[Congressional Record (Bound Edition), Volume 151 (2005), Part 9]
[Extensions of Remarks]
[Pages 12616-12618]
[From the U.S. Government Publishing Office, www.gpo.gov]




                     AN ARTICLE BY MR. LEE JACKSON

                                 ______
                                 

                             HON. RON PAUL

                                of texas

                    in the house of representatives

                         Tuesday, June 14, 2005

  Mr. PAUL. Mr. Speaker, I would like to place in today's record the 
following article by Mr. Lee Jackson, a constituent of mine who is 
battling a perverse tax law. Mr. Jackson and several other individuals 
were the target of a frivolous lawsuit that rightfully was dismissed 
for its lack of merit. Mr. Jackson and his fellow defendants--all 
totally blameless--spent many thousands of dollars in legal fees 
fighting the meritless suit. They understandably filed their own 
lawsuit against both the original plaintiffs and the plaintiffs' law 
firm. However, they cannot reach a monetary settlement for damages 
because our tax code treats all proceeds from such a settlement--even 
the portion Mr. Jackson owes to his attorneys--as taxable income for 
Mr. Jackson. As a result, Mr. Jackson literally cannot afford to settle 
his case because he will owe more in income taxes than he receives from 
the settlement! Furthermore, he cannot deduct his attorneys fees 
because of the alternative minimum tax. Mr. Jackson's story, as told 
below, provides a vivid example of why Congress must change the tax 
code to ensure that attorney fees are deemed taxable income to the 
attorneys who actually receive them, not their clients.

                             Taxing Justice

     ``It is in justice that the ordering of society is 
         centered.'' Aristotle
     ``Justice is the constant and perpetual will to allot to 
         every man his due.''--Domitus Ulpian

                            (By Lee Jackson)

       There is perversity in using tax policy to reduce the 
     numbers of frivolous lawsuits. Courts were developed in the 
     first place to adjudicate impartially the relative merit of 
     one person's argument over another's in a dispute. The 
     controlling premise was that courts were best able to sort 
     through facts and opposing arguments in specific cases and 
     arrive at impartial resolutions.
       Distrust in the courts has upset the delicate balance 
     between the legislature and the judiciary. When judges pick 
     and choose the laws they will or will not enforce; when they 
     dictate new law from the bench; when their standard strays 
     from the Constitution and looks to current popular thinking 
     and foreign decisions; or when judges bow before the force of 
     political money during confirmation re-election cycles; when 
     those things happen, citizens lose confidence in the ability 
     to achieve justice, and turn to the legislature for relief. 
     Therein lies new danger.
       Courts are uniquely suited to try the facts of particular 
     cases. Legislatures are not. However, legislatures must react 
     to concerns of constituents, and so they have sought 
     solutions as Americans pressed them to weigh in on the 
     perceived high volume of seemingly frivolous cases that drove 
     up medical and other costs, and seemed to precipitate a 
     downward spiral in quality of crucial services.
       Attending these issues were actions of legislatures, 
     courts, and executive branches of government. Take the case 
     of Cynthia Spina, the Illinois Forest Preserve policewoman 
     who won a judgment against her employer after a six-year 
     sexual-harassment lawsuit. Instead of netting $300,000 after 
     paying $1 million to her attorney, she was taxed $400,000 by 
     the IRS. The law that made such travesty possible was 
     promulgated in 1996 that differentiate between types of 
     damages. Gone was the concept of damages being a monetary 
     amount determined by a jury as the amount necessary to bring 
     a plaintiff back to equilibrium. Justice is now a taxable 
     event.
       A new premise seems to permeate the land: That all 
     plaintiffs are suspect, and likely to

[[Page 12617]]

     be greedy money-grubbers forwarding spurious complaints. Such 
     a premise does a disservice to juries whose members receive 
     negligible compensation for their services and to the vast 
     majority of plaintiffs who turn to courts as a last resort.
       Consider our case still pending in California. My partner 
     and I appealed to the FBI and the SEC for alleged corporate 
     malfeasance. We also alerted the public via the Internet. For 
     our trouble, we, along with friends and family were sued 
     personally for $60 million. The courts in California found we 
     had done nothing wrong and further, that we were sued 
     primarily to silence us.
       In effect, the courts in California were used as a weapon 
     to interfere with our rights to free speech. Along the way, 
     this case resulted in a binding precedent extending First 
     Amendment rights to the Internet. That precedent has been 
     used all the way to the US Supreme Court as well as in 
     several state supreme courts.
       Left with hundreds of thousands of dollars in legal bills 
     accumulated for our defense, we sought to recover through the 
     courts. As we proceeded, we became aware of the Spina case, 
     and feared that the same tax provisions could apply to us.
       What we found was even more perverse. Spina's debacle 
     resulted because the attorney's fee was charged as income to 
     her, and then Alternative Minimum Tax (AMT) was applied. In 
     tax court, Spina pleaded the unfairness with the judge, who 
     sympathized with her but said his hands were tied by the law 
     (a fine time to be a strict constructionist! I think it 
     intuitively obvious to the casual observer that a US 
     government that taxes a citizen more than the citizen 
     receives is breaking a Constitutional proscription 
     somewhere!).
       In the California case, we (the erstwhile defendants) 
     became plaintiffs in pursuit of recovery of our legal expense 
     and other damages. It is worth mentioning that our wives were 
     also sued, and another couple as well. Neither our wives nor 
     the other couple were even alleged to have done anything 
     wrong--they were sued in order to bring pressure on us. My 
     partner and I live in Texas. The other couple lives in Maine.
       We soon learned of a difference in treatment depending upon 
     residence. In Texas, the legislature had defined attorneys' 
     fees as belonging to attorneys, and therefore not taxable to 
     plaintiffs. In Maine, no such determination had been made. 
     Also, the Federal District court in which Texas lies had 
     decided that damages were not subject to Alternative Minimum 
     Taxes. The federal court district in which Maine lies had 
     decided the opposite. As a result, the Maine plaintiffs could 
     expect to realize an after-tax net that would have been an 
     estimated \1/15\ of the net that the Texas plaintiffs could 
     have expected on the same estimated award. Ironically, all we 
     plaintiffs in our case had been subjected to the exact same 
     set of circumstances; we would have appeared together in the 
     same court; and, if damages were awarded, they would have 
     been determined by the exact same jury.
       Enter the Supreme Court. In January, 2005, the Supreme 
     Court issued a decision that decreed equal federal tax 
     treatment among all plaintiffs across the breadth of the 
     United States; that attorneys' fees should be taxed to 
     plaintiffs; and that Alternative Minimum Taxes apply. In 
     effect, the Supreme Court's decision put almost all 
     plaintiffs in the same tax position as Spina. Taken to its 
     logical and viable extreme, this decision puts civil courts 
     off limits as an alternative to violence to resolve bona fide 
     disputes.
       There is an exemption to that decision. Inspired by the 
     Spina case, Congress last year passed the Civil Rights Tax 
     Relief Act. It provided that, in Civil Rights cases, 
     attorneys' fees would not be taxed to plaintiffs (on the 
     basis that the amount had been taxed twice--first to 
     plaintiffs, then to attorneys). Unfortunately for Spina, the 
     law was not made retroactive, so as of this moment, she still 
     contends with the IRS over her tax bill. However, other 
     plaintiffs with similar cases realized tremendous relief.
       Not so for us in our California case, and thousands of 
     other plaintiffs also facing ruinous taxes after winning 
     their cases. Clearly the courts in California were used as a 
     weapon to infringe on our civil rights. However, in that 
     underlying case, we were then defendants. When we filed suit 
     to recover damages, the case was characterized differently 
     and was no longer, technically, a civil rights case. Our 
     dilemma had been to seek court assistance to recover, or face 
     paying our legal expense for our own defense in the 
     underlying case for years to come. It did not occur to us at 
     the time we filed with the court that we could win and end up 
     owing an even greater amount to the IRS.
       That is the effect of the Supreme Court ruling. Because 
     ours is technically not a civil rights case, we do not enjoy 
     the benefits of the exemption inspired by the Spina case. We 
     had properly appealed to our government for help, and the 
     government has now placed us in a position where our own best 
     interests are indeterminate, so we cannot settle (ironic, 
     since the intent of most tort reform has been to encourage 
     settlement). When a jury makes an award, the tax exposure 
     will likely be ruinous. Another irony is that the higher the 
     award, the greater our tax exposure. And we are middle-class 
     citizens.
       The basis on which the Supreme Court decided that 
     attorneys' fees are taxed as income to plaintiffs is that 
     plaintiffs pay attorneys; that the amount they pay comes to 
     them as a result of the award; that money to pay attorneys 
     was something they did not have prior to the award, and 
     therefore coming, as it would from the award, must be income. 
     The rationale is held irrelevant (in contingency cases) that 
     attorneys receive payment only if and after an actual award 
     is received and that there is shared risk between plaintiff 
     and attorney.
       There is another problem with taxing awards as income, and 
     this is even more poignant. As mentioned earlier, awards are 
     a jury's determination of the monetary equivalent of 
     restoring a client to equilibrium (without consideration for 
     tax consequences). By definition, plaintiffs owned that 
     equivalent value prior to the need to seek court intervention 
     and thus is not income.
       Where back wages are sought and won, obviously income is 
     received. However, even in those cases there should be no 
     more taxes assessed or collected than would have been had the 
     plaintiff been paid normally.
       Another major factor that should weigh in favor of 
     plaintiffs and obviate taxes on awards is that courts, state 
     legislatures, and Congress establish the rules under which a 
     citizen seeks justice. A plaintiff going into court in pro 
     per is in extreme jeopardy of losing over factors as 
     innocuous as presenting the case in a form that violates 
     local-court determined rules. When citizens are sued, they 
     often have no choice but to retain the very best legal 
     expertise possible. When they win their cases and are left 
     with oppressive debt, they should have recourse to the courts 
     for relief without incurring even more horrendous debt to the 
     government. The idea is laughable that people would willingly 
     choose to spend their hard-earned income and scarce time to 
     be in court for recreation (i.e. the ``pursuit of 
     happiness'').
       The concept of exemptions presents its own difficulties. By 
     legislatively determining that some cases are entitled to 
     favorable tax treatment over others, lawmakers are making 
     judgments over the relative merits of cases in advance of 
     either a judge or jury examining specific facts. On its face, 
     such policy screams violation of Constitutional equal 
     protection and equal access to the courts. Justice is no 
     longer blind. And to the extent that such laws continue, the 
     Federal government becomes complicit in chilling citizen 
     participation on issues such as the ones in our case in 
     California. Bad guys already know this, and they know that as 
     a result, they can do bad things to good people with 
     impunity. The combined branches of government have evolved 
     those conditions.
       At present, there is legislative effort under way to cure 
     the situation for plaintiffs excluded by current exemptions. 
     There is also a strong Congressional move to abolish AMT 
     altogether. (That would be a great thing for the country, but 
     a subject for another time.) A danger for plaintiffs is that, 
     should AMT be abolished, a strong sense could I devolve that 
     the plight of plaintiffs would then be resolved. Such is not 
     the case.
       AMT only increases the degree of travesty. Eliminating them 
     for plaintiffs still leaves them exposed to ordinary tax 
     rates (think of an ordinary citizen paying taxes on a $1 
     million award, half of which goes to pay attorneys, and much 
     which goes to pay other expenses. The citizen could still be 
     in a break-even or deficit position, and certainly one that 
     in no way approaches restoration or justice.).
       Studying ways to include others in exemptions is self-
     defeating. There are too many circumstances to contemplate 
     and leaves citizens with the dubious proposition of having to 
     seek a legislative solution after having won in court. It 
     further requires the impossible task of timing the court 
     decision such that it is issued only after the passage of the 
     legislation in order to be sure that the new law protects 
     them (retroactivity is frowned upon in the House).
       The real issues are: Should any legislature ever be 
     deciding the relative merit of any civil dispute over any 
     other civil dispute by creating rapacious tax laws and then 
     establishing exemptions? (As soon as they do so, they create 
     violations of equal protection and access.) Should the 
     government ever be entitled to a share of what a jury has 
     decided is the amount required to restore a plaintiff to 
     equilibrium? (Every dollar taxed on an award is a dollar 
     subtraction from that plaintiff's restoration as determined 
     by a jury after due deliberation over all facts pertinent to 
     the case--justice becomes impossible as a practical and 
     mathematical matter). Should attorneys' fees be taxed to 
     plaintiffs? (The government is going to tax that amount to 
     the attorney. When the attorney is retained on a contingency 
     basis, both attorney and plaintiff are entering into a 
     transaction that is high risk with no gain for either unless 
     they win at court. And, it is the courts, Congress, and state 
     legislators that set the conditions under which requiring an 
     attorney for any court proceeding is mandated as a practical 
     matter for most citizens.)
       If the answer to each of the above questions is ``no'' (and 
     I think a reasonable man

[[Page 12618]]

     would conclude that is the correct answer for each of 
     question), then the proper legislative response is easy: 
     Define attorneys' fees as belonging to attorneys; and, do 
     away with taxes on awards.
       If both of those actions are taken, plaintiffs with bona 
     fide complaints rightfully will enjoy a full measure of 
     restoration to equilibrium as determined by a jury of their 
     peers. Admittedly, that allows for occasionally rewarding 
     miscreants. The alternative ensures penalizing law-abiding 
     citizens who have already suffered.
       Adopting the above leaves unsettled how to discourage 
     frivolous cases. There are other ways to do that including 
     award limits, and attorney fee caps. However, the solution 
     cannot and must not include provisions that deny justice and 
     impose further penalties on law-abiding citizens who appeal 
     to their governments.
       As these things ate contemplated, a figurative call to arms 
     is in order. Taxes imposed on individual citizens across the 
     breadth of the original Thirteen Colonies in our early 
     history were only a fraction of the burden thrust on 
     individual contemporary citizens now carrying these burdens. 
     These unjustly treated citizens already number in thousands; 
     and their numbers will grow rapidly as the effects of the 
     Supreme Court decision become felt.
       It is hard to conceive of a single congressional district 
     left unaffected. Corrective action should be swift.
       Citizens that must contend with government taxes and tax 
     collecting agencies of the government after prevailing in 
     court are denied justice. Allowing them to negotiate to a 
     reduced amount after the fact is neither justice nor a 
     solution--it is a mockery and refutation of the most 
     fundamental principles which gave birth to our great country 
     and for which patriots gave their lives.
       In contemplating concepts of taxing justice, it is 
     appropriate to recall that plaintiffs seek court resolution 
     as an alternative to violence; that they pay in advance for 
     their ``day in court'' through normal taxes; that in entering 
     the court, they demonstrate tremendous faith in their fellow 
     citizens and government; that the aim of the court is to 
     return prevailing plaintiffs to equilibrium; and that if 
     plaintiffs are successful, they are entitled to an assumption 
     of having brought a bona fide complaint. To require more is 
     to delay justice, and in that regard, it is well to remember 
     William Gladstone's words: ``Justice delayed is justice 
     denied.''
       Or as Theodore Roosevelt said, ``Justice consists not in 
     being neutral between right and wrong, but in finding out the 
     right and upholding it, wherever found, against the wrong.'' 
     Leaving citizens stranded in bewildering circumstances that 
     destroy the pursuit of happiness and is brought about by 
     poorly thought out government action is wrong. Correcting 
     quickly is right.

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