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 judg-
ments, settlements, or agreements that operate as a tax.
Be it enacted by the Senate and House of Representa-
tives 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 cer-
tain charitable organizations to meet certain qualification 
requirements) is amended by adding at the end the fol-
lowing 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 re-
ferred to in subsection (f)(1) with respect to such trans-
action. 
‘‘(b) ADDITIONAL TAX ON THE COLLECTING ATTOR-
NEY.—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 pe-
riod, there is hereby imposed a tax equal to 200 percent 
of the excess fee involved. The tax imposed by this para-
graph 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.—
riods of substantial risk of non-pay-
ment of fees and for skillful or inno-
vative services which increase the 
amount of the applicable plaintiff’s re-
covery. 
‘‘(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), respec-
tively. 
‘‘(ii) RISK
PERCENTAGE.—For pur-
poses 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 at-
torney 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 de-
voted 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 de-
voted 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 pur-
poses of this subparagraph, the term ‘skill 
percentage’ means, in the case of a col-
lecting attorney who has demonstrated ex-
ceptionally skillful or innovative legal serv-
ice which generated a recovery for the ap-
plicable plaintiff substantially greater than 
the typical recovery in similar cases, a per-
centage rate that is proportional to the in-
crease in the applicable plaintiff’s recovery 
and that is not more than 100 percent. 
‘‘(iv) LIMITATION.—An appropriate 
adjustment rate shall not increase the col-
lecting 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 pre-
sumed 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 adjust-
ment 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 pur-
poses of this section—
‘‘(1) COLLECTING ATTORNEY.—The term ‘col-
lecting 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 enti-
ty’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 per-
son by reason, directly or indirectly, of a breach 
of duty that causes damage to such natural per-
son, 
‘‘(B) any organization described in para-
graph (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 orga-
nization, 
‘‘(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 aggre-
gating at least $100,000,000. 
‘‘(2) TAXABLE PERIOD.—The term ‘taxable pe-
riod’ means, with respect to any excess fee trans-
action, 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 addi-
tional measures necessary to place the applica-
ble plaintiff in a financial position not worse 
than that in which such plaintiff would be if the 
collecting attorney were dealing under the high-
est fiduciary standards. 
‘‘(B) PAYMENT OF EXCESS FEES.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), a collecting attorney 
corrects an excess fee transaction by pay-
ing any excess fees plus interest to the ap-
plicable plaintiff. 
‘‘(ii) CERTAIN SETTLEMENTS.—In the 
case of excess fees arising from or related 
to that certain Master Settlement Agree-
ment 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 in-
volving the States of Florida, Minnesota, 
Mississippi, and Texas, the collecting at-
torney 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 im-
posed by this section by transferring any por-
tion of the excess fee or refusing to accept any 
portion of the excess fee. 
‘‘(4) LIMITED REASONABLE CAUSE.—For pur-
poses 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 ex-
change therefor determined with the maximum ad-
justment rate allowed under subsection (c)(1)(C). 
‘‘(g) DISCLOSURE REQUIREMENTS.—
‘‘(1) TREATMENT
AS
EXCESS
FEE.—Any fee 
provided after the date of the enactment of this sub-
section by an applicable plaintiff (including pay-
ments resulting from litigation on behalf of an appli-
cable plaintiff determined on an hourly or percent-
age basis, whether such fee is paid from the applica-
ble plaintiff’s recovery, pursuant to a separately ne-
gotiated agreement, or in any other manner), di-
rectly or indirectly, to or for the use of any col-
lecting attorney with respect to such applicable 
plaintiff shall be deemed to be an excess fee provided 
in an excess fee transaction unless the disclosure re-
quirements described in paragraph (2) are met. 
‘‘(2) CONTENTS OF STATEMENT.—The disclo-
sure 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 sub-
section (f)(1), if such collecting attorney—
‘‘(A) includes in the return of tax for such 
taxable year a statement including the informa-
tion described in subsection (c)(1) with respect 
to such claim, and 
‘‘(B) provides a statement including the in-
formation described in subsection (c)(1) to the 
applicable plaintiff prior to the deadline (includ-
ing extensions) for filing such return. 
‘‘(h) LEGAL AUDITING FIRM.—
‘‘(1) IN GENERAL.—In any case before a Fed-
eral 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 sub-
mitted 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 at-
torney 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 per-
formed tasks that could have been performed by 
attorneys with lower billing rates,
‘‘(D) whether the collecting attorney used 
appropriate billing methodology, including keep-
ing contemporaneous time records and using 
appropriate billing time increments, 
‘‘(E) whether particular tasks were staffed 
appropriately, 
‘‘(F) whether the costs and expenses sub-
mitted by the collecting attorney were reason-
able, 
‘‘(G) whether the collecting attorney exer-
cised billing judgment, and 
‘‘(H) any other matters normally ad-
dressed by the legal auditing firm when review-
ing 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 pe-
riod. The report shall be presumed correct unless re-
butted 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 applica-
ble plaintiff’s recovery, or both in a manner deter-
mined 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 Chari-
table 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 pro-
ceedings) is amended by redesignating section 7437 as 
section 7438 and by inserting after section 7436 the fol-
lowing 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 col-
lecting 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 re-
spect to such determination or failure. Any such declara-
tion 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 attor-
ney’s fee has been approved by a court in accordance with 
section 4959(c)(1)(D) or by the Secretary pursuant to sec-
tion 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 pursu-
ant 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 pro-
ceeding 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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