David Randolph Smith

U.S. Supreme Court Rules Attorneys' Fees
Taxable to Client in Non PI Cases

C.I. R. v. Banks, 2005 WL 1238 25 (Jan. 24, 2005). "We hold that, as a general rule, when a litigant's recovery constitutes income, the litigant's income includes the portion of the recovery paid to the attorney as a contingent fee. We reverse the decisions of the Courts of Appeals for the Sixth and Ninth Circuits." The decision involved attorneys' fee awards in two employment discrimination cases (Banks and Banaitis). The Court resolved a split between the Circuits and held that the amount of the attorney's fee is taxable income to the client and must be included in gross income and then deducted by the taxpayer, subject to the operation of the Alternative Minimum Tax. As commentators will explain, however, this holding is a general rule that does not apply to personal injury cases because recoveries for "personal injury" are specifically excluded from adjusted gross income by Section 104 of the Internal Revenue Code.26 U.S.C. § 104(a)(2). The tax issue comes up most often in employment cases, but not in personal injury lawsuits, because damage awards resulting from "personal injury or sickness" are specifically excluded from taxation. While in some instances clients in non personal injury cases can claim the contingent fee portion of their awards as a deduction, they cannot do so at all if they are subject to the alternative minimum tax. Bills pending before Congress aimed at benefiting the victims of employment discrimination would end their obligation to pay taxes on the portion of their damage awards that go toward lawyer fees. ATLA has prepared an excellent summary/article explaining the relative non-impact of Banks for most trial lawyers