Plaintiff Attorneys Get a (Tax) Break

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Plaintiff Attorneys By Brian Michaels, Esq. Get a (Tax) Break!

Trial lawyers fight hard for their clients. They can invest years of time and money in a case, with the hopes of getting paid when they recover for their client. The payouts may be few and far between, but when they come, they come all at once—a complete mismatch of taxable revenues and deductions. Such is the world of the contingent fee.

What many trial lawyers don’t often consider, or don’t know, is that there is a new, unique and powerful option available only to contingent fee lawyers—the deferral of their fees with a customized investment portfolio. That is, the contingent fee trial lawyer can choose how and when to receive the agreed upon fee, including the option of a deferred “customized portfolio,” giving him the chance for market-based returns. This “customized portfolio” can consist of a managed portfolio of equities, bonds, structured notes, alternative investments and other non-insurance investments. This new deferral opportunity gives the lawyer the chance to receive a higher rate of return on the deferred fee than was available in the past.

10 x The Trial Lawyer This unique opportunity basically al- subject to ERISA type constraints such decrease the overall tax rate paid on the lows the contingent fee to be deferred so as employee participation requirements, fee over time, saving additional dollars that the fee is collected in installments, income caps (100% of the fee could be lost to tax—resulting in real, hard dollar as determined by the lawyer. The lawyer deferred), and ERISA type reporting. tax savings. pays income tax in the year that a cash This can also be an attractive tool to installment is actually received, and not Why would a lawyer consider this type smooth out income from year-to-year when the client matter is successfully of strategy? and to minimize problems such as the completed. Why is this so powerful? It alternative minimum tax and phase-outs, allows the lawyer, in essence, to invest his 1. INCOME TAX DEFERRAL. with the very real possibility of lowering fee on a pre-tax basis (in the same invest- taxes actually paid. ments as they would after-tax) without For example, let’s assume a fee of the usual restrictions placed upon such $1,000,000 and the lawyer does not 2. RETIREMENT PLANNING. arrangements. defer his fee. Let’s also assume a tax rate Score a tax victory for trial lawyers! of 40%. Here the lawyer would net One hundred percent of income can Dollars not lost to tax are increased dol- $600,000 to invest, losing $400,000 to be deferred. Unlike other retirement lars in the lawyer’s pocket. Likewise, the tax. Now assume the lawyer defers his plans, there is no income limit and no earnings on those dollars not lost to tax fee. He pays no tax in the current year participation rules. It has been described (or paid in a later year) equal more dol- and has the full $1,000,000 to invest. as an uncapped 401(k) plan. Again, tax lars in the lawyer’s pocket. The attorney now has a much larger deferral, along with the possibility of de- So, not only is this plan custom- investment base that can generate much ferring receipt of income (or smoothing ized, but it is not subject to the income greater returns than if he did not defer the income) into lower income years can tax rules that regulate other deferred his fee. Through proper planning, the leverage fees into a greater net retirement compensation arrangements, nor is it lawyer can also design the payout to income.

The Trial Lawyer x 11 down to business 3. “MATCHING” INCOME AND designed by the individual attorney. Any caveats? DEDUCTIONS. As discussed earlier, returns can be This is based in federal income tax law. “market-based,” which can be derived ® Law firms and solos can use deferred from a managed portfolio of equities, As with any tax matter, work with an Strategic Finance for Law Firms attorney fees to provide for future law bonds, structured notes, alternative experienced deferred attorney fee con- firm overhead expenses. By deferring a investments and other non-insurance sultant and your tax adviser. portion of current fees (or a portion of investments (generally, any publicly The assignment companies who of- big spikes in income), firms can lower traded asset), or they can be fixed and fer deferred attorney fees have different reliance on lines of credit for future op- guaranteed through the use of fixed requirements. Like many issues that in- erating costs. In effect, deferring present annuities. Payments can be customized volve tax strategies, procedure and form Over a Decade income allows lawyers to “match” future to contain both fixed and market-based is very important. It is important that income and deductions. components. the lawyer works with a consultant with Lawyers may feel relieved knowing In addition, payments can be made the experience and expertise required that firm overhead is completely funded monthly, quarterly, semi-annually, in making sure that specific rules are In Business for the next five years and they can annually, or other ways that match followed. focus on cases instead of worrying about the income needs of the attorney. The Deferring one’s fees is a powerful paying bills. This state of mind might deferral can be a single lump sum at tool that has been utilized by contingent also enable lawyers to better serve their some future date or a number of lump fee attorneys for decades and approved clients since they don’t need to worry sums at specified dates. Payments can be by the Courts. It is a flexible and benefi- about bills. made for the life of a recipient (with a cial strategy worth exploring, especially guaranteed amount). Any of the options in an investment climate where rates of How does this work? just discussed can be mixed together. returns are continually being squeezed. The payments can be truly designed to Trial lawyers should take advantage When the matter generating the match the specific needs of the finan- of leveraging the power of deferral to fee is being settled, the attorney or law cial, operational, and life needs of the “mitigate the mismatch” and “maximize firm determines what amount they want attorney or law firm. the value” of their hard fought fees. paid in future years and when. That payment stream is then written into the Why does this work? settlement agreement. That obligation Brian Michaels is General Counsel to make those future payments is then These deferrals have been around for for Brook-Hollow Financial assigned to an independent assignment years, approved by the U.S. Tax Court (www.brook-hollow.com) and can company, such as Kenmare Assignment in Childs v. Commissioner (2103 T.C. be reached at 480-463-1597 or Company Ltd. , or an A.M. Best A or 634, 94 TNT 223-15 (1994), and af- [email protected]. Brian A+ rated life insurance company owned firmed by the 11th Circuit U.S. Federal received his Bachelor of Arts degree or controlled “assignment company.” Appeals Court in Childs v. Commission- in Accounting from the University The future payments are then made er, (aff’d without opinion) 89 F.3d 856, of Northern Iowa. He received his directly to the attorney or law firm, Doc 96-19540, 96 TNT 133-7 (11th law degree from William Mitchell according to the agreed upon schedule Cir. 1996)). College of Law. Prior to working and amount, by the assignee. for Brook-Hollow, he worked for An individual attorney may defer Why haven’t I heard of this before? Deloitte & Touche as a Senior Tax his or her fee or the deferral can be done Manager, specializing in tax consult- at the law firm level. The entire fee from While deferring attorney fees has been ing for 1031 exchanges and tax a particular case or matter does not need around for years, the investment options planning for high net worth individ- to be deferred, but assignment compa- available have been restrictive. Before uals. He also worked as a Senior Vice nies typically require minimum assign- Kenmare Assignment Company, Ltd. President of Norwest Bank (Wells ments of $100,000. Additionally, the entered the market, the only assignment Fargo) where he managed personal attorney’s decision to structure his fees is companies have been controlled by large trust for the state of Arizona. not dependent upon his client structur- insurance companies, who restrict fund- ing his settlement. ing vehicles to the fixed and variable The payment stream is custom- annuities they provide.

Carl Berkowitz, PhD, PE, AICP, has 48 years of Trial Lawyer magazine. Andrew has 30 years which was nominated for the 2007 Academy transportation and traffic-engineering experience, experience in the media, including working as an Award for Documentary Feature. Papantonio is served as a litigation consultant, and held various anchorman and reporter for numerous televi- also a frequent guest to MSNBC, CNBC, Fox positions in industry, government, and higher sion stations. He has also traveled across America News Channel and Fox Business Channel. education, with extensive experience in planning, working as a media consultant for attorneys. design, safety, security, construction, mainte- In addition, Andrew has written and directed Michael Parenti received his Ph.D. in political nance, operations, and management. He holds a TV commercials and videos winning several science from Yale University. He has taught at a BCE in Civil Engineering and an MBA in Indus- international, national and local awards. Findley number of colleges and universities in the United trial Management from The City College of New attended Troy University as a Wallace leadership States and abroad. Parenti has won awards from York, and an MS in Transportation Planning and scholarship recipient. Project Censored, the Caucus for a New Political a PhD in Transportation Planning and Engineer- Science, the city of Santa Cruz, New Jersey Peace ing from Polytechnic University (NYU-Poly). Clay Frickey began his long career with Action, the Social Science Research Council, In addition to his work involving pedestrians, Network Affiliates at the tender age of three, the Society for Religion in Higher Educa- and virtually every form of transportation and starring in a syndicated legal ad. Due to the com- tion, and other organizations. In 2007, he was its safety (including aviation and maritime), Dr. mercial’s overwhelming success, Clay decided to awarded a Certificate of Special Congressional Berkowitz has written numerous reports and ar- go on sabbatical for the next 18 years, discovering Recognition from U.S. Representative Barbara ticles for major publications, chaired task forces, far distant lands and gaining a proper education Lee. Parenti is an internationally known award- appeared on national television and radio, and culminating in his graduation from the Univer- winning author and lecturer and is one of the made numerous scholarly presentations world- sity of Denver with degree in Marketing. Upon nation’s leading progressive political analysts. wide. He holds memberships in many transporta- graduating from college, Clay joined Network His most recent books include God and His tion professional associations and is referred as an Affiliates full time as a member of the traffic Demons (Prometheus), Contrary Notions (City expert witness through The TASA Group. department, assistant to the sales department, Lights), and The Assassination of Julius Caesar and general jack-of-all-trades in the summer of (New Press) Jerri H. Coletti has practiced in the product 2008. Outside of the office, Clay enjoys playing liability area for 15 years, representing both guitar, recording music, golfing and traveling Troy Rafferty is a shareholder at Levin, Papan- plaintiffs and defendants. She currently repre- the world. tonio. He is board certified in civil trial law and sents plaintiffs as a partner in the Newsome Law litigates mass tort, pharmaceutical and major Firm. Prior to joining Newsome Law Firm in Brian Michaels is General Counsel for Brook personal injury cases throughout the country. Mr. 2003, Coletti spent five years as an American Bar Hollow Financial. He received his Bachelor of Rafferty is AV rated by Martindale-Hubbell and Association liaison to the Republic of Bulgaria Arts degree in Accounting from the University has been recognized as one of the country’s top and a legislative advisor to the governments of of Northern Iowa. He received his law degree lawyers through inclusion in The Best Lawyers in Bulgaria and Uganda through the U.S. Agency from William Mitchell College of Law. Prior to America, The Legal 500, and Super Lawyers. for International Development. She is licensed to joining Brook Hollow, he worked as a Senior Tax practice in Florida, Ohio and Texas. Manager for Deloitte & Touche, specializing in Daniel T. Ramsdell is the founder and national tax consulting for 1031 exchanges and tax plan- director of the Association of Plaintiff Interstate Farron Cousins is Executive Editor for The Trial ning for high net worth individuals. Brian also Trucking Lawyers of America, L.L.C. Dan is Lawyer magazine. He is also a regular contributor worked as a Senior Vice President of Norwest a past elected chairman of the AAJ Interstate for EnergyBoom.com and DeSmogBlog.com. Bank (Wells Fargo), where he managed personal Trucking Litigation Group, and serves as an Cousins has worked for the Ring of Fire radio trust for the state of Arizona. elected member of the Board of Governors of program with hosts Robert F. Kennedy, Jr. and the Missouri Association of Trial Attorneys. A Mike Papantonio since 2004, and is currently C. Richard Newsome is the Managing Partner of contributing author to the book Truck Accident the producer of the program. He received his Newsome Law Firm, a boutique firm specializing Litigation, Dan has been a frequent speaker for bachelor’s degree in Political Science from the in representation of consumers catastrophically Trial Lawyer Associations across America on the University of West Florida in 2005 and became a injured by defective products. He is the President subject of interstate trucking litigation. member of American MENSA in 2009. of the Florida Justice Association and has served on the FJA board since 1998, previously hold- Harlan Schillinger is a 34 year veteran of the Lee Fang is a Researcher for The Progress Report ing the positions of F.L.A.G. Trustee, Executive advertising industry who joined Network in and ThinkProgress.org at the Center for Ameri- Committee Member, Secretary, and Membership 1985 to lead their attorney marketing efforts. can Progress Action Fund. Lee is a lifelong resi- Chairman. He has also served as a member of the Prior to joining Network Affiliates, Harlan was dent of Prince George’s County, Maryland, and Board of Governors for the American Association vice-president and one of the founding partners holds a B.A. in government and politics from the for Justice, and is a Past President of the Central of Madison, Muyskens & Jones, in Lakeville, University of Maryland, College Park. Previously, Florida Trial Lawyers Association. Connecticut. Along with his partners, Harlan Lee interned with ThinkProgress and worked as a founded the first syndication firm for retailers researcher for Progressive Accountability. During Mike Papantonio is a senior partner at Levin, using television commercials throughout the college, Lee held internships with Media Matters Papantonio, Thomas, Mitchell, Rafferty, & United States. Throughout the year, Harlan at- for America, Congresswoman Stephanie Tubbs Proctor. Mike Papantonio, Robert F. Kennedy, tends attorney meetings, conventions and several Jones (D-OH), and Westin Rinehart. Jr., and Sam Seder currently host Ring of Fire, a prominent roundtable forums throughout the nationally syndicated radio show. Mike’s role on country as a speaker and contributor in order to Andrew Findley is a contributing writer to The Ring of Fire is featured in the movie Jesus Camp, help his clients stay on top of the legal field.

8 x The Trial Lawyer