By: John Freund
California trial lawyers might have Senator Lindsey Graham to thank for their right to claim tax deductions on upfront costs in contingency fee cases. Yes – Lindsey Graham – the Republican Senator from South Carolina. Apparently Graham – a former trial lawyer himself – ditched the House provision to do away with the deductibility loophole for contingency fee attorneys in the 9th Circuit, which covers California, and several other Western states.
As reported on by Reuters, The 9th Circuit Court of Appeals is the only legislative district in the country that allows contingency fee lawyers to deduct their upfront costs as a business expense every year, without waiting for the resolution of the particular case in which the costs are incurred. That ruling was made in a 1995 case, Boccardo v. Commissioner of the IRS (56 F.3d 1016).
The latest version of the House’s tax reform bill sought to do away with the 9th Circuit’s ruling and place them in line with the rest of the country. However Senator Graham removed that provision in the Senate’s version of the bill, which passed early Saturday morning.
As LFJ reported earlier this summer, there was some concern on the part of Republicans and pro-tort reform folks that Senator Graham may ‘defect,’ after Graham attended a pro-trial lawyers fundraiser in Houston held by superstar Texas attorney Mark Lanier. Apparently those concerns were not without merit, as Graham appears to have fired a salvo in favor of trial lawyers.
Graham spokesman Kevin Bishop said in an email that barring plaintiffs’ lawyers from deducting upfront litigation costs “disincentivizes equal access to justice for those of limited financial means.” The House provision, he said, “targets contingency fee arrangements, used mainly by individuals – who have worthy cases – that can’t pay for a lawyer up front.”
That doesn’t sit well with those on the right. The American Tort Reform Association (ATRA), which has previously lobbied against proposed legislation that would extend upfront expense deductability to all contingency fee lawyers, isn’t buying Graham’s rationale. “Good cases can always find good lawyers to argue them on contingency,” ATRA spokesman Darren McKinney said. “It’s the specious cases that, if subsidized and thus prolonged, result in unjust settlements that enrich Sen. Graham’s political patrons at everyone else’s expense.”
According to Congress’s Joint Committee on Taxation, the issue of deductibility for the 9th Circuit alone is a $500 million one. A drop in the bucket of both California state and U.S. federal tax deficits, to be sure, but nothing to scoff at in terms of its impact on the trial lawyer community.
Of course, nothing is set in stone yet. House and Senate leaders will come together over the coming days to negotiate a final bill which President Trump is expected to sign into law. ATRA is already lobbying legislators to undo Graham’s revocation. On Monday, the tort reform organization sent out a press release that linked to a Nov. 29 excerpt from the Congressional Record showing that Graham introduced an amendment to strike the non-deductability clause from the Senate version of the law.
So we’ll have to wait and see what the final bill looks like. But for now at least, it appears California trial lawyers have Senator Lindsey Graham to thank for lowering their tax bill. Whoever said ‘Politics makes strange bed-fellows’ knew exactly what they were talking about.