[Congressional Record Volume 155, Number 30 (Friday, February 13, 2009)]
[Senate]
[Pages S2325-S2326]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER (for himself, Mr. Graham, Mr. Leahy, Mr. Wyden, 
        Mr. Crapo, Mr. Martinez, and Ms. Landrieu):
  S. 437. A bill to amend the Internal Revenue Code of 1986 to allow 
the deduction of attorney-advanced expenses and court costs in 
contingency fee cases; to the Committee on Finance.
  Mr. SPECTER. Mr. President, I seek recognition to introduce 
legislation to amend Section 162 of the Internal Revenue Code to permit 
attorneys to deduct expenses and court costs incurred on behalf of 
contingency fee clients as an ordinary and necessary business expense 
in the year such expenses are sustained. I introduced the same 
legislation in the 110th Congress, and the bill attracted bipartisan 
support. My bill simply clarifies the law to make certain that 
attorneys who take on contingency fee cases are able to enjoy the same 
tax benefits as virtually every other small business in the country.
  Contingency agreements between attorneys and clients are very common 
in personal injury, medical malpractice, product liability, Social 
Security disability, workers compensation, civil liberties, and 
employment cases. Under these agreements, an attorney pays all out-of-
pocket costs associated with a case before any conclusion to the case. 
Such expenses include costs for expert witnesses, depositions, medical 
records, and court fees. Contingency agreements have numerous benefits 
to clients; in particular, indigent individuals who might otherwise be 
unable to afford legal services.
  The obvious benefit to clients of contingency fee arrangements is 
that they do not have to incur out-of-pocket expenses for attorneys' 
fees. This may be particularly valuable to clients who do not have the 
ability to pay attorneys by the hour to advance their case. The 
arrangement also benefits the client by effectively spreading the risk 
of litigation. An hourly-rate payment agreement requires the client to 
assume all of the risk because the attorneys' fees are a sunk cost. 
However, under a contingent-fee arrangement, the attorney shares that 
risk and is only paid a fee if he wins the case or obtains a 
settlement.

  Currently, the Internal Revenue Service, IRS, treats expenses and 
court costs on behalf of contingency clients as loans to the client. As 
a result, the IRS does not permit any deduction by the attorney until 
the litigation is resolved, sometimes many years after the attorney has 
incurred the expenses on behalf of their client. The IRS treats the 
expenses and court costs as a loan despite the fact that no interest is 
charged and the lawyer only recoups costs if the case is won or 
settled. Not only is the IRS's position illogical, but it is contrary 
to a ruling by the United States Court of Appeals for the 9th Circuit.
  In Boccardo v. Commissioner, 56 F.3d 1016, 9t Cir. 1995, the 9th 
Circuit held that because the firm had a ``gross fee'' contract with 
the client, the firm incurred ordinary and necessary business expenses 
in the payment of costs and charges in connection with its clients' 
litigation. Consequently, litigation costs such as filing fees, witness 
fees, travel expenses, and medical consultation fees were deductible as 
ordinary and necessary business expenses in the year the costs were 
incurred on behalf of the clients. In a ``gross fee'' contract, the 
client is only obligated to pay their attorney a percentage of the 
amount recovered and is not expressly responsible for specific 
repayment of costs. While the Boccardo court contrasted ``gross fee'' 
contracts with ``net fee'' contracts, such a distinction is trivial for 
tax purposes. In both agreements, the attorney takes a considerable 
business risk to incur significant costs on behalf of a client and only 
recoups the expenses if a recovery is won.
  Despite the Boccardo court's ruling in favor of attorneys, the IRS 
continues to treat the out-of-pocket costs related to contingency fee 
cases as loans. Lawyers who make the decision to deduct these costs are 
exposed to potential audit and litigation. Over the past 13 years, 
taxpayers have had to proceed at their own peril--Ninth Circuit 
taxpayers risk a conflict with the IRS on this matter despite the case 
law, and taxpayers outside of the Ninth Circuit have no guidance at all 
since they cannot directly rely on Boccardo.
  My bill reverses an unfair IRS position by treating these businesses 
the same as all other small businesses. It does so by allowing 
attorneys with contingency fee clients to deduct their expenses and 
costs in the year that they are paid. My legislation does not give 
attorneys anything above and beyond that which is currently enjoyed by 
virtually every other small business in our country.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 437

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

     SECTION 1. DEDUCTION OF ATTORNEY-ADVANCED EXPENSES AND COURT 
                   COSTS IN CONTINGENCY FEE CASES.

       (a) In General.--Section 162 of the Internal Revenue Code 
     of 1986 (relating to trade or business expenses) is amended 
     by redesignating subsection (q) as subsection (r) and by

[[Page S2326]]

     inserting after subsection (p) the following new subsection:
       ``(q) Attorney-Advanced Expenses and Court Costs in 
     Contingency Fee Cases.--There shall be allowed as a deduction 
     under this section any expenses and court costs paid or 
     incurred by an attorney the repayment of which is contingent 
     on a recovery by judgment or settlement in the action to 
     which such expenses and costs relate. Such deduction shall be 
     allowed in the taxable year in which such expenses and costs 
     are paid or incurred by the taxpayer.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to expenses and costs paid or incurred after the 
     date of the enactment of this Act, in taxable years beginning 
     after such date.
                                 ______