Sorry. I lost my mind. But only for a minute or two.
Posted on 01/26/2005 9:50:51 AM PST by det dweller too
Lawsuit Winners Lose the Tax Battle
· The Supreme Court rules unanimously that plaintiffs must pay levies on awards without first subtracting legal fees.
WASHINGTON — The winners of big lawsuits may find themselves losers at tax time, thanks to a Supreme Court ruling Monday.
The justices, agreeing with the Internal Revenue Service, ruled that all the money plaintiffs won in lawsuits must be included in their gross incomes, even if a large portion of it went to lawyers.
(Excerpt) Read more at latimes.com ...
For the Record
Earlier versions of this story, which also ran in today's newspaper, incorrectly stated that the ruling will affect cases involving auto accidents and medical malpractice. Federal tax law exempts compensation for such "personal injuries." The ruling is likely to affect taxes on money won in lawsuits that result in punitive damages or for claims such as defamation.
To cover the cost of fighting lawsuits — which can drag out for years — lawyers often require clients to agree from the beginning to pay them as much as 40% of any judgment obtained.
But under the court's ruling, all of the final award will be considered as income to the plaintiff — even though he may receive 60% of that amount.
"It is a fundamental rule of taxation that income is to be taxed to the person who earns it, even when it is paid at the person's direction to someone else," the Justice Department and the IRS told the high court.
In a unanimous decision, the justices reversed the rulings of two lower courts, including the U.S. 9th Circuit Court of Appeals, which had held that plaintiffs should pay taxes on the amounts they received after subtracting lawyers' fees.
John W. Banks, fired from his post with the California Department of Education, sued the agency for discrimination. Shortly after the trial began, the two sides settled and the department paid Banks $464,000. His lawyer received $150,000 of it.
However, the IRS said Banks owed income taxes on the entire $464,000, and the Supreme Court agreed in the case of Internal Revenue Service vs. Banks.
In many instances, a plaintiff can take the legal fees as an itemized deduction on his tax form. However, those itemized deductions gradually fade for high-income earners. In addition, as the court noted, taxpayers subject to the alternative minimum tax — the special levy created to make sure wealthy filers could not evade taxation by claiming lots of deductions and credits — are not allowed any miscellaneous itemized deductions.
Beyond that, some lawsuits that drag on for years result in a judge awarding legal fees that far exceed the amount won by the plaintiff. For example, Illinois police Officer Cynthia Spina sued her employer for sex discrimination and harassment and was awarded $300,000 in damages. But a judge awarded her lawyer $1 million in legal fees. The IRS insisted that the total amount of $1.3 million was taxable income to Spina, and she ended up "losing every penny of the award," the court was told in one brief.
In his opinion for the court, Justice Anthony M. Kennedy acknowledged the ruling could "lead to the perverse result that the plaintiff loses money by winning the suit."
Congress can change the tax laws, and while this case was pending, lawmakers did exempt from a taxpayer's gross income "attorney fees and courts costs" that arose from "a claim of unlawful discrimination."
Lawmakers said they wanted to shield from taxes legal fees that arose from federal civil rights and job discrimination claims.
In cases involving auto accidents and medical malpractice. federal tax law exempts compensation for such "personal injuries." The ruling, however, is likely to affect taxes on money won in lawsuits that result in punitive damages or for claims such as defamation.
Chief Justice William H. Rehnquist did not vote in the decision.
The money is double taxed since the Lawyer has to claim it too.
This is a tough one.
Who do I want to profit less from lawsuits, lawyers or the government?
If you use money that was taxed to pay a lawyer to fight a parking ticket you can't deduct his fee. Why should you be able to deduce his fee for any other reason?
Correctomundo..the trial lawyers are gonna love this...
Who do I want to profit less from lawsuits, lawyers or the government?
What's the difference?
The money is double taxed since the Lawyer has to claim it too.
True, and I don't see Workman's Compensation anywhere in the article, wonder if it will effect those, though I don't see how it would.
Don't think that would work. A Corporation formed after the acts forming the basis for the suit would not have standing. A possible way out along those lines though is to claim the act being litigated arises out of the conduct of your own personal business and try to include both income and expenses associated with the suit on Schedule C of your Tax Return.
have the attorney's fees awarded directly to him by the Court
They usually are already, in that the lawyer gets the award, and deducts his portion, then issues a check to his client for the remaining amount.
I know a lawyer and this is common practice.
Then that portion should be a deductible expense.
Ex. Court awards 1M$ judgment, Plaintiff hires another collections attorney to effect execution or Plaintiff executes on his own. The originl attorney very probably would not be in the direct flow unless he had filed a lein against the award, for example.
Voila!
Back door tort reform!
This is almost as good a way to discourage frivolous lawsuits as "loser pays," though I would prefer "loser pays."
We are talking about the IRS here.
Logic does not apply.
I haven't dug deeply enough into the facts of the case to conclude if the Supreme Court did what they should be doing. If they did just rule correctly on a bad law, then the Supreme Court did its job.
Sorry. I lost my mind. But only for a minute or two.
Where did you get that from? Both the Plaintiff and the lawyer must pay taxes. The Plaintiff on the entire amount and the lawyer on the attorney fee portion.
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