[Congressional Record Volume 155, Number 30 (Friday, February 13, 2009)]
[Senate]
[Pages S2329-S2330]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER (for himself and Mr. Leahy):
  S. 440. 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, I seek recognition to introduce 
legislation to amend Section 62(a)(20) of the Internal Revenue Code to 
allow taxpayers to subtract from their taxable gross income the 
attorneys' fees and court costs paid by the taxpayer in connection with 
an award or settlement of monetary damages in a civil claim. Such a 
deduction is commonly referred to as an ``above-the-line'' deduction.
  Under current law, there is an inequity in the tax code that results 
in the double taxation of attorneys' fees and costs in certain 
circumstances. In addition, attorneys' fees paid by individuals in 
recovering a taxable award in certain civil claims are only deductible 
as miscellaneous itemized deductions. As such, they are subject to a 
reduction equal to two percent of the individual's adjusted gross 
income and subject to a complete disallowance when calculating the 
alternative minimum tax. Consequently, many plaintiffs end up incurring 
significant tax liability beyond the amount they actually bring home 
after winning or settling a case.
  Congress partially corrected the problem in 2004, when we passed, and 
President Bush signed, the American Jobs Creation Act of 2004, Jobs 
Act. The Jobs Act allows an above-the-line deduction for amounts 
attributable to attorneys' fees and costs received by individuals based 
on claims brought under certain statutes, including the False Claims 
Act, 1862(b)(3)(A) of the Social Security Act, or unlawful 
discrimination claims. Prior to enactment of the Jobs Act, the Internal 
Revenue Code already excluded from income awards arising out of claims 
relating to physical injury and sickness. However, attorneys' fees paid 
in the pursuit and collection of punitive awards, awards for libel, 
slander, or other awards in cases not involving a physical injury or a 
claim of discrimination are still not subtracted from gross income.
  In 2005, the United States Supreme Court added further confusion to 
the issue. In Commissioner v. Banks, 543 U.S. 426 (2005), the Court 
attempted to resolve a circuit split on the Federal income tax 
treatment of attorneys' fees. In an 8-0 opinion, the Court held that 
when a litigant's recovery constitutes income, the litigant's income 
includes the portion of the recovery paid to the attorney as a 
contingent fee. Consequently, for those claims not excluded from gross 
income in the Jobs Act, attorneys' fees are subjected to double 
taxation; subjected to a reduction equal to two percent of the 
individual's adjusted gross income when listed as a miscellaneous 
itemized deduction; and subjected to a complete disallowance when 
calculating the alternative minimum tax.
  My legislation corrects the problem by permitting taxpayers to 
subtract from their taxable gross income the attorneys' fees and court 
costs paid by the taxpayer in connection with an award or settlement of 
monetary damages in all civil claims. The legislation would ensure more 
uniform treatment of contingency fees in all types of litigation, not 
just the limited categories of litigation as specified in the Jobs Act. 
Importantly, this change does not affect the requirement that attorneys 
pay federal income tax on legal fees they receive. The legislation does 
eliminate the inequity of the client also paying taxes on attorneys' 
fees despite not receiving the funds under the terms of a contingency 
fee contract.
  I encourage my colleagues to join me in this effort to bring fairness 
to the tax code.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.

[[Page S2330]]

  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 440

       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.

  Mr. LEAHY. Mr. President, I am pleased to join Senator Specter in the 
introduction of two bills, S. 437 and S. 440, that will correct 
inconsistencies and provide fairness to lawyers and their clients under 
the Federal Tax Code.
  Currently, attorneys who take on contingency fee cases, and advance 
their clients funds for court costs, witnesses, or other expenses, 
cannot deduct these expenses as ordinary business expenses at the time 
they are made. Instead, attorneys who advance these costs may not take 
a deduction until the case for which they are advanced is resolved. In 
most cases this is a timeframe of several years. This results in an 
attorney carrying the burden of these costs from year to year until the 
case is resolved. For many small law firms or solo practitioners, this 
is a significant burden.
  Where attorneys are advancing costs to clients so that those clients 
may pursue their rights in court, they deserve to be treated as any 
other small business owner. This disparate treatment is inequitable and 
correcting it will make legal representation more easily provided by 
attorneys and more available to clients.
  The other bill we introduce today helps clients who have been awarded 
funds through a contingency fee arrangement. Under current tax law, 
punitive damages awards and awards to a plaintiff resulting from 
certain claims are subject to Federal taxation for the entire amount of 
the award, even if the plaintiff then uses a portion to satisfy a 
contingency fee agreement. The result is that the portion of an award 
to a plaintiff in a contingency fee arrangement that then goes to an 
attorney is taxed twice--once through the plaintiff and again through 
the attorney.
  This legislation will allow a plaintiff who has recovered an award to 
take an above the line deduction for the portion of his or her award 
that will be transmitted to the attorney who provided the 
representation. This is a commonsense solution and where an individual 
has suffered an injury and will rely on his or her award it is sound 
policy to reduce this unnecessary and duplicative tax burden.
  Neither of these bills gives any special treatment to attorneys or 
their clients. Rather, in combination, they will help attorneys provide 
more representation to clients who by virtue of their financial or 
other circumstances must enter a contingency fee arrangement, and will 
allow a greater amount of funds recovered to be put to use by the 
individual for whose benefit they were awarded.
  I thank Senator Specter for introducing this legislation and I hope 
all Senators will join us in supporting these sensible corrections to 
our Tax Code.
                                 ______