Washington, DC – House Ways and Means Ranking Member Dave Camp (R-MI) and Senate Finance Ranking Member Chuck Grassley (R-IA) sent a letter to Treasury Secretary Timothy Geithner expressing concern that the Treasury Department might impose a tax policy change benefiting trial lawyers nationwide, bypassing Congress and the IRS’ own precedent in doing so.  

The issue arose after Assistant Secretary for Tax Policy Michael F. Mundaca confirmed the Treasury Department is considering reversing its policy that trial lawyers may not deduct loans to clients as business expenses in certain contingency cases.  While the Ninth Circuit Court of Appeals ruled such deductions are allowable fifteen years ago, the IRS has continued to enforce its rule disallowing such tax deductions in all other Circuits.

“We urge you not to make such changes in the government’s enforcement of the tax laws, absent a clear direction from Congress or to comply with court decisions,” wrote the senior Republicans on the House and Senate tax-writing committees.

Grassley and Camp said they are concerned that Treasury might be establishing a pattern of unilaterally making tax changes in contravention of congressional intent.  In November 2008, Treasury and the IRS came under fire from Grassley and others for giving a tax break that allowed banks to acquire one another. The Treasury ruling helped to accommodate the sale of the Wachovia Corporation to Wells Fargo.  Grassley questioned whether Treasury had the authority to bestow such a tax break independently of congressional action.

Regarding the legal expenses issue, Camp and Grassley noted:

• No other Circuit Court has affirmed the Ninth Circuit decision;
• On other matters, the IRS has maintained its policies despite unfavorable decisions from multiple Circuit Courts; and
• Despite the introduction of provisions in both the House and Senate to affirm the Ninth Circuit Court decision, Congress has failed to enact such a law.

In questioning the Administration’s decision to impose a tax policy benefiting a narrow group of taxpayers – a tax break that would cost the government $1.572 billion over 10 years -- Camp and Grassley requested the following:

1. Copies of all legal memoranda or other documentation, including e-mails and records of conversations, documenting Treasury’s authority to issue such regulations or guidance.
2. Copies of all drafts of such regulations or guidance and an indication of when these are expected to be effective and whether these were expected to be released for public comment before becoming effective.
3. Explanation of when and why such regulations or guidance were deemed to be urgent and necessary since the issue does not appear to be included in the March 16, 2010, Treasury update of the 2009-2010 Priority Guidance Plan.
4. Copies of all communications, including e-mails, letters and records of conversations, between Treasury and outside parties regarding the issuance of such regulations or guidance.

The full letter can be read here.

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