Deduction for Class Action Plaintiffs Lawyers Targeted

By Laura Davison and Steven M. Sellers

House and Senate versions of tax bills in Congress could take an extra bite out of class action litigation earnings for some plaintiffs lawyers.

H.R. 1 and S. 1 would end a tax break for litigation expenses in some class lawsuits by no longer allowing those costs to be deductible in California and eight other Western states.

Those costs can be written off as business expenses under a 1995 Ninth Circuit decision that permits lawyers to apply a more tax-friendly deduction in contingency fee litigation expenses.

The bills would apply the no-deduction approach in the other 41 states nationwide.

“Why should plaintiffs’ lawyers in a handful of states get a handout from taxpayers that is contrary to long-established IRS tax policy in 41 other states?,” Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, said Nov. 30.

“The tax bill closes this plaintiffs’ lawyer loophole in the Ninth Circuit,” Rickard said in an email.

Several plaintiff class action lawyers either declined to comment on the bills or didn’t respond to requests for comment.

But Jay Edelson, of Edelson PC in Chicago, a prominent class action litigator, told Bloomberg Law Nov. 30 he didn’t object to this aspect of the tax legislation.

This is another way for the U.S. Chamber of Commerce “to take a shot at class actions,” Edelson said. “But I’m not crying for the class action bar on this one.”

“The rest of the tax bill is a disaster, with huge giveaways to the rich from the poor, but if we’re really fighting for consumers, it’s hypocritical to say we shouldn’t pay more taxes,” Edelson said.

Curbing Class Actions

Republicans have taken steps to curb class lawsuits in recent months, including a bill passed by the House in March. The Fairness in Class Action Litigation Act (H.R. 985), sponsored by Rep. Bob Goodlatte (R-Va.), would affect nearly all facets of class action practice including requiring that all potential members in a case suffer the same injuries.

The tax bill provisions would raise about $500 million over a decade, according to estimates from the congressional scorekeeper the Joint Committee on Taxation. That’s a relatively small amount within the context of a tax bill that will cost nearly $1.5 trillion.

The deduction is currently available in California, Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.

The inclusion of the provision in both the House and Senate bills makes it a likely candidate to end up in a final tax bill, which could reach President Donald Trump by the end of the year. The Senate is slated to vote on their version of the bill this week.

The two chambers will have to compromise on a final bill prior to it becoming law. Most of the revenue-raising provisions in the bills, such as ending the deduction for class action lawsuits, will likely stay in the legislation throughout the negotiations as lawmakers scrape to find offsets to cover their steep tax cuts.

To contact the reporters on this story: Laura Davison in Washington at ldavison@bloombergtax.com; Steven M. Sellers in Washington at ssellers@bloomberglaw.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bloomberglaw.com

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