EDITORIAL: Pushback on trial-lawyer tax breaks

Republican lawmakers blow the whistle on Treasury’s fiat

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The trial-lawyer bosses who pull the strings of most congressional Democrats are continuing to press for a special tax break through a secret deal with the Treasury. This is despite the fact that they have never been able to persuade Congress itself to approve their shenanigans. Two Republican lawmakers are right on target in fighting back against this $1.6 billion tax boondoggle.

An anonymous spokesman for plaintiffs’ lawyers made the case for what he called “the same, fair tax treatment that every other small business in the country currently enjoys” in The Hill newspaper on Monday. The notion is laughable.

“The Treasury is looking to clarify a provision in the tax code that prohibits trial lawyers from deducting expenses for contingency cases in the year they are incurred,” according to The Hill. “Instead, these expenses can only be deducted after the case has concluded. The [lawyers] seek to make it so trial lawyers can deduct these expense in the year they are paid. … Currently, expenses incurred by trial lawyers for contingency cases are considered to be loans that the client will eventually repay.”

Victor Schwartz, author of a prominent textbook on tort law and a leading opponent of jackpot-justice lawsuits, has estimated for about 25 years without contradiction that plaintiffs’ lawyers win at least some money by judgment or settlement from some 95 percent of their cases. In other words, these are loans for which repayment is quite likely. As the Heritage Foundation’s Jack Park explains, “When a carmaker or dealer, [or] a furniture company … makes a loan to the buyer by selling over time, those loans are part of a related business, not a deductible business expense. In fact, those loans generally do not become deductible unless and until there is a default. Why shouldn’t the trial lawyers wait until there is a default to deduct their loans like everyone else?”

The difference is important because if the lawyers get the tax subsidy, the Treasury will be floating the lawyers’ interest costs. Trial-lawyer-friendly congressmen, led by Sen. Arlen Specter, Pennsylvania Democrat, have tried but failed to persuade their colleagues to provide the subsidy. Since 1997, the IRS for good reason has refused to treat the loans as a deductible business expense. Suddenly, however, the Obama-controlled Treasury has acknowledged that it is considering an administrative ruling that provides the subsidy without actual legislation.

Enter Sen. Charles E. Grassley and Rep. Dave Camp, Republicans of Iowa and Michigan, respectively. On July 22, they wrote to Treasury Secretary Timothy F. Geithner demanding legal memoranda, drafts of the possible new regulations and copies of all communications with “outside parties” about the issue. They evince clear doubts about the Treasury’s “authority” to change the rules without congressional action.

Questions and doubts about this special gift for trial lawyers are well-founded. Tax policy should be changed, if at all, by Congress, not by bureaucrats doing the bidding of the White House’s political allies.

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