February 19, 2007

Austin Law Firm Well-Armed for Debate
on Delinquent Tax Collection Proposal

By Mike Hailey
Capitol Inside Editor

An Austin law firm that was selected last year to track down unpaid taxes for the Internal Revenue Service could be one of the big winners if recommendations it's made for delinquent tax collection are approved by the Legislature and signed into law this year.

Linebarger Goggan Blair & Sampson, which also collects delinquent property taxes for local governments across the state, would be competing against other law firms and collection agencies for contingency fee contracts that Comptroller Susan Combs would have the power to award under a proposal that lawmakers will consider during the regular session.

Senate Bill 296 by State Senator Robert Duncan as currently written would allow the comptroller to hire outside firms for the collection of state taxes and fees that have been overdue for 120 days or more. Private firms would be allowed to keep up to 30 percent of the delinquent taxes or fees that they actually collect along with penalties, interest and possible court costs that are associated with them. The taxpayers who fell behind would be responsible for the private collectors' fees and associated costs.

The measure would allow the comptroller to outsource delinquent tax collection through contingency fee contracts without prior approval from the Legislative Budget Board or the state attorney general as lawmakers required in 1999 amid an outcry over billions of dollars in legal fees that a half-dozen private lawyers stood to make off the landmark tobacco case.

The Senate measure includes some of the same proposals that the Linebarger firm endorsed in a package of recommendations that it presented to the Texas Tax Reform Commission that Governor Rick Perry created in late 2005 and tapped former Comptroller John Sharp to chair. Linebarger Goggan recommended that the attorney general be given the option of allowing state agencies to secure outside help for the collection of delinquent taxes at fees of 30 percent - an amount it described as the industry average. The law firm's contracts with local governments pay fees between 15 percent and 20 percent and its deal with the IRS will allow it to keep 24 percent of the overdue federal taxes it collects.

In the report to the Sharp commission, the Linebarger law firm proposed making delinquent taxpayers foot the bill for the private tax collectors' fees instead of the state. While Linebarger Goggan recommended that contracts for delinquent tax collections be given to more than one firm, it proposed periodic evaluations so the outside collectors with the best track records would have the best shot at future state contracts.

Linebarger Goggan has been forced in recent years to overcome allegations of bribery and other misdeeds involving tax collection activities in Texas and other states. But the legal snarls didn't stop it from landing the federal government's business last year. Linebarger Goggan was one of three private firms that the IRS selected from a field of 33 competitors in early 2006 after it received the green-light to hire outside help for delinquent tax collection. Now Linebarger and other law firms and collection agencies will have the opportunity to seek state contracts through a competitive bidding process if the Legislature gives its blessings to the Senate proposal.

Linebarger Goggan has more than two dozen lobbyists signed on to represent it at the Texas Capitol in 2007 after contributing more than $650,000 to state lawmakers and other candidates in 2006. The firm's political donations last year included $50,000 to House Speaker Tom Craddick, $30,000 to Attorney General Greg Abbott and $25,000 apiece to Governor Rick Perry, Lieutenant Governor David Dewhurst and Combs.

While Linebarger Goggan has contributed to all 31 current state senators during the past six years, it hasn't donated to Duncan since giving him $1,000 in 2000. Duncan, a Lubbock Republican who chairs the powerful State Affairs Committee, is widely regarded as one of the Senate's most respected and effective members. SB 296 has been referred to the committee he chairs.

According to Texas Ethics Commission records, the Linebarger law firm's highest paid outside lobbyist is Reggie Bashur, who was one of Combs' top political consultants when she was running for comptroller in 2006 during the final year of a two-term stint as state agriculture commissioner. Linebarger's armory includes Austin lobbyists Nora del Bosque, Bryan Eppstein, Michelle Wittenburg, Stephanie Gibson, Mario Martinez and Machree Gibson. Former Travis County Attorney Ken Oden, who's now a lawyer at the Linebarger firm, and ex-lawmaker Glenn Lewis, a member of the firm while he served in the state House until 2004, are also registered to lobby for the firm in Austin this year.

Linebarger's victory in the federal competition came four years after a partner was convicted on federal bribery and bank fraud charges in connection with payments to a pair of San Antonio city council members that revolved on a contract to collect fines and fees for the city. Two years later, the law firm was accused of bribery and bid-rigging in a lawsuit over debt collection contracts for local governments in Texas and Florida. The federal government has also investigated a Linebarger collection deal in Louisiana.

While the legal problems might have cost the firm some local business in South Texas, they didn't appear to work against it in the IRS delinquent tax collection sweepstakes last year. As the focus shifts to the state level, rival firms in Texas will be working to see that no one competitor enjoys any unfair advantages in the privatization of the collection of overdue taxes here. But they can expect to be outnumbered on most every front.

Perdue Brandon Fielder Collins & Mott - a Lubbock-based law firm that would compete for the delinquent state tax collection business - has one lobbyist at the Capitol for every four that Linebargar Goggan has fielded so far. But the Perdue Brandon group will be a formidable force with lobbyists like Randy Erben, Sabrina Thomas Brown, Kathy Grant, Gilbert Turrieta and Louis Bacarisse watching out for its interest.

The Perdue Brandon law firm was no slouch on the campaign trail - even though it didn't come close to matching Linebarger Goggan in the campaign donations department while contributing $100,000 to lawmakers, statewide officials and other state-level candidates in 2006. Perdue gave Abbott $10,000 while donating $5,000 and $6,000 to Perry and Dewhurst respectively.

Another competitor - the Round Rock-based law firm of McCreary Veselka Bragg & Allen - has former state Senator David Sibley signed on to lobby for it along with Jay Propes and Susan Ross. The McCreary, Perdue and Linebarger firms are all members of the American Collectors Association of Texas, which has been working to keep the industry united behind a plan that would benefit more than one private tax collector in Texas.

The association's executive director, Dwain James, said the same essential proposals that are contained in the Duncan bill had significant support two years ago but failed because they'd been incorporated into legislation that didn't pass as a result of other unrelated provisions. While public employee unions opposed the privatization of delinquent tax collections at the federal level,. James said he did not expect that same kind of opposition here this year because private firms would only be hired after the state had already tried without success to collect the tax debt. As a result, James predicted that no state employees would be losing their jobs if SB 296 or similar legislation passes in 2007.

The legislation that Duncan has filed would give the comptroller the power to regulate the activities that private firms undertake attempting to collect tax debt on contingency contracts. The comptroller could authorize legal action by the firms hired for tax collections - and the delinquent taxpayer would have to pay court costs on top of the private collection fees and the penalties and interest they would already owe.

Combs' staff has been working with the attorney general's office on possible revisions to SB 296. Allen Spelce, the comptroller's communications director, said the measure could undergo some significant changes before it's taken up by the Senate.

Current law allows the comptroller to hire outside help for tax collections, but contracts with private firms for that purpose must be reviewed by the attorney general. SB 296 in its current form would make contracts with private companies for delinquent tax collection exempt from that provision.

The legislation as it's now composed would also allow the comptroller to bypass the formal approval process for contingent fee contracts that the Legislature established in 1999 amid the furor over the money that the private lawyers who'd been hired by Dan Morales when he was attorney general were supposed to be paid under the terms of their deal with the state then. The fees for the five lawyers who worked on the case together were eventually set by a national arbitration panel at more than $3 billion out of a record $17 billion judgment amid protests from then-Governor George W. Bush. Shortly after being sworn in as attorney general in early 1999, John Cornyn launched an investigation into the handling of the tobacco lawsuit including a claim for a half-billion dollars in legal fees by a separate attorney who was friends with Morales despite the other lawyers' assertions that he'd not been part of their team in the lawsuit. Morales was eventually convicted on fraud charges stemming from the tobacco case and sentenced to federal prison.

Pressed by Bush and Cornyn, the Legislature set up the oversight process for contingency fee contracts. As a result, state agencies and officials who enter into such contracts must first determine that the legal services they're outsourcing can't be performed adequately by their on in-house legal help or by attorneys who would be paid by the hour. Contracts with private lawyers who are hired to collect debt that exceeds $100,000 must be approved by the LBB under the provisions approved eight years ago. Contracts with private firms for delinquent tax collection would be exempt from that requirement as well if the new bill were to become law as it's currently written.

As the state comptroller during the 1990s, Sharp managed to round up hundreds of millions of dollars in state taxes that hadn't been paid through a limited amnesty program that became known as Project Fair Pay. But the state in recent years has been writing off increasing amounts of tax debt that it determines to be uncollectible. Delinquent taxes and other state debt had climbed to more than $4.5 billion by this time a year ago, according to the Linebarger Goggan report to the tax commission that recommended the state business tax that the Legislature adopted in special session last spring.

Linebarger Goggan recommended that the measures it had proposed be a centerpiece part of the plan that the Sharp commission would present to legislators for the special session on school finance and taxes. "Call it the New Project Fair Pay," the law firm suggested. But the special tax panel had been leery about anything that had the potential to distract from its main focus and spark possible controversy that could cause its entire effort to unravel.