Nos. 03-892 and 03-907, Supreme Court of the United States (filed Aug. 18, 2004)

The Association of Trial Lawyers of America on Aug. 18 filed an amicus curiae brief in the Supreme Court of the United States challenging the IRS tax treatment of contingency fees. In 1996, Congress made damage awards taxable in nonphysical injury cases, such as employment discrimination suits. The IRS has insisted that the portion of the recovery paid to plaintiff’s attorney under a contingency fee agreement must be reported as income by the client, as well as the attorney. The government has taken the same position regarding court-awarded fees under federal civil rights statutes. The result has been excessive taxation of plaintiffs. In some instances, victims of discrimination who “won” in court have found they owe more in federal taxes than their net recovery. Unfortunately, the Tax Court and most U.S. courts of appeals have agreed with the IRS.

ATLA’s brief, prepared by the Center for Constitutional Litigation, argues that this unfair result undermines both state and federal protections of personal rights and is based on a wrong interpretation of the Court’s basic tax doctrines. ATLA suggests that a plaintiff’s release of a cause of action in exchange for compensation constitutes a disposition of a property right and that attorney fees should be subtracted from the proceeds, as is the case in most dispositions of property.

ATLA's Amicus Curiae Brief: Commissioner of Internal Revenue v. Banks and Commissioner of Internal Revenue v. Banaitis