[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 887 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                 S. 887

 To amend the Internal Revenue Code of 1986 to apply an excise tax to 
     excessive attorneys fees for legal judgments, settlements, or 
                   agreements that operate as a tax.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             April 10, 2003

  Mr. Kyl (for himself and Mr. Cornyn) introduced the following bill; 
     which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to apply an excise tax to 
     excessive attorneys fees for legal judgments, settlements, or 
                   agreements that operate as a tax.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Intermediate Sanctions Compensatory 
Revenue Adjustment Act of 2003'' (ISCRAA).

SEC. 2. EXCISE TAXES ON EXCESS FEE TRANSACTIONS OF CERTAIN ATTORNEYS.

    (a) In General.--Subchapter D of chapter 42 of the Internal Revenue 
Code of 1986 (relating to failure by certain charitable organizations 
to meet certain qualification requirements) is amended by adding at the 
end the following new section:

``SEC. 4959. TAXES ON EXCESS FEE TRANSACTIONS.

    ``(a) Initial Taxes.--There is hereby imposed on the collecting 
attorney in each excess fee transaction a tax equal to 5 percent of the 
excess fee. The tax imposed by this paragraph shall be paid by any 
collecting attorney referred to in subsection (f)(1) with respect to 
such transaction.
    ``(b) Additional Tax on the Collecting Attorney.--In any case in 
which a tax is imposed by subsection (a) on an excess fee transaction 
and the excess fee involved in such transaction is not corrected within 
the taxable period, there is hereby imposed a tax equal to 200 percent 
of the excess fee involved. The tax imposed by this paragraph shall be 
paid by any collecting attorney referred to in subsection (f)(1) with 
respect to such transaction.
    ``(c) Excess Fee Transaction; Excess Fee.--For purposes of this 
section--
            ``(1) Excess fee transaction.--
                    ``(A) In general.--The term `excess fee 
                transaction' means any transaction in which a fee is 
                provided by an applicable plaintiff (including payments 
                resulting from litigation on behalf of an applicable 
                plaintiff determined on an hourly or percentage basis, 
                whether such fee is paid from the applicable 
                plaintiff's recovery, pursuant to a separately 
                negotiated agreement, or in any other manner), directly 
                or indirectly, to or for the use of any collecting 
                attorney with respect to such applicable plaintiff if 
                the amount of the fee provided exceeds the value of the 
                services received in exchange therefor or subsection 
                (g)(1) applies.
                    ``(B) Determination of value.--For purposes of 
                subparagraph (A), in determining whether the amount of 
                the fee provided exceeds the value of the services 
                received in exchange therefor, the value of the 
                services shall be the sum of--
                            ``(i) the reasonable expenses incurred by 
                        the collecting attorney in the course of the 
                        representation of the applicable plaintiff, and
                            ``(ii) a reasonable fee based on--
                                    ``(I) the number of hours of non-
                                duplicative, professional quality legal 
                                work provided by the collecting 
                                attorney of material value to the 
                                outcome of the representation of the 
                                applicable plaintiff, taking into 
                                account the factors described in 
                                subparagraphs (B) and (D) of subsection 
                                (h)(2),
                                    ``(II) reasonable hourly rates for 
                                the individuals performing such work 
                                based on hourly rates charged by other 
                                attorneys for the rendition of 
                                comparable services, including rates 
                                charged by adversary defense counsel in 
                                the representation, taking into account 
                                the factors described in subparagraphs 
                                (A), (C), (E), and (G) of subsection 
                                (h)(2), and
                                    ``(III) to the extent such items 
                                are not taken into account in 
                                establishing the reasonable hourly 
                                rates under subclause (II), an 
                                appropriate adjustment rate determined 
                                in accordance with subparagraph (C) to 
                                compensate the collecting attorney for 
                                periods of substantial risk of non-
                                payment of fees and for skillful or 
                                innovative services which increase the 
                                amount of the applicable plaintiff's 
                                recovery.
                    ``(C) Adjustment rate.--
                            ``(i) In general.--For purposes of this 
                        paragraph, an appropriate adjustment rate is a 
                        percentage of the reasonable hourly rate under 
                        subparagraph (B)(ii)(II) which is added to the 
                        amount of such rate and which is not more than 
                        the sum of one risk percentage and one skill 
                        percentage described in clauses (ii) and (iii), 
                        respectively.
                            ``(ii) Risk percentage.--For purposes of 
                        this subparagraph, the term `risk percentage' 
                        means a percentage rate that is proportional to 
                        the collecting attorney's risk of nonrecovery 
                        of fees and which is--
                                    ``(I) in the case of a collecting 
                                attorney who assumed a substantial risk 
                                of nonpayment of fees, not more than 
                                100 percent,
                                    ``(II) in the case of a collecting 
                                attorney who assumed a substantial risk 
                                of nonpayment of fees and devoted more 
                                than 8,000 hours of legal work (as 
described in subparagraph (B)(ii)(I)) and more than 2 years to the case 
before resolution of all claims, not more than 200 percent, or
                                    ``(III) in the case of a collecting 
                                attorney who assumed a substantial risk 
                                of nonpayment of fees and devoted more 
                                than 15,000 hours of legal work (as 
                                described in subparagraph (B)(ii)(I)) 
                                and more than 4 years to the case 
                                before resolution of all claims, not 
                                more than 300 percent.
                            ``(iii) Skill percentage.--For purposes of 
                        this subparagraph, the term `skill percentage' 
                        means, in the case of a collecting attorney who 
                        has demonstrated exceptionally skillful or 
                        innovative legal service which generated a 
                        recovery for the applicable plaintiff 
                        substantially greater than the typical recovery 
                        in similar cases, a percentage rate that is 
                        proportional to the increase in the applicable 
                        plaintiff's recovery and that is not more than 
                        100 percent.
                            ``(iv) Limitation.--An appropriate 
                        adjustment rate shall not increase the 
                        collecting attorney's fee above an amount that 
                        is proportional to the applicable plaintiff's 
                        recovery.
                    ``(D) Court approval of fees.--Fee payments 
                approved by any court shall be presumed to not be in 
                excess of the value of the services received in 
                exchange therefor if the court approving the fee--
                            ``(i) did not approve an adjustment rate 
                        greater than that determined to be appropriate 
                        under subparagraph (C) in a case where such fee 
                        included an adjustment rate, and
                            ``(ii) obtained and relied upon a report of 
                        a legal auditing firm with respect to such fee 
                        in accordance with the procedures in subsection 
                        (h).
            ``(2) Excess fee.--The term `excess fee' means the excess 
        referred to in paragraph (1)(A).
    ``(d) Joint and Several Liability.--For purposes of this section, 
if more than 1 person is liable for any tax imposed by subsection (a), 
all such persons shall be jointly and severally liable for such tax.
    ``(e) Applicable Plaintiff.--For purposes of this section, the term 
`applicable plaintiff' means any person represented by a collecting 
attorney with respect to a claim described in subsection (f)(1).
    ``(f) Other Definitions and Rules.--For purposes of this section--
            ``(1) Collecting attorney.--The term `collecting attorney' 
        means any person engaged in the practice of law who 
        represents--
                    ``(A) any governmental entity, including any State, 
                municipality, or political subdivision of a State, or 
                any person acting on such entity's behalf, including 
                pursuant to Federal or State Qui Tam statutes, in a 
                claim for recoupment of payments made or to be made by 
                such entity to or on behalf of any natural person by 
                reason, directly or indirectly, of a breach of duty 
                that causes damage to such natural person,
                    ``(B) any organization described in paragraph (3) 
                or (4) of section 501(c) and exempt from tax under 
                section 501(a), in a claim for damages based on a 
                breach of duty, whether civil or criminal, causing 
                damage to such organization,
                    ``(C) any natural person seeking to recover damages 
                in a claim based on breaches of duty, whether civil or 
                criminal, causing damage to such natural person, or
                    ``(D) any assignee or other holder of claims 
                described in subparagraph (A), (B), or (C),
        when 1 or more of such claims, whether or not joined in 1 
        action, involve the same or a coordinated group of plaintiff's 
        attorneys or similarly situated defendants, arise out of the 
        same transaction or set of facts or involve substantially 
        similar liability issues, and result in settlements or 
        judgments aggregating at least $100,000,000.
            ``(2) Taxable period.--The term `taxable period' means, 
        with respect to any excess fee transaction, the period 
        beginning with the date on which the transaction occurs and 
        ending 90 days after the earliest of--
                    ``(A) the date of the mailing of a notice of 
                deficiency under section 6212 with respect to the tax 
                imposed by subsection (a), or
                    ``(B) the date on which the tax imposed by 
                subsection (a) is assessed.
            ``(3) Correction.--
                    ``(A) General rule.--Any excess fee transaction is 
                corrected by undoing the excess fee to the extent 
                possible and taking any additional measures necessary 
                to place the applicable plaintiff in a financial 
                position not worse than that in which such plaintiff 
                would be if the collecting attorney were dealing under 
                the highest fiduciary standards.
                    ``(B) Payment of excess fees.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), a collecting attorney corrects an 
                        excess fee transaction by paying any excess 
                        fees plus interest to the applicable plaintiff.
                            ``(ii) Certain settlements.--In the case of 
                        excess fees arising from or related to that 
                        certain Master Settlement Agreement of November 
                        23, 1998, and other, concluded Settlement 
                        Agreements based on State health care 
                        expenditures pursuant to title XIX of the 
                        Social Security Act (42 U.S.C. 1396 et seq.), 
                        including lawsuits involving the States of 
                        Florida, Minnesota, Mississippi, and Texas, the 
                        collecting attorney corrects an excess fee 
                        transaction by paying any excess fees plus 
                        interest to the 50 States in proportion to each 
State's share of the United States population.
                    ``(C) No waiver of fee.--No collecting attorney may 
                avoid imposition of any tax imposed by this section by 
                transferring any portion of the excess fee or refusing 
                to accept any portion of the excess fee.
    ``(g) Disclosure Requirements.--
            ``(1) Treatment as excess fee.--Any fee provided after the 
        date of the enactment of this subsection by an applicable 
        plaintiff (including payments resulting from litigation on 
        behalf of an applicable plaintiff determined on an hourly or 
        percentage basis, whether such fee is paid from the applicable 
        plaintiff's recovery, pursuant to a separately negotiated 
        agreement, or in any other manner), directly or indirectly, to 
        or for the use of any collecting attorney with respect to such 
        applicable plaintiff shall be deemed to be an excess fee 
        provided in an excess fee transaction unless the disclosure 
        requirements described in paragraph (2) are met.
            ``(2) Contents of statement.--The disclosure requirements 
        of this paragraph are met for any taxable year in which a 
        collecting attorney receives any fees with respect to a claim 
        described in subsection (f)(1), if such collecting attorney--
                    ``(A) includes in the return of tax for such 
                taxable year a statement including the information 
                described in subsection (c)(1) with respect to such 
                claim, and
                    ``(B) provides a statement including the 
                information described in subsection (c)(1) to the 
                applicable plaintiff prior to the deadline (including 
                extensions) for filing such return.
    ``(h) Legal Auditing Firm.--
            ``(1) In general.--In any case before a Federal district 
        court or a State court in which the court approves fees paid to 
        a collecting attorney, the court shall seek bids from legal 
        auditing firms with a specialty in reviewing attorney billings 
        and select 1 such legal auditing firm to review the billing 
        records submitted by the collecting attorney, under the same 
        standards the firm would use if it were hired by a private 
        party to review legal bills submitted to the party, for the 
        reasonableness of such attorney's billing patterns and 
        practices. The court shall require the collecting attorney to 
        submit billing records, cost records, and any other information 
        sought by such firm in its review.
            ``(2) Review by legal auditing firm.--In reviewing the 
        billing records and work performed by the collecting attorney, 
        the legal auditing firm shall address all relevant matters, 
        including--
                    ``(A) the hourly rates of the collecting attorney 
                compared with the prevailing market rates for the 
                services rendered by the collecting attorney,
                    ``(B) the number of hours worked by the collecting 
                attorney on the case compared with other cases that the 
                collecting attorney worked on during the same period,
                    ``(C) whether the collecting attorney performed 
                tasks that could have been performed by attorneys with 
                lower billing rates,
                    ``(D) whether the collecting attorney used 
                appropriate billing methodology, including keeping 
                contemporaneous time records and using appropriate 
                billing time increments,
                    ``(E) whether particular tasks were staffed 
                appropriately,
                    ``(F) whether the costs and expenses submitted by 
                the collecting attorney were reasonable,
                    ``(G) whether the collecting attorney exercised 
                billing judgment, and
                    ``(H) any other matters normally addressed by the 
                legal auditing firm when reviewing attorney billings 
                for private clients.
            ``(3) Filing of report; response; burden of proof.--The 
        court shall set a date for the filing of the report of the 
        legal auditing firm, and allow the collecting attorney or any 
        applicable plaintiff to respond to the report within a 
        reasonable time period. The report shall be presumed correct 
        unless rebutted by the collecting attorney or any applicable 
        plaintiff by clear and convincing evidence.
            ``(4) Fee for legal auditing firm.--The fee for the report 
        of the legal auditing firm shall be paid from the collecting 
        attorney's fee award, the applicable plaintiff's recovery, or 
        both in a manner determined by the court.
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out this section, including 
regulations to prevent avoidance of the purposes of this section and 
regulations requiring recordkeeping and information reporting.''.
    (b) Conforming and Clerical Amendments.--
            (1) Subsections (a), (b), and (c) of section 4963 of the 
        Internal Revenue Code of 1986 are each amended by inserting 
        ``4959,'' after ``4958,''.
            (2) Subsection (e) of section 6213 of such Code is amended 
        by inserting ``4959 (relating to excess fee transactions),'' 
        before ``4971''.
            (3) Paragraphs (2) and (3) of section 7422(g) of such Code 
        are each amended by inserting ``4959,'' after ``4958,''.
            (4) The heading for subchapter D of chapter 42 of such Code 
        is amended to read as follows:

``Subchapter D--Failure by Certain Charitable Organizations and Persons 
 to Meet Certain Qualification Requirements and Fiduciary Standards''.

            (5) The table of subchapters for chapter 42 of such Code is 
        amended by striking the item relating to subchapter D and 
        inserting the following:

                              ``Subchapter D. Failure by certain 
                                        charitable organizations and 
                                        persons to meet certain 
                                        qualification requirements and 
                                        fiduciary standards''.
            (6) The table of sections for subchapter D of chapter 42 of 
        such Code is amended by adding at the end the following new 
        item:

``Sec. 4959. Taxes on excess fee transactions.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to excess fees paid on or after June 1, 2002.

SEC. 3. DECLARATORY JUDGMENTS RELATING TO EXCISE TAXES ON EXCESS FEE 
              TRANSACTIONS OF CERTAIN ATTORNEYS.

    (a) In General.--Subchapter B of chapter 76 of the Internal Revenue 
Code of 1986 (relating to judicial proceedings) is amended by 
redesignating section 7437 as section 7438 and by inserting after 
section 7436 the following new section:

``SEC. 7437. DECLARATORY JUDGMENTS RELATING TO TAX ON EXCESS FEE 
              TRANSACTIONS.

    ``(a) In General.--In a case of actual controversy involving--
            ``(1) a determination by the Secretary or the collecting 
        attorney with respect to the imposition of the excise tax on 
        excess fee transactions on such collecting attorney under 
        section 4959, or
            ``(2) a failure by the Secretary or the collecting attorney 
        to make such a determination,
upon the filing of an appropriate pleading by an applicable plaintiff, 
the Tax Court may make a declaration with respect to such determination 
or failure. Any such declaration shall have the force and effect of a 
decision of the Tax Court and shall be reviewable as such.
    ``(b) Deferential Review.--If a collecting attorney's fee has been 
approved by a court in accordance with section 4959(c)(1)(D) or by the 
Secretary pursuant to section 4959, the Tax Court shall review the fee 
only for an abuse of discretion.
    ``(c) Legal Auditing Firm.--In any petition for a declaration 
referred to in subsection (a):
            ``(1) No previous report.--If a report by a legal auditing 
        firm that meets the requirements of section 4959(h) has not 
        been previously produced and relied on by another court, the 
        Tax Court shall hire such a legal auditing firm and rely on its 
        report pursuant to the procedures in section 4959(h).
            ``(2) Second report.--
                    ``(A) In general.--If a report by a legal auditing 
                firm has been approved by a court in accordance with 
                section 4959, the Tax Court shall hire a second legal 
                auditing firm upon the request of the petitioner.
                    ``(B) Fee for report.--The Tax Court may direct the 
                petitioner to pay the fee for any report of a legal 
                auditing firm provided pursuant to subparagraph (A).
    ``(d) Time for Bringing Action.--No proceeding may be initiated 
under this section by any person until 90 days after such person first 
notifies the Secretary of the excess fee transaction with respect to 
which the proceeding relates.
    ``(e) Definitions.--For purposes of this section, any term used in 
this section and also in section 4959 shall have the meaning given such 
term by section 4959.''.
    (b) Clerical Amendment.--The table of sections for subchapter B of 
chapter 76 of the Internal Revenue Code of 1986 is amended by striking 
the item relating to section 7437 and by inserting the following new 
items:

``Sec. 7437. Declaratory judgments relating to tax on excess fee 
                            transactions.
``Sec. 7438. Cross references.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to actions after the date of the enactment of this Act.
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