Senate ditches House provision to close deductibility loophole for trial lawyers

By: Alison Frankel

Plaintiffs’ lawyers in California and other western states can thank Senator Lindsey Graham, a South Carolina Republican, for preserving – at least for now – their right to claim tax deductions for their upfront costs in contingency fee cases.

As I told you last Friday, the House of Representatives included in its tax reform bill a provision to close a tax deductability loophole for contingency fee lawyers who practice in the 9th U.S. Circuit Court of Appeals. The 9th Circuit ruled in a 1995 case, Boccardo v. Commissioner of the IRS (56 F.3d 1016), that plaintiffs’ lawyers are entitled to deduct their upfront costs as a business expense every year, without waiting for the resolution of the particular contingency fee case in which they incurred the costs.

The Internal Revenue System does not allow such deductions anywhere else in the country. The House tax bill proposed a legislative override of the 9th Circuit carve-out. At the urging of Virginia Republican Bob Goodlatte, the bill included a provision to prohibit contingency fee lawyers across the U.S. from deducting their upfront costs.

The tax bill approved in November by the Senate Finance Committee also included that prohibition. But the final Senate version of the law, passed in the early morning hours on Saturday, ditched the non-deductability provision. That means the House and Senate will have to decide in their conference on the final version of the tax law whether to include the bar on deductions for contingency fee lawyers. The issue, believe it or not, is a $500 million controversy, at least according to Congress’s Joint Committee on Taxation.

The American Tort Reform Association blames Lindsey Graham for knocking the House provision out of the Senate bill. On Monday, ATRA sent out a press release that linked to a Nov. 29 excerpt from the Congressional Record that showed Graham introduced an amendment to strike the non-deductibility clause from the Senate version of the law. The Senate did not vote on Graham’s amendment but the provision was removed from the law the Senate voted on.

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.”

ATRA, which has previously lobbied against proposed legislation and administrative rulemaking that would extend upfront expense deductibility 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.”