Trial lawyers are lobbying Congress to change our tax law to allow them to deduct litigation costs as soon as they are incurred before a case is actually resolved. This might sound like a technical change in tax rules, but it would mean a multi-billion dollar tax break for the plaintiffs’ bar. Trial lawyers would effectively get to use taxpayer dollars to fund the costs of bringing lawsuits – costs the lawyer fully expects to recover at the end of the case.
The trial lawyers, through their lobbying organization, the American Association for Justice (AAJ), have pushed for this tax rule change for more than a decade. They have sought to amend the Internal Revenue Code and persuade the Treasury Department to change tax rules. The trial lawyers’ goal is to be able to deduct expenses such as fees paid to experts to support their lawsuits and use that tax savings (on Uncle Sam and taxpayers’ tab) to potentially fund more lawsuits. The ability to immediately write-off costs the lawyer expects to recoup later on also provides a natural incentive to bring more speculative lawsuits by having the government share the financial risks involved.
The trial lawyers’ latest effort includes trying to “tuck” this tax law change into the Biden Administration’s massive spending bills, such as the Build Back Better Act. By burying this tax break in thousands of pages of other proposals, they appear to hope it will fly under the radar.
Taxpayers should be made aware of this proposed tax change because it would have dramatic effects on society. In addition to having taxpayers help underwrite lawsuits they may strongly oppose and potentially generating more litigation, the change would set a troubling precedent for other expenditures made with the full expectation of repayment.
So far, the relatively modest media attention on this proposed tax change has focused on legislation in Congress, but that may miss a key point. There is likely a “shell game” going on. While legislative proposals draw attention, the real trial lawyer lobbying work may be at the Treasury Department to change rules behind the scenes without public scrutiny.
The trial lawyers tried this approach under President Barack Obama, and it nearly worked. The Treasury Department was reportedly on the cusp of announcing a tax rule change, only to back off once some public sunlight was placed on the effort. There is a saying that history does not repeat itself, it approximates itself. That may well be happening right now.
The trial lawyers can be expected to argue, before both Congress and the Treasury Department, that the tax deduction they seek is justified because litigation costs are just like any other business expenses. But this argument collapses under even the most basic scrutiny because “ordinary” business expenses, such as employee compensation or property rental or maintenance expenses, are sunk costs that the business never expects to be repaid. On the other hand, litigation expenses are costs the lawyer expects to recoup and recover if the lawsuit is successful. If the lawsuit is unsuccessful, then –– and only then –– does current tax law allow the deduction like with other sunk costs.
Our tax law should not be changed to give trial lawyers more money to bring more lawsuits and do so at taxpayers’ expense. Sunlight is the best disinfectant to stop this unsound proposal, as was done under Mr. Obama, and can hopefully do the same under Mr. Biden.
• Victor E. Schwartz is a former law professor and law school dean and current co-chair of the Public Policy Group of the law firm Shook, Hardy & Bacon, LLP.