Contingent Legal Fees on Settlements and Awards and the Calculation of Gross Income by Individuals for United States Federal Income Tax Purposes

Document Type

Article

Publication Date

12-2004

Abstract

Lawsuits involving contingent legal fees are reasonably common. This paper focuses on the appropriateness of the inclusion in plaintiff's gross income for individual federal tax purposes of the portion of settlements going to attorneys for contingent legal fees. We present an example of the significant difference in taxes payable by a plaintiff under the two competing tax treatments. We also recap the current position of the various Circuit Courts on the issue using the opposing views of the Sixth to the Second and Seventh Circuits to frame a discussion of the issue and then discuss the treatment of securities classaction settlement proceeds that are apparently treated differently for tax purposes. The Supreme Court has recently granted certiorari in two cases and will be addressing the inclusion of contingent legal fees in gross income. We advocate that although taking the broader Sixth Circuit approach of excluding contingent attorney's fees on a joint endeavor theory would lead to more equitable results for plaintiffs, it would not necessarily be prudent judicial action and that the appropriate remedy to the situation may best be Congressional action, as the Internal Revenue Service has consistently favored inclusion.

Comments

Copyright 2004 American Accounting Association

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Publication Title

The ATA Journal of Legal Tax Research

Published Citation

Coyne, Michael P., Mason Richard M., & Mills, John R. "Contingent Legal Fees on Settlements and Awards and the Calculation of Gross Income by Individuals for United States Federal Income Tax Purposes", The ATA Journal of Legal Tax Research. Volume 2, Number 1, December 2004, p. 1-12.

DOI

10.2308/jltr.2004.2.1.1

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