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Organized medicine to Geithner: Don't give lawyers tax break for litigation expenses

The AMA and other groups are asking the Treasury secretary to reject a policy change they say could encourage attorneys to file more lawsuits.

By Carolyne Krupa — Posted Sept. 13, 2010

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The American Medical Association and 90 state and national medical organizations are opposing a proposed change to federal tax policy that would let trial lawyers claim deductions upfront in certain cases.

On Sept. 1, the organizations sent a letter to U.S. Treasury Secretary Timothy F. Geithner, saying that allowing trial lawyers to deduct litigation expenses in some cases could encourage attorneys to file more lawsuits.

"Such a change is estimated to cost taxpayers over $1.5 billion and could act as a financial incentive for trial attorneys to file less meritorious lawsuits against physicians and other health care providers," the letter stated.

The letter comes less than a month after an AMA report showed that 60.5% of physicians 55 and older have been sued, and an average 95 liability claims are filed for every 100 physicians during the doctors' careers.

The average cost to defend a case was $22,163 for suits dropped, dismissed or withdrawn, and more than $100,000 for claims that went to court, the report said.

An analysis in the September Health Affairs found that medical liability system costs, including defensive medicine, are about $55.6 billion a year, or 2.4% of yearly health care spending.

Meritless lawsuits cost health care in other ways: They take valuable time away from patients, doctors say.

"Even if you're not the one named, you often may have touched the chart or touched the patient, so all of a sudden you're out of your office giving a deposition," said Lori J. Heim, MD, president of the American Academy of Family Physicians, one of the groups that signed the letter.

The letter was prompted by news reports that the Treasury Dept. is considering revising federal tax policy. The change would allow trial lawyers to claim a tax deduction on expenses in gross fee contingency cases before the conclusion of a case.

Under such contingency contracts, a lawyer agrees to pay all litigation costs for a client upfront in exchange for a set percentage from a judgment or settlement. These agreements are an alternative to net fee contingency contracts, where the attorney paying litigation costs gets reimbursed by the client and receives a portion of any award or settlement.

Existing tax rules allow trial lawyers who pay litigation costs upfront for clients to claim tax deductions on those expenses only if there is no award.

Proponents of the policy change argue that paying litigation costs in contingency cases is a business expense and should be tax deductible, especially because a case can take several years to be resolved.

The American Assn. for Justice, which represents trial lawyers, declined to respond to the letter. Instead, the association reissued its statement regarding the proposed tax revision.

"It is no secret that we have advocated that our members receive the same fair tax treatment that every other small business in the country currently enjoys," AAJ spokesman Ray De Lorenzi said in the statement. "Obviously, we are exploring all avenues to clarify this confusing tax code."

The Treasury Dept. declined to discuss the proposal.

"All I can tell you is that the Treasury Dept. has not yet determined whether additional guidance on this issue is appropriate at this time," spokeswoman Sandra Salstrom said.

Ongoing tax debate

Trial lawyers have sought the ability to claim tax deductions on litigation expenses in the past. Bills submitted to the U.S. House and Senate in 2009 would have allowed the deductions in all contingency fee cases. Both bills were referred to committee but never came up for a vote.

The Treasury Dept.'s consideration of the tax revision centers on the 1995 case Boccardo v. Commissioner of Internal Revenue. The 9th Circuit Court of Appeals in San Francisco ruled that an attorney could deduct litigation costs in gross fee contingency cases as business expenses in the year the money was spent.

In 1997, the Internal Revenue Service told staff to allow the deductions for gross fee contingency cases in the 9th Circuit in accordance with Boccardo but nowhere else. The 9th Circuit includes Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.

This April, Senate Finance Committee Chair Max Baucus (D, Mont.) and Sen. Richard J. Durbin (D, Ill.) asked the Treasury Dept. to clarify its position on the matter.

They cited a 2000 U.S. Tax Court ruling that reinforced Boccardo by distinguishing between gross fee contingency contract cases and net fee contingency cases. The court likened expenses paid in net fee contingency cases to nondeductible loans because of the expectation they will be repaid by the client at the conclusion of a case.

The April 29 letter from Baucus and Durbin said the IRS position spelled out in 1997 "adds confusion to the deductibility of attorney-advanced litigation costs."

Sen. Chuck Grassley (R, Iowa) and Rep. Dave Camp (R, Mich.) followed with a July 22 letter urging Geithner not to alter U.S. tax policy "absent a clear direction from Congress or to comply with court decisions."

In their letter to Geithner, the AMA and other medical organizations said there is no compelling reason for the Treasury Dept. to change policy on deducting litigation costs.

"Any change to the tax code that encourages more lawsuits is a step in the wrong direction for our health care system," AMA Immediate Past President J. James Rohack, MD, said in a statement. "Instead, the AMA supports proven medical liability reforms already working in California and Texas, as well as testing for innovative reform models, to reduce health care costs and keep physicians caring for patients."

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External links

American Medical Association's letter to Treasury Secretary Timothy F. Geithner regarding opposition to a proposed change to federal tax policy, Sept. 1 (link)

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