal contractual obligation for future payment (much like any other type of loan agreement). Deductible business expenses are a separate animal in that they represent sunk capital costs that are not based on the vagaries of litigation..

In 2008, the same tax break was attached to H.R. 6049, the Energy and Job Creation Act, AKA the "tax extenders" legislation. (PoL post.) The effort came up short because of the publicity the provision eventually attracted; the same politic dynamic was developing this year, so the AAJ must have figured there was nothing to lose by acknowledging its activities. Might as well try defending the legislation itself, no matter how self-serving that case obviously is.


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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.