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2005 Ron Paul Chapter 62
Not linked on Ron Paul’s Congressional website.
Congressional Record [.PDF]
An Article By Mr. Lee Jackson
14 June 2005
HON. RON PAUL
OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
Tuesday, June 14, 2005
2005 Ron Paul 62:1
Mr. PAUL. Mr. Speaker, I would like to place in today’s record the following article by
Mr. Lee Jackson, a constituent of mine who is
battling a perverse tax law. Mr. Jackson and
several other individuals were the target of a
frivolous lawsuit that rightfully was dismissed
for its lack of merit. Mr. Jackson and his fellow
defendants — all totally blameless — spent many
thousands of dollars in legal fees fighting the
meritless suit. They understandably filed their
own lawsuit against both the original plaintiffs
and the plaintiffs’ law firm. However, they cannot
reach a monetary settlement for damages
because our tax code treats all proceeds from
such a settlement — even the portion Mr. Jackson
owes to his attorneys — as taxable income
for Mr. Jackson. As a result, Mr. Jackson literally
cannot afford to settle his case because
he will owe more in income taxes than he receives
from the settlement! Furthermore, he
cannot deduct his attorneys fees because of
the alternative minimum tax. Mr. Jackson’s
story, as told below, provides a vivid example
of why Congress must change the tax code to
ensure that attorney fees are deemed taxable
income to the attorneys who actually receive
them, not their clients.
2005 Ron Paul 62:2
TAXING JUSTICE
“It is in justice that the ordering of society is
centered.”
Aristotle
“Justice is the constant and perpetual will to
allot to every man his due.”
— Domitus
Ulpian
(By Lee Jackson)
2005 Ron Paul 62:3
There is perversity in using tax policy to reduce the numbers of frivolous lawsuits.
Courts were developed in the first place to
adjudicate impartially the relative merit of
one person’s argument over another’s in a
dispute. The controlling premise was that
courts were best able to sort through facts
and opposing arguments in specific cases and
arrive at impartial resolutions.
2005 Ron Paul 62:4
Distrust in the courts has upset the delicate balance between the legislature and the
judiciary. When judges pick and choose the
laws they will or will not enforce; when they
dictate new law from the bench; when their
standard strays from the Constitution and
looks to current popular thinking and foreign
decisions; or when judges bow before the
force of political money during confirmation
re-election cycles; when those things happen,
citizens lose confidence in the ability to
achieve justice, and turn to the legislature
for relief. Therein lies new danger.
2005 Ron Paul 62:5
Courts are uniquely suited to try the facts of particular cases. Legislatures are not.
However, legislatures must react to concerns
of constituents, and so they have sought solutions
as Americans pressed them to weigh
in on the perceived high volume of seemingly
frivolous cases that drove up medical and
other costs, and seemed to precipitate a
downward spiral in quality of crucial services.
2005 Ron Paul 62:6
Attending these issues were actions of legislatures, courts, and executive branches of
government. Take the case of Cynthia Spina,
the Illinois Forest Preserve policewoman
who won a judgment against her employer
after a six-year sexual-harassment lawsuit.
Instead of netting $300,000 after paying $1
million to her attorney, she was taxed
$400,000 by the IRS. The law that made such
travesty possible was promulgated in 1996
that differentiate between types of damages.
Gone was the concept of damages being a
monetary amount determined by a jury as
the amount necessary to bring a plaintiff
back to equilibrium. Justice is now a taxable
event.
2005 Ron Paul 62:7
A new premise seems to permeate the land: That all plaintiffs are suspect, and likely to
be greedy money-grubbers forwarding spurious
complaints. Such a premise does a disservice
to juries whose members receive negligible
compensation for their services and
to the vast majority of plaintiffs who turn to
courts as a last resort.
2005 Ron Paul 62:8
Consider our case still pending in California. My partner and I appealed to the FBI
and the SEC for alleged corporate malfeasance.
We also alerted the public via the
Internet. For our trouble, we, along with
friends and family were sued personally for
$60 million. The courts in California found
we had done nothing wrong and further, that
we were sued primarily to silence us.
2005 Ron Paul 62:9
In effect, the courts in California were used as a weapon to interfere with our rights to
free speech. Along the way, this case resulted
in a binding precedent extending First
Amendment rights to the Internet. That
precedent has been used all the way to the
US Supreme Court as well as in several state
supreme courts.
2005 Ron Paul 62:10
Left with hundreds of thousands of dollars in legal bills accumulated for our defense, we
sought to recover through the courts. As we
proceeded, we became aware of the Spina
case, and feared that the same tax provisions
could apply to us.
2005 Ron Paul 62:11
What we found was even more perverse. Spina’s debacle resulted because the attorney’s
fee was charged as income to her, and
then Alternative Minimum Tax (AMT) was
applied. In tax court, Spina pleaded the unfairness
with the judge, who sympathized
with her but said his hands were tied by the
law (a fine time to be a strict constructionist!
I think it intuitively obvious to the
casual observer that a US government that
taxes a citizen more than the citizen receives
is breaking a Constitutional proscription
somewhere!).
2005 Ron Paul 62:12
In the California case, we (the erstwhile defendants) became plaintiffs in pursuit of
recovery of our legal expense and other damages.
It is worth mentioning that our wives
were also sued, and another couple as well.
Neither our wives nor the other couple were
even alleged to have done anything wrong —
they were sued in order to bring pressure on
us. My partner and I live in Texas. The other
couple lives in Maine.
2005 Ron Paul 62:13
We soon learned of a difference in treatment depending upon residence. In Texas,
the legislature had defined attorneys’ fees as
belonging to attorneys, and therefore not
taxable to plaintiffs. In Maine, no such determination
had been made. Also, the Federal
District court in which Texas lies had
decided that damages were not subject to Alternative
Minimum Taxes. The federal court
district in which Maine lies had decided the
opposite. As a result, the Maine plaintiffs
could expect to realize an after-tax net that
would have been an estimated 1/15 of the net
that the Texas plaintiffs could have expected
on the same estimated award. Ironically, all
we plaintiffs in our case had been subjected
to the exact same set of circumstances; we
would have appeared together in the same
court; and, if damages were awarded, they
would have been determined by the exact
same jury.
2005 Ron Paul 62:14
Enter the Supreme Court. In January, 2005, the Supreme Court issued a decision that decreed
equal federal tax treatment among all
plaintiffs across the breadth of the United
States; that attorneys’ fees should be taxed
to plaintiffs; and that Alternative Minimum
Taxes apply. In effect, the Supreme Court’s
decision put almost all plaintiffs in the same
tax position as Spina. Taken to its logical
and viable extreme, this decision puts civil
courts off limits as an alternative to violence
to resolve bona fide disputes.
2005 Ron Paul 62:15
There is an exemption to that decision. Inspired by the Spina case, Congress last year
passed the Civil Rights Tax Relief Act. It
provided that, in Civil Rights cases, attorneys’
fees would not be taxed to plaintiffs
(on the basis that the amount had been taxed
twice — first to plaintiffs, then to attorneys).
Unfortunately for Spina, the law was not
made retroactive, so as of this moment, she
still contends with the IRS over her tax bill.
However, other plaintiffs with similar cases
realized tremendous relief.
2005 Ron Paul 62:16
Not so for us in our California case, and thousands of other plaintiffs also facing ruinous
taxes after winning their cases. Clearly
the courts in California were used as a weapon
to infringe on our civil rights. However,
in that underlying case, we were then defendants.
When we filed suit to recover damages,
the case was characterized differently
and was no longer, technically, a civil rights
case. Our dilemma had been to seek court assistance
to recover, or face paying our legal
expense for our own defense in the underlying
case for years to come. It did not occur
to us at the time we filed with the court that
we could win and end up owing an even
greater amount to the IRS.
2005 Ron Paul 62:17
That is the effect of the Supreme Court ruling. Because ours is technically not a
civil rights case, we do not enjoy the benefits
of the exemption inspired by the Spina case.
We had properly appealed to our government
for help, and the government has now placed
us in a position where our own best interests
are indeterminate, so we cannot settle (ironic,
since the intent of most tort reform has
been to encourage settlement). When a jury
makes an award, the tax exposure will likely
be ruinous. Another irony is that the higher
the award, the greater our tax exposure. And
we are middle-class citizens.
2005 Ron Paul 62:18
The basis on which the Supreme Court decided that attorneys’ fees are taxed as income
to plaintiffs is that plaintiffs pay
attorneys;
that the amount they pay comes to
them as a result of the award; that money to
pay attorneys was something they did not
have prior to the award, and therefore coming,
as it would from the award, must be income.
The rationale is held irrelevant (in
contingency cases) that attorneys receive
payment only if and after an actual award is
received and that there is shared risk between
plaintiff and attorney.
2005 Ron Paul 62:19
There is another problem with taxing awards as income, and this is even more
poignant. As mentioned earlier, awards are a
jury’s determination of the monetary equivalent
of restoring a client to equilibrium
(without consideration for tax consequences).
By definition, plaintiffs owned
that equivalent value prior to the need to
seek court intervention and thus is not income.
2005 Ron Paul 62:20
Where back wages are sought and won, obviously income is received. However, even in
those cases there should be no more taxes assessed
or collected than would have been had
the plaintiff been paid normally.
2005 Ron Paul 62:21
Another major factor that should weigh in favor of plaintiffs and obviate taxes on
awards is that courts, state legislatures, and
Congress establish the rules under which a
citizen seeks justice. A plaintiff going into
court in pro per is in extreme jeopardy of
losing over factors as innocuous as presenting
the case in a form that violates
local-court determined rules. When citizens
are sued, they often have no choice but to retain
the very best legal expertise possible.
When they win their cases and are left with
oppressive debt, they should have recourse to
the courts for relief without incurring even
more horrendous debt to the government.
The idea is laughable that people would willingly
choose to spend their hard-earned income
and scarce time to be in court for
recreation (i.e. the “pursuit of happiness”).
2005 Ron Paul 62:22
The concept of exemptions presents its own difficulties. By legislatively determining
that some cases are entitled to favorable
tax treatment over others, lawmakers
are making judgments over the relative merits
of cases in advance of either a judge or
jury examining specific facts. On its face,
such policy screams violation of Constitutional
equal protection and equal access to
the courts. Justice is no longer blind. And to
the extent that such laws continue, the Federal
government becomes complicit in
chilling citizen participation on issues such
as the ones in our case in California. Bad
guys already know this, and they know that
as a result, they can do bad things to good
people with impunity. The combined
branches of government have evolved those
conditions.
2005 Ron Paul 62:23
At present, there is legislative effort under way to cure the situation for plaintiffs excluded
by current exemptions. There is also
a strong Congressional move to abolish AMT
altogether. (That would be a great thing for
the country, but a subject for another time.)
A danger for plaintiffs is that, should AMT
be abolished, a strong sense could I devolve
that the plight of plaintiffs would then be resolved.
Such is not the case.
2005 Ron Paul 62:24
AMT only increases the degree of travesty. Eliminating them for plaintiffs still leaves
them exposed to ordinary tax rates (think of
an ordinary citizen paying taxes on a $1 million
award, half of which goes to pay attorneys,
and much which goes to pay other expenses.
The citizen could still be in a break-
even or deficit position, and certainly one
that in no way approaches restoration or justice.).
2005 Ron Paul 62:25
Studying ways to include others in exemptions is self-defeating. There are too many
circumstances to contemplate and leaves
citizens with the dubious proposition of having
to seek a legislative solution after having
won in court. It further requires the impossible
task of timing the court decision
such that it is issued only after the passage
of the legislation in order to be sure that the
new law protects them (retroactivity is
frowned upon in the House).
2005 Ron Paul 62:26
The real issues are: Should any legislature ever be deciding the relative merit of any
civil dispute over any other civil dispute by
creating rapacious tax laws and then establishing
exemptions? (As soon as they do so,
they create violations of equal protection
and access.) Should the government ever be
entitled to a share of what a jury has decided
is the amount required to restore a plaintiff
to equilibrium? (Every dollar taxed on an
award is a dollar subtraction from that
plaintiff’s restoration as determined by a
jury after due deliberation over all facts pertinent
to the case — justice becomes impossible
as a practical and mathematical matter).
Should attorneys’ fees be taxed to
plaintiffs? (The government is going to tax
that amount to the attorney. When the attorney
is retained on a contingency basis,
both attorney and plaintiff are entering into
a transaction that is high risk with no gain
for either unless they win at court. And, it is
the courts, Congress, and state legislators
that set the conditions under which requiring
an attorney for any court proceeding is
mandated as a practical matter for most
citizens.)
2005 Ron Paul 62:27
If the answer to each of the above questions is “no” (and I think a reasonable man
would conclude that is the correct answer for
each of question), then the proper legislative
response is easy: Define attorneys’ fees as belonging
to attorneys; and, do away with
taxes on awards.
2005 Ron Paul 62:28
If both of those actions are taken, plaintiffs with bona fide complaints rightfully
will enjoy a full measure of restoration to
equilibrium as determined by a jury of their
peers. Admittedly, that allows for occasionally
rewarding miscreants. The alternative
ensures penalizing law-abiding citizens who
have already suffered.
2005 Ron Paul 62:29
Adopting the above leaves unsettled how to discourage frivolous cases. There are
other ways to do that including award limits,
and attorney fee caps. However, the solution
cannot and must not include provisions
that deny justice and impose further penalties
on law-abiding citizens who appeal to
their governments.
2005 Ron Paul 62:30
As these things ate contemplated, a figurative call to arms is in order. Taxes imposed
on individual citizens across the breadth of
the original Thirteen Colonies in our early
history were only a fraction of the burden
thrust on individual contemporary citizens
now carrying these burdens. These unjustly
treated citizens already number in thousands;
and their numbers will grow rapidly
as the effects of the Supreme Court decision
become felt.
2005 Ron Paul 62:31
It is hard to conceive of a single congressional district left unaffected. Corrective action
should be swift.
2005 Ron Paul 62:32
Citizens that must contend with government taxes and tax collecting agencies of the
government after prevailing in court are denied
justice. Allowing them to negotiate to a
reduced amount after the fact is neither justice
nor a solution — it is a mockery and refutation
of the most fundamental principles
which gave birth to our great country and
for which patriots gave their lives.
2005 Ron Paul 62:33
In contemplating concepts of taxing justice, it is appropriate to recall that plaintiffs
seek court resolution as an alternative to violence;
that they pay in advance for their
“day in court” through normal taxes; that in
entering the court, they demonstrate tremendous
faith in their fellow citizens and
government; that the aim of the court is to
return prevailing plaintiffs to equilibrium;
and that if plaintiffs are successful, they are
entitled to an assumption of having brought
a bona fide complaint. To require more is to
delay justice, and in that regard, it is well to
remember William Gladstone’s words: “Justice
delayed is justice denied.”
2005 Ron Paul 62:34
Or as Theodore Roosevelt said, “Justice consists not in being neutral between right
and wrong, but in finding out the right and
upholding it, wherever found, against the
wrong.” Leaving citizens stranded in bewildering
circumstances that destroy the pursuit
of happiness and is brought about by
poorly thought out government action is
wrong. Correcting quickly is right.
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