[Congressional Record Volume 153, Number 40 (Thursday, March 8, 2007)]
[Senate]
[Page S2905]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER:
  S. 813. A bill to amend the Internal Revenue Code of 1986 to allow an 
above-the-line deduction for attorney fees and costs in connection with 
civil claim awards; to the Committee on Finance.
  Mr. SPECTER. Mr. President, the first bill which I am introducing, 
and that is to permit attorneys to deduct payment of litigation costs 
as ordinary and necessary business expenses. In litigation, 
illustratively on a personal injury claim, the plaintiff frequently is 
without funds and can only move forward with the litigation on a 
contingency fee basis. In these situations, it is customary for the 
attorney to advance the costs of filing fees, depositions, and other 
costs there may be. The Internal Revenue Service has taken the position 
that those are loans from the attorney to the client, so the attorney 
cannot immediately deduct litigation payments as ordinary business 
expenses. If the litigation costs are treated as ordinary business 
expenses, the attorney would be able to deduct the expenses as they are 
incurred.
  The Ninth Circuit has held that the Internal Revenue Service is 
wrong. As a result, attorneys in States within the Ninth Circuit can 
deduct as ordinary and necessary expenses advances on litigation. This 
legislation would make it explicit under the Internal Revenue Code that 
these advanced costs could be deducted by attorneys across the country.
  Again, I ask that the Record contain my extemporaneous comments and 
the explanation as to why there is some repetition in the formal 
statement which I now ask unanimous consent be printed in the Record, 
as well as the two bills which follow these two pieces of legislation 
which I am introducing.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                         Senator Arlen Specter


   Statement on legislation to permit attorneys to deduct payment of 
      litigation costs as ordinary and necessary business expenses

       Mr. SPECTER. Mr. President, I have sought recognition to 
     introduce legislation amending the Internal Revenue Code to 
     permit attorneys to deduct payments of litigation expenses on 
     behalf of contingency fee clients as an ordinary and 
     necessary business expense. The IRS deems these advances to 
     be loans, so the attorney cannot immediately deduct 
     litigation related payments as ordinary expenses. If the 
     payments are treated as ordinary and necessary business 
     expenses, the attorney receives the benefit of being able to 
     deduct the expenses as they are incurred, and to recognize 
     the income associated with those expenses if and when damages 
     are recovered, which may be years later.
       In part because the IRS deems these payments to be loans, 
     and State canons of legal ethics--based on common law of 
     medieval England--prohibited loans to clients, contingency 
     fee lawyers for many years were not able to pay these 
     expenses. In the latter part of the 1800s States began 
     permitting attorneys to advance client expenses as long as 
     the client remained obligated to repay the advances. Even for 
     their indigent clients, if there ultimately was not an award, 
     attorneys were required to seek repayment. The ABA Model Rule 
     has been updated to state that ``a lawyer may advance court 
     costs and expenses of litigation, the repayment of which may 
     be contingent on the outcome of the matter.'' Many States 
     model their rules on these Model Rules, and their ethics 
     rules have been updated, but the Internal Revenue Code has 
     not. Because my bill appropriately treats payments of costs 
     under contingency fee arrangements as ordinary business 
     expenses, attorneys may structure their fee contracts in ways 
     that do not run afoul of State ethics rules.
       In addition, I note that tax treatment of these payments is 
     not consistent across all jurisdictions. In Boccardo v. 
     Commissioner, 56 F.3d 1016 (9th Cir. 1995) the Ninth Circuit 
     disagreed with the IRS and held that advances on behalf of 
     clients were ``ordinary and necessary expenses'' in 
     contingency cases with ``gross fee'' contracts. So the rule 
     is different in States in the Ninth Circuit; the IRS 
     continues to take the position that expense advances are not 
     deductible as ordinary and necessary business expenses in 
     other jurisdictions. This different treatment is neither 
     logical nor equitable.
       This change will encourage lawyers to represent those who 
     may not otherwise be able to pay an attorney for his work. 
     This is good policy and common sense.
                                  ____


                                 S. 813

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

     SECTION 1. ABOVE-THE-LINE DEDUCTION FOR ATTORNEY FEES AND 
                   COSTS IN CONNECTION WITH CIVIL CLAIM AWARDS.

       (a) In General.--Paragraph (20) of section 62(a) of the 
     Internal Revenue Code of 1986 is amended to read as follows:
       ``(20) Costs involving civil cases.--Any deduction 
     allowable under this chapter for attorney fees and court 
     costs paid by, or on behalf of, the taxpayer in connection 
     with any action involving a civil claim. The preceding 
     sentence shall not apply to any deduction in excess of the 
     amount includible in the taxpayer's gross income for the 
     taxable year on account of a judgment or settlement (whether 
     by suit or agreement and whether as lump sum or periodic 
     payments) resulting from such claim.''.
       (b) Conforming Amendment.--Section 62 of the Internal 
     Revenue Code of 1986 is amended by striking subsection (e).
       (c) Effective Date.--The amendments made by this section 
     shall apply to fees and costs paid after the date of the 
     enactment of this Act with respect to any judgment or 
     settlement occurring after such date.
                                 ______