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Tuesday, January 25, 2005

Law - U.S. Supreme Court rules Contingent Fees Taxable to Client

Tony Mauro of Legal Times reports today:

In a pair of cases with potential pocketbook impact on lawyers and their clients, the Supreme Court ruled on Monday that the contingent fee portion of lawsuit settlements and awards is taxable to the client, even if the money goes directly to the attorney.

But initial reaction to the 8-0 decision was more muted than expected because a law passed by Congress last fall limits the ruling's implications, and the decision won't doom the contingent fee system, which fuels a broad range of private litigation.

While the cases -- Commissioner of Internal Revenue v. Banks and Commissioner of Internal Revenue v. Banaitis -- were pending last fall, Congress passed a provision allowing taxpayers who win awards in employment, whistleblower and civil rights litigation not to count attorney fees and court costs as taxable income. Congress already allows this for lawyer fees in personal injury cases.

Here is Linda Greenhouse's report in today's NY Times. Some quotes:
The Supreme Court ruled on Monday that the full amount of a court award or legal settlement is taxable to the successful plaintiff, even if a sizable portion goes directly to a lawyer under a contingent fee agreement.

The lower federal courts have been split on the question. Acting on government appeals in two cases, the justices voted 8 to 0, with the ailing Chief Justice William H. Rehnquist not participating, to overturn decisions by the federal appeals courts in San Francisco and Cincinnati. Both courts had rejected the Internal Revenue Service's position that all economic gain is taxable to the person who has earned it, unless specifically exempted by Congress.

Shortly before the cases were argued in November, Congress changed the tax law in favor of a subcategory of lawsuit-winning taxpayers. Under that law, the American Jobs Creation Act of 2004, taxpayers can deduct lawyers' fees and court costs "in connection with any action involving a claim of unlawful discrimination." Discrimination is broadly defined to include many kinds of employment disputes.

Writing for the court on Monday, Justice Anthony M. Kennedy said the new law would probably have applied to the cases at issue, both involving employment-related lawsuits. But the law is not retroactive and does not apply to other kinds of lawsuits. Consequently, the Justice Department had urged the court not to find the cases moot.

Posted by Marcia Oddi on January 25, 2005 08:42 AM
Posted to General Law Related