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Obama administration's $1.6 billion earmark to trial lawyers

Trial lawyer lobbyist (and now AAJ (f.k.a. ATLA) president CEO) Linda Lipsen ruefully told her annual convention last year that a bill by Senator Specter to give trial lawyers a tax break could not pass as a stand-alone and that it would need to be "tuck[ed]" into another bill. That legislative effort failed: no one wanted to be giving away $1.6 billion in tax money to trial lawyers to bring job-destroying contingency-fee lawsuits in this economy. But Ms. Lipsen, reports Legal Newsline, has good news for the convention this year regardless: the Obama administration is going to do an end-around its own party's Congress by enacting the bill through new administrative tax regulations. See also Dan Fisher @ Forbes, Overlawyered, WLF, earlier on POL.

The issue is the tax-deductability of loans trial lawyers give their clients when bringing litigation. Under current tax law, the loans are treated as loans, and cannot be deducted unless the client does not pay the loan back at the end of the litigation. The tax break would treat the loans as a cost of doing business, and permit deduction immediately—which is, one would think, problematic if state bar associations enforced their own ethical rules, which prohibit lawyers advancing money to clients as expenses except as a bona fide loan. But don't count on any investigations by professional responsibility committees to see whether transactions classified as ethical loans are being called business expenses when reported to the IRS.

That said, if professional responsibility committees won't act, defendants should. Defendants can conduct discovery into whether plaintiffs have received loans from their lawyers, and, if so, conduct reasonable investigations into whether the law firm deducted the "loan" on its taxes the next year. If so, there is a good-faith basis to bring a lawsuit for champerty in many states. (A simple inquiry letter asking the attorney to state under penalty of perjury that they did not deduct the loan on their taxes should be sufficient for Rule 11 purposes to create a reasonable inference to bring a complaint on grounds of information and belief.) Alas, the organized defense bar is probably too cowardly to take that step, and too many corporate general counsels do not insist upon muscular defense representation.

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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.