S.Amdt. 573

SA 573. Mr KYL (for himself, Mr. Cornyn, and Mr. Alexander) submitted an amendment intended to be proposed by him to the bill S. 1054, to provide for reconciliation pursuant to section 201 of the concurrent resolution on the budget for fiscal year 2004; which was ordered to lie on the table; as follows:

Strike page 96, line 1, through page 97, line 18, and insert the following:

SEC. 333. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER AMOUNTS.

(a) In General.--Subsection (f) of section 162 (relating to trade or business expenses) is amended to read as follows:

“(f) Fines, Penalties, and Other Amounts.--

“(1) In general.--Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or entity described in paragraph (3) in relation to the violation of any law or the investigation or inquiry into the potential violation of any law.

“(2) Exception for amounts constituting restitution.--Paragraph (1) shall not apply to any amount which the taxpayer establishes constitutes restitution for damage or harm caused by the violation of any law or the potential violation of any law. This paragraph shall not apply to any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation.

“(3) Certain nongovernmental regulatory entities.--An entity is described in this paragraph if it is--

“(A) a nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange (as defined in section 1256(g)(7)), or

“(B) to the extent provided in regulations, a nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) as part of performing an essential governmental function.

“(4) Imposition of tax on excess fee transactions.--

“(A) In general.--There is hereby imposed on the collecting attorney in each excess fee transaction a tax equal to 5 percent of the excess fee.

“(B) Payment.--The tax imposed by subparagraph (A) shall be paid by any collecting attorney referred to in paragraph (10)(A) with respect to such transaction.

“(5) Penalty.--

“(A) In general.--In any case in which a tax is imposed by paragraph (4) on an excess fee transaction and the excess fee involved in such transaction is not corrected within the taxable period, there is hereby imposed a penalty equal to 200 percent of the excess fee involved. The penalty imposed by this paragraph shall be paid by any collecting attorney referred to in paragraph (10)(A) with respect to such transaction. The penalty imposed by this subsection shall be treated in the same manner as a penalty imposed under subchapter B of chapter 68.

“(B) Payment.--The penalty imposed under subparagraph (A) shall be paid by any collecting attorney referred to in paragraph (10)(A) with respect to such transaction.

“(6) Excess fee transaction.--For purposes of this section--

“(A) In general.--The term ‘excess fee transaction' means any transaction in which a fee is provided by an applicable plaintiff (including payments resulting from litigation on behalf of an applicable plaintiff determined on an hourly or percentage basis, whether such fee is paid from the applicable plaintiff's recovery, pursuant to a separately negotiated agreement, or in any other manner), directly or indirectly, to or for the use of any collecting attorney with respect to such applicable plaintiff if the amount of the fee provided exceeds the value of the services received in exchange therefor or paragraph (11)(A) applies.

“(B) Determination of value.--For purposes of subparagraph (A), in determining whether the amount of the fee provided exceeds the value of the services received in exchange therefor, the value of the services shall be the sum of--

“(i) the reasonable expenses incurred by the collecting attorney in the course of the representation of the applicable plaintiff, and

“(ii) a reasonable fee based on--

“(I) the number of hours of non-duplicative, professional quality legal work provided by the collecting attorney of material value to the outcome of the representation of the applicable plaintiff, taking into account the factors described in clauses (ii) and (iv) of paragraph (12)(B),

“(II) reasonable hourly rates for the individuals performing such work based on hourly rates charged by other attorneys for the rendition of comparable services, including rates charged by adversary defense counsel in the representation, taking into account the factors described in clauses (i), (iii), (v), and (vii) of paragraph (12)(B), and

“(III) to the extent such items are not taken into account in establishing the reasonable hourly rates under subclause (II), an appropriate adjustment rate determined in accordance with subparagraph (C) to compensate the collecting attorney for periods of substantial risk of non-payment of fees and for skillful or innovative services which increase the amount of the applicable plaintiff's recovery.

“(iii) Fees in certain settlements.--For purposes of this subparagraph, the value of services for any collecting attorney receiving fees under the Master Settlement Agreement shall be deemed to include a reasonable fee that is based on a reasonable hourly rate (including appropriate adjustment rates) of not less than $____ per hour

“(C) Adjustment rate.--

“(i) In general.--For purposes of this paragraph, an appropriate adjustment rate is a percentage of the reasonable hourly rate under subparagraph (B)(ii)(II) which is added to the amount of such rate and which is not more than the sum of one risk percentage and one skill percentage described in clauses (ii) and (iii), respectively.

“(ii) Risk percentage.--For purposes of this subparagraph, the term ‘risk percentage' means a percentage rate that is proportional to the collecting attorney's risk of nonrecovery of fees and which is--

“(I) in the case of a collecting attorney who assumed a substantial risk of nonpayment of fees, not more than 100 percent,

“(II) in the case of a collecting attorney who assumed a substantial risk of nonpayment of fees and devoted more than 8,000 hours of legal work (as described in subparagraph (B)(ii)(I)) and more than 2 years to the case before resolution of all claims, not more than 200 percent, or

“(III) in the case of a collecting attorney who assumed a substantial risk of nonpayment of fees and devoted more than 15,000 hours of legal work (as described in subparagraph (B)(ii)(I)) and more than 4 years to the case before resolution of all claims, not more than 300 percent.

“(iii) Skill percentage.--For purposes of this subparagraph, the term ‘skill percentage' means, in the case of a collecting attorney who has demonstrated exceptionally skillful or innovative legal service which generated a recovery for the applicable plaintiff substantially greater than the typical recovery in similar cases, a percentage rate that is proportional to the increase in the applicable plaintiff's recovery and that is not more than 100 percent.

“(iv) Limitation.--An appropriate adjustment rate shall not increase the collecting attorney's fee above an amount that is proportional to the applicable plaintiff's recovery.

“(D) Court approval of fees.--Fee payments approved by any court shall be presumed to not be in excess of the value of the services received in exchange therefor if the court approving the fee--

“(i) did not approve an adjustment rate greater than that determined to be appropriate under subparagraph (C) in a case where such fee included an adjustment rate, and

“(ii) obtained and relied upon a report of a legal auditing firm with respect to such fee in accordance with the procedures in paragraph (12).

“(7) Excess fee.--For purposes of this section, the term ‘excess fee' means the excess referred to in paragraph (6)(A).

“(8) Joint and several liability.--For purposes of this section, if more than 1 person is liable for any tax or penalty imposed by paragraph (4), all such persons shall be jointly and severally liable for such tax or penalty.

“(9) Applicable plaintiff.--For purposes of this section, the term ‘applicable plaintiff' means any person represented by a collecting attorney with respect to a claim described in paragraph (10)(A).

“(10) Other definitions and rules.--For purposes of this section--

“(A) Collecting attorney.--The term ‘collecting attorney' means any person engaged in the practice of law who represents--

“(i) any governmental entity, including any State, municipality, or political subdivision of a State, or any person acting on such entity's behalf, including pursuant to Federal or State Qui Tam statutes, in a claim for recoupment of payments made or to be made by such entity to or on behalf of any natural person by reason, directly or indirectly, of a breach of duty that causes damage to such natural person,

“(ii) any organization described in paragraph (3) or (4) of section 501(c) and exempt from tax under section 501(a), in a claim for damages based on a breach of duty, whether civil or criminal, causing damage to such organization,

“(iii) any natural person seeking to recover damages in a claim based on breaches of duty, whether civil or criminal, causing damage to such natural person, or

“(iv) any assignee or other holder of claims described in clause (i), (ii), or (iii), when 1 or more of such claims, whether or not joined in 1 action, involve the same or a coordinated group of plaintiff's attorneys or similarly situated defendants, arise out of the same transaction or set of facts or involve substantially similar liability issues, and result in settlements or judgments aggregating at least $100,000,000.

“(B) Taxable period.--The term ‘taxable period' means, with respect to any excess fee transaction, the period beginning with the date on which the transaction occurs and ending 90 days after the earliest of--

“(i) the date of the mailing of a notice of deficiency under section 6212 with respect to the tax imposed by paragraph (4), or

“(ii) the date on which the tax imposed by paragraph (4) is assessed.

“(C) Master settlement agreement.--The term ‘Master Settlement Agreement' means that certain Master Settlement Agreement of November 23, 1998, and other, concluded Settlement Agreements based on State health care expenditures pursuant to title XIX of the Social Security Act (42 U.S.C. 1396 et seq.), including lawsuits involving the States of Florida, Minnesota, Mississippi, and Texas.

“(D) Correction.--

“(i) General rule.--Any excess fee transaction is corrected by undoing the excess fee to the extent possible and taking any additional measures necessary to place the applicable plaintiff in a financial position not worse than that in which such plaintiff would be if the collecting attorney were dealing under the highest fiduciary standards.

“(ii) Payment of excess fees.--

“(I) In general.--Except as provided in subclause (II), a collecting attorney corrects an excess fee transaction by paying any excess fees plus interest to the applicable plaintiff.

“(II) Certain settlements.--In the case of excess fees arising from or related to the Master Settlement Agreement, the collecting attorney corrects an excess fee transaction by paying any excess fees plus interest to the Secretary of the Treasury as trustee for the Master Settlement Agreement Attorney Excess Fee Trust Fund. The Secretary shall distribute 60 percent of any money paid into the Master Settlement Agreement Attorney Excess Fee Trust Fund to the 50 States by regulations in proportion to each State's share of the United States population.

“(iii) No waiver of fee.--No collecting attorney may avoid imposition of any tax imposed under paragraph (4) by transferring any portion of the excess fee or refusing to accept any portion of the excess fee.

“(E) Limited reasonable cause.--For purposes of section 4962(a), an excess fee transaction shall not be treated as an event which was due to reasonable cause if the amount of the fee provided would exceed the value of the services received in exchange therefor determined with the maximum adjustment rate allowed under paragraph (6)(C).

“(11) Disclosure requirements.--

“(A) Treatment as excess fee.--Any fee provided after the date of the enactment of this subsection by an applicable plaintiff (including payments resulting from litigation on behalf of an applicable plaintiff determined on an hourly or percentage basis, whether such fee is paid from the applicable plaintiff's recovery, pursuant to a separately negotiated agreement, or in any other manner), directly or indirectly, to or for the use of any collecting attorney with respect to such applicable plaintiff shall be deemed to be an excess fee provided in an excess fee transaction unless the disclosure requirements described in subparagraph (B) are met.

“(B) Contents of statement.--The disclosure requirements of this paragraph are met for any taxable year in which a collecting attorney receives any fees with respect to a claim described in paragraph (10)(A), if such collecting attorney--

“(i) includes in the return of tax for such taxable year a statement including the information described in paragraph (6) with respect to such claim, and

“(ii) provides a statement including the information described in paragraph (6) to the applicable plaintiff prior to the deadline (including extensions) for filing such return.

“(12) Legal auditing firm.--

“(A) In general.--In any case before a Federal district court or a State court in which the court approves fees paid to a collecting attorney, the court shall seek bids from legal auditing firms with a specialty in reviewing attorney billings and select 1 such legal auditing firm to review the billing records submitted by the collecting attorney, under the same standards the firm would use if it were hired by a private party to review legal bills submitted to the party, for the reasonableness of such attorney's billing patterns and practices. The court shall require the collecting attorney to submit billing records, cost records, and any other information sought by such firm in its review.

“(B) Review by legal auditing firm.--In reviewing the billing records and work performed by the collecting attorney, the legal auditing firm shall address all relevant matters, including--

“(i) the hourly rates of the collecting attorney compared with the prevailing market rates for the services rendered by the collecting attorney,

“(ii) the number of hours worked by the collecting attorney on the case compared with other cases that the collecting attorney worked on during the same period,

“(iii) whether the collecting attorney performed tasks that could have been performed by attorneys with lower billing rates,

“(iv) whether the collecting attorney used appropriate billing methodology, including keeping contemporaneous time records and using appropriate billing time increments,

“(v) whether particular tasks were staffed appropriately,

“(vi) whether the costs and expenses submitted by the collecting attorney were reasonable,

“(vii) whether the collecting attorney exercised billing judgment, and

“(viii) any other matters normally addressed by the legal auditing firm when reviewing attorney billings for private clients.

“(C) Filing of report; response; burden of proof.--The court shall set a date for the filing of the report of the legal auditing firm, and allow the collecting attorney or any applicable plaintiff to respond to the report within a reasonable time period. The report shall be presumed correct unless rebutted by the collecting attorney or any applicable plaintiff by clear and convincing evidence.

“(D) Fee for legal auditing firm.--The fee for the report of the legal auditing firm shall be paid from the collecting attorney's fee award, the applicable plaintiff's recovery, or both in a manner determined by the court.

“(13) Regulations.--The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations to prevent avoidance of the purposes of this section and regulations requiring recordkeeping and information reporting.”.

“(14) Declaratory judgments relating to tax on excess fee transactions.--

“(A) In general.--In a case of actual controversy involving--

“(i) a determination by the Secretary or the collecting attorney with respect to the imposition of the excise tax on excess fee transactions on such collecting attorney under paragraph (4), or

“(ii) a failure by the Secretary or the collecting attorney to make such a determination, upon the filing of an appropriate pleading by an applicable plaintiff, the Tax Court may make a declaration with respect to such determination or failure. Any such declaration shall have the force and effect of a decision of the Tax Court and shall be reviewable as such.

“(B) Deferential review.--If a collecting attorney's fee has been approved by a court in accordance with paragraph (6)(D) or by the Secretary pursuant to this section, the Tax Court shall review the fee only for an abuse of discretion.

“(C) Legal auditing firm.--In any petition for a declaration referred to in subparagraph (A):

“(i) No previous report.--If a report by a legal auditing firm that meets the requirements of paragraph (10) has not been previously produced and relied on by another court, the Tax Court shall hire such a legal auditing firm and rely on its report pursuant to the procedures in paragraph (10).

“(ii) Second report.--

“(I) In general.--If a report by a legal auditing firm has been approved by a court in accordance with this section, the Tax Court shall hire a second legal auditing firm upon the request of the petitioner.

“(II) Fee for report.--The Tax Court may direct the petitioner to pay the fee for any report of a legal auditing firm provided pursuant to subclause (I).

“(D) Time for bringing action.--No proceeding may be initiated under this paragraph by any person until 90 days after such person first notifies the Secretary of the excess fee transaction with respect to which the proceeding relates.”.

(b) Conforming Amendments.--

(A) Subsections (a), (b), and (c) of section 4963 are each amended by inserting “, or paragraph (4) of section 162(f)” before the period.

(B) Subsection (e) of section 6213 is amended by inserting “, or paragraph (4) of section 162(f) (relating to excess fee transactions),” before the period.

(C) Paragraphs (2) and (3) of section 7422(g) are each amended by inserting “162(f)(4),” before “4941”.

(c) Effective Date.--

(A) In general.-- Except as provided in subparagraph (B), the amendments made by this section shall apply to amounts paid or incurred after April 27, 2003, except that such amendment shall not apply to amounts paid or incurred under any binding order or agreement entered into on or before April 27, 2003. Such exception shall not apply to an order or agreement requiring court approval unless the approval was obtained on or before April 27, 2003.

(B) Excess fees.--

(i) In general.--The amendments made by this section relating to taxes and penalties on excess attorney fees shall apply to excess fees paid after the date of enactment of this Act.