Trial lawyers’ push to change fed tax rule stalls

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By Albert Turco

BOSTON — After pressing Congress for years to change a tax policy that limits the ability of lawyers in contingency-fee cases to deduct litigation costs as business expenses, trial attorneys appear to be giving up the fight.

“The political reality is that this is not the time,” said Boston litigator Anthony Tarricone, past president of the American Association for Justice.  “Congress can’t even pass a budget bill right now.”

The existing policy went into effect in 1995.

In the wake of the 9th Circuit’s decision in Boccardo v. Commissioner that a personal injury lawyer could deduct the litigation costs paid by his firm under a contingency fee arrangement as business expenses in the year they were incurred, the Internal Revenue Service implemented a rule prohibiting attorneys from deducting case costs unless the case has concluded.

The AAJ lobbied Congress for years and finally convinced legislators to file bills to change the policy in both 2007 and 2009.

But both bills died in committee.

Nothing has been filed this session, and the lead sponsors of the 2009 version, Sen. Arlen Specter, D- Pa., and Rep. Artur G. Davis,  D-Ala., are no longer in office.

AAJ Communications Director Ray De Lorenzi declined to respond to questions about whether the group decided to abandon its legislative efforts or was unable to find sponsors, stating, “We don’t talk about strategy.”

He said the AAJ remains committed to changing the tax rule, but refused to say how it would proceed.

READ THE TEXT OF THE 2009 BILL

Singled out 
Trial attorneys say the existing policy unreasonably bars lawyers from taking advantage of a standard business practice and benefit that virtually all other professionals routinely enjoy.

“We are the only profession in America singled out like this,” said Tarricone, a partner at Kreindler & Kreindler. “These are legitimate business costs.”

He said the current rule hurts small businesses at a time when legislators are looking for ways to protect jobs.

Boston defense attorney Barbara H. Buell, who represents hospitals and doctors sued for medical malpractice, also questions the rule.

“On our side, the costs are usually reimbursed close to concurrently by the insurance carrier or the self-insured party,” said Buell, a partner at Smith, Duggan, Buell & Rufo. “Plaintiffs’ attorneys may have to advance thousands to pay for experts, depositions and discovery.”

But according to Boston tax lawyer Robert G. Kester, the rationale behind the rule is straightforward: “In general, a taxpayer cannot deduct a loss until it is fully and finally determined.”

Prohibiting the deduction of litigation costs until the conclusion of a case is consistent with this existing tax principle, the Goodwin Procter attorney said.

Hits some practice areas hard 
Medford attorney Sean M. Beagan, who primarily represents plaintiffs in personal injury and employment matters, said he isn’t losing sleep over the cost deduction issue.

“If I see a quality case, I’m willing to invest in it,” Beagan said. But he acknowledged that he avoids certain practice areas for economic reasons.

“The costs required to bring medical malpractice suits are too high for small firms to take on,” Beagan said. “You need to spend at least $10,000 just to get started with records and experts.”

Attorney Amato A. DeLuca agreed.

His firm, DeLuca & Weizenbaum, represents plaintiffs in medical malpractice cases in Massachusetts and Rhode Island.

“I had one case where we spent two months and had $225,000 in expenses, and then the defendant’s lawyer made a precluded argument in his closing remarks, and the judge declared a mistrial,” Amato said. “I can’t recover those costs.”

The policy can cause even bigger problems for lawyers who handle large class actions, said Beagan, where “the mailings alone are costly.”

Under the current rule, plaintiffs’ class action firms need significant capital or credit, said Boston attorney Shannon Liss-Riordan.

“We have cases where we have carried hundreds of thousands of dollars of expenses for years,” said Liss-Riordan, of Lichten & Liss-Riordan.

Attorney Donald A. Migliori, a partner in Motley Price’s Providence office, said his firm has spent over $30 million on a single environmental class action.

There are some ways to manage the expense, Migliori said. Plaintiffs’ firms working together can pool resources to save money.

Other alternatives include taking out loans or attracting investment funds from a venture group, he said.