Discrimination/Legal Malpractice légale fees déductible?

[myssjeep]

Can the leagal fees for a legal malpractice settlement be an above line deduction 62(a)20. The legal malpractice stemmed from an employment discrimination suit. The settlement is not from the former employer but former attorney.

 

[adjusterjack]

Line 62 on a US tax return has nothing to do with legal fees so I'm guessing you are in a country other than the US.

You'll have to get an answer from a local tax accountant.

 

[Mass_Shyster]

Please stand by for someone who actually understands Internal Revenue Code (“IRC”) Section 62

 

[LdiJ]

Here is the Section 62 to which they are referring. You really have to read all of 62(a) to understand the context for part 20.

https://www.law.cornell.edu/uscode/text/26/62

However, the reality of things is unless the attorney fees for this particular suit can be defined as an above the line deduction they won't be able to be deducted as that section of Schedule A has been eliminated.

 

[myssjeep]

The deduction would have been above the line if it was a settlement between the employer and employee, but it ended up being between the former attorney and employee. The discrimination suit was thrown out due to an unresponsive attorney.

It looks like the attorney fees will not be above line deductions so taxes will need to be paid on the entire settlement. Was just double checking.

 

[LdiJ]

The deduction would have been above the line if it was a settlement between the employer and employee, but it ended up being between the former attorney and employee. The discrimination suit was thrown out due to an unresponsive attorney.

It looks like the attorney fees will not be above line deductions so taxes will need to be paid on the entire settlement. Was just double checking.

There are actually ways around that. Who will be issuing the 1099 to you? Your attorney or the attorney that you sued? If its your attorney they should really be accepting payment from the other attorney, and then 1099ing you for just your share.

 

[Taxing Matters]

There are actually ways around that. Who will be issuing the 1099 to you? Your attorney or the attorney that you sued? If its your attorney they should really be accepting payment from the other attorney, and then 1099ing you for just your share.

No. The Supreme Court has held that the entire award to the plaintiff is includable in the income of the plaintiff even in a contingent fee arrangement:

The attorney is an agent who is dutybound to act only in the interests of the principal, and so it is appropriate to treat the full amount of the recovery as income to the principal. In this respect Judge Posner's observation is apt: “[T]he contingent-fee lawyer [is not] a joint owner of his client's claim in the legal sense any more than the commission salesman is a joint owner of his employer's accounts receivable.” Kenseth, 259 F.3d, at 883. In both cases a principal relies on an agent to realize an economic gain, and the gain realized by the agent's efforts is income to the principal. The portion paid to the agent may be deductible, but absent some other provision of law it is not excludable from the principal's gross income.​

​

Commissoner v. Banks, 543 U.S. 426, 436–37, 125 S. Ct. 826, 833, 160 L. Ed. 2d 859 (2005).

To suggest that the attorney indicate on the 1099 that only the portion left after the contingent share is taken by the attorney is income to the plaintiff is wrong and could be tantamount to tax evasion. The entire award is taxable to the plaintiff; as the Supreme Court indicated, the only issue left is the the extent to which it is deductible. As already discussed in this thread, it is not an above the line deduction in this case.

 

[LdiJ]

No. The Supreme Court has held that the entire award to the plaintiff is includable in the income of the plaintiff even in a contingent fee arrangement:

The attorney is an agent who is dutybound to act only in the interests of the principal, and so it is appropriate to treat the full amount of the recovery as income to the principal. In this respect Judge Posner's observation is apt: “[T]he contingent-fee lawyer [is not] a joint owner of his client's claim in the legal sense any more than the commission salesman is a joint owner of his employer's accounts receivable.” Kenseth, 259 F.3d, at 883. In both cases a principal relies on an agent to realize an economic gain, and the gain realized by the agent's efforts is income to the principal. The portion paid to the agent may be deductible, but absent some other provision of law it is not excludable from the principal's gross income.​

​

Commissoner v. Banks, 543 U.S. 426, 436–37, 125 S. Ct. 826, 833, 160 L. Ed. 2d 859 (2005).

To suggest that the attorney indicate on the 1099 that only the portion left after the contingent share is taken by the attorney is income to the plaintiff is wrong and could be tantamount to tax evasion. The entire award is taxable to the plaintiff; as the Supreme Court indicated, the only issue left is the the extent to which it is deductible. As already discussed in this thread, it is not an above the line deduction in this case.

While I am not going to argue with case law, its a patently unfair situation. The commission paid to a salesman is a deductible expense for his employer. Therefore there is no double taxation. In this instance part of the award is being double taxed. The OP has to pay tax on the whole thing, and then the attorney will pay tax on it as well.

 

[FlyingRon]

There's more support than just the one case TM posted. In addition to being includable as income, it almost always bumps the recipient up into the AMT range, so it's a double wammy.

 

[ShyCat]

It is not "a patently unfair situation". It should be irrelevant whether the attorney is paid on contingency or directly by the client along the way through retainer or payments. It is income to the attorney either way and thus included in the attorney's gross income. It is an expense to the client either way, paid with post-tax dollars. Whether or not that expense is deductible on the client's tax return is not contingent on the manner in which it was paid and is completely irrelevant to the attorney's taxes. What would be unfair is if the two scenarios were treated differently.

 

[FlyingRon]

Up until this year, legal fees for cases that resulted in taxable awards were a miscellaneous deduction. Usually, the award was sufficiently large that the fees dwarfed the 2% AGI floor. Starting in this year, this class of miscellaneous deduction is no longer allowed. Legal fee that led to such awards are no longer deductible.

The 62(a)(20) exemption just covers the legal fees that were specifically allotted by the law under which the award was made (outside a few certain cases covered by the statutes, you don't recover legal fees as part of your award in the US).

 

[LdiJ]

There's more support than just the one case TM posted. In addition to being includable as income, it almost always bumps the recipient up into the AMT range, so it's a double wammy.

It is not "a patently unfair situation". It should be irrelevant whether the attorney is paid on contingency or directly by the client along the way through retainer or payments. It is income to the attorney either way and thus included in the attorney's gross income. It is an expense to the client either way, paid with post-tax dollars. Whether or not that expense is deductible on the client's tax return is not contingent on the manner in which it was paid and is completely irrelevant to the attorney's taxes. What would be unfair is if the two scenarios were treated differently.

You are free to have the opinion that its not patently unfair, I have the right to have the opinion that it is. Expenses involved in the production of income should be deductible in my opinion. However the new tax law took that away for people getting awards like that and for employees as well.

 

[HRZ]

IT may be pure ice water on attorney fees ...but until and unless the law is changed ..it is the law !

IT may have major repercussions on a variety of fee awards...designed to give the little guy access to system ...such as special education, discrimination , you name it ...

 

[ShyCat]

You are free to have the opinion that its not patently unfair, I have the right to have the opinion that it is. Expenses involved in the production of income should be deductible in my opinion. However the new tax law took that away for people getting awards like that and for employees as well.

Okay, then I misunderstood your objection. I was not arguing about the fairness of the attorney fees not being deductible, only that the full award is taxable income to the recipient regardless of how the attorney was paid. All amounts being equal, the client who paid out-of-pocket for his attorney should not have a greater taxable income amount than the one who received the amount net of the attorney's contingency fee.

 

[Taxing Matters]

While I am not going to argue with case law, its a patently unfair situation. The commission paid to a salesman is a deductible expense for his employer. Therefore there is no double taxation.

And this is logically no different. The sales made by the salesperson are indeed taxable income to the employer. The question is then whether the commission paid to the employee (salesperson) are deductible. As that is clearly a business expense, Congress has provided that it is deductible. Here, it's the same thing: the entire award here is taxable to the plaintiff. The only issue then is whether the fee paid the lawyer to get it is deductible, just as with the company paying the salesperson. Deductions are, as the courts have repeatedly said, matters of legislative grace and since in this instance the lawyer fee is not a business expense, some other basis for deduction must be found. The malpractice lawsuit against his former lawyer would be deductible as an itemized deduction subject to the 2% limit the fee was paid prior to 2018. As the law passed last year did away with this category of deduction for the years 2018 through 2025, the taxpayer does not get to deduct this if it was paid in 2018. But then, the Congress did substantially increase the standard deduction for 2018 instead. How the taxpayer would fare in this situation pre-2018 versus post 2017 would require running the specific numbers, of course.

Whether eliminating the deduction is unfair, is of course, a matter of opinion and I respect your opinion that is not fair to eliminate the deduction. I will not express my opinion on that; it is what it is. But it is neither illogical or unfair, IMO, that the entire award is included in the income of the plaintiff. That makes it consistent with other like circumstances, including the salesperson situation that you mentioned. The issue comes down to, again as the Supreme Court noted, whether Congress provides for the deduction.

And, while I get your point, it is not certainly an issue of double taxation.