This is the seventh in a series of articles on issues surrounding the Taxation of Settlements and Verdicts. This article addresses the question of whether the fact that attorney fees are provided for by a statute has any affect on including these fees in plaintiff’s gross income.
United States Supreme Court. The Supreme Court in Commissioner v. Banks, 125 S.Ct. 826 (2005) did not address the contention that application of the anticipatory assignment principle would be inconsistent with the purpose of statutory fee-shifting provisions, such as those applicable in Banks which was brought under 42 U.S.C. Sections 1981, 1983 and 2000(e) et. seq. In Banks, there was no court-ordered fee award or any indication in Banks’ contract with his attorney or the settlement that the contingent fee paid was in lieu of statutory fees that might otherwise have been recovered. The Court noted that the American Jobs Creation Act of 2004 redresses the concern for many, perhaps most, claims governed be fee-shifting statutes.
United States Tax Court. The United State Tax Court has addressed this issue at least twice since the Supreme Court’s decision in Banks.
Vincent v. Commissioner, T.C. Memo, 2005-95. In Vincent, the Petitioner’s contingent fee agreement with her attorney stated that the attorney would be entitled to a defined percentage of any recovery, unless, as occurred in Vincent, the attorney received his fees and costs pursuant to a fee shifting statute. The Tax Court followed the Court of Appeals for the Ninth Circuit which held that a defendant’s payment of a plaintiff/taxpayer’s attorney’s fees and costs pursuant to a fee shifting statute constitutes income to the taxpayer. Sinyard v. Commissioner, 268 F.3d 756 (9th Cir. 2001), affg. T.C. Memo. 1998-364. In Sinyard, the taxpayers and their attorney signed a contingent fee agreement similar to the one in Vincent. The settlement agreement apportioned some of the settlement so as to pay in full the attorney’s fees and costs pursuant to the fee shifting provisions of 29 U.S.C. secs. 216(b) and 626(b). The Court held that the apportioned funds were attributable to the taxpayers, who, in the Court’s words, “bound themselves to pay * * * [their attorneys] one-third of what they received. When * * * [the defendant] satisfied this obligation, the Sinyards were so much the richer. That they never laid hands on the money paid to the lawyers does not obliterate their constructive receipt.” Id. at 759.Green v. Commissioner, T.C. Memo. 2007-39.
The United States Tax Court again addressed this question in Green V. Commissioner
. It stated: A litigant generally may not exclude the portion of a recovery paid to his or her attorney where, as here, the litigant’s recovery constitutes income. Commissioner v. Banks, 543 U.S. 426, 436-437 (2005). This is true whether the attorney’s fee was paid on a contingent fee basis or under a fee-shifting statute. Sinyard v. Commissioner, 268 F.3d 756 (9th Cir. 2001), affg. T.C. Memo. 1998-364; Vincent v. Commissioner, T.C. Memo. 2005-95.