sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

It might have to do with where you are. While I haven't
researched this in detail I have a recollection of recent
cases which have determined that, at least in California, a
contingent fee contract means the lawyer is the owner of his
share of funds at the time of payment. As a result those
fees are not claimed as taxable income on the part of the
client, so no deduction from income is necessary.

Stu

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mmb <mm.bane[at]verizon.net> wrote:

- quote -

Since it was settled out of court: suppose the settlement
agreement said "Client will get $X and ex-employer will pay
client's attorney fees of $Y." In that case, would the
attorney fees show up at all on the client's tax return?

In other cases, since an occupation is something engaged in
for money, could a plaintiff claim that he has a part-time
occupation of suing? In that case, his legal fees are a
business expense. (True, he'd have to pay self-employment
taxes on the net, but he still might be much better off than
AMT would leave him.)

Seth

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mm.bane[at]verizon.net (mmb) wrote:

- quote -

Unless the client can show personal physical injuries or
sickness, the settlement is taxable because there is no
exception to section 61 to exclude the damages from income.
As for the attorney fees, if he lives in the fifth, sixth or
eleventh circuit or Oregon, he may exclude attorney fees
probably without a challenge because of the holdings in
those circuits. Otherwise they must be included in income,
unless a specific authority under state law exists, such as
a judgment under the Fair Housing Act in California.

Timothy E Kelly, Esq.
Certified Specialist, Taxation Law
Board of Legal Specialization
State Bar of California

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mmb wrote:

- quote -

Well, let us ask the attorney what his authority is for
having it not taxable--you are starting with 26 USC 61 (or
IRS Section 61 if you prefer--but 26 USC 61 sounds more
formal <grin> ).

As for whether the attorney fees are miscellaneous itemized
deductions--which Circuit Court of Appeals would your
client's case be heard in if he/she appealed a Tax Court
ruling? As well, which state law governs the attorney fee?

Because right now we have a *mess* in this area <grin> , but
depending on which court would hear the appeal, the answer
will change (and heaven help us if the Ninth is the one
involved <grin> ).

--
Ed Zollars, CPA
Phoenix, Arizona

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My client received a settlement from a Political Firing
case. It was settled out of court. I looked it up in the
Lasser Tax book and it appears that he should claim the full
amount as income, but deduct the contingent lawyer's fee as
a Misc. Deduction. However, my client talked to an attorney
who said that it was not taxable. Of course, that is what he
wants to hear!!

Who's right...and why.

Thanks.
M. Bane (New Tax Preparer)

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