A simple change to I.R.S. tax code interpretation will significantly reduce the trade in frivolous lawsuits.
A simple change to I.R.S. tax code interpretation will significantly reduce the trade in frivolous lawsuits. Any good tort reform will be somewhat uncomfortable for both sides of the aisle, but the proposal outlined below will align divergent interests, and allow for a new revenue stream for the Federal government.
Waived legal fees provided by an attorney have not been considered as taxable income for the plaintiff, even though the plaintiff barters his case (as if it were a product) with the attorney. Damages won in a lawsuit are not taxable. I presume this is to assist in making the plaintiff whole. But in the event the case is lost, the bartered legal fees, which are almost universally waived, should be considered as taxable income.
For instance, I sue Dr. Jones for missing a diagnosis, and I was allegedly harmed. My attorney takes the case on contingency. If we win the case he takes a percentage of the winnings along with other negotiated fees, if we lose the case he waives the fees. If I win damages are not taxable. He invests 200 hours at $450.00/hour in services. We lose the case, and he waives the $90,000 in legal fees we accrued. I should be taxed on the bartered $90,000 worth of services. If I receive/barter $90,000 worth of product or services from any other sector I owe tax on that income, bartered legal fees should not be any different.
This proposal is win win win lose. It will drive additional revenue to the treasury, it is not a new tax, just an alteration in tax interpretation, it will reduce the filing if frivolous litigation, it will reduce mal-practice and liability insurance, it will reduce the practice of defensive medicine, no constituents are targeted as future claims have not occurred, it will garner support for reform from moderate holdout Democrats and Republicans alike. It's a loser for many attorneys, but then again so is most tort reform propositions.