[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 887 Introduced in Senate (IS)]
108th CONGRESS
1st Session
S. 887
To amend the Internal Revenue Code of 1986 to apply an excise tax to
excessive attorneys fees for legal judgments, settlements, or
agreements that operate as a tax.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
April 10, 2003
Mr. Kyl (for himself and Mr. Cornyn) introduced the following bill;
which was read twice and referred to the Committee on Finance
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to apply an excise tax to
excessive attorneys fees for legal judgments, settlements, or
agreements that operate as a tax.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Intermediate Sanctions Compensatory
Revenue Adjustment Act of 2003'' (ISCRAA).
SEC. 2. EXCISE TAXES ON EXCESS FEE TRANSACTIONS OF CERTAIN ATTORNEYS.
(a) In General.--Subchapter D of chapter 42 of the Internal Revenue
Code of 1986 (relating to failure by certain charitable organizations
to meet certain qualification requirements) is amended by adding at the
end the following new section:
``SEC. 4959. TAXES ON EXCESS FEE TRANSACTIONS.
``(a) Initial Taxes.--There is hereby imposed on the collecting
attorney in each excess fee transaction a tax equal to 5 percent of the
excess fee. The tax imposed by this paragraph shall be paid by any
collecting attorney referred to in subsection (f)(1) with respect to
such transaction.
``(b) Additional Tax on the Collecting Attorney.--In any case in
which a tax is imposed by subsection (a) 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 tax equal to 200 percent
of the excess fee involved. The tax imposed by this paragraph shall be
paid by any collecting attorney referred to in subsection (f)(1) with
respect to such transaction.
``(c) Excess Fee Transaction; Excess Fee.--For purposes of this
section--
``(1) Excess fee transaction.--
``(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 subsection
(g)(1) 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
subparagraphs (B) and (D) of subsection
(h)(2),
``(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 subparagraphs
(A), (C), (E), and (G) of subsection
(h)(2), 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.
``(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 subsection
(h).
``(2) Excess fee.--The term `excess fee' means the excess
referred to in paragraph (1)(A).
``(d) Joint and Several Liability.--For purposes of this section,
if more than 1 person is liable for any tax imposed by subsection (a),
all such persons shall be jointly and severally liable for such tax.
``(e) 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 subsection (f)(1).
``(f) Other Definitions and Rules.--For purposes of this section--
``(1) Collecting attorney.--The term `collecting attorney'
means any person engaged in the practice of law who
represents--
``(A) 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,
``(B) 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,
``(C) 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
``(D) any assignee or other holder of claims
described in subparagraph (A), (B), or (C),
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.
``(2) 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--
``(A) the date of the mailing of a notice of
deficiency under section 6212 with respect to the tax
imposed by subsection (a), or
``(B) the date on which the tax imposed by
subsection (a) is assessed.
``(3) Correction.--
``(A) 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.
``(B) Payment of excess fees.--
``(i) In general.--Except as provided in
clause (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 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, the
collecting attorney corrects an excess fee
transaction by paying any excess fees plus
interest to the 50 States in proportion to each
State's share of the United States population.
``(C) No waiver of fee.--No collecting attorney may
avoid imposition of any tax imposed by this section by
transferring any portion of the excess fee or refusing
to accept any portion of the excess fee.
``(g) Disclosure Requirements.--
``(1) 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 paragraph (2) are met.
``(2) 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 subsection (f)(1), if such collecting attorney--
``(A) includes in the return of tax for such
taxable year a statement including the information
described in subsection (c)(1) with respect to such
claim, and
``(B) provides a statement including the
information described in subsection (c)(1) to the
applicable plaintiff prior to the deadline (including
extensions) for filing such return.
``(h) Legal Auditing Firm.--
``(1) 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.
``(2) 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--
``(A) the hourly rates of the collecting attorney
compared with the prevailing market rates for the
services rendered by the collecting attorney,
``(B) 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,
``(C) whether the collecting attorney performed
tasks that could have been performed by attorneys with
lower billing rates,
``(D) whether the collecting attorney used
appropriate billing methodology, including keeping
contemporaneous time records and using appropriate
billing time increments,
``(E) whether particular tasks were staffed
appropriately,
``(F) whether the costs and expenses submitted by
the collecting attorney were reasonable,
``(G) whether the collecting attorney exercised
billing judgment, and
``(H) any other matters normally addressed by the
legal auditing firm when reviewing attorney billings
for private clients.
``(3) 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.
``(4) 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.
``(i) 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.''.
(b) Conforming and Clerical Amendments.--
(1) Subsections (a), (b), and (c) of section 4963 of the
Internal Revenue Code of 1986 are each amended by inserting
``4959,'' after ``4958,''.
(2) Subsection (e) of section 6213 of such Code is amended
by inserting ``4959 (relating to excess fee transactions),''
before ``4971''.
(3) Paragraphs (2) and (3) of section 7422(g) of such Code
are each amended by inserting ``4959,'' after ``4958,''.
(4) The heading for subchapter D of chapter 42 of such Code
is amended to read as follows:
``Subchapter D--Failure by Certain Charitable Organizations and Persons
to Meet Certain Qualification Requirements and Fiduciary Standards''.
(5) The table of subchapters for chapter 42 of such Code is
amended by striking the item relating to subchapter D and
inserting the following:
``Subchapter D. Failure by certain
charitable organizations and
persons to meet certain
qualification requirements and
fiduciary standards''.
(6) The table of sections for subchapter D of chapter 42 of
such Code is amended by adding at the end the following new
item:
``Sec. 4959. Taxes on excess fee transactions.''.
(c) Effective Date.--The amendments made by this section shall
apply to excess fees paid on or after June 1, 2002.
SEC. 3. DECLARATORY JUDGMENTS RELATING TO EXCISE TAXES ON EXCESS FEE
TRANSACTIONS OF CERTAIN ATTORNEYS.
(a) In General.--Subchapter B of chapter 76 of the Internal Revenue
Code of 1986 (relating to judicial proceedings) is amended by
redesignating section 7437 as section 7438 and by inserting after
section 7436 the following new section:
``SEC. 7437. DECLARATORY JUDGMENTS RELATING TO TAX ON EXCESS FEE
TRANSACTIONS.
``(a) In General.--In a case of actual controversy involving--
``(1) 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
section 4959, or
``(2) 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 section 4959(c)(1)(D) or by the
Secretary pursuant to section 4959, 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 subsection (a):
``(1) No previous report.--If a report by a legal auditing
firm that meets the requirements of section 4959(h) 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 section 4959(h).
``(2) Second report.--
``(A) In general.--If a report by a legal auditing
firm has been approved by a court in accordance with
section 4959, the Tax Court shall hire a second legal
auditing firm upon the request of the petitioner.
``(B) 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 subparagraph (A).
``(d) Time for Bringing Action.--No proceeding may be initiated
under this section 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.
``(e) Definitions.--For purposes of this section, any term used in
this section and also in section 4959 shall have the meaning given such
term by section 4959.''.
(b) Clerical Amendment.--The table of sections for subchapter B of
chapter 76 of the Internal Revenue Code of 1986 is amended by striking
the item relating to section 7437 and by inserting the following new
items:
``Sec. 7437. Declaratory judgments relating to tax on excess fee
transactions.
``Sec. 7438. Cross references.''.
(c) Effective Date.--The amendments made by this section shall
apply to actions after the date of the enactment of this Act.
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