Contingency fees as taxable income to the client?
Monday's Supreme Court decision in Commissioner v. Banks, ___ U.S. ___ (Jan. 24, 2005), could have an impact on some UCL settlements. In Banks, the Supreme Court unanimously held that "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." Evidently, there are statutory exceptions for certain employment, civil rights, and personal injury cases. (One of the statutory exceptions was enacted while the Banks case was pending, but the Supreme Court refused to give it retroactive effect.) It also appears that although attorney's fees constitute "income" in some types of cases, they are deductible unless the client is subject to the alternative minimum tax. It's all very complicated, and the lesson to be learned is to make sure that any fees award or settlement in your UCL case is expressly tied to Code of Civil Procedure section 1021.5, the "private attorney general" fee-shifting statute, rather than to the contingency fee agreement. The Supreme Court expressly declined to decide whether fees awarded pursuant to a fee-shifting statute are subject to the same rule. Yesterday's Daily Journal and Recorder both had articles on the case, as did the Los Angeles Times. Two blogs, TaxProf Blog and TaxBiz, both have more on the decision. If anyone reading is a tax law expert and can provide some thoughts on how this decision might impact UCL settlements, please post a comment.
- posted by Kim Kralowec @ 9:24 AM