I 

108TH CONGRESS 

1ST SESSION H. R. 1926

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 HOUSE OF REPRESENTATIVES 

MAY 1, 2003

Mr. HAYWORTH introduced the following bill; which was referred to the 

Committee on Ways and Means 

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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Intermediate Sanctions 

5 Compensatory Revenue Adjustment Act of 2003’’ 

6 (ISCRAA).
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1 SEC. 2. EXCISE TAXES ON EXCESS FEE TRANSACTIONS OF 

2 CERTAIN ATTORNEYS. 

3 (a) IN GENERAL.—Subchapter D of chapter 42 of the 

4 Internal Revenue Code of 1986 (relating to failure by cer5 tain charitable organizations to meet certain qualification 

6 requirements) is amended by adding at the end the fol7 lowing new section: 

8 ‘‘SEC. 4959. TAXES ON EXCESS FEE TRANSACTIONS. 

9 ‘‘(a) INITIAL TAXES.—There is hereby imposed on 

10 the collecting attorney in each excess fee transaction a tax 

11 equal to 5 percent of the excess fee. The tax imposed by 

12 this paragraph shall be paid by any collecting attorney re13 ferred to in subsection (f)(1) with respect to such trans14 action. 

15 ‘‘(b) ADDITIONAL TAX ON THE COLLECTING ATTOR16 NEY.—In any case in which a tax is imposed by subsection 

17 (a) on an excess fee transaction and the excess fee involved 

18 in such transaction is not corrected within the taxable pe19 riod, there is hereby imposed a tax equal to 200 percent 

20 of the excess fee involved. The tax imposed by this para21 graph shall be paid by any collecting attorney referred to 

22 in subsection (f)(1) with respect to such transaction. 

23 ‘‘(c) EXCESS FEE TRANSACTION; EXCESS FEE.—For 

24 purposes of this section—

25 ‘‘(1) EXCESS FEE TRANSACTION.—
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1 ‘‘(A) IN GENERAL.—The term ‘excess fee 

2 transaction’ means any transaction in which a 

3 fee is provided by an applicable plaintiff (in4 cluding payments resulting from litigation on 

5 behalf of an applicable plaintiff determined on 

6 an hourly or percentage basis, whether such fee 

7 is paid from the applicable plaintiff’s recovery, 

8 pursuant to a separately negotiated agreement, 

9 or in any other manner), directly or indirectly, 

10 to or for the use of any collecting attorney with 

11 respect to such applicable plaintiff if the 

12 amount of the fee provided exceeds the value of 

13 the services received in exchange therefor or 

14 subsection (g)(1) applies. 

15 ‘‘(B) DETERMINATION OF VALUE.—For 

16 purposes of subparagraph (A), in determining 

17 whether the amount of the fee provided exceeds 

18 the value of the services received in exchange 

19 therefor, the value of the services shall be the 

20 sum of—

21 ‘‘(i) the reasonable expenses incurred 

22 by the collecting attorney in the course of 

23 the representation of the applicable plain24 tiff, and 

25 ‘‘(ii) a reasonable fee based on—
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1 ‘‘(I) the number of hours of non2 duplicative, professional quality legal 

3 work provided by the collecting attor4 ney of material value to the outcome 

5 of the representation of the applicable 

6 plaintiff, taking into account the fac7 tors described in subparagraphs (B) 

8 and (D) of subsection (h)(2), 

9 ‘‘(II) reasonable hourly rates for 

10 the individuals performing such work 

11 based on hourly rates charged by 

12 other attorneys for the rendition of 

13 comparable services, including rates 

14 charged by adversary defense counsel 

15 in the representation, taking into ac16 count the factors described in sub17 paragraphs (A), (C), (E), and (G) of 

18 subsection (h)(2), and 

19 ‘‘(III) to the extent such items 

20 are not taken into account in estab21 lishing the reasonable hourly rates 

22 under subclause (II), an appropriate 

23 adjustment rate determined in accord24 ance with subparagraph (C) to com25 pensate the collecting attorney for pe-
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1 riods of substantial risk of non-pay2 ment of fees and for skillful or inno3 vative services which increase the 

4 amount of the applicable plaintiff’s re5 covery. 

6 ‘‘(C) ADJUSTMENT RATE.—

7 ‘‘(i) IN GENERAL.—For purposes of 

8 this paragraph, an appropriate adjustment 

9 rate is a percentage of the reasonable 

10 hourly rate under subparagraph (B)(ii)(II) 

11 which is added to the amount of such rate 

12 and which is not more than the sum of one 

13 risk percentage and one skill percentage 

14 described in clauses (ii) and (iii), respec15 tively. 

16 ‘‘(ii) RISK PERCENTAGE.—For pur17 poses of this subparagraph, the term ‘risk 

18 percentage’ means a percentage rate that 

19 is proportional to the collecting attorney’s 

20 risk of nonrecovery of fees and which is—

21 ‘‘(I) in the case of a collecting at22 torney who assumed a substantial risk 

23 of nonpayment of fees, not more than 

24 100 percent, 
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1 ‘‘(II) in the case of a collecting 

2 attorney who assumed a substantial 

3 risk of nonpayment of fees and de4 voted more than 8,000 hours of legal

5 work (as described in subparagraph 

6 (B)(ii)(I)) and more than 2 years to 

7 the case before resolution of all 

8 claims, not more than 200 percent, or 

9 ‘‘(III) in the case of a collecting 

10 attorney who assumed a substantial 

11 risk of nonpayment of fees and de12 voted more than 15,000 hours of legal 

13 work (as described in subparagraph 

14 (B)(ii)(I)) and more than 4 years to 

15 the case before resolution of all 

16 claims, not more than 300 percent. 

17 ‘‘(iii) SKILL PERCENTAGE.—For pur18 poses of this subparagraph, the term ‘skill 

19 percentage’ means, in the case of a col20 lecting attorney who has demonstrated ex21 ceptionally skillful or innovative legal serv22 ice which generated a recovery for the ap23 plicable plaintiff substantially greater than 

24 the typical recovery in similar cases, a per25 centage rate that is proportional to the in-
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1 crease in the applicable plaintiff’s recovery 

2 and that is not more than 100 percent. 

3 ‘‘(iv) LIMITATION.—An appropriate 

4 adjustment rate shall not increase the col5 lecting attorney’s fee above an amount that 

6 is proportional to the applicable plaintiff’s 

7 recovery. 

8 ‘‘(D) COURT APPROVAL OF FEES.—Fee 

9 payments approved by any court shall be pre10 sumed to not be in excess of the value of the 

11 services received in exchange therefor if the 

12 court approving the fee—

13 ‘‘(i) did not approve an adjustment 

14 rate greater than that determined to be 

15 appropriate under subparagraph (C) in a 

16 case where such fee included an adjust17 ment rate, and 

18 ‘‘(ii) obtained and relied upon a report 

19 of a legal auditing firm with respect to 

20 such fee in accordance with the procedures 

21 in subsection (h). 

22 ‘‘(2) EXCESS FEE.—The term ‘excess fee’ 

23 means the excess referred to in paragraph (1)(A). 

24 ‘‘(d) JOINT AND SEVERAL LIABILITY.—For purposes 

25 of this section, if more than 1 person is liable for any tax 
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1 imposed by subsection (a), all such persons shall be jointly 

2 and severally liable for such tax. 

3 ‘‘(e) APPLICABLE PLAINTIFF.—For purposes of this 

4 section, the term ‘applicable plaintiff’ means any person 

5 represented by a collecting attorney with respect to a claim 

6 described in subsection (f)(1). 

7 ‘‘(f) OTHER DEFINITIONS AND RULES.—For pur8 poses of this section—

9 ‘‘(1) COLLECTING ATTORNEY.—The term ‘col10 lecting attorney’ means any person engaged in the 

11 practice of law who represents—

12 ‘‘(A) any governmental entity, including 

13 any State, municipality, or political subdivision 

14 of a State, or any person acting on such enti15 ty’s behalf, including pursuant to Federal or 

16 State Qui Tam statutes, in a claim for 

17 recoupment of payments made or to be made by 

18 such entity to or on behalf of any natural per19 son by reason, directly or indirectly, of a breach 

20 of duty that causes damage to such natural per21 son, 

22 ‘‘(B) any organization described in para23 graph (3) or (4) of section 501(c) and exempt 

24 from tax under section 501(a), in a claim for 

25 damages based on a breach of duty, whether
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1 civil or criminal, causing damage to such orga2 nization, 

3 ‘‘(C) any natural person seeking to recover 

4 damages in a claim based on breaches of duty, 

5 whether civil or criminal, causing damage to 

6 such natural person, or 

7 ‘‘(D) any assignee or other holder of 

8 claims described in subparagraph (A), (B), or 

9 (C), 

10 when 1 or more of such claims, whether or not 

11 joined in 1 action, involve the same or a coordinated 

12 group of plaintiff’s attorneys or similarly situated 

13 defendants, arise out of the same transaction or set 

14 of facts or involve substantially similar liability 

15 issues, and result in settlements or judgments aggre16 gating at least $100,000,000. 

17 ‘‘(2) TAXABLE PERIOD.—The term ‘taxable pe18 riod’ means, with respect to any excess fee trans19 action, the period beginning with the date on which 

20 the transaction occurs and ending 90 days after the 

21 earliest of—

22 ‘‘(A) the date of the mailing of a notice of 

23 deficiency under section 6212 with respect to 

24 the tax imposed by subsection (a), or 
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1 ‘‘(B) the date on which the tax imposed by 

2 subsection (a) is assessed. 

3 ‘‘(3) CORRECTION.—

4 ‘‘(A) GENERAL RULE.—Any excess fee 

5 transaction is corrected by undoing the excess 

6 fee to the extent possible and taking any addi7 tional measures necessary to place the applica8 ble plaintiff in a financial position not worse 

9 than that in which such plaintiff would be if the 

10 collecting attorney were dealing under the high11 est fiduciary standards. 

12 ‘‘(B) PAYMENT OF EXCESS FEES.—

13 ‘‘(i) IN GENERAL.—Except as pro14 vided in clause (ii), a collecting attorney 

15 corrects an excess fee transaction by pay16 ing any excess fees plus interest to the ap17 plicable plaintiff. 

18 ‘‘(ii) CERTAIN SETTLEMENTS.—In the 

19 case of excess fees arising from or related 

20 to that certain Master Settlement Agree21 ment of November 23, 1998, and other, 

22 concluded Settlement Agreements based on 

23 State health care expenditures pursuant to 

24 title XIX of the Social Security Act (42 

25 U.S.C. 1396 et seq.), including lawsuits in-
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1 volving the States of Florida, Minnesota, 

2 Mississippi, and Texas, the collecting at3 torney corrects an excess fee transaction 

4 by paying any excess fees plus interest to

5 the 50 States in proportion to each State’s 

6 share of the United States population. 

7 ‘‘(C) NO WAIVER OF FEE.—No collecting 

8 attorney may avoid imposition of any tax im9 posed by this section by transferring any por10 tion of the excess fee or refusing to accept any 

11 portion of the excess fee. 

12 ‘‘(4) LIMITED REASONABLE CAUSE.—For pur13 poses of section 4962(a), an excess fee transaction 

14 shall not be treated as an event which was due to 

15 reasonable cause if the amount of the fee provided 

16 would exceed the value of the services received in ex17 change therefor determined with the maximum ad18 justment rate allowed under subsection (c)(1)(C). 

19 ‘‘(g) DISCLOSURE REQUIREMENTS.—

20 ‘‘(1) TREATMENT AS EXCESS FEE.—Any fee 

21 provided after the date of the enactment of this sub22 section by an applicable plaintiff (including pay23 ments resulting from litigation on behalf of an appli24 cable plaintiff determined on an hourly or percent25 age basis, whether such fee is paid from the applica-
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1 ble plaintiff’s recovery, pursuant to a separately ne2 gotiated agreement, or in any other manner), di3 rectly or indirectly, to or for the use of any col4 lecting attorney with respect to such applicable 

5 plaintiff shall be deemed to be an excess fee provided 

6 in an excess fee transaction unless the disclosure re7 quirements described in paragraph (2) are met. 

8 ‘‘(2) CONTENTS OF STATEMENT.—The disclo9 sure requirements of this paragraph are met for any 

10 taxable year in which a collecting attorney receives 

11 any fees with respect to a claim described in sub12 section (f)(1), if such collecting attorney—

13 ‘‘(A) includes in the return of tax for such 

14 taxable year a statement including the informa15 tion described in subsection (c)(1) with respect 

16 to such claim, and 

17 ‘‘(B) provides a statement including the in18 formation described in subsection (c)(1) to the 

19 applicable plaintiff prior to the deadline (includ20 ing extensions) for filing such return. 

21 ‘‘(h) LEGAL AUDITING FIRM.—

22 ‘‘(1) IN GENERAL.—In any case before a Fed23 eral district court or a State court in which the 

24 court approves fees paid to a collecting attorney, the 

25 court shall seek bids from legal auditing firms with 
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1 a specialty in reviewing attorney billings and select 

2 1 such legal auditing firm to review the billing 

3 records submitted by the collecting attorney, under 

4 the same standards the firm would use if it were 

5 hired by a private party to review legal bills sub6 mitted to the party, for the reasonableness of such 

7 attorney’s billing patterns and practices. The court 

8 shall require the collecting attorney to submit billing 

9 records, cost records, and any other information 

10 sought by such firm in its review. 

11 ‘‘(2) REVIEW BY LEGAL AUDITING FIRM.—In 

12 reviewing the billing records and work performed by 

13 the collecting attorney, the legal auditing firm shall 

14 address all relevant matters, including—

15 ‘‘(A) the hourly rates of the collecting at16 torney compared with the prevailing market 

17 rates for the services rendered by the collecting 

18 attorney, 

19 ‘‘(B) the number of hours worked by the 

20 collecting attorney on the case compared with 

21 other cases that the collecting attorney worked 

22 on during the same period, 

23 ‘‘(C) whether the collecting attorney per24 formed tasks that could have been performed by 

25 attorneys with lower billing rates,
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1 ‘‘(D) whether the collecting attorney used 

2 appropriate billing methodology, including keep3 ing contemporaneous time records and using 

4 appropriate billing time increments, 

5 ‘‘(E) whether particular tasks were staffed 

6 appropriately, 

7 ‘‘(F) whether the costs and expenses sub8 mitted by the collecting attorney were reason9 able, 

10 ‘‘(G) whether the collecting attorney exer11 cised billing judgment, and 

12 ‘‘(H) any other matters normally ad13 dressed by the legal auditing firm when review14 ing attorney billings for private clients. 

15 ‘‘(3) FILING OF REPORT; RESPONSE; BURDEN

16 OF PROOF.—The court shall set a date for the filing 

17 of the report of the legal auditing firm, and allow 

18 the collecting attorney or any applicable plaintiff to 

19 respond to the report within a reasonable time pe20 riod. The report shall be presumed correct unless re21 butted by the collecting attorney or any applicable 

22 plaintiff by clear and convincing evidence. 

23 ‘‘(4) FEE FOR LEGAL AUDITING FIRM.—The fee 

24 for the report of the legal auditing firm shall be paid 

25 from the collecting attorney’s fee award, the applica-
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1 ble plaintiff’s recovery, or both in a manner deter2 mined by the court. 

3 ‘‘(i) REGULATIONS.—The Secretary shall prescribe 

4 such regulations as may be necessary or appropriate to 

5 carry out this section, including regulations to prevent 

6 avoidance of the purposes of this section and regulations 

7 requiring recordkeeping and information reporting.’’. 

8 (b) CONFORMING AND CLERICAL AMENDMENTS.—

9 (1) Subsections (a), (b), and (c) of section 4963 

10 of the Internal Revenue Code of 1986 are each 

11 amended by inserting ‘‘4959,’’ after ‘‘4958,’’. 

12 (2) Subsection (e) of section 6213 of such Code 

13 is amended by inserting ‘‘4959 (relating to excess 

14 fee transactions),’’ before ‘‘4971’’. 

15 (3) Paragraphs (2) and (3) of section 7422(g) 

16 of such Code are each amended by inserting ‘‘4959,’’ 

17 after ‘‘4958,’’. 

18 (4) The heading for subchapter D of chapter 42 

19 of such Code is amended to read as follows:
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1 ‘‘Subchapter D—Failure by Certain Chari2 table Organizations and Persons to Meet 

3 Certain Qualification Requirements and 

4 Fiduciary Standards’’.

5 (5) The table of subchapters for chapter 42 of 

6 such Code is amended by striking the item relating 

7 to subchapter D and inserting the following:

‘‘SUBCHAPTER D. Failure by certain charitable organizations and 

persons to meet certain qualification requirements 

and fiduciary standards’’.

8 (6) The table of sections for subchapter D of 

9 chapter 42 of such Code is amended by adding at 

10 the end the following new item:

‘‘Sec. 4959. Taxes on excess fee transactions.’’.

11 (c) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to excess fees paid on or after June 

13 1, 2002. 

14 SEC. 3. DECLARATORY JUDGMENTS RELATING TO EXCISE 

15 TAXES ON EXCESS FEE TRANSACTIONS OF 

16 CERTAIN ATTORNEYS. 

17 (a) IN GENERAL.—Subchapter B of chapter 76 of the 

18 Internal Revenue Code of 1986 (relating to judicial pro19 ceedings) is amended by redesignating section 7437 as 

20 section 7438 and by inserting after section 7436 the fol21 lowing new section: 
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1 ‘‘SEC. 7437. DECLARATORY JUDGMENTS RELATING TO TAX 

2 ON EXCESS FEE TRANSACTIONS. 

3 ‘‘(a) IN GENERAL.—In a case of actual controversy 

4 involving—

5 ‘‘(1) a determination by the Secretary or the 

6 collecting attorney with respect to the imposition of 

7 the excise tax on excess fee transactions on such col8 lecting attorney under section 4959, or 

9 ‘‘(2) a failure by the Secretary or the collecting 

10 attorney to make such a determination, 

11 upon the filing of an appropriate pleading by an applicable 

12 plaintiff, the Tax Court may make a declaration with re13 spect to such determination or failure. Any such declara14 tion shall have the force and effect of a decision of the 

15 Tax Court and shall be reviewable as such. 

16 ‘‘(b) DEFERENTIAL REVIEW.—If a collecting attor17 ney’s fee has been approved by a court in accordance with 

18 section 4959(c)(1)(D) or by the Secretary pursuant to sec19 tion 4959, the Tax Court shall review the fee only for an 

20 abuse of discretion. 

21 ‘‘(c) LEGAL AUDITING FIRM.—In any petition for a 

22 declaration referred to in subsection (a): 

23 ‘‘(1) NO PREVIOUS REPORT.—If a report by a 

24 legal auditing firm that meets the requirements of 

25 section 4959(h) has not been previously produced 

26 and relied on by another court, the Tax Court shall 
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1 hire such a legal auditing firm and rely on its report 

2 pursuant to the procedures in section 4959(h). 

3 ‘‘(2) SECOND REPORT.—

4 ‘‘(A) IN GENERAL.—If a report by a legal 

5 auditing firm has been approved by a court in 

6 accordance with section 4959, the Tax Court 

7 shall hire a second legal auditing firm upon the 

8 request of the petitioner. 

9 ‘‘(B) FEE FOR REPORT.—The Tax Court 

10 may direct the petitioner to pay the fee for any 

11 report of a legal auditing firm provided pursu12 ant to subparagraph (A). 

13 ‘‘(d) TIME FOR BRINGING ACTION.—No proceeding 

14 may be initiated under this section by any person until 

15 90 days after such person first notifies the Secretary of 

16 the excess fee transaction with respect to which the pro17 ceeding relates. 

18 ‘‘(e) DEFINITIONS.—For purposes of this section, 

19 any term used in this section and also in section 4959 

20 shall have the meaning given such term by section 4959.’’. 

21 (b) CLERICAL AMENDMENT.—The table of sections 

22 for subchapter B of chapter 76 of the Internal Revenue 

23 Code of 1986 is amended by striking the item relating to 

24 section 7437 and by inserting the following new items:

‘‘Sec. 7437. Declaratory judgments relating to tax on excess fee transactions. 

‘‘Sec. 7438. Cross references.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to actions after the date of the 

3 enactment of this Act.

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