Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

SUPREME COURT: CONTINGENT ATTORNEY FEES ARE INCOME

January 24, 2005

The Supreme Court today ruled that contingent fees in successful lawsuits are taxable income to the recipients, and must be deducted as miscellaneous itemized deductions. As miscellaneous deductions are not deductible for computing alternative minimum tax, this usually means they aren't really deductible at all.

The Court rejected the argument that the contingent fees shouldn't be treated as income to the plaintiff in the first place.

In effect the Court is again telling Congress: you broke it, you fix it. Congress last year changed this rule for plaintiffs who prevail in civil rights cases, but the Supreme Court's ruling will still apply to other cases unless Congress acts.

The Tax Prof is on top of this one.

Prior Tax Update Coverage: SUPREMES TO HEAR CASE ON TAXATION OF CONTINGENT ATTORNEY FEES IN INCOME

UPDATE: Prof. Maule weighs in with a kind of wisdom that has so far eluded our tax writers:

   The Congress needs a better way of dealing with tax 
   issues, and I, for one, will not accept "but it's 
   complicated" as an excuse for its failure to prevent 
   the sort of mess that taxpayers found themselves in, 
   when it is the Congress itself that created the mess. 
   The fact that Congress chose to help only some 
   taxpayers and not all highlights the dangers of a 
   Congress that legislates by caving to lobbyists rather 
   than acting with wisdom and even-handed judgment. 
   And leaving the clean-up to the courts is just plain 
   irresponsible.

      Bookmark: del.icio.us • Digg • reddit