Earlier this week, the Wall Street Journal published an editorial decrying the House of Representatives massive, 2,000-page budget bill, claiming that it will raise taxes on businesses while subsidizing lawsuits against them.
“By reducing trial lawyers’ legal costs, [the bill] would effectively subsidize contingency-fee cases. Lawyers will be more likely to file dubious lawsuits and drag out cases if they can immediately deduct their expenses,” the editorial reads in part, calling this component of the bill “a direct income transfer to plaintiffs’ lawyers….”
According to the editorial, under current practice, the IRS generally bars lawyers working on contingency-fee cases from deducting expenses such as depositions, expert testimony, and discovery until a case resolves. In most contingency-fee arrangements, attorneys front the costs of a lawsuit in return for some share—usually 30% to 40%—of the client’s eventual settlement or award. Under the House budget bill, trial lawyers would be allowed to deduct contingency-fee expenses – which would cost $2.5 billion over a decade, according to the Joint Committee on Taxation.
As the editorial points out, the IRS has long treated contingency-fee expenses like non-deductible loans because a winning case results in those expenses being repaid. In the event of losing a case, the IRS has allowed attorneys to write off those expenses. But under the proposed bill, trial attorneys would be allowed to deduct contingency-fee expenses “disregarding the possibility that such amount will be repaid.” The bill also says that “income attributable to any related recovery shall not be reduced by such amount.”
American businesses have spent almost two years facing a pandemic and worker and supply shortages, and now they face the possibility of government-subsidized lawsuits. Congress must not pass this “tax break for trial lawyers” and instead provide businesses across our nation a chance to recover.