US Plaintiffs Face Tax On Contingent Fees In Commercial Lawsuits

by Glen Shapiro, LawAndTax-News.com, New York

27 January 2005

Ruling in the cases of Commissioner of Internal Revenue v. Banks and Commissioner of Internal Revenue v. Banaitis on Monday, the US Supreme Court stated that successful plaintiffs in commercial lawsuits must pay tax on their entire damages awards, despite the fact that their attorneys will take a large contingent fee out of the amount, upon which additional tax will be paid.

The 8-0 decision was welcomed by the Internal Revenue Service, which has claimed that the entire award in such cases counts as income to the plaintiff for the purposes of their tax liability.

The verdict's impact has been softened by a provision contained in the American Jobs Creation Act (AJCA), which allows those who win awards in civil rights, public interest, employment and whistleblower lawsuits to disallow attorney fees and court costs for the purposes of calculating taxable income.

However, speaking to the legal media this week, experts warned that in other types of commercial litigation, settlement claims are likely to increase in order to accommodate the double taxation of the settlement amount.

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